(This blog is continued from a longer set of posts which you can find here: Part 1: Introducing FATCA – What Does It Mean In Your Life? and Part 2: FATCA: How Does The Meadows Bill Interact?)
I was asked to answer the question:
“What exactly would it mean to repeal FATCA?”
The short answer to the question is:
“We make FATCA go away by reversing all the changes to the Internal Revenue Code that collectively comprise FATCA.”
The real question becomes: “How do we reverse FATCA?”
The detailed answer is long and technical. It includes (as appendixes) the complete text of Part V of the HIRE Act (which created FATCA) and the complete text of H.R. 5935 – the Meadows Bill. I would not expect people to read the text of the legislation (it is overwhelming).
The Three Faces Of FATCA
Whether you support FATCA or oppose FATCA, a broad understanding of the original FATCA legislation will help in your “FATCA Discussions”. It will also help you understand that there are actually “Three Faces To FATCA”. When you find yourself in a “FATCA Chat” you should be clear on whether you are talking about:
- Face 1 – The part of FATCA that is aimed at foreign financial institutions (Internal Revenue Code Sections 1471 – 1474 – Chapter 4)
- Face 2 – The FATCA IGAs that have for all practical purposes replaced “Chapter 4: Sections 1471 – 1474” (the part of FATCA that applies to non-U.S. financial institutions) of the Internal Revenue Code
- Face 3 – The various amendments to the Internal Revenue Code (particularly Section 6038D) which presume that Americans abroad are tax evaders and (1) force disclosure of much of their financial lives and (2) impose punitive taxation (particularly in the case of “foreign trusts” and penalties (form 8938) on them.
Question: What does the Meadows bill do actually do?
Answer: It gets rid of Face 1 and Face 3 but leaves Face 2 (The FATCA IGAs intact). This is an important point. Because the FATCA IGAs were never authorized by FATCA, the repeal of FATCA would leave the FATCA IGAs intact!
The full text of Meadows Bill is here. You will see that it reverses (section by section) the HIRE Act amendments to the Internal Revenue Code that created FATCA. It converts the Internal Revenue Code (at least in terms of FATCA provisions) to what it was before FATCA.
But, to appreciate the Meadows Bill, we must first understand FATCA in its original incarnation.
In the beginning, Congress created …
In order to understand the Meadows Bill, you must understand the legislative origins of FATCA – specifically the HIRE Act.
All legislation must have an “Offset Provision” (which explains how to pay for the new law). (Almost all legislation affecting Americans abroad is found in “Revenue Offset Provisions”. The effect is to force a politically powerless group to pay for a powerful majority.
In this case the “Offset Provision” (which created FATCA) is Title 5 of the HIRE Act. The “Offset Provisions” are summarized as follows. I have added IN BOLD what the significance of this is. Please note that Subtitle A is the “Income Taxes” section of the Internal Revenue Code. Remember that FATCA contains two specific targets. Target 1 is “foreign financial institutions“. Target 2 is “Americans abroad” (and a few Homeland Americans) who have accounts (mostly for legitimate reasons) at Foreign Financial Institutions.
Explaining the FATCA legislation
What follows is an explanation of what the “FATCA legislation really is. It will explain how FATCA has two specific targets: (1) Foreign Financial Institutions and (2) The “U.S. Persons” who make use of their services.
Summary of the FATCA provisions in the HIRE Act
(NOTE THAT I HAVE ADDED MY COMMENTARY IN CAPITAL LETTERS.)
TITLE V–OFFSET PROVISIONS
Subtitle A (SUBTITLE A IS THE INCOME TAX SECTION OF THE INTERNAL REVENUE CODE) –Foreign Account Tax Compliance
Part I–Increased Disclosure of Beneficial Owners – AIMED AT FOREIGN FINANCIAL INSTITUTIONS
Sec. 501. Reporting on certain foreign accounts.
THIS CREATES CHAPTER 4 (SECTIONS 1471 – 1474) THAT ARE THE SECTIONS AIMED AT FOREIGN FINANCIAL INSTITUTIONS. IT IS WHAT MOST PEOPLE UNDERSTAND FATCA TO BE.
It’s right there. It’s Chapter 4. That said, Chapter 4 of the Internal Revenue Code has been rendered largely irrelevant by the FATCA IGAs.
Sec. 502. Repeal of certain foreign exceptions to registered bond requirements
Part II–Under Reporting With Respect to Foreign Assets – AIMED SQUARELY AT AMERICANS ABROAD – INCREASES THE OVERALL REPORTING REQUIREMENTS FOR U.S. PERSONS, CREATES FORM 8938 AND IMPOSES PENALTIES ON NORMAL DAY-TO-DAY-LIVING
Sec. 511. Disclosure of information with respect to foreign financial assets. – CREATES INTERNAL REV CODE 6038D WHICH RESULTS IN FORM 8938. INTERNAL REVENUE CODE S. 6038D READS AS FOLLOWS:
26 U.S. Code § 6038D – Information with respect to foreign financial assets
(a) In general Any individual who, during any taxable year, holds any interest in a specified foreign financial asset shall attach to such person’s return of tax imposed by subtitle A for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe).
