27 February 2019

There was a time not so long ago when the idea of stashing a bunch of cash in an offshore account was so common that it became something of a cliché. Whether it was a bank account in the Cayman Islands or a shell company in Jamaica, the dream of a tax-free haven located in some warm, tropical clime felt so real we could almost taste the rum punch and feel like we were sitting on the beach twiddling our little paper umbrella.

Like many clichés, there was a root of truth to these fantasies. The reality was somewhat more complicated, but there was enough evidence of fraud and tax avoidance for the federal government to finally try to sniff it out. And so, in 2013, Congress enacted the Foreign Account Tax Compliance Act (FATCA), which was specifically designed to address tax abuse by U.S. persons through the use of offshore accounts. FATCA took a two-pronged approach to attacking this problem. First, it required Foreign Financial Institutions (FFIs) to provide the Internal Revenue Service (IRS) with information on U.S. persons invested in accounts outside the U.S. Second, it required certain non-U.S. entities to provide information about U.S. owners.

By placing the responsibility for reporting on the financial institutions and business entities, the IRS hopes to cut off the potentially fraudulent tax evader at the pass, making it harder and harder for them to invisibly invest their resources in offshore opportunities. As leverage to encourage reporting compliance, the U.S. can penalize foreign financial institutions for not sharing information on U.S. persons with them. Those who do not can be charged with securities fraud and money-laundering conspiracy.

So. Maybe you have questions. That’s why we’re here…

Does FATCA apply to me?

So, this is the first, best question, and its answer depends on which side of the FATCA prong you are on. To be a little more technical, under FATCA, certain U.S. taxpayers holding foreign financial assets with an aggregate value higher than $50,000 need to report that income to the IRS via FORM 8938. This threshold is higher for married taxpayers filing jointly and certain taxpayers who live in a foreign country. So, that is our individual taxpayer side.

In regard to foreign financial institutions, FATCA requires certain foreign financial institutions to report to the IRS concerning financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In this particular aspect, the reach of FATCA is strong, touching on nearly every entity that does business with U.S. persons.

How do FATCA regulations define a “U.S. Person”?

This is a peculiar phrase, isn’t it? It seems designed to be inclusive, to cover the wide range of business people who constitute the U.S. taxpaying population; as such, it includes more than just those who can claim U.S. citizenship. The final regulations lay out seven criteria that would qualify a taxpayer as a U.S. person. These include:

  • U.S. citizen or lawful permanent resident (green card)
  • U.S. birthplace
  • U.S. residence address or U.S. correspondence address (including U.S. P.O. boxes)
  • A U.S. telephone number, regardless of whether said number is the only telephone number associated with the account or not
  • Standing instructions to pay any amount from the account to an account maintained in the U.S.
  • An “in care of” address or a “hold mail” address that is the sole address with respect to the client
  • A power of attorney or signatory authority granted to a person with a U.S. address

Meeting one of these criteria does not necessarily mean that the account is owned by a U.S. person, only that taxpayers and FFIs should give the account increased scrutiny.

Interested in learning more about how to decide which entity management software is best for your organization? Download our entity management software buyer’s guide and see how you can best fit your entity needs.

What happens if I don’t reply to my bank’s FATCA request?

Woe be unto you. If you decide not to reply, most likely your FFI bank will report your non-response to the IRS. If you have improperly or incompletely filed the necessary annual forms such as FATCA Form 8938 or FBAR, or failed to report the income at all, the IRS can completely drop the hammer on you. By which I mean audit, inquiry and investigation, quite possibly leading to fines and penalties.

What kind of penalties? Glad you asked. According to Golding, these fines could range as high as 100% of the value of the account in a multi-year audit situation. Linger on that for a moment: 100% AND a multi-year audit. The horror!

What penalties are in place for FFIs that fail to report the accounts of qualifying U.S. persons?

FFIs that fail to comply are subject to 30% withholding tax on specified U.S. source income. This income might include such assets as interest, dividends and proceeds from security sales. If the FFI agrees to comply, but their individual clients refuse to provide information to determine whether they are U.S. persons, the same 30% withholding goes into effect.

How can Entity Management Software help me keep my organization compliant with FATCA laws?

The details of FATCA laws can seem overwhelming, and this handful of questions only begins to scratch the surface. In coming posts, we will be digging a bit deeper into the FATCA mines, hopefully bringing up some useful gems. But, even with this cursory introduction, we hope you can begin to see that FATCA’s challenges have as much to do with entity management as they do with properly figuring out income amounts. Particularly for corporations with multiple qualifying entities and for FFIs that might be dealing with many, many qualifying clients, the response to FATCA will require coordinated, verifiable customer information and clear, concise reporting.

Organizations will need the tools to orchestrate useful collaborations between their legal departments, treasury, IT teams, private banking, risk management, asset management and compliance departments. Entity Management Software such as Blueprint can give your company access to powerful applications that verify, organize and distribute your customer data, all while safeguarding your customer and institutional data in safe, customizable databases.

If you’d like more information on how Blueprint can help you prepare your organization for FATCA compliance, or a host of other entity management solutions, contact a Blueprint representative today.

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