According to the IRS, “The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts.

Under FATCA, U.S. taxpayers holding financial assets outside the United States will report those assets to the IRS. In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

The Foreign Account Tax Compliance Act (FATCA), which goes into effect on January 1, 2013 – and you know it’ll be here before you blink – was enacted by the U.S. government to minimize the estimated $345 billion of uncollected annual tax revenue stemming from tax evasion of U.S. customers with non-U.S. entities.

It requires that foreign financial institutions reach an agreement with the IRS and identify and report U.S. accounts or subject these accounts or, the foreign entities to a 30% (thirty percent) withholding tax.

Yup! You read that right! 30%

Deloitte.com describes FATCA as a new disclosure and withholding regime.

Under newly proposed U.S. Treasury Code Sections 1471 through 1474, effective for payments after December 31, 2012, all foreign financial institutions (FFIs) will be required to enter into disclosure compliance agreements with the U.S. Treasury, and all non-financial foreign entities (NFFEs) must report and/or certify their ownership or be subject to the same 30 percent withholding.

This new reporting and withholding regime will ultimately impact current account opening processes, transaction processing systems and “know your customer” procedures utilized by foreign banks. Chief compliance officers, tax reporting heads and other key players within your organization will need to evaluate the potential impact of these regulations and develop a plan for managing and remediating any potential risk associated with Foreign Account Tax Compliance Act (FATCA) non-compliance.

The legislative intent of FATCA is to ensure there is no gap in the ability of the U.S. government to determine the ownership of U.S. assets in foreign accounts. As such, this revenue raising provision, which was originally enacted as a part of the Hiring Incentives to Restore Employment (HIRE) Act (Pub. L. No. 111-147), is expected to significantly impact the systems and operations of both U.S. and non-U.S. companies.

While the regulations have not been finalized to date, companies will likely need to make modifications to their internal systems, control frameworks, processes and procedures for timely compliance with these regulations on or before their effective date of January 1, 2013.

FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return.

Reporting applies for assets held in taxable years beginning after March 18, 2010. (Notice 2011-55 provides guidance for affected taxpayers required to file prior to the availability of Form 8938.) Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification).

Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.

To rent or buy this 54 minute video with Costa Rica Attorney Roger Petersen please visit our Video On Demand page here.

FATCA will also require foreign financial institutions (“FFIs”) to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

To properly comply with these new reporting requirements, an FFI will have to enter into a special agreement with the IRS by June 30, 2013. Under this agreement a “participating” FFI will be obligated to:

1. undertake certain identification and due diligence procedures with respect to its accountholders;
2. report annually to the IRS on its accountholders who are U.S. persons or foreign entities with substantial U.S. ownership; and
3. withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.

Notice 2011-53 provides the phased-in timeline of key FATCA implementation dates for FFIs. It is important to note that many details of the new reporting and withholding requirements pertaining to FFIs must be developed through Treasury regulations that are expected to be proposed by December 31, 2011. Published IRS Notices accessible from this FATCA internet site provide currently available information and guidance.

The banks in Costa Rica will be required to act whether you’re ready or not so, if the banks will “report annually to the IRS on its accountholders who are U.S. persons” it would probably be very wise not to wait until these rules take effect but to begin evaluating your own financial affairs now…

Please contact your tax professional now and make sure you are prepared.

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Written by Scott Oliver, author of 1. Costa Rica Real Estate Scams & How To Avoid Them, 2. How To Buy Costa Rica Real Estate Without Losing Your Camisa, 3. Costa Rica’s Guide To Making Money Offshore and 4. ¿Cómo Comprar Bienes Raices en Costa Rica, Sin Perder Su Camisa?

Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.