Death and taxes.
These, we are told, are the two inevitabilities of life. And while, so far as we know, the End does indeed come for us all, the Taxman can sometimes be fooled. At least, that is, for a little while.
As part of the effort to combat tax evasion, the United States Treasury and the Internal Revenue Service (IRS) introduced the Foreign Account Tax Compliance Act (FATCA) in 2010. The main goal of the measure is to target the assets held by US taxpayers in foreign financial institutions (FFIs). In the past, these offshore accounts have been commonly used as an easy way to avoid paying US taxes. FATCA seeks to remedy that loophole by requiring individuals and companies to report all significant holdings held outside the United States, whether they be cash and securities, or any other asset that produces a taxable event, including royalties, ownership stakes, rent, real estate or insurance policies.
In addition to requiring individuals to report their offshore holdings, FATCA also mandates that the FFIs provide details on any US taxpayer customers who hold significant stakes in their institutions. These institutions must report details on the financial accounts of US taxpayers directly to the IRS or, in some situations, to a local tax authority, which then shares that information with the IRS. Institutions regulated by FATCA are obligated to screen and identify US taxpayers, then perform due diligence and transactions required to comply with FATCA's guidelines. FFIs that fail to comply run the risk of incurring a punitive tax of 30 percent on all US investments.
Does FATCA apply to you?For individuals. FATCA impacts individuals who can be considered US taxpayers and who own a certain threshold of holdings in an FFI. There are seven criteria institutions use to flag individuals who may be considered US taxpayers. These include:
- Being a US citizen or permanent resident
- US place of birth
- US address, including US Post Office box
- US telephone number
- Enacting repeating payment instructions to pay amounts to US address or to an account maintained in the United States
- Current power of attorney or signatory authority granted to a person with a US address
- 'In care of' or hold mail addresses that is the sole address for the account holder
According to the IRS, single individuals, or those who file separately from their spouse, are obligated by FATCA to report all foreign assets in excess of $200,000 if living abroad or $50,000 if living in the United States. Individuals who fail to meet FATCA reporting requirements may be subject to a $10,000 failure to file penalty and an additional $50,000 penalty for continued failure to file after IRS notification.
For businesses. Businesses owned by a US person or that have a majority shareholder who is a US person are also impacted by FATCA. In addition, FATCA requires FFIs to report all individual US taxpayers who hold significant investments in their institutions to the IRS.
The Challenges of FATCA Reporting
The screening and due diligence that FATCA reporting requires places many businesses in the difficult position of having to solicit and verify such information as citizenship, residence, account numbers and financial activity for customers who they suspect may be US taxpayers.
According to Denise Hintzke, the Managing Director of Financial Services Tax practice at Deloitte Tax LLP, "what seems to be the most difficult for a number of institutions are the due diligence procedures that they have had to put into place to identify the tax residency of their account holders and investors. Many times, just getting their customers to respond to the documentation request is difficult."
Hintzke reports that while many organizations have been proactive about implementing technology processes to help manage the daunting task of FATCA compliance, some remain slow to adopt the proper stance toward the requirements. "For many organizations, FATCA has now become business as usual," she explains. "They have taken the time to develop appropriate policies, procedures, and the supporting technology to address it. However, there can still be struggles with collecting appropriate documentation and other information needed for reporting."
Technology-Assisted Compliance Solutions
For businesses and institutions that find themselves on the administrative end of a FATCA compliance report, the work can seem quite daunting. Luckily, there are software solutions that can help.
Most authorities suggest breaking down the process of FATCA compliance into three stages or phases of operations.
Phase 1: Initiating a preliminary management framework
In this first phase, organizations begin by sorting through all related entities and assets and classifying them according to whether they fall under FATCA obligations. Once this delineation is made, the organization should strive to create a permanent, accurate database for storing all FATCA-related information, preferably one that can be easily managed and updated from multiple locations. This process will include data verification and data reconciliation, and can be the most taxing, depending on the quality of the existing entity data. The end result, however, is a single source of clean, reliable data that supports all future compliance needs.
Phase 2: Instituting ongoing, automated surveys
Once the principal data repository is established, organizations can keep their compliance listings up-to-date through a series of automated surveys. These surveys periodically check for any changes in the FATCA data, and allow organizations to register these changes across the enterprise. Surveys of this kind are fully customizable to suit the level of required detail, and they can be programmed for automated release, safeguarding the organization against human error or scheduling mishaps.
Phase 3: Establishing clear workflow management
Through the use of software solutions, organizations can take advantage of automated workflow enhancements. For example, not only do such software platforms organize and store FATCA-related data, they can also help keep responsible organization officials abreast of upcoming filings and other requirements, ensuring that all necessary compliance measures are taken in good time. These processes are then logged and preserved in an automated audit trail, which can be made available to managers or auditors at any time. Such measures promote efficiency and provide a clear path for compliance measures to be accomplished.