On December 30, 2022, the Treasury Department issued Notice 2023-11, guidance aimed at helping foreign banks and US citizens living abroad who have experienced problems staying in compliance with the US Foreign Account Tax Compliance Act (FATCA).
Who is Affected by FATCA?
FATCA primarily affects US citizens who have $10,000 or more in foreign financial institutions (FFIs) by requiring them to report their foreign financial accounts and foreign assets on their tax returns.
It also requires FFIs to report account balances, certain account transactions, and the identity, including TINs (Social Security or ITIN numbers), of account holders to the IRS, for all accounts held by US citizens.
Specifically, the guidance provides temporary relief to FFIs for reporting TINs of US citizens who meet certain requirements for years 2022, 2023, and 2024.
How Does the New Guidance Help?
The new guidance from Treasury states that FFIs that report information on US account holders to the IRS without including the TINs associated with those accounts will not be flagged for significant noncompliance. FFIs must continue to make a good-faith effort to obtain TINs from US citizens residing in that jurisdiction as outlined below in “Limits of Guidance” order to receive this relief.
The purpose of this temporary relief is to give the Treasury time to work with FFIs to establish a more appropriate permanent solution.
The relief applies to the FFIs’ reporting for 2022, 2023, and 2024, in each case due by Sept. 30 of the following year.
Limits of Guidance
The relief applies only to preexisting accounts. FFIs must continue to:
- Obtain and report the date of birth of each individual or controlling person whose US TIN is not reported
- Beginning in 2023, annually request a missing US TIN from each account holder
- Beginning in 2023, annually search its electronically searchable data for any missing US TINs
- Report the applicable TIN Code, as published and updated by the IRS, for each account missing a required US TIN.
It’s important to note that even with the temporary relief, taxpayers who fail to comply with FATCA regulations can face significant financial penalties.
FATCA was passed as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010 in an effort to combat tax evasion by American using off-shore accounts to shelter their money from the IRS (it was created after it was revealed that Americans were hiding billions of dollars in illegal Swiss accounts).
The Problem with FATCA
While the law was intended to prevent wealthy American from evading taxes, it applies to anyone identified as a “US person.” This includes all US citizens and can also include Green Card holders and certain corporations.
The guidance just issued primarily affects “accidental Americans.” Typically, these are people who have lived most or all of their lives outside the US but hold American citizenship. This is usually either because they were born on American soil to foreign nationals or because one or both parents are American but live permanently overseas.
Many “accidental Americans” don’t have Social Security numbers or ITINs. Nonetheless, as American citizens, they are considered taxpayers and are subject to the rules imposed on FFIs by FATCA. But without TINs for these individuals, FFIs that keep accounts for them are in violation of FATCA.
Rather than face penalties, many FFIs no longer accept or keep US citizens as account holders. As a result, many Americans living abroad over the past 12 years have faced difficulty obtaining even basic banking services, let alone financial products such as mortgages and business loans. By extension, spouses, business partners, and others who might hold a joint account with an “accidental American” also risk have their bank accounts closed.
FATCA has been implicated in the drastic rise in the number of Americans who have renounced their citizenship. The number has rose from 743 in 2009, the year before FATCA was passed, to 6,705 in 2020.
The United States is one of only two countries (Eritrea is the other) with a citizenship-based tax system. Most other countries adhere to residence-based taxation, but the US considers all its citizens to be taxpayers and requires them to submit yearly tax filings to the IRS, regardless of whether they reside in the US or elsewhere.
Tonneson + Co Can Help
Living abroad or keeping assets in FFIs can complicate your tax situation. As noted above, even with the temporary guidance, taxpayers who are not in compliance with FATCA face serious penalties.
At Tonneson + Co, we work with our clients to determine whether they need to include FATCA in their annual tax filings, and we help ensure their returns are accurate and timely. If you’re a US citizen living abroad or if you have assets in one or more FFIs, contact us today.
Contact us at Tonneson + Co today to learn how we can help.
If you’re interested in working with Tonneson + Co, please reach out to us. We look forward to hearing from you!