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VIEWpoint Issue 1 | 2023
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by Bill Leary, Director, Doeren Mayhew
Most U.S. taxpayers with foreign financial accounts or foreign businesses are responsible for providing information to foreign financial institutions on their offshore investments, and under agreements with the United States, foreign financial institutions are now attempting to determine whether accounts are classified as U.S. accounts. The international tax accountants at Doeren Mayhew are beginning to see these information requests come in from foreign banks, with clients finding them difficult to complete because of the technical U.S. tax jargon used.
The requests by foreign financial institutions relate to the U.S. Foreign Account Tax Compliance Act (FATCA), which is aimed at perceived tax abuses by U.S. persons using offshore accounts to avoid U.S. tax. Under FATCA, foreign financial institutions (FFIs) need to provide the Internal Revenue Service (IRS) with information on certain U.S. persons invested in accounts outside of the United States and to provide information about U.S. owners for certain non-U.S. entities. A 30 percent penalty may apply to any “pass-thru payment” to any account holders who do not supply the required information (“recalcitrant”) or other FFIs that do not meet the FATCA’s requirements. (In some case, the 28 percent U.S. backup withholding may apply.)
The United States is collaborating with foreign governments to agree on one of two model intergovernmental agreements (IGAs) to implement FATCA rules in foreign jurisdictions to gather U.S. tax information. In addition, certain financial institutions may enter into agreements with the United States independently.
FFIs subject to Model 1 agreements will need to comply with U.S. due diligence rules contained in Annex I of the IGA. An exchange of information under an IGA may be on a reciprocal or nonreciprocal basis. Measures are also in place to maintain confidentiality, but filers remain concerned about leaked information, as well as foreign compliance issues that may result.
Certain jurisdictions have reached IGA agreements “in substance.” An FFI in one of these jurisdictions must register on the FATCA registration website and certify its status to a withholding agent consistent with the treatment under the relevant model IGA. See Announcement 2014-17.
U.S. owners of reportable accounts also need to consider U.S. information reporting requirements. Direct or certain indirect ownership of foreign accounts might need to file U.S. FinCEN Form 114, “Report of Foreign Bank and Financial Accounts.” FinCEN Form 114 supersedes TD F 90-22.1 (the form that was used in prior years). This form is not filed as part of a U.S. tax return. Another related filing that may be required is IRS Form 8938 (“Statement of Specified Foreign Assets”). Separate information returns may also be required for foreign entities with U.S. owners (e.g., Forms 5471, 8865, and 8858). Penalties for noncompliant filers can be severe, and FATCA heighten the risk of penalties.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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