A recent judgment by an appellant court judge in Israel ordered Bank Hapoalim to transfer money out of a U.S. citizens account, overruling the banks attempt to freeze the account until the account holder signed a W-9 form.
To paraphrase, the judge stated that there is no law or ordinance in the law books, or even by the Bank of Israel, that makes compliance with the IRS a legal requirement. Therefore, Bank Hapoalim is required to transfer the money, whether or not the account holder complies with the IRS requirements.
That being said, this is only a small victory for U.S. citizens in Israel, as they still have the personal requirement to report financial accounts to the United States government, and face significant penalties for failure to properly and timely disclose such accounts. While past blog entries have discussed the FBAR reporting in detail, please read below for an unofficial summary and explanation of the newest IRS form, which was initiated in 2011
Intro – what is FATCA?
If you have recently opened a bank account in Israel or in any country outside of the United States, you may have been asked some questions regarding your citizenship. You may have even heard of the infamous FATCA
FATCA is the acronym for The Foreign Account Tax Compliance Act. Under FATCA, certain US taxpayers are required to report financial assets that they own which are held outside the United States. This requirement should not be confused with the Report of Foreign Bank and Financial Accounts (known by also as the FBAR). The FBAR and the FATCA filings are separate requirements, and although they may sound similar in nature, it is important to be familiar with the instructions and regulations for each report. with the FBAR requirement, there are significant penalties for failing to comply with the FATCA requirements (discussed below)
Under FATCA, various foreign financial institutions, such as banks, investment companies, and certain insurance companies, will be required to report information about the accounts held by US citizens directly to the IRS. It is for this reason that your bank may ask you if you are a US citizen. They will need to give your account information to the IRS.
The individuals who are required to comply with the FATCA requirements include: U.S. citizens, one who is a resident alien of the United States for any part of the tax year, and a non-resident alien who makes an election to be treated as a resident alien in order to file a joint return. An individual with a green card and one who is treated as a residential alien for tax-reporting purposes under the substantial presence test are both considered residential aliens for FATCA purposes and have to comply with the reporting requirements. Contact your tax professional to determine whether you may have to comply with the FATCA requirements, even if you are not a U.S. citizen.
How do individuals comply with FATCA?
FATCA is filed by attaching a report, called Form 8938 to your tax return (usually a Form 1040). The form lists each foreign account that the taxpayer owns, as well as the maximum balance for that account for the year. These accounts include bank accounts, pensions, investments, and even some insurance accounts. See instructions or consult your tax professional for a full list of reportable assets. Since the maximum values for the account is usually denominated in a foreign currency, the maximum value is converted into a dollar value using the end-of-year exchange rates provided by the US Treasury.
Who has to file?
At this point, FATCA only applies to individuals, but at a later point, there may be some entities that will be required to file FATCA.
A taxpayer who is not required to file an income tax return for a specific year is not required to file Form 8938.
US Taxpayers who have foreign assets with a value below a specific threshold do not have to file a Form 8938:
- For US citizens residing in the United States, if the total value of the foreign assets is at or below $50,000 at the end of the tax year, there is no requirement to report them, unless the value exceeded $75,000 at any point during the year. If a taxpayer is filing a joint return with a spouse, the threshold doubles to $100,000 at the end of the year of $150,000 at any point during the year.
- For US citizens living outside of the US, there is no requirement to report ones foreign assets if the value is under $200,000. If a taxpayer is filing a joint return with a spouse, the threshold doubles to $400,000.
What happens if you already filed the 1040?
What do I do about last year? is a question that is often asked. The good news is that the FATCA requirement is only in effect since 2011. This means that you do not have to worry about tax filings for years prior to 2011. If you have already filed for the years 2011 or 2012, and neglected to file a Form 8938, you are required to file an amended return with the Form 8938 included. You will also need to include a cover letter of explanation to the amended tax filing.
Penalties for not filing
The penalties for failing to file the IRS From 8938 are substantial. If an individual who is required to file FATCA does not do so, the IRS will charge them $10,000! Even if a taxpayer does file the Form 8938, if he under-reports his foreign financial assets, he can be charged with the entire $10,000 penalty. Whats more, if the individual does not respond to the $10,000 fine, the IRS will assess an additional charge of $10,000 every 30 days. In addition to the fine, a taxpayer who fails to file the Form 8938 pay be subject to criminal penalties.
It certainly pays to speak you your accountant to clarify whether you have to file the FATCA form, and be certain to keep a close eye on the deadlines!