Welcome to the blog of inTAXicating.ca! Since 2008 we've been writing posts to help Canadians solve their tax issues with the Canada Revenue Agency. If you have any questions, or if you need assistance with any CRA matters including, but not limited to; Collections, Enforcement, Audits, Liens, Back-Filing, Assessments, Director's Liability, s160/325, Taxpayer Relief or the Voluntary Disclosure Program. If you have debt and are considering Bankruptcy or a Consumer Proposal, speak with us first. With over 10-years of CRA experience in the Collections division, our expertise is in the diagnosing and solving of the most complex tax problems.
The June 30th deadline to file your Report of Foreign Bank and Financial Accounts, also know as FBAR’s with the IRS is rapidly approaching. If you are a US person and have more than $10,000 in any foreign financial account (or are a signatory authority) then you need to file these by the deadline. These accounts include; bank account, brokerage account, mutual fund, trust, or other type of foreign financial account.
The Bank Secrecy Act requires US persons to report annually to the IRS any foreign financial accounts and their dollar amounts, however, under FATCA, those US persons who have not been doing so, will have their information reported for them by Foreign Financial Institutions (FFI’s) to the IRS and the penalties can be quite large.
If you are an US person, then you are required to submit this filing if;
1. You had a financial interest in, or signature authority over, at least one financial account located outside of the US; and
2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.
Stepping back for a second, the IRS through FATCA has provided a clear definition of what constitutes an US Person” and you are an US person for taxation purposes if you are;
• US citizen;
• US resident based on the number of days spent in the US during the year;
• US green card holder (even if the green card has expired);
• US created corporations, partnerships, limited liability companies which were created or organized in the US or are owned by US persons;
• US created partnership;
• US estates and trusts – formed under the laws of the US or created by US persons;
• Virtually everyone born in the US;
These rules also catch those with dual nationality, even if such persons are registered taxpayers in a non-US country (the US considers you “foreign” and asks you to complete a Form W8-BEN) These regulations also can include individuals who were born outside the US but who have at least one US parent.
Worried yet? So now you probably want to know more about when the FBAR’s are due.
The FBAR is due by June 30th of the year following the year that the account holder meets the $10,000 threshold. There are no extensions as there are for US personal tax returns. Filers cannot request an extension of the FBAR due date.
If a filer does not have all the available information to file the return by June 30, they should file as complete a return as they can and amend the document when the additional or new information becomes available.
If you need help filing the FBAR’s you can reach the IRS Monday – Friday, 8 a.m. to 4:30 p.m. Eastern time, at 313-234-6146 for callers outside the US, or send an email to the IRS at FBARquestions@irs.gov. The email system does not accept actual FBAR reports.
Once completed, the FBAR’s are sent to;
U.S. Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621
If an express delivery service is used, send completed forms to:
IRS Enterprise Computing Center
ATTN: CTR Operations Mailroom, 4th Floor
985 Michigan Avenue
Detroit, MI 48226
The contact phone number for the delivery messenger service is 313-234-1062. The number cannot be used to confirm that your FBAR was received.
The FBAR is not to be filed with the filer’s Federal tax return.
Alternatively, a FBAR filing verification request may be made in writing and must include the filer’s name, taxpayer identification number (TIN) and the filing period. There is a $5 fee for verifying five or fewer FBARs and a $1 fee for each additional FBAR. A copy of the filed FBAR can be obtained at a cost of $0.15 per page. Check or money order should be made payable to the United States Treasury.
It is also possible to amend previously filed FBAR’s. It can be done by;
Checking the Amended box in the upper right-hand corner of the first page of the form;
Making the needed additions or corrections;
Stapling it to a copy of the original FBAR; and
Attaching a statement explaining the additions or corrections.
Beginning July 1st, 2013, Mandatory Electronic filing of FBAR forms!
E-filing is a quick and secure way to file FBAR’s and filers receive an acknowledgement of each submission right away.
So if you were required to file FBAR’s and failed to, the consequences can be quite alarming!
Failure to file a FBAR when required to do so may potentially result in civil penalties, criminal penalties or both.
