A number of prior posts on our Miami tax law blog have dealt with the increasing reach of the Foreign Account Tax Compliance Act, or FATCA. It appears that the U.S. Treasury Department is continuing to make progress in getting other nations to agree to its terms. After reaching deals with a number of European nations and Japan, Treasury has made clear that other countries have two options when deciding to comply with FATCA.
The first option will be what Treasury has termed a reciprocal agreement. As the name suggests, foreign governments will provide information on U.S. taxpayers holding assets in their financial institutions, while the U.S. will return the favor. Not every nation will qualify to enter into a reciprocal agreement, however.
Eligibility will depend on a few select criteria. First, foreign nations must satisfy Treasury that any information provided by the U.S. will stay secure and will be "used solely for tax purposes." In addition, a country must have a valid prior agreement to exchange tax information or a tax treaty already in place with the U.S.
The second option provides that foreign nations will disclose U.S. taxpayers' offshore account information to the Internal Revenue Service. But unlike the reciprocal agreement, the countries will receive no data on their taxpayers with assets in the U.S.
In two years' time, the IRS may begin to impose penalties on overseas financial institutions that refuse to follow FATCA's provisions. The U.S. government hopes this provides an incentive for foreign nations to agree to one of the two FATCA options.
Source: Reuters, "Treasury tells how to comply with offshore account law," Patrick Temple-West and Kevin Drawbaugh, July 26, 2012.
• Foreign banks are not the only ones that could face penalties under FATCA. U.S. taxpayers can endure substantial penalties for failing to comply with offshore account laws.