2017 FATCA Updates
While there has been a strong movement in recent years to repeal FATCA, it has not gained momentum with the new administration. Regardless it could not be done through an executive order. It would require an act of Congress and probably an overhaul of the tax system. FATCA has come a long way in bringing foreign financial institutions into cooperation and negotiating Intergovernmental Agreements with foreign countries. Too much time and effort has been invested by governments and banks in complying with FATCA for the US government to repeal it now. It is here to stay.
Intergovernmental Agreements (IGAs)
FATCA was enacted in 2010 by Congress to target non-compliance by U.S. taxpayers with foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers in which U.S. taxpayers hold a substantial ownership interest. FFIs are encouraged to either directly register with the IRS to comply with the FATCA regulations (and FFI agreement, if applicable) or comply with the FATCA Intergovernmental Agreements (IGA) treated as in effect in their jurisdictions.
There are two types of IGA agreements:
- Model 1: This agreement provides for reciprocal information exchange between the United States and the partner jurisdiction.
- Model 2: This type of agreement is not reciprocal. The partner jurisdiction will provide information regarding U.S. account holders to the United States, but not vice versa.
List of IGAs
Several updates have been made in 2016 and 2017 (highlighted).
There are several statuses that an agreement could be in:
- Signed: the IGA has been signed and agreed to by both the US and foreign taxing authority; however, it may not yet be in force unless indicated
- Agreement in substance: an IGA has not been finalized, but the US has reached “agreements in substance” with the foreign jurisdiction
- In force: the obligation to exchange information officially begins when the competent authorities provide notification that each is satisfied with the other’s confidentiality safeguards and infrastructure necessary for sharing information
Participating Foreign Financial Institutions
Even if the jurisdiction may not have an IGA in force, foreign financial institutions may be voluntarily providing information to the IRS. You can search the FATCA Foreign Financial Institution List to see if your financial institution is on the list.
If your institution is on the list then you may receive a letter from the financial institution if the financial institution has reason to believe that you are a US person (or have US nexus). Eventually your information will be reported to the IRS directly by the financial institution (model 2 IGA) or through the foreign competent authority (model 1 IGA).
Once the IRS receives this information, it can choose a number of options. It can open up a civil examination of the taxpayer’s return. In the very worst cases (e.g., several million $, located in a tax haven, etc), it may result in a criminal investigation. At this point it may be too late to enter into the offshore voluntary disclosure program (OVDP) or streamlined filing compliance procedures.
That is why it is imperative to contact an attorney to discuss your options if you have unreported foreign assets. If you’ve received a letter from your foreign bank, you should immediately seek counsel before responding.