If, as is the case for many Canadians who were not aware of the requirement to file US tax returns, you learned that you were required to file FBARs for earlier years, then you should file the delinquent FBAR reports and attach a statement explaining why the reports are filed late. No penalty will be asserted if the IRS determines that the late filings were due to “reasonable cause”.
Otherwise, cumulative FBAR penalties can actually exceed the amount in a taxpayer’s foreign accounts under the penalty provisions found in 31 U.S.C. 5314(a)(5).
Keep copies of what you have sent to the IRS, and the supporting documentation, for a period of five years. Failure to maintain required records may result in civil penalties, criminal penalties or both.
The IRS allows filing of FBAR’s back to 2008 on their current form (revised October 2008), and anything older than 2008 can be reported on the FBAR form revised in July 2000.
A spouse having a joint financial interest in an account with the filing spouse should be included as a joint account owner in Part III of the FBAR. The filer should write “(spouse)” on line 26 after the last name of the joint spousal owner. If the only reportable accounts of the filer’s spouse are those reported as joint owners, the filer’s spouse need not file a separate report. If the accounts are owned jointly by both spouses, the filer’s spouse should also sign the report. It should be noted that if the filer’s spouse has a financial interest in other accounts that are not jointly owned with the filer or has signature or other authority over other accounts, the filer’s spouse should file a separate report for all accounts including those owned jointly with the other spouse.
If you are a US person with substantial foreign financial assets, you should know that in 2013, the IRS introduced Form 8938 for you to report with your FBAR’s.
Taxpayers with specified foreign financial assets that exceed certain thresholds ($50,000) must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. The new Form 8938 filing requirement does not replace or otherwise affect a taxpayers requirement to file FBAR. The IRS has provided a chart comparing Form 8938 and FBAR requirements, here.
If you need helping getting compliant, or trying to determine your IRS / FATCA plan of action, all you need to do is reach out to us at Intaxicating Tax Services. With 17-years of Canadian tax experience and 30-years of US tax filing, our team will ensure you provide only what you are required to provide.
A large transfer agency with a Canadian client paying US sourced income enquired as to whether an IRS Form 1099-B, Proceeds from Broker and Barter Exchange Transactions – an information form used to report the proceeds received from the sale of securities during the current year – should be issued to non-residents of the US, or if this form is only required to be sent to Americans.
It was a good question and in a business where budgets are tight, it’s better to be safe than sorry.
I placed some calls to the IRS, spoke to people in the industry and checked through the IRS website and here was what my research turned up – and take notice of the wording used – as it is very similar to the wording used by the CRA regarding the T5008, Return of Securities Transactions.
“A broker or barter exchange must file Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, for each person:
For whom the broker has sold (including short sales) stocks, bonds, commodities, regulated futures contracts, foreign currency contracts (pursuant to a forward contract or regulated futures contract), forward contracts, debt instruments, etc., for cash,
Who received cash, stock, or other property from a corporation that the broker knows or has reason to know has had its stock acquired in an acquisition of control or had a substantial change in capital structure reportable on Form 8806, or
Who exchanged property or services through a barter exchange.”
A broker is any person who, in the ordinary course of a trade or business, stands ready to effect sales to be made by others. A broker may include a U.S. or foreign person or a governmental unit and any subsidiary agency.
You are considered a broker if:
You are an obligor that regularly issues and retires its own debt obligations or
You are a corporation that regularly redeems its own stock.
Then the IRS pulls back a little bit here;
“However, for a sale, redemption, or retirement at an office outside the United States, only a U.S. payer or U.S. middleman is a broker.”
You are not considered a broker if:
You are a corporation that purchases odd-lot shares from its stockholders on an irregular basis (unless facts indicate otherwise),
You manage a farm for someone else, or
You are an international organization that redeems or retires its own debt.
So a transfer agent, even through it is a Canadian Corporation, is paying out distributions in US dollars, which makes them an US payor for the purposes of the IRS legislation, must issue 1099’s to US persons no matter where in the world they reside.
W8 certified non-residents of the US instead receive a 1042S, which reports dividend income received on US stocks for foreign investors.
In additions, each transaction is reported (other than regulated futures or foreign currency contracts) on a separate Form 1099-B, so a US person could be receiving multiple 1099-B’s at year-end. Transactions involving regulated futures or foreign currency contracts are reported on an aggregate basis.
