FATCA, or Foreign Account and Tax Compliance Act, is routinely described as the United States’ global banking law. The reason for this characterization is because FATCA not only requires action by US taxpayers, but also the law requires an array of individuals and financial entities to take action. Individuals who fail to maintain their compliance can face harsh penalties due to FATCA or other laws, like FBAR, that require the disclosure of offshore accounts. Since foreign financial institutes that fail to comply with FATCA are subject to a 30 percent withholding, these institutes are extremely likely to comply with FATCA and provide information to the United States government. The U.S. government will then use this information to identify and pursue taxpayers who are noncompliant or suspected of engaging in offshore tax evasion.
However, FATCA has produced a number of unintended consequences in the United States and beyond. One of these effects has been felt by legal permanent residents and new citizens who wish to invest or send money back to their home country. One nation where the new obligation to disclose reportable accounts is having an outsized impact is India. US taxpayers holding foreign financial accounts or other assets in India must take steps to ensure that they are compliant. Failure to take these steps can result in huge fines and potential criminal tax charges.
FATCA covers the entirety of the international banking system. Individuals covered by FATCA – typically US taxpayers and others with sufficient links to the United State – are responsible for ensuring that their income tax returns are true and accurate. Since a taxpayer files his or tax return under the penalty of perjury, this obligation includes providing accurate and truthful information on the taxpayers return. One of the questions on the return’s Schedule B inquires about funds held offshore. Taxpayers who misinterpret this question or think that they do not have to report foreign accounts due to a lack of income or gains have likely made a very serious mistake.
The FATCA account reporting obligation is based on the resident alien, legal permanent resident, citizen, or other U.S. taxpayer’s filing status and whether the individual is living within the United States. Taxpayers who are married and file jointly with their spouse can hold or control more assets before a reporting obligation is triggered. Likewise, taxpayers living outside of the United States have a higher account disclosure threshold. Therefore, married taxpayers filing jointly while outside of the United States can hold the greatest amount of assets. Conversely, a sole filer living in the United States can hold the least amount of foreign assets before a filing obligation is triggered.
Under FATCA a U.S. taxpayer must file IRS Form 8938, Statement of Specified foreign Financial Assets, by the annual filing deadline. Information the taxpayer must report on Form 8938 includes the number of foreign deposit and custodial accounts, the value of these accounts, tax items attributable to foreign financial assets, exempted foreign assets, and additional tax information. It is important to note that filing FATCA does not relieve a taxpayer of his or her obligation to, if applicable, also file FBAR. The failure to File FATCA can result in up to a $10,000 penalty for each violation, a penalty of up to $50,000 for continued noncompliance, and a 40 percent understatement penalty on any unreported or nondisclosed tax. FBAR can result in additional penalties. When the noncompliance is believed to be the product of willful behavior, FBAR penalties routinely exceed the original account value.
For U.S. citizens and U.S. based individuals, maintaining compliance with FATCA is essential. Even if you are complaint with Indian tax laws, you must also maintain compliance with the U.S. Tax Code. For instance, an Indian investor living in the United States but investing into business venture in India must pay U.S. taxes on the dividend and interest derived from the investment. Failure to include this information in a U.S. tax return or as part of a FATCA disclosure can result in a U.S.-based tax enforcement action.
Furthermore, the difficulties and complexities of implementing FATCA had, for a time, spurred Indian financial institutions to close U.S.-based accounts and to refuse to accept new investment from the United States. The increasing certainty regarding the handling of FATCA obligations means that this nearly blanket ban in likely to be removed. However, investors may still face problems investing in India due to the new disclosure regime all parties must comply with. Furthermore if taxpayers do oen accounts or make investments in a foreign nation, they must ensure that they are compliant with all disclosure obligations.
If you are facing serious tax problems due to undisclosed accounts or investments in a foreign nation, the potential consequences you face are severe. The experienced tax professionals of the Tax Law Offices of David W. Klasing can assess and analyze your situation to provide potential means to mitigate the penalties you face. We are dedicated to providing taxpayers with options so that they can reestablish their tax compliance. To schedule a reduced-rate consultation, call our firm at 800-681-1295 or contact us online.