(b) Specified foreign financial assets For purposes of this section, the term “specified foreign financial asset” means—(1)any financial account (as defined in section 1471(d)(2)) maintained by a foreign financial institution (as defined in section 1471(d)(4)), and
(2) any of the following assets which are not held in an account maintained by a financial institution (as defined in section 1471(d)(5))—(A)any stock or security issued by a person other than a United States person,
(B) any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person, and
(C) any interest in a foreign entity (as defined in section 1473).
(c) Required information The information described in this subsection with respect to any asset is: (1)In the case of any account, the name and address of the financial institution in which such account is maintained and the number of such account.
(2) In the case of any stock or security, the name and address of the issuer and such information as is necessary to identify the class or issue of which such stock or security is a part.
(3) In the case of any other instrument, contract, or interest—(A) such information as is necessary to identify such instrument, contract, or interest, and
(B) the names and addresses of all issuers and counterparties with respect to such instrument, contract, or interest.
(4)The maximum value of the asset during the taxable year.
(d) Penalty for failure to disclose(1) In general If any individual fails to furnish the information described in subsection (c) with respect to any taxable year at the time and in the manner described in subsection (a), such person shall pay a penalty of $10,000.
(2) Increase in penalty where failure continues after notification If any failure described in paragraph (1) continues for more than 90 days after the day on which the Secretary mails notice of such failure to the individual, such individual shall pay a penalty (in addition to the penalties under paragraph (1)) of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of such 90-day period. The penalty imposed under this paragraph with respect to any failure shall not exceed $50,000.
(e) Presumption that value of specified foreign financial assets exceeds dollar threshold If—(1)the Secretary determines that an individual has an interest in one or more specified foreign financial assets, and
(2) such individual does not provide sufficient information to demonstrate the aggregate value of such assets, then the aggregate value of such assets shall be treated as being in excess of $50,000 (or such higher dollar amount as the Secretary prescribes for purposes of subsection (a)) for purposes of assessing the penalties imposed under this section.
(f) Application to certain entities To the extent provided by the Secretary in regulations or other guidance, the provisions of this section shall apply to any domestic entity which is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if such entity were an individual.
(g) Reasonable cause exception No penalty shall be imposed by this section on any failure which is shown to be due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information is not reasonable cause.
(h) Regulations The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance which provide appropriate exceptions from the application of this section in the case of—(1) classes of assets identified by the Secretary, including any assets with respect to which the Secretary determines that disclosure under this section would be duplicative of other disclosures,
(2) nonresident aliens, and
(3) bona fide residents of any possession of the United States.
(Added Pub. L. 111–147, title V, § 511(a), Mar. 18, 2010, 124 Stat. 109.)
THE FOLLOWING POINTS ARE NOTEWORTHY:
THE REFERENCES TO S. 1471 AND OTHER SECTIONS OF THE CHAPTER 4 FATCA PROVISIONS.
THE SECRETARY HAS THE AUTHORITY TO EXEMPT NONRESIDENT ALIENS FROM THE FORM 8938 FILING OBLIGATION AND HAS CHOSEN TO DO SO. THE EXEMPTION EXTENDS TO GREEN CARD HOLDERS WHO ARE, BY VIRTUE OF TREATY TIE BREAKER RULES, NONRESIDENT ALIENS.
THE SECRETARY MAY PRESCRIBE A REPORTING THRESHOLD WHICH EXCEEDS $50,000 (WHICH HAS BEEN DONE IN THE CASE OF AMERICANS ABROAD)
THE SECRETARY HAS THE A BROAD AUTHORITY TO PRESCRIBE REGULATIONS TO CARRY OUT THE PURPOSES OF S. 6038D. THIS IS PROBABLY BROAD ENOUGH TO EXEMPT AMERICANS ABROAD, WHICH PRESUMABLY IS THE BASIS FOR THE SUGGESTED FATCA SAME COUNTRY EXEMPTION. NOTE THAT IN DECEMBER 2016 TREASURY SPECIFICALLY CONSIDERED AND REJECTED THE FATCA SAME COUNTRY EXEMPTION PROPOSED BY “ACA” AND “DEMOCRATS ABROAD”.
IN A CONFLICT BETWEEN U.S. LAW AND THE FOREIGN LAW, THE U.S. LAW WILL TAKE PRECEDENCE – SEE INTERNAL REVENUE CODE S. 6038D.