Note: Sales of each of the following types of securities are reported on a separate Form 1099-B, even if all three types were sold in a single transaction:
Covered securities (defined later) with short-term gain or loss,
Covered securities with long-term gain or loss, and
Noncovered securities (securities that are not covered securities) if you choose to check box 6a when reporting their sale.
The gross proceeds value on a 1099-B is reported minus commissions.
Other common 1099 forms used:
Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., is the US tax form used to report distributions made to taxpayers from their retirement accounts, including an IRA or Coverdell ESA
Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, is the federal information form used to report account information on accounts held by non-resident aliens, foreign corporations and other types of foreign entities. Information such as distributions of ordinary income dividends and short- and long-term capital gains, the tax withholding rate, and the amount of U.S. tax withheld and deposited is reported on Form 1042-S.
This form is used to report an over-contribution from an Educational Savings Account (ESA). Contributions to an ESA are not deductible, only the earnings are taxable. The IRS does not require the use of tax codes on Form 1099-Q.
I came across an interesting article from the Montreal Gazette which covers a couple of interesting issues, and one of keen interest to Canadians as to whether to declare a vacation home in Florida, and if not, what the consequences are.
Did you know that you are required to report it to the IRS on a form 1040 and as well to the CRA, and that it is a credit on the Canadian side?
I have always felt that as Canadians we need to speak up more and promote our own blogging talents. We live in the best country in the world and as Canadians we pride ourselves on being a little on the shy side, a lot on the polite side and not as “in your face” as some other countries in the world, which makes the kind folks at Ninjamatics so awesome for doing all of us Canadian bloggers a favour by creating and hosting these awards.
It is an honour to be nominated. I went through the categories and there are some incredibly talented bloggers writing on the web who deserve much more attention than they have received to date.
Intaxicating has been nominated in two categories;
Business & Career; and
The Ninjamatics’ 2012 Canadian Weblog Awards are a juried competition which means — no voting – so I don’t have to ask (or beg) people to vote for me. Yay.
The nominees shortlist will be announced on January 15, 2013, and the winners will be announced on January 31, 2013.
A running blogroll of the nominees is kept on the Ninjamatics website throughout the year so that they can continue to highlight Canada’s blogging talent.
Intaxicating is the tax blog for Intaxicating Tax Services, a firm specializing in assisting people and corporations who have tax problems with the Canada Revenue Agency (CRA), the IRS, the MRQ or with WSIB. With 17-years taxation experience, 11 years with the CRA, there is no better firm to represent you than the one who taught CRA collectors how to collect.
In case you have just starting to catch wind of FATCA and you are wondering if you are going to get caught up in its web, you might find this post very useful. I have gone to the Internal Revenue service (IRS) website and pulled out their passages on American’s living in Canada and the expectations on how they will be handled under FATCA – coming globally January 1st, 2013.
The IRS has clearly stated that “All persons born in the United States are US citizens. This is the case regardless of the tax or immigration status of a persons parents. Furthermore, a person born outside the United States may also be a US citizen at birth if at least one parent is a US citizen and has lived in the United States for a period of time.”
If you are of the belief that as an American living in Canada that you do not need to file a US tax return because you do not generate any US source income in any way, that is also incorrect; “The IRS reminds you to report your worldwide income on your US tax return and lists the possible consequences of hiding income overseas.”
As a US citizen living in Canada, the rules for filing income, estate and gift tax returns and for paying estimated tax are generally the same whether you are living in the US or not.
Not reporting income from foreign (including Canadian) sources may be a crime. The IRS and its international partners (including the CRA) are pursuing those who hide income or assets offshore to evade taxes. Specially trained IRS examiners focus on aggressive international tax planning, including the abusive use of entities and structures established in foreign jurisdictions. The goal is to ensure US citizens and residents are accurately reporting their income and paying the correct tax.
In addition to reporting your worldwide income, you must also report on your US tax return whether you have any foreign (Canadian or international) bank or investment accounts. The Bank Secrecy Act requires you to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), if:
You have financial interest in, signature authority, or other authority over one or more accounts in a foreign country, and
The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.
“I am a U.S. citizen who moved to Canada to live and work there as a Canadian permanent resident, do I pay both U.S. and Canadian Taxes?
