The Foreign Account Tax Compliance Act, FATCA, has created waves throughout the financial industries around the globe and various financial institutions are dumping their clients with US citizenship because the new law requires the institutions to report on certain client activities.

Many banks say that compliance with FATCA is way too expensive and it’s easier and more economical to close US citizen’s accounts.

Foreign banks and all Foreign Financial Institutions, FFI’s, must comply or face a punitive 30 percent withholding tax on all payments from the US. Additionally, the account holders will be subject to a 40 percent penalty on understatements of income from an undisclosed foreign financial asset.

Here are the details of FATCA that you need to know.

As of January 1, 2013, all foreign financial institutions must identify United States citizen account holders who have more than $50,000.000 of accumulated financial assets. It’s important to realize that this $50,000 threshold is not just the amount you have in your bank accounts. The Internal Revenue Service, IRS, has established that if you have assets and cash of more than $50,000 of aggregate value, including; your property, vehicles, jewelry, precious metals, bonds, stocks as well as cash in banks.

The institutions are obligated to send the IRS all your account balances and disclose all receipts and any withdrawals. Additionally, if you formed an offshore company to control your assets and you are listed as a stockholder and/or have ownership rights, your company’s assets will be included in the information that will be sent to the IRS.

Furthermore, The IRS has made this new law retroactive, to include assets held in taxable years beginning after March 18, 2010.

Let’s take a look at how the IRS defines Foreign Financial Institutions, FFI’s

• Currency dealer or exchanger.
• Check casher.
• Issuer of traveler’s checks, money order, or stored value (funds or monetary value represented in digital electronics format (whether or not specially encrypted) and stored or capable of storage on electronic media in such a way as to be retrievable and transferable electronically).
• Seller or redeemer of traveler’s checks, money orders or stored value.
• Money transmitter.
• Licensed gambling casinos/card clubs having gross annual gaming revenues in excess of $1,000,000 (except those in Nevada where the dollar criteria is $10,000,000).
• A domestic agent, or agency of a foreign bank which is not supervised by one of the Federal Banking Regulations, such as a law firm acting as an agent for a foreign bank.
• Banks and other financial institutions which are not supervised and examined for safety and soundness by any Federal banking agency or the SEC.

Just in case you are confused by these new IRS regulations and how they apply to your personal situation, here’s some questions and answers that the US Treasury Department amended in their Report of Foreign Bank and Financial Accounts, FBAR, on February 24, 2011.

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Q. What is a financial account?

A. A “financial account” includes any bank, securities, securities derivatives or other financial instruments accounts. The term includes any savings, demand, checking, deposit or any other account maintained with a financial institution or other person engaged in the business of a financial institution. Financial account also generally includes any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds). Individual bonds, notes, or stock certificates held by the filer are not a financial account nor is an unsecured loan to a foreign trade or business that is not a financial institution.

Q. What is meant by the term “commingled funds?”

A. The reference to “commingled fund” appears in the definition of the term “financial account” in the FBAR instructions. The instructions state that the term “financial account” generally encompasses accounts in which the assets are held in a commingled fund and the account owner holds an equity interest in the fund. Persons with a financial interest in, or signature authority over, a foreign commingled fund that is a mutual fund are required to file an FBAR unless another filing exception, as provided in the FBAR instructions or other relevant guidance, applies. The IRS will not interpret the term “commingled fund” as applying to funds other than mutual funds with respect to FBARs for calendar year 2009 and prior years. Thus, the IRS will not apply its enforcement authority adversely in the case of persons with a financial interest in, or signature authority over, any other foreign commingled fund with respect to that account for calendar year 2009 and earlier calendar years, including hedge funds and private equity funds.

Q. Is a FBAR required for accounts maintained with financial institutions located in a foreign country if the accounts hold non cash assets, such as gold?

A. Yes. An account with a financial institution that is located in a foreign country is a financial account for FBAR purposes whether the account holds cash or non-monetary assets.

