While Taxpayers are still waiting for further guidance from the new administration on proposed tax reform, especially regarding international tax issues, there are three compliance issues that, like a trick birthday candle, are not going gently into the good night: FATCA, FIRPTA, and FBAR. This blog post will briefly summarize the compliance requirements and the adverse effects of non-compliance on taxpayers, both foreign and domestic.
Are you an entrepreneur or business owner? Do you have foreign investors? Do you use foreign contractors? If you answered yes, then FATCA applies directly to you. Triggered by the UBS Swiss bank account scandal, the Foreign Account Tax Compliance Act, commonly referred to as FATCA, was enacted by Congress in March of 2010 to require Foreign Financial Institutions and Foreign Entities to register with the IRS and disclose information regarding United States persons with accounts or investments.
FATCA applies to payments of United States source income to a foreign entity that have not met the set registration and disclosure requirements. To comply with FATCA, investors, shareholders, or partners must disclose certain information regarding its FATCA compliance status on the applicable IRS form to the U.S. investment entity or U.S. banking institution (the withholding agent) prior to a “withholdable payment” (as defined in the FATCA Regulations) being made to the foreign entity. In the absence of one the previously mentioned IRS forms (e.g. W-8BEN-E, W-8BEN, W-8IMY, W-8EXP) evidencing the foreign entity’s FATCA status, the withholding agent will be required to withhold on any withholdable payment at a 30% rate. Unfortunately for the foreign entity, the 30% rate of withholding is nonrefundable and the foreign entity would lose any benefit of a reduction in withholding rates on certain types of payments from a tax treaty with the United States.
Are you a Real Estate Broker? Are you a foreign individual that owns real property in the United States? If you answered yes, then please read more to find out how FIRPTA applies to you. The Foreign Investment in Real Property Act of 1980, as amended, applies to all transactions involving the disposition of a United States real property interest. Under FIRPTA, it is incumbent upon the buyer of United States real property interest to obtain from the seller either: (i) a Certificate of Non-Foreign Status from a domestic seller or (ii) a FIRPTA withholding exemption certificate issued by the IRS from a foreign seller prior to or at closing. (Limited exceptions to FIRPTA may apply but are outside the scope of this post). Absent one of those two FIRPTA certificates, the buyer must withhold 15% of the purchase price of the real property and remit it to the IRS. Note that the withholding rate is 10% for transactions that occurred before February 17, 2016. Unlike FATCA withholding, FIRPTA withholding is preliminary; the seller can file a United States tax return and receive a refund of over-withheld funds. The penalties for non-compliance with FIRPTA are steep for the buyer and seller. The IRS will not only require the buyer to remit the non-withheld amount on the purchase price, but also may impose penalties for failure to file and remit amounts required to be withheld. Likewise, the seller will not get a credit for amounts withheld but not properly remitted in accordance with FIRPTA. Therefore, it is in both parties interest to ensure FIRPTA requirements are fulfilled on a timely basis even if full consideration was already paid to the seller.
Do you own a bank account outside the United States? Do you have family that does? Are you an officer in a business that has foreign operations? These are just a few situations in which an FBAR may need to be filed. In addition to FATCA, United States individuals and entities must affirmatively report foreign bank accounts they own, jointly own, or have signatory authority over with an aggregate value of over $10,000 on an informational form called the FBAR. It is important to note that the FBAR is not filed with the IRS. Instead, it is a separate filing that must be submitted to the Financial Crimes Enforcement Network (FINCEN). As of the tax year ended December 31, 2017, the FBAR is due annually on April 15th with a permanent, automatic extension available to October 15th for taxpayers.
The penalties for non-compliance are punitive with a minimum penalty of $10,000 per account. United States persons that have not filed previously required FBARs may qualify for Streamlined Domestic Offshore Procedures or the Offshore Voluntary Disclosure Program, but it is not expected that either of these programs will be available in perpetuity. Therefore, taxpayers unsure whether they are required to disclose their foreign accounts are advised to consult with their tax advisors as soon as possible to determine if they have a filing requirement and potentially avoid penalties for unreported accounts.
Awareness of these permanent tax laws is a good first step, but the penalties for non-compliance will only become more punitive. Please consult your tax, legal, and financial advisors for more detailed information on these issues. Saville Dodgen & Company’s Global Tax and Advisory Group is here to help you navigate through these treacherous waters and can work with your financial and legal advisors in the United States and abroad to make sure you are in compliance.
Written by William Collins, Senior CPA at Saville