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The Foreign Account Tax Compliance Act (FATCA) created compliance obligations for both U.S. taxpayers and Foreign Financial Institutions (FFIs). A Columbus tax attorney at The McGuire Law Firm can assist taxpayers and institutions in Ohio (OH) with understanding the FATCA provisions and how these rules apply.
This article provides an overview of the application of FATCA to U.S. taxpayers, U.S. financial institutions, and foreign financial institutions.
What Is FATCA?
FATCA was enacted by Congress to help combat U.S. tax evasion. In general, FATCA requires U.S. taxpayers to report information about certain foreign financial assets they hold.
These assets may include:
- Foreign bank or financial accounts
- Other interests in foreign financial institutions or foreign entities
FATCA also imposes reporting and withholding obligations on United States Financial Institutions and Foreign Financial Institutions related to transactions involving certain entities.
FATCA Requirements for U.S. Taxpayers
U.S. taxpayers are required to report information about their foreign financial assets on their U.S. tax returns when applicable thresholds are met.
Not all foreign assets are required to be reported. However, when the aggregate value of foreign financial assets exceeds certain threshold amounts in a given tax year, reporting is required.
These assets are reported on IRS Form 8938.
Form 8938 carries significant penalties for failure to file, including penalties for late filing.
Implications of FATCA for U.S. Financial Institutions
United States Financial Institutions (USFIs) and other U.S. withholding agents are required to withhold 30% of certain U.S.-source payments made to foreign entities if the institution is unable to document the residency status of the person or entity for FATCA purposes.
USFIs and withholding agents are also required to report information to the IRS regarding certain non-financial foreign entities that have substantial U.S. owners.
FATCA and Foreign Financial Institutions (FFIs)
To avoid withholding under FATCA, a Foreign Financial Institution (FFI) may register with the Internal Revenue Service.
By registering, the FFI agrees to report information to the IRS regarding:
- U.S. accounts held by the FFI
- Accounts of certain foreign entities with substantial U.S. owners
This reporting mechanism allows the IRS to identify and prevent U.S. taxpayers from hiding assets offshore.
FFIs that enter into an agreement with the IRS may also be required to withhold 30% on certain payments made to foreign payees who do not comply with FATCA requirements.
Which Entities Are Considered FFIs Under FATCA?
Most government entities, non-profits, small financial institutions, and retirement entities are generally exempt from FFI registration and reporting requirements.
Entities commonly treated as FFIs include:
- Banks and depository institutions
- Mutual funds
- Hedge funds
- Private equity funds
- Certain insurance companies
If an FFI is not exempt and fails to register, it may be subject to a 30% withholding tax on certain U.S.-source payments.
FFIs that successfully register receive a Global Intermediary Identification Number (GIN) from the IRS.
Speaking With a Columbus, Ohio Tax Attorney About FATCA Compliance
A Columbus tax attorney at The McGuire Law Firm can assist clients throughout Ohio (OH) with FATCA compliance issues, including understanding reporting obligations and navigating the IRS voluntary disclosure program.
If you have questions regarding FATCA requirements for U.S. taxpayers or financial institutions, speaking with a tax attorney can help you address compliance concerns and avoid penalties. Contact the John McGuire Law Firm for a free consultation.