June 26, 2014
By: Diane Kennedy, Contributor
FATCA (Foreign Account Tax Compliance Act) goes into force on July 1, 2014. The IRS has already extended the deadline for 2 years for financial institutions that aren’t in compliance yet, but have made progress to come into compliance.
FATCA has a couple of components. One targets foreign financial institutes and requires them to report on any accounts that are owned by US persons or in which US persons are beneficiaries or signators. The other part adds a lot of penalties for US persons who have not been in compliance with foreign account reporting.
First, let’s look at when and how you need to report if you have financial accounts.
If you have a foreign account or sign on one, you need to check the appropriate box on Schedule B of Form 1040.
If you have over $10,000 at any time throughout the year, you are required to file FinCen 114, due by June 30th of the following year. There is no extension possible.
If you have over $50,000 at the end of the year, or over at $75,000 at any point during the year (and are single), you need to file Form 8938 with your Form 1040. If you’re married, the threshold amounts are doubled. If you live outside the US permanently, you have higher thresholds for both single and married filing jointly.
You also need to file forms if you own a certain percentage of or have voting rights for a foreign corporation or partnership, have a grantor-type foreign trust or receive gifts.
If you’re not sure if you’re hitting the limits and need to report, talk to a qualified tax professional. There are some complicated rules. FATCA didn’t change the rules, it just stiffened the penalties for failing to file. You can now face penalties of $10,000 – $250,000 (or even more) and jail time of up to 6 months.
If you haven’t reported in the past, and should have, you need to get into compliance fast. If you come forward voluntarily, you won’t face criminal penalties but you still might have some fines to pay.
The new amnesty program makes it easier to come into compliance. Under this new program, the taxpayer must certify that the failure to report all income, pay all tax, and submit all required informational returns was due to non-willful conduct and must meet a non-residency requirement.
Non-willful conduct means that you made a mistake due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law. In other words, you goofed and you didn’t know better.
The non-residency requirement is met, if, in any one of more of the most recent three years , the individual did not have a US home and the individual was physically outside the United States for at least 330 full days. There is a separate test for foreign earned income test, the bona fide test, but it appears for this amnesty program only one test will work. That is the physical presence test.
In order to get amnesty for the civil and criminal penalties, you must prepare:
(1) For each of the most recent 3 years for which the US tax return due date has passed, file delinquent or amended tax returns, together with all required information (Forms 3520, 5471 and 8938), and
(2) For each of the most recent 6 years for which the FBAR due date has passed (FinCen 114/TD 90-22.1), and
(3) Pay the full amount of tax and interest due in connection with these delinquent or amended returns.
If you come forward with all of the above, and you qualify for amnesty, you can avoid all of the penalties (failure to file, accuracy related, etc).
But, this only works if you come forward voluntarily. If you wait for the IRS to find out in an audit, you will face all of the penalties. Act fast if you’re in this situation.
Diane Kennedy, CPA helps business owners legally pay less tax. She’s the New York Times best-selling author of “Loopholes of the Rich”, “Real Estate Loopholes”, and 7 other best-selling financial and tax books. She’s also a business owner and real estate investor. Her motto is “It’s Your Money. Keep More Of It.”