By Kimberly Wied
The US quietly passed an extensive tax law last year that will soon be touching the lives of any American citizen living abroad who has assets in a foreign account.
The Foreign Account Tax Compliance Act was passed by the US Congress in 2010 in conjunction with the US HIRE Act as part of a package of legislation intended to help the United States address issues of tax evasion on behalf of US citizens. We wrote a previous post on the US HIRE Act providing more details specific to this act.
Any US citizen living abroad, green card holder (Permanent Resident), dual citizen with the United States or other US residents for income tax purposes will fall under the regulations imposed by this act starting in 2013.
Additionally US citizens living abroad are also already subject to another type of report related to their financial account information for the tax year 2010, called the Report of Foreign Bank and Financial Accounts (the “FBAR”). This form must be submitted at the same time as the typical Income Tax Return form that Americans are required to submit to the IRS every year.
However, the purpose of the FBAR is to submit detailed information about any financial interest in or signature authority over an account held in a foreign country by an American citizen. Instead of being submitted directly to the IRS for reporting (although it is linked with the income tax information stored by the IRS), the FBAR must be sent to the US Department of Treasury and must be received on or before June 30th, 2011.
What is the significance of the FBAR and the Foreign Account Tax Compliance Act?
FBAR
Let’s start with the FBAR, as it is a bit easier to dissect. Basically, an individual falling into one of the US citizenship categories mentioned above is now required to file an FBAR if the aggregate value of their foreign financial accounts exceeds $10,000 at any point in time during the tax calendar year.
To clear up any potential misconceptions, this blanket amount of $10,000 applies to the aggregate value of ALL foreign financial accounts owned/held by that person. For example, if the individual has three accounts, one with $3,000 total, one with $5,000 total and one with $2,000 total, the total aggregate amount is $10,000 and all accounts must be reported on the FBAR.
The FBAR also covers any financial accounts that the individual might hold with another person (joint account), such as an account held with a foreign spouse, as a guardian for children, with friends, etc.
Now, on to the types of accounts covered by this law. For FBAR purposes, financial accounts that fall under reporting regulations include any foreign account such as a savings, checking, demand, brokerage, securities, deposit, time deposit, commodity futures, options account, insurance policy with cash value, an annuity policy with cash value, shares in a mutual fund, or any other similar account held with a foreign financial institution or pooled fund account.
To add insult to injury, the extremely comprehensive list includes foreign whole of life insurance policies, foreign pensions, annuities, foreign money market funds and investment accounts containing foreign mutual funds.
For more information on the different categories that can apply to a United States citizen and require them to file the FBAR, please consult information from the IRS on the Foreign Account Tax Compliance Act (FATCA).
The Nitty Gritty of the Foreign Account Tax Compliance Act
One of the main aspects of the Foreign Account Tax Compliance Act that has foreign banks in a tizzy is the requirement (beginning January 13, 2011), for all foreign financial institutions to report their American clients holding assets in a foreign account to the IRS in America. This is no easy task, and will place exorbitant costs on banks to comply with this far-reaching tax law in regards to their American customers.
In a meeting last week between international senior bank executives and the US Treasury Secretary, Tim Geithner, the executives strongly asked for reconsideration of certain aspects of the law and for modifications to be made that might be more realistic for banks to enforce. The banks could incur billions of dollars in costs if forced to go through records to locate all accounts held by US citizens and then report the accounts to the IRS. This process could also potentially conflict with the domestic privacy laws in existence for that particular country.
If foreign banks do not comply with the new law, they will face a 30 percent withholding tax on any payments made to the bank from the United States. This 30 percent tax will then be provided to the IRS as tax.
Those that are critical of the new law state that the threat of the withholding tax, along with the act of force by the US to conscript foreign, sovereign institutions to become arms of US tax law, state that this law will eventually lead to foreign interests vacating US capital markets.
This new tax law has stirred up significant controversy from abroad, from both US citizens living as expats overseas, as well as from foreign financial institutions and other domestic and foreign stakeholders. It is not beyond the realm of possibility that these tough requirements could lead foreign banks to deny banking services to US citizens living abroad.
As the Foreign Account Tax Compliance Act will be affecting all Americans or other individuals tied to an American account in an official capacity, now is the time to seriously consider hiring a certified accountant experienced in assisting American expats with their taxes. Other forms not mentioned above are also linked to the FBAR process, and some US citizens will fall under the requirements for submission of the additional forms.
How will Americans living abroad react to the news of the fresh, strict requirements? Is it possible that America will experience a higher number of American expats renouncing their US citizenship, particularly if they have been living abroad for a number of years if not most of their life?
We think this might not be too far off the mark, and it will be interesting to see statistics recorded from 2013 after the new law is enforced.
Related Documents:
A Little Known US Law Packing a Huge Punch: The US Hire Act and How It Affects US Expat Taxes
{ 8 comments… read them below or add one }
You have a typo in this paragraph:
(the word “fund” is missing the “d”).
I wish this FBAR issue was mutual fun, but it certainly is not! 😀
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Now, on to the types of accounts covered by this law. For FBAR purposes, financial accounts that fall under reporting regulations include any foreign account such as a savings, checking, demand, brokerage, securities, deposit, time deposit, commodity futures, options account, insurance policy with cash value, an annuity policy with cash value, shares in a mutual fun, or any other similar account held with a foreign financial institution or pooled fund account.
The error has now been corrected, thank you Susan for pointing it out. We do try to provide entertaining content, glad we hit the nail on the head with this one!
I’ve been told people who have dual citizenship cannot renounce their US citizenship without paying these taxes and penalties. I’ve also been told that they can be stopped at the border and arrested. True?
I understand it is possible to get a 2nd passport to a number of countries by just paying a large fee (i.e. Switzerland and I believe Chile). Couldn’t US citizens just get a passport from one of these countries and set up an account using one of these passports? Noone would be the wiser.
Does anyone know if the Thai banks are actually complying with this requirement? From your article, it sound like 2011 might the first year any of the banks might have submitted info. Wonder if it is safe to assume that is not necessary to file retroactive prior year reports as IRS would have no info on prior years?
“I understand it is possible to get a 2nd passport to a number of countries by just paying a large fee (i.e. Switzerland and I believe Chile). Couldn’t US citizens just get a passport from one of these countries and set up an account using one of these passports? Noone would be the wiser.”
You are absolutely correct and I speak from first hand experience. I am a dual US-Irish citizen living in Germany. I opened my German back account with my Irish passport and they US has nothing to do with the whole ordeal.
What is the personal tax exsemptions when living on a retirement visa in Thailand or are there any ?
Christmas never feels the same in Thailand as at home. The sun and the heat just make it feel like another day. But at least in Bangkok they sell crsmhtias cards and all.
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