FATCA: The New Borderless Anti-Tax Evasion Law

The FATCA is one of the most ambitious measures by a US administration to curb tax evasion through offshore accounts and by US persons based abroad. Under the provisions, anyone classified as a US person is required to report all withholdable income from US sources to the IRS. The law goes even further to compel the foreign financial institutions-FFIs-to report certain accounts of US persons to the IRS. The foreign financial institutions that fail to comply with the FATCA law will face a steep and punitive withholding tax of 30% that will effectively freeze them out of the financial markets in the United States.

Given the privacy and diplomatic issues surrounding the implementation of the FATCA, the US Treasury Department has postponed its implementation a couple of times even though the law is still on course and will go into full force in 2014.

Understanding Tax Evasion vs. Tax Avoidance

The FATCA punishes tax evasion as opposed to tax avoidance which is a legal process to minimize the taxes that you pay to the US Government. The FATCA was instituted as part of the Hiring Incentives to Restore Employment (HIRE) Act with the specific aim of cracking down on the offshore tax evasion by US persons. The law therefore does not target individuals engaged in the legal tax avoidance procedures or steps that are within the law. While tax avoidance exploits all the ‘’legal loopholes” to minimize tax obligations, tax evasion makes use of illegal means to reduce tax obligations. The FATCA provision is basically targeted at the tax evaders.

The IRS Tax Evasion Reform and FATCA

The IRS tax evasion reform and FATCA provisions will be far-reaching.  The FFI will have to report on the withholdable income from US sources to the IRS and will be targeting US persons’ offshore accounts that hold at least $50,000.  The reforms have seen the US sign bilateral agreements with several governments to pave the way for compliance. Given the fact that no country will be exempt from the FATCA provisions, including those that have tax treaties with the United States, the powerful law will touch on virtually every US citizen that lives abroad and is covered by the provisions.

The FATCA implementation is already on course and is expected to impact several hundred thousand institutions. The IRS has provided a FATCA registration website where companies can register and begin compliance with the new law.  The IRS Federal tax evasion reform is expected to continue for several years. The entities that will be affected should expect additional regulations and reforms in the coming years as the implementation of the law rolls into motion.

One way to ensure you are on the right side of the new provisions is by hiring a credible tax advisor that can offer expert advice on compliance. The new anti-tax evasion law will run concurrent with the existing tax reporting and withholding laws although the application of both laws will be mutually exclusive. The account of a US person that is subjected to one of the provisions will be exempted from the other.

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