Answer: As a U. S. citizen living in Canada you:
Are required to file annual U.S. income tax returns and may be required to file certain information returns if applicable (e.g. Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans; Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)).
You must report your worldwide income on your US income tax return if you meet the minimum income filing requirements for your filing status and age.
You must contact the Canadian Government to determine whether you must file a Canadian tax return and pay Canadian taxes – unless you are already filing tax returns here in Canada, then this step is obvious.
You may be able to elect to exclude some or all of your foreign earned income, if certain requirements are met, or to claim a foreign tax credit if Canadian income taxes are paid.
Behind on your filing to the IRS, are you?
The IRS began an open-ended offshore voluntary disclosure program (OVDP) in January 2012, on the heels of strong interest in the 2011 and 2009 programs, which may end at any time. The intent of this program is to offer people with undisclosed income from offshore accounts another opportunity to get current with their US tax returns. The 2012 OVDP has a higher penalty rate than the previous program but offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk detection by the IRS and possible criminal prosecution.
Rumour has it that in September, the IRS will be releasing some new documents (besides the final regulations) aimed at helping Canadians file their US tax returns up to date – the IRS wants the most recent 3 years and 6 years of FBAR information from Canadians.
My thoughts here are that the IRS thinks all Americans living in Canada are not paying taxes so that anyone with over $1500 owing will still be penalized. Once these US persons provide proof of their filing of Canadian tax returns at a higher rate, then the best the IRS can get from these residents if valid certifications and by adding them to the database, another potential income source to track.
So if after all this you are unsure if you need to file you might want to seek out an accountant or lawyer which a strong US presence to advise you. Remember if you are a US person and you let your bank know, they are required under FATCA to notify the IRS.
At the very least you should preapare your US tax returns for the previous 3 years and include the Canadian taxes paid under “foreign tax paid” to see where you fall under FATCA. Then take them to an accountant with a strong knowledge of US tax in order for them to ensure the US return is correct and have them advise you on where they feel you fall under FATCA. From there… It’s up to you.
There is no hiding from FATCA, so prepare for now and prepare for the future before the IRS gets to you first.
I knew what FBAR was, but I didn’t know what it really was, if you know what I mean and I realized that when one of my staff asked me what it meant.
So off to research I went and I came up with this;
FBAR stands for “Foreign Bank Account Reporting” and it has been around since before I was born (1970 to be exact) and there is a requirement for US citizens, residents and persons doing business in the US to file a Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts) with the US Treasury if they have a financial interest in, or a signatory authority over, a financial account in a foreign country – if the aggregate value of the financial account exceeds $10,000 at any time during the year.
Until recently this area has not been heavily enforced, but that was before FATCA and the IRS has offered multiple voluntary disclosure programs in an effort to obtain taxpayer compliance before cracking down in effort to allow time for people to come forward and declare their interests.
Who qualifies as a US citizsen? In this context, a citizen or resident of the United States, a domestic partnership, a domestic corporation or a domestic estate or trust.
The types of accounts deemed to be financial accounts subject to FBAR generally are any type of account that holds liquid assets or marketable securities. Thus, everything from a cash account to a foreign mutual fund, such as an exchange traded fund, is classified as a financial account. In addition, only accounts located in a foreign jurisdiction are subject to FBAR reporting.
Having the power of signature or other authority over a foreign financial account has the ability to subject unsuspecting taxpayers to the reporting requirement. If an individual can order the distribution or disbursement of funds or other property from the institution where the funds or property are maintained, by signing a document providing such direction (or in conjunction with one other person signing the document), that individual has signature authority over the financial account.
Individuals serving as shareholders, partners, and trustees also may be deemed to hold a financial interest in an account if the account is owned by or the individual with legal title is any of the following:
(1) A person acting as an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person
(2) A corporation in which the U.S. person owns more than 50% of the total stock either directly or indirectly
(3) A partnership in which the U.S. person owns an interest in more than 50% of the profits
The problem here is that it it is not so simple to determine out if there is a filing requirement or not. Sometimes people provide information to the government which they feel covers all the government’s requirements but may actually fall very far short. You don’t know what you don’t know.
