I recently interviewed Felicia M. Seaton (www.feliciaseaton.com), who has been
practicing US law since 1996 and is also licensed by the Israel Bar Association
as a foreign attorney. She focuses her practice on US income-tax compliance and
US estate-planning law for Americans and Israelis residing in Israel.Can
you explain FACTA?
Seven million US “persons” (humans, trusts, companies,
estates) reside outside of the US. Only about 500,000 of them file tax returns
annually. Hence, Congress enacted the Foreign Account Tax Compliance Act (FATCA)
in March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act.
It is intended to obtain information about US taxpayers who own assets of any
kind that are located outside of the US.
We increasingly live in a world
of data exchange between countries and between financial institutions and
Although the IRS has had a mechanism in place for taxpayers
to “come clean” since 1948, we find ourselves living in a reality that no longer
enables us to ignore our legal obligation as US persons.
What does all of
this mean for individuals?
While serving as commissioner of the IRS through
November 2012, Doug Shulman made several statements clearly indicating that the
IRS had set out to find US persons living outside of the US who are not filing
US tax returns nor reporting to the US. In June 2011, he was quoted as saying,
“The risk of getting caught will only increase.”
If they have not already
done so, expect your non-US financial institutions (whether bank or broker, or
transfer agent, etc.) to require you to complete and sign a Form W-9, which is
an IRS form. Please note that if you are not a US person, you will submit a
different form and be done with any involvement with the IRS, unless of course
you own US assets, which is another topic.How will they know?
financial institution may require you to prove that the information that you
have provided is truthful. If you either delay submission of this W-9 form to
your financial institution, or outright refuse to submit it, under FATCA your
financial institution will be required to withhold 30 percent of any US-source
income starting in 2014.
This withholding is an amount that will be held
by the IRS.
The non-US financial institution where you have your account
will transfer the funds to the IRS. If an account owner wishes to claim a refund
of the withholding amount in part or in its entirety, the account owner will
have to apply for a refund or a credit against the withholding
By filing a US tax return. The result is that the account
owner who did not want to be identified, and hence refused to comply with filing
the W-9 form, will have to come forth to the IRS and identify themselves and
file a tax return to claim any portion of the withholding as a refund or
The withholding mechanism is really a penalty, designed to
encourage foreign financial institutions to disclose information about US
account holders or owners, if any, rather than endure the more unpleasant
consequences of 30% withholding from broad categories of payments to
them.What if I do not submit a W-9? Can the IRS find me?
All US persons
will be required (and many already are required today) to complete and sign a
W-9 IRS form. This is because FATCA obligates non-US financial institutions to
identify all US account holders. Intergovernmental agreements that the US and
foreign governments are signing also require identification.
in August 2012, Israel’s Ministry of Finance International Affairs Department
publicized the formation of a team to examine the application of FATCA in
Israel. The ministry’s press release definitively acknowledged the obligation of
Israeli financial entities to report US-person account holders to the US tax
Israel and the US are expected to sign an agreement by the
end of this calendar year. It is expected to be reciprocal, meaning each
government will provide the other with information about their nationals – the
US about Israelis owning accounts located in the US, and Israel about Americans
owning accounts located in Israel.So will the IRS find you?
setting mechanisms in place of extensive magnitude to ensure that it does. It is
no longer a feasible option to separate out your foreign assets from your US
assets for reporting purposes.
The governments are already sharing
“Getting caught” is also not a viable option for you. It is
a dangerous risk to take. I frequently tell my clients that they should already
consider themselves on the verge of being caught. The foreign financial
institutions’ demand that we submit a Form W-9 is really all it takes. Clean it
all up once and for all, and do it right. It is time.
Part 2 of the
interview with will appear next week.
The information contained in this
article reflects the opinion of the author and not necessarily the opinion of
Portfolio Resources Group, Inc. or its
email@example.com Aaron Katsman is a licensed
financial adviser in Israel and the United States who helps people with US
investment accounts. He is the author of the book Retirement GPS: How to
Navigate Your Way to A Secure Financial Future with Global Investing.
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