Does your business have an offshore bank account or other foreign financial assets? Do you know what forms you need to file with the IRS? Have you heard about GATCA and wonder how it affects your foreign accounts? Do you know your reporting obligations under FATCA? These topics can be tough for business owners to understand. And if you don’t follow the rules, you may get hit with penalties from the IRS
Silver Tax Group is here to help you with all of these issues. Keep reading to learn about the difference between GATCA vs FATCA along with your obligations to the IRS.
What Is FATCA?
FATCA is the Foreign Account Tax Compliance Act. It’s a United States law. The goal of FATCA is to help combat tax evasion by people and companies who hide money in overseas financial accounts.
FATCA went into effect in 2010. It requires foreign banks and institutions to report information concerning U.S. citizens with more than $10,000 in accounts. By requiring such information, the IRS can learn the identities of individuals who have not reported offshore financial assets. The penalties for failing to report on such assets are severe. These penalties include bank levees, seized assets, wage garnishments, and even jail time.
To do this, FATCA requires certain taxpayers to report financial assets located outside the United States. In addition, it requires foreign financial institutions to submit information about financial accounts held by American citizens. These include banks, brokers, investment entities, and insurance companies.
You may face criminal charges for violations of the Foreign Account Tax Compliance Act (FATCA). Such charges can include obstruction of the functions of the IRS.
FATCA concerns foreign financial institutions reporting on American account holder information to treasury officials. The policy behind FATCA is to prevent such accountholders from hiding income.
What Are My Reporting Obligations Under FATCA?
The IRS receives a tremendous amount of information from foreign financial institutions because of FATCA. There are currently 310,000 foreign financial institutions across the globe that report on the finances of accountholders to tax authorities. These institutions come from over 100 nations.
If you have foreign financial assets, FATCA may require you to report them to the IRS. You report these assets to the IRS by filing Form 8938.
Form 8938 is filed as part of your annual income tax return. You only have to file Form 8938 if you file an income tax return.
Keep in mind that Form 8938 isn’t the only form you may need to file regarding your foreign accounts. Depending on the type of assets or amount of money you have, you may need to file additional forms as part of your tax return. You may also need to file forms with other agencies, such as FinCEN Form 114.
Not every business is required to file Form 8938. Instead, the IRS requires this form from businesses that meet certain requirements.
As a business, you are only required to file Form 8938 if the value of your foreign financial assets exceeds $50,000 on the last day of the tax year or is over $75,000 at any time during the tax year. If you don’t meet this threshold, you don’t need to file.
Even if you meet the threshold, you only need to file Form 8938 if you are a certain type of business. These businesses include:
- Closely held domestic corporations that receive over half of their gross income from passive income.
- Closely held domestic corporations or partnerships which have over half of their assets produce passive income or are held by the entity to produce passive income.
- Closely held domestic partnerships that have over half of their gross income from passive income.
- Domestic trusts that have at least one specified individual or domestic entity as a current beneficiary.
If you meet both of these requirements, it’s very important that you file Form 8938 as part of your tax return. If you don’t file Form 8938, you are subject to up to $60,000 in penalties and a 40 percent penalty for the amount of tax underreported due to not reporting these assets. In addition, your foreign accounts may be frozen or even seized. As you see, it’s a big deal if you don’t file Form 8938!
Also, FATCA has specific filing requirements for those receiving income abroad. The IRS will compare these returns with the Report of Foreign Bank and Financial Accounts (FBAR) prepared by financial institutions. This aids the IRS in uncovering missing or incorrect information.
Investigative tools used by the IRS has now generated over $10 billion in unpaid tax revenue under FATCA. The IRS also uses various voluntary disclosure schemes to get taxpayers to come forward to reveal undisclosed assets. However, it appears the voluntary disclosure schemes will end this fall. Penalties for nondisclosure could then become even harsher.
If you have questions about filing Form 8938 or any other forms, please speak to a tax professional. They can help you understand your reporting obligations to the IRS and tell you which forms you need to file.
What a FATCA Prosecution May Look Like
A group of U.S. taxpayers are facing conspiracy charges concerning securities fraud, money laundering, and a number of tax crimes. The conspiracy apparently fell apart after an undercover agent discovered what was going on. Those charged allegedly opened multiple foreign accounts without collecting required FATCA information.
