FATCA, the Foreign Account Tax Compliance Act was legislated by the United States Congress in May 2010 and entered into force in July 2014.

FATCA obliges U.S. taxpayers, American passport holders and American social security number owners to report foreign financial accounts whose value exceeds 10,000 dollars, and additional holdings in certain offshore assets to the IRS (Internal Revenue Service). FATCA also obligates foreign financial institutions to report financial accounts whose value exceeds 10,000 dollars held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest. This obliges U.S. taxpayers even if they do not reside in the U.S and even if they have Israeli citizenship.

FATCA was enacted as part of the U.S struggle against tax non-compliance. By applying it the U.S wishes to tax all of its assessee’s international income. More specifically the IRS has notified taxpayers that it will attempt to collect a 30% tax on its assessee’s accounts.

The banks must locate the bank accounts of U.S customers and sign them on a W9 form. This is a Request for Taxpayer Identification Number (TIN) and Certification Form. The form is to be submitted to the IRS by June 30th of the following tax year.

History

large israeli banks
Largest Banks in Israel

The banks have held a duty to disclose to the IRS information regarding foreign accounts as early as the 1970’s, when The Currency and Foreign Transactions Reporting Act of 1970 (which is commonly referred to as the “Bank Secrecy Act” or “BSA”) was enacted. The act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000, and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA is sometimes referred to as an “anti- money laundering” law.
Through the years several other “anti-money laundering” acts have been enacted to amend the BSA including provisions in Title III of the USA PATRIOT Act of 2001, until in 2010 Congress passed FATCA which imposes additional reporting requirements on taxpayers separate and distinct from the Bank Secrecy Act.

Cooperation of Bank of Israel

Many countries which have strong relationships with the United States have instructed their local banks to follow FATCA, as did Bank of Israel. An inter-governmental deal between the US and the Israeli government was signed in 2014, and Israel has cooperated fully with FATCA requirements since the inter-governmental deal was signed.
In early 2014 the Bank of Israel directed all Israeli banks to prepare for implementing FATCA. Israel has committed to surrender to the U.S information regarding U.S. taxpayer’s accounts. The U.S in return is to surrender to Israel information regarding Israeli taxpayer’s accounts.
There are an estimated ten million Americans living outside of the USA. All of these taxpayers are required to comply with FATCA reporting regulations when they file their tax returns. There are about 100,000 U.S citizens residing in Israel, most of whom are required to comply with FATCA reporting requirements.

Filing Requirements: IRS Form 8938 and FinCen Form 114

If you have financial assets in Israel, you are required to file two separate forms to the US government in addition to your tax return. IRS Form 8938 must be filed together with your annual tax return. Then a separate report, the Foreign Bank and Financial Accounts (FBAR) FinCen Form 114 must be submitted to the office of Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, distinct and separate from the IRS. The deadline for filing FinCen Form 114 is June 30th following the end of your tax year.

If you are required to file, filing one of these two forms does not absolve you from the obligation to file the other form. And there are significant penalties for failing to file either or both of these forms.
Please note that there are several significant differences in requirements for these two different forms. There are differences in minimum thresholds required for reporting – as little as $10,000 for Form 8938, and a minimum of $50,000 in assets for reporting on your FinCEN form, but this threshold can increase to $200,000 for a married couple filing jointly. Also, the two forms have different definitions of the term “foreign financial accounts”.

Penalties

A bank that does not provide the waivers and information demanded about its U.S clients is subject to penalties, ranging from heavy fines to barring it from the U.S. A number of Swiss banks have already been fined in large sums in the past for failing to disclose information about their U.S clients. For example in 2009 UBS bank was fined 780 million dollars. Penalties might also be imposed on American taxpayers; they can be fined up to 100,000 dollars or up to 50% of their account’s value.

Types of Assets Requiring Annual Reporting Under FATCA

Under FATCA only specified foreign financial assets need to be reported. The following statement from the IRS stipulates exactly which foreign assets that need to be reported under FATCA:

“Specified Foreign Financial Assets 

Specified foreign financial assets include foreign financial accounts and foreign non-account assets held for investment (as opposed to held for use in a trade or business), such as foreign stock and securities, foreign financial instruments, contracts with non-U.S. persons, and interests in foreign entities. 

There are exceptions to the reporting requirement. For example, you do not have to report the following assets because they are not considered specified foreign financial assets:

  • A financial account maintained by a U.S. payor. A U.S. payor includes a U.S. branch of a foreign financial institution, a foreign branch of a U.S. financial institution, and certain foreign subsidiaries of U.S. corporations. Therefore, financial accounts with such entities do not have to be reported.
  • A beneficial interest in a foreign trust or a foreign estate, if you do not know or have reason to know of the interest. If you receive a distribution from a foreign trust or foreign estate, however, you are considered to have knowledge of your interest in the trust or estate.
  • An interest in a social security, social insurance, or other similar program of a foreign government. 

Other Exceptions from Reporting 

If you reported specified foreign financial assets on other forms, you do not have to report them a second time on Form 8938. These include interests in

  • trusts and foreign gifts reported on Form 3520 or Form 3520-A (filed by the trust);
  • foreign corporations reported on Form 5471;
  • passive foreign investment companies reported on Form 8621;
  • foreign partnerships reported on Form 8865; and
  • registered Canadian retirement savings plans reported on Form 8891.”

Not All Countries Are Complying With US FATCA Requirements.

American investors with financial assets in certain foreign countries need to be warned that some foreign banks are refusing to comply with FATCA’s reporting requirements. The banks claim that the reporting requirements are a real headache and that FATCA compliance costs these foreign banks money. And some foreign banks are forcing US citizens to renounce their US citizenship if they wish to continue investing in that foreign country. And the number of US citizens who have renounced their US citizenship has soared: in 2020, over 6,000 Americans renounced their US citizenship for these reasons. U.S. citizenship must be renounced in person at the US embassy of the country where you reside. Most embassies have been closed for the last year due to COVID precautions. The US government has expressed concern that once all US embassies are re-opened after COVID restrictions end, there will be a further surge in the number of Americans renouncing their US citizenship. The fee to renounce US citizenship has been increased to $2,400 in an attempt to shorten the long waiting list of Americans applying to renounce their citizenship.

Many countries have not yet become compliant with FATCA. Here is a full list of United Nations Member countries and their FATCA IGA status:

https://non-fatca-banks.com/

FATCA compliance is complicated and tricky. You need expert advice from our law firm which specializes in tax law for both Israel and the United States. We know FATCA in all its intricate detail. We are experienced regarding all waivers and disclaimers to Uncle Sam.

We are located in Tel Aviv with offices in New York and Los Angeles, California. We invite you to schedule a complimentary consultation with our firm to learn how we can solve your Israeli legal and business matters.