If there is a filing responsibility, the form, TD F 90-22.1, is due to the IRS by June 30th and there are no extensions provided for. Oddly, the filing of this form has no income tax implications so it goes in seperate from the personal tax return, but the civil and criminal penalties for not filing are severe and potentially very costly.
Oh, and FUBAR? Fucked Up Beyond All Recognition, that is what penalties and interest for missing any of the IRS’ filing deadlines will do to you…
With a new W9 and W-8IMY on the way and these forms still in draft form in it’s consultation stage, the IRS asks that the existing forms be used and not the new ones yet.
The new withholding certificates effectively divide the information reporting requirements between two classes of payees: nonresident alien individuals and all foreign entities other than individuals.
New W-8BEN will simplify the declarations required to be made by foreign individuals. It will only require basic identifying information, declarations with respect to treaty status (as relevant), and a general certification as to foreign status.
New W-8BEN-E will require each foreign entity to make two distinct declarations:
The foreign entity’s status for purposes of the US outbound withholding tax regime (e.g., the 30 percent withholding tax generally imposed on US-source dividends paid to non-US persons unless reduced by an applicable income tax treaty). This will be the same as the declaration required in the current IRS Form W-8BEN, as last revised in 2006.
The FATCA-related declaration, which will require an entity to provide substantial detail by declaring its overall status for FATCA purposes from among twenty-four different categories (all described in detail in the Proposed Regulations).
In addition, new W-8BEN-E will require a foreign entity to provide its Foreign Financial Institution Employer Identification Number and FATCA ID, as applicable (both are discussed in the Proposed Regulations).
To learn more about the withholding of tax on nonresident aliens and foreign entities, see IRS Publication 515 (2012).
Details on the FATCA Registration Process for Foreign Financial Institutions (FFIs)*
In building an online system for foreign financial institutions (FFIs) to register as participating FFIs, the IRS has developed a flexible system that has the ability for the FFI to create accounts, chose login and passwords, create challenge questions and maintain the account once formed. The automated system aims to make the registration process as quick and easy as possible, facilitates communication electronically and provides e-mail alerts to keep the registration process moving forward.
FFIs will register and enter an agreement (a certification, if a Registering Deemed-Compliant FFI) through an online registration system.
Each FFI must select a FATCA Responsible Officer (RO).
This individual will be identified in the FATCA registration system.
In a typical case, the RO will be the individual who will sign the FFI agreement.
The RO may select Points of Contact (POCs) to help complete all aspects of the registration process except signing.
Up to five POCs may be selected.
There must be at least one in-house POC (may be the RO).
It is anticipated POCs may include certain third-party individuals, both local and US (e.g., service provider).
It is anticipated that there will be power of attorney procedures allowing the RO to delegate full FATCA registration duties (including signing) to another in-house individual.
This in-house individual with the power of attorney from the RO will be identified in the registration system as the FFI’s Authorized Third Party (ATP).
If it proves unworkable for the Responsible Officer (RO) or another in-house individual to register the FFI, it is anticipated there will be power of attorney procedures allowing the RO to delegate full FATCA registration duties (including signing) to certain U.S.-licensed tax professionals that are subject to our regulatory jurisdiction.
The U.S.-licensed tax professional with the power of attorney from the RO l will be identified in the registration system as the FFI’s Authorized Third Party (ATP).
FATCA registration is a user maintained account – it can be edited or modified by the user.
The person signing the FFI agreement (or certification) must make an affirmative statement during the registration process that he or she has the authority to act for the FFI.
Positive ID verification will be required for the individual who signs the agreement/certification on behalf of the FFI.
Person who signs the agreement/certification will be issued a FATCA Individual identification Number (FIIN) following ID verification.
If this individual already has an SSN or ITIN, he/she may choose to use it to obtain his/her FIIN electronically through the registration system If this individual does not have an SSN or ITIN, or does not want to provide his/her SSN or ITIN electronically to obtain a FIIN, he/she must obtain his/her FIIN by filing a short paper form along with a copy of specified ID documentation.
The FIIN is the only identification number necessary for the individual to complete the registration process.
IRS will closely monitor the account creation and FATCA registration process
I often get asked about 1099 reporting in emails and comments and most of it comes from Canadians looking to figure out what gets reporting on which IRS Form 1099 and why there are so many.
