As part of the war on unreported capital and tax evasion, the US initiated FACTA in 2010 – the Foreign Account Tax Compliance Act. According to this law, offshore financial entities are required to search their