S. 6038D gave birth to IRS Form 8938
FATCA Form 8938 is the Form that is used to report the “Foreign Assets” mandated by Internal Revenue Code S. 6038D.
- Americans abroad are required to report virtually all of their “foreign assets” (but local to them) to the IRS.
- This creates a “paper trail” which will make it more likely that Americans abroad will pay an Exit Tax if (when) they renounce U.S. citizenship.
All of these concepts are summarized by the IRS.
The relationship between Form 8938 and FBAR is described here.
Sec. 512. Penalties for underpayments attributable to undisclosed foreign financial assets. – INCREASES PENALTIES WHEN TAXES OWED ON UNDISCLOSED ACCOUNTS ARE FOUND. THE INTERNAL REVENUE CODE REQUIRES THE FILING OF NUMEROUS INFORMATION RETURNS. AMERICANS ABROAD ARE “PERSONS SUBJECT TO SPECIAL DISCLOSURE PROVISIONS“. THESE SPECIFIC DISCLOSURE PROVISIONS INCLUDE S. 6038 (FORM 5471 AND FORM 8865 – FOREIGN CORPORATIONS AND PARTNERSHIPS), S. 6038D (FOREIGN FINANCIAL ASSETS ON FROM 8398) AND FOREIGN TRUST REPORTING S. 6048
Sec. 513. Modification of statute of limitations for significant omission of income in connection with foreign assets. – WHEN IT COMES TO FOREIGN ACCOUNTS THE IRS CAN AUDIT FOR 6 YEARS INTO OF THE USUAL 3 YEARS
Part III–Other Disclosure Provisions
Sec. 521. Reporting of activities with respect to passive foreign investment companies. – FOR THE FIRST TIME PFICS ARE REQUIRED TO BE DISCLOSED WHETHER THERE IS OR THERE IS NOT INCOME FROM THE FUNDS (THIS IS INCREDIBLY SIGNIFICANT) – INTERNAL REV CODE 1298(f) https://www.law.cornell.edu/uscode/text/26/1298 WHAT THIS MEANS IS THAT AMERICANS ABROAD WHO OWN A NON-U.S. MUTUAL FUND ARE REQUIRED TO REPORT THIS TO THE IRS WHETHER OR NOT THEY ARE OTHERWISE REQUIRED TO FILE A U.S. INCOME TAX RETURN!
The disclosure takes place on Form 8621. The instructions to Form 8621 are incomprehensible to all but a select group of tax preparers. IT IS VERY EXPENSIVE TO PAY A TAX PREPARER TO COMPLETE FORM 8621.
Effect: Americans abroad are effectively prohibited from owning all but U.S. mutual funds.
Sec. 522. Secretary permitted to require financial institutions to file certain returns related to withholding on foreign transfers electronically.
Part IV–Provisions Related to Foreign Trusts
Sec. 531. Clarifications with respect to foreign trusts which are treated as having a United States beneficiary. – SEE INTERNAL REV CODE S. 679(f).
Sec. 532. Presumption that foreign trust has United States beneficiary. CREATES A PRESUMPTION THAT THE USA CAN TAX THE BENEFICIARY OF ANY TRUST ANYWHERE. NOTE THAT THIS IS A PRESUMPTION, BUT IT DOES PUT THE ONUS ON THE TRUST/BENEFICIARY TO SHOW THAT THE BENEFICIARY IS NOT A U.S. PERSON.
Sec. 533. Uncompensated use of trust property. – BASICALLY THE USE OF TRUST PROPERTY IS NOW TREATED AS A TAXABLE DISTRIBUTION TO THE PERSON USING THE PROPERTY – IRC SECTION 643(I)
Sec. 534. Reporting requirement of United States owners of foreign trusts. – AMENDS THE REPORTING REQUIREMENTS WITH RESPECT TO FOREIGN TRUSTS – THE SECRETARY CAN SPECIFY WHICH INFORMATION IS REQUIRED TO BE REPORTED
Sec. 535. Minimum penalty with respect to failure to report on certain foreign trusts. – CREATES A PENALTY FOR FAILURE TO DISCLOSE THE INTEREST IN THE FOREIGN TRUST (SEE S. 534 ABOVE) WHICH IS THE GREATER OF 10,000 OR 35% OF THE VALUE OF THE REPORTABLE AMOUNT OF THE TRUST. (INTERNAL REVENUE CODE S. 677)
Part V–Substitute Dividends and Dividend Equivalent Payments Received by Foreign Persons Treated as Dividends
Sec. 541. Substitute dividends and dividend equivalent payments received by foreign persons treated as dividends.
Subtitle B–Delay in Application of Worldwide Allocation of Interest
Sec. 551. Delay in application of worldwide allocation of interest.
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