Hopefully this will shed some light on the number of forms and what they report. I think we all kow why they are in use, right? When a business entity or individual receives any kind of income, the IRS usually wants to know about it. Funny how that works, eh?
Besides who received the income, the IRS also wants to know the amount of income, the entity that made the payment, and the purpose.
I feel it is important to understand that there are also other types of IRS forms that are used to report income or payments, such as employee compensation which is generally reported on a Form W2.
Below is a list of individual 1099 Forms for specific payment reporting;
• 1099-A – Reports Acquisition or Abandonment of Secured Property
• 1099-B – Reports Proceeds From Broker and Barter Exchange Transactions
• 1099-C – Reports Cancellation of Debt
• 1099-CAP – Reports Changes in Corporate Control and Capital Structure
• 1099-DIV – Reports Dividends and Distributions
• 1099-G – Reports Certain Government Payments
• 1099-H – Reports Health Coverage Tax Credit Advance Payments
• 1099-INT – Reports Interest Income
• 1099-LTC – Reports Long-Term Care and Accelerate Death Benefits
• 1099-MISC – Reports Miscellaneous Income *
• 1099-OID – Reports Original Issue Discount
• 1099-PATR – Reports Taxable Distributions Received From Cooperatives
• 1099-Q – Reports Payments From Qualified Education Programs
• 1099-R – Reports Distributions From Pensions, Annuities, and Retirement
• 1099-S – Reports Proceeds From Real Estate Transactions
• 1099-SA – Reports Distributions From an HAS, or Medicare Advantage MSA
Second most popular questions: Is there a minimum reporting threshold? Answer: The minimum dollar amount that must be reported varies depending on specific types of payments.
*Many different types of payments are also reported on Form 1099-MISC. The requirements for reporting payments on 1099-MISC can be complicated and the IRS Instructions for 1099-MISC IRS http://www.irs.gov/pub/irs-pdf/i1099msc.pdf should be consulted.
Third most popular questions: Who gets a copy? Answer: When a 1099 is issued, one copy is retained by the payee for their records, one copy is send to the recipient of the payments, and a copy is sent to the IRS for reporting.
Is there an electronic filing requirement? Any filers who have over 250 or more to report are required to file with the IRS electronically.
What is the deadline? The reporting deadline to the IRS is February 28th, however, if the filer is reporting electronically, the deadline is March 31st.
In most cases the payment recipient should receive their copy of the 1099 by January 31st.
There are some exceptions to the recipient due date. Form 1099-B, 1099-S, and payments reported on 1099-MISC for proceeds paid by attorneys and certain payments reported by brokers have until February 15th for the payment recipient copy.
Individuals that receive payment as reported on a 1099 are generally required to report those payments on Form 1040 as income. Business entities may have to report payments as part of their income.
I have been all over FATCA since March 18th, 2010 when President Obama passed the Hires Act through Congress, aimed at getting Americans working and taxing the wealthy (isn’t that what all socialist and democratic governments do?) Out of this Act comes FATCA, the Foreign Account Tax Compliance Act which is set to become law January 1st, 2013 and unlike most new taxes, FATCA changes the way taxation is administered globally.I’m going to outline why FATCA was brought in, what the US government is trying to do, and why there have been a couple of events in the past 2 weeks which have come to light which leads me to believe that this was not what the US government was thinking when they pushed the Hires Act through Congress.
So FATCA, in case you are unaware, is on its way to becoming the world’s first global tax on Americans, administered by financials institutions and non-financial entities around the world… OR else. Can the IRS do this, you ask? Apparently yes they can. Why do they need to do this you are wondering? Because US investors have been evading taxes by hiding their identities from the IRS or they have created offshore companies to hold their investments out of sight and out of reach of the IRS. The net result here is that the IRS needed to find a way to track down all these US persons who should be filing US tax returns disclosing all their worldwide income but are either not filing, nor including these items.
The estimated lost tax revenues from these US taxpayers using offshore schemes to evade US income taxes is in excess of $100 billion dollars per year. Think the US could use these funds? Yeah, I thought so too. Say hello to FATCA.