A U.S. attorney released the following statement pertaining to the case: “The charges announced today reflect the commitment of this Office and our law enforcement partners to combat tax evasion by identifying fraudulent offshore safe havens.” This attorney also warns that they will continue to pursue violators.
FATCA has become a tool for worldwide reporting of offshore accounts. The government also has a large number of resources for combatting violations. FATCA requires reporting for Americans holding foreign accounts in excess of $50,000. And consequences for covering up violations may be severe – more severe than the actual violation.
Government officials are serious about enforcement of rules pertaining to disclosure of offshore assets and income. Penalties for failure to declare offshore assets can include seizure of assets, wage garnishments and even prison time. It’s important to consider finding legal guidance regarding any questions you may have about foreign asset reporting. The consequences of noncompliance are extremely severe.
Noncompliance can result in a $10,000 failure to file penalty. There could be a $50,000 penalty for continuing failure to file violations. An understatement of taxes owed due to undisclosed assets could result in a 40 percent forfeiture. The statute of limitations for violations also can be extended for omissions and failures to disclose.
What Is GATCA?
GATCA is the Global Account Tax Compliance Act. GATCA is also known as CRS, or the Common Reporting Standard.
GATCA is similar to FATCA and both have the goal to share information to help prevent and solve financial crimes. However, unlike FATCA, GATCA is an international agreement.
GATCA is a set of reporting standards that many countries follow. It creates requirements for financial institutions. It doesn’t create additional requirements for individual taxpayers. By creating uniform standards for collecting and exchanging information, it makes it easier for nations around the world to monitor and investigate financial crimes.
The important thing to know is that GATCA doesn’t create additional reporting obligations for individual taxpayers. Instead, it creates standards for financial institutions around the world to follow.
What Are the Differences Between the Two?
While FATCA and GATCA have similar goals, they have different requirements for financial institutions. For example:
- GATCA has no threshold requirement for the amount of money required for a report. Depending on the filer, FATCA sets minimum requirements.
- GATCA requires income and sale proceeds to be reported. FATCA only requires account balances to be reported.
As mentioned above, this doesn’t affect individual taxpayers. However, financial institutions need to comply with both standards. Until the United States adopts GATCA standards to replace FATCA, there will be two different standards for financial institutions to follow.
If You Are a Business Owner With an Offshore Account, What Do You Need to Know?
If you are a business owner with foreign accounts, you need to know several things:
- Make sure to file Form 8938 with your tax return. You can avoid inquiry letters and penalties from the IRS by disclosing these accounts every year.
- Remember that you may need to file other forms. Make sure to file FinCEN Form 114 and anything else that applies to your business.
- Remember that for now, you don’t have any obligations under GATCA.
In addition, you need to be aware that these standards may change. This means before you file your taxes every year, you should check to see that there aren’t any changes.
FATCA and specialization of financial institutions
Due to FATCA, financial institutions have increasingly specialized. In Switzerland, it is mostly financial advisors connected with the U.S. Securities and Exchange Commission (SEC) who interact with U.S. citizens.
For this reason, many foreign banks will not do business with U.S. citizens. Others will simply choose to do business with a single market rather than multiple markets. Because of complexities, many financial institutions choose not to deal with the FATCA processes. And some simply do not understand FATCA requirements.
Protect Your Foreign Assets
It is understandable why banks are nervous about noncompliance with FATCA. Even for financial institutions, the penalties for violations are severe. As one oversea executive stated, “It is pretty simple – either you comply or you are out of business.”
We don’t expect U.S. citizens to give up their foreign assets. Yet when even financial institutions find it difficult to understand FATCA, one can only imagine the concerns Michigan residents have trying to understand it.
Guidance from an experienced tax attorney, as well as legal representation, can be essential when it comes to reporting on foreign assets. It may prevent unwanted attention from the IRS.
Have Questions About Your Overseas Financial Accounts? Contact Us Today!
Besides filing criminal charges, the IRS may seize 50 percent of an account and assess additional penalties.
It is therefore important to seek the advice of a seasoned tax attorney when reporting issues concerning FATCA arise.
We know that it’s hard to keep track of all the forms you need to file with the IRS about your foreign accounts. If you have questions about Form 8938 or about any other forms you may need to file, contact us to speak to an offshore banking attorney who understands FATCA, GATCA, and how to stay in compliance with the IRS.