FATCA, the Foreign Account Tax Compliance Act, was crucial legislation enacted by the United States Congress in May 2010 and enforced in July 2014. It is a significant aspect of international tax law that every U.S. taxpayer and foreign financial institution should be well-informed about.

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 requires foreign financial institutions to identify and 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 means these institutions are responsible for identifying and reporting on behalf of their U.S. account holders, even if they do not reside in the U.S. and have Israeli citizenship.

FATCA was enacted as a pivotal part of the U.S. government’s robust efforts to combat tax non-compliance and offshore tax evasion. Its application is a crucial step towards ensuring that all U.S. taxpayers are not using offshore accounts to evade their tax obligations. The IRS has notified taxpayers that it will attempt to collect a 30% tax on its assessees’ accounts, underscoring the seriousness of the issue.

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 must be submitted to the IRS by June 30th of the following tax year.

History

The banks have held a duty to disclose to the IRS information regarding foreign accounts as early as the 1970s when The Currency and Foreign Transactions Reporting Act of 1970 (which is commonly referred to as the “Bank Secrecy Act” or “BSA”) was enacted. This act was a significant step in the U.S. government’s efforts to combat money laundering and tax evasion. It requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000, and report suspicious activity that might signify money laundering, tax evasion, or other criminal activities. The BSA is sometimes called an “anti-money laundering” law. Several other “anti-money laundering” acts have been enacted to amend the BSA over the years, 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 from the Bank Secrecy Act.

Several other “anti-money laundering” acts have been enacted to amend the BSA over the years, 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 from the Bank Secrecy Act.

Cooperation of the Bank of Israel

Like many other countries with strong ties to the United States, the Bank of Israel has fully embraced FATCA. A bilateral agreement between the U.S. and Israeli governments was signed in 2014, ensuring the Bank of Israel’s complete cooperation with FATCA requirements. This cooperation is a testament to the reliability and trustworthiness of the financial institutions involved, providing a sense of security to the audience.

In early 2014, the Bank of Israel, in cooperation with the Israeli government, directed all Israeli banks to prepare for implementing FATCA. As part of this preparation, 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.

An estimated ten million Americans live outside the USA. All of these taxpayers are required to comply with FATCA reporting regulations when they file their tax returns. This means they must report their specified foreign financial assets, including their foreign financial accounts, on IRS Form 8938. About 100,000 U.S. citizens reside in Israel, most of whom must comply with FATCA reporting requirements.

Filing Requirements: IRS Form 8938 and FinCen Form 114

If you have financial assets in Israel, you must file two separate forms to the US government and your tax return. IRS Form 8938, which is part of your annual tax return, requires you to provide detailed information about your specified foreign financial assets, including their maximum value during the tax year. 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. This form requires you to report the maximum value of your foreign financial accounts during the calendar year. The filing deadline for 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. There are significant penalties for failing to file either or both of these forms.

So, there are several significant differences in requirements for these two 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. Still, this threshold can increase to $200,000 for a married couple filing jointly. Also, the two forms have different definitions of “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. Several 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. In addition to these financial penalties, there are potential legal consequences for non-compliance, including criminal charges for willful violations of the reporting requirements. These charges can lead to imprisonment and a criminal record, significantly impacting your personal and professional life.

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 precisely 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:

• It’s important to note that there are exceptions to the reporting requirement. For instance, financial accounts maintained by a U.S. payor, which 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, do not have to be reported. This knowledge will help you navigate the reporting process with confidence.
• A beneficial interest in a foreign trust or estate if you do not know or have reason to know of the interest. However, if you receive a distribution from a foreign trust or foreign estate, you are considered to understand your interest in the trust or estate.
• An interest in social security, social insurance, or other similar programs 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 again 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 Comply with US FATCA Requirements

American investors with financial assets in certain foreign countries must be warned that some foreign banks refuse 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.

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 to shorten the long waiting list of Americans applying to renounce their citizenship.

Many countries still need to become compliant with FATCA. Here is a complete list of United Nations Member countries and their FATCA IGA status:

FATCA compliance is complicated and tricky. It would be best if you had expert advice from our law firm, which specializes in tax law for Israel and the United States. We know FATCA in all its intricate detail. We are experienced with all waivers and disclaimers to Uncle Sam.

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