So how can the US crack down on these US persons who are hiding their funds? Well first they tried asking some foreign banks for a list of Americans who they had on their registry. That did not go over well at all. The banks said, you have a specific person you want information on, we will give you details, however the IRS didn’t know, they wanted everyone and the foreign banks we not going to give us their revenue sources. So the US government sued beginning with Switzerland. Not the best way to win friends, globally, by suing them, so the US government and the IRS them began pushing FATCA on everyone.
In a nutshell, it requires all foreign banks and foreign institutions to provide information to the IRS as soon as they find a US person on their system / in their bank. The IRS intends on using this information to locate, audit and potentially prosecute US persons who are evading the paying of their fair share of taxes. The scope of FATCA is global. The complexity of FATCA is massive.
The IRS figures through FATCA that every organization globally will opt in to FATCA and will become agents of the IRS and within 5 years will have flushed out every US person to the IRS – both those who are complying and those and those who are not (those who are not have a catchy new name: recalcitrant).
The IRS even offers a way out of FATCA if you are an US person… Just give the IRS 1/3rd of your worldwide income and renounce your US citizenship and you’re out. For good.
Recently, however, I came across two fantastic articles through my FATCA research which clearly shows me that the IRS and the US government may not have thought through the full implications of FATCA.
So here is problem number 1, in a great article from Bloomberg;
http://www.bloomberg.com/news/2012-05-08/u-s-millionaires-told-go-away-as-tax-evasion-rule-looms.html. This article outlines the international response to FATCA as the deadline to sign up with the IRS gets closer and closer. Instead of gearing up systems to flush out these US investors who have been hiding millions and millions of dollars (the FATCATs), these foreign financial institutions (FFI’s) and non-financial foreign entities (NFFE’s) are going through their foreign policies to find ways to instead remove Americans from their business. The costs associated with complying with FATCA outweighs the benefit of US monies. Oh oh.
Does the IRS and US government really want to prohibit US persons from investing outside of the US?
Problem number 2 came recently when Brazilian-born Eduardo Saverin, the billionaire Facebook co-founder, renounced his US citizenship he gained as a teenager in advance of the company’s impending IPO and moved to Singapore to avoid paying capital gains taxes on his approximately $3 billion stake in Facebook.
This is FATCA response #2. Renounce your citizenship and you’re out. So instead of staying in the US and paying taxes, the very rich do not appreciate carrying the taxation burden for a tax and spend government and they take their wealth to another country where it will be appreciated.
Caught red-faced the US government needed to respond so they looked to do to Saverin what they did to the foreign banks who had US persons on their registry. They threatened to sue. Then they changed the law. The US senate introduced a bill under which any expatriate with either a net worth of $2 million, or an average income tax liability of at least $148,000, will be automatically presumed to be leaving the country for tax purposes — enabling the IRS to impose a tax on any investment gains that person makes in the future. Crazy. Greedy.
Apparently Saverin filed to give up his US citizenship in January of 2011, but the news didn’t surface until the federal government released the information in a routine report. Saverin may be barred from re-entering the US if authorities decide he left the country for tax reasons because you don’t want a super-rich guy coming into your country and buying things! That will show him.
Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign- sourced income.” Saverin won’t escape all US taxes because Americans who give up their citizenship owe what is effectively an exit tax on the capital gains from stock holdings.
Saverin maintains that his renunciation of American citizenship, which actually took place last September, wasn’t a ploy to skip out on American taxes, but rather an attempt to free himself from FATCA, which he described as a burdensome restrictions on American investors abroad. US citizens are severely restricted as to what they can invest in and where they can maintain accounts. Many foreign funds and banks won’t accept Americans so it was for financial reasons and not tax related.
It’s true that FATCA is making life more difficult for US persons, including the IRS’ global reach (many countries tax based on residency); foreign bank account reporting rules; and FATCA. As a result of all the regulations, some foreign banks are dumping more U.S. customers.
Saverin is hardly the only one taking this particular route to big tax savings. The number of those renouncing US citizenship stands at around 1,800 last year.
While I cannot see the US government pulling back on FATCA I think they need to look again at what they are trying to accomplish and how they plan on getting there before all their high-income earners not in the US disappear from the radar within 5-10 years of FATCA being in force. So the tax pool will grow, then diminish and the IRS will be looking for newer ways to increase tax revenues.