The Foreign Account Tax Compliance Act (FATCA), which has recently come in to force, applies to any person or entity described as a U.S. person. There is some ambiguity as to who may actually be a U.S. person. For instance, would the non-U.S. spouse of a U.S. citizen living abroad be subject to FATCA’s provisions? In many ambiguous cases, the answer may be surprising.
26 USC §1473 gives some insight as to who is not a U.S. person. For instance, “any corporation the stock of which is regularly traded on an established securities market” would be exempted from FATCA’s reporting requirements. This is good news if you are a publically traded company, but small and medium sized businesses, and individuals are still subject to the rule.
Persons subject to FATCA as U.S. persons can generally be summed up in the following list:
- U.S. Citizens,
- U.S. Residents for tax purposes,
- U.S. partnerships and corporations,
- Estates other than foreign estates,
- Trusts, provided that the trust is either,
- Subject to jurisdiction of a U.S. court,
- One or more U.S. persons substantially controls the assets of the trust.
It makes sense that any U.S. citizen would be a U.S. person. U.S. citizens are taxed based on worldwide income, regardless of where they live or where the income is derived from. Likewise, resident aliens for tax purposes are also U.S. persons. The implication of this is that the law defines a resident alien based on tax jurisdiction. In other words, even certain undocumented immigrants could be subject to FATCA. Resident alien, as defined for tax purposes, does not just mean green card holders.
While the list of U.S. persons is helpful, it does not completely encompass the range of entities that could be subject to FATCA. For example, a foreign company with a U.S. citizen owning 10% or more of the company would be required to make FATCA-related disclosures of ownership to avoid the penalty. Some of the disclosure is carried out by requiring certain intermediaries (e.x., banks) to collect FATCA-related information. The ambiguity and extent of FACTA mean that it is a smart idea to contact a legal counsel if international tax issues are a concern.
Potential penalties for failing to file required disclosures to the IRS are substantial and the IRS has been less willing to show leniency in international tax issues than they generally do for domestic issues. In a related case regarding a Foreign Bank Account Report (FBAR) failure to file, the IRS levied a penalty of 50% of the average balance in each of the three years that a U.S. taxpayer failed to file. See US v. Carl R. Zwerner, Case # 1:13‑cv‑22082‑CMA (SD Florida, June 11, 2013). Do the math and the penalty comes out to be well in excess of the entire value of the account!
FBAR disclosures are required when a U.S. person has signature authority over a foreign bank account which, at any time during the year, holds over $10,000. While FBAR regulations are separate from FATCA, the two have some overlap and oftentimes a client will find themselves subjected to both rules. Given that IRS enforcement is not taking a lenient position on FATCA or FBAR, it is critical that any person subjected to these rules engage our legal counsel for assistance, or make sure that they have competent legal representation.