Q. What does “maximum value of account” mean?

A. The maximum value of account is the largest amount (not the average amount) of currency and nonmonetary assets that appear on any quarterly or more frequent account statements issued for the applicable year. If periodic account statements are not issued, the maximum account value is the largest amount of currency or nonmonetary assets in the account at any time during the year. Convert foreign currency by using the official exchange rate at the end of the year. Though the FBAR instructions direct filers to use the official exchange rate, the Internal Revenue Service has no official exchange rate and generally accepts any posted exchange rate that is used consistently.

Q. A person owns foreign financial accounts X, Y and Z with maximum account balances of $100, $12,000 and $3,000, respectively. Does the person have to file an FBAR and if so, which accounts must be listed on the FBAR?

A. The FBAR instructions require the filing of the FBAR form ” if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year ” In this scenario, the person has an FBAR filing obligation because the aggregate value of foreign financial accounts X, Y and Z is $15,100. The person must report foreign financial accounts X, Y and Z on the FBAR even though accounts X and Z have maximum account values below $10,000.

Q. A person owns foreign financial accounts A, B and C with account balances of $3,000, $1,000 and $8,000, respectively. Does the person have to file an FBAR and if so, which accounts must be listed on the FBAR?

A. Even though no single account is over $10,000, because the aggregate value of accounts A, B and C is over $10,000, the person has to file a FBAR and must report foreign financial accounts A, B and C on the FBAR.

Q. Is a FBAR required if the account generates neither interest nor dividend income?

A. Yes, an FBAR must be filed whether or not the foreign account generates any income.

Q. Does the term “other authority over a financial account” mean that a person, who has the power to direct how an account is invested but who cannot make disbursements to the accounts, has to file a FBAR?

A. No, a FBAR is not required because the person has no power of disposition of money or other property in the account.

Q. Must a U.S. person file an FBAR to report a Euro currency account in the Cayman Islands?

A. Yes, the Cayman Islands account is a foreign account.

Q. A New York corporation owns a foreign company that has foreign accounts. The corporation will file a FBAR for the foreign company’s accounts. Do the primary owners of the U.S. company also have to file?

A. Yes, if any owner directly or indirectly owns more than 50 percent of the total value of the shares of stock, that owner will have to file a FBAR.

Q. What are the exceptions to the FBAR filing requirement?

A. Accounts in U.S. military banking facilities, operated by a United States financial institution to serve U.S. government installations abroad, are not considered as accounts in a foreign country. For this reason, these accounts do not have to be reported on a FBAR.

An officer or employee of a bank that is subject to the supervision of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, or the Federal Deposit Insurance Corporation need not report that he has signature or other authority over a foreign bank, securities or other financial account maintained by the bank, if the officer or employee has NO personal financial interest in the account.

An officer or employee of a domestic corporation whose equity securities are listed on a national securities exchange or which has assets exceeding $10 million and 500 or more shareholders of record, need not file a report concerning signature authority over a foreign financial account of the corporation, if he has NO personal financial interest in the account and he has been advised, in writing, by the chief financial officer of the corporation that the corporation has filed a current report, which includes that account

This is your wake-up call to plan ahead and maintain your financial accounts within the new regulations.

Since the financial threshold for FATCA has been established by the IRS to include all your foreign financial assets and cash with an aggregate value exceeding $50,000, this new law is intended to include just about all United States citizens, because average citizens have accumulated more than $50.000.00 of assets during their lifetimes. If you’re a pensionado or someone who has not accumulated assets totaling $50,000.00 or this amount of cash in personal bank accounts, probably you will not be inconvenienced by FATCA. However, as with all US government laws, they can be applied to anyone, retroactively, if a government institution decides to mess with your life.

Be safe, not sorry; this is a good time to explore in-home security and think strongly about planning for a concealed safe to store your personal financial records, valuables and cash that you may need to keep securely at home, rather than in a bank.

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Written by VIP Member Thomas Patrick Rosenberger of CostaRicaHomebuilder.com With more than 28 years of homebuilding experience, 18 of which have been in Costa Rica, construction consultant Tom Rosenberger knows the ins and outs of building and remodeling a home in the Central Valley area of Costa Rica. You can contact Tom using his Contact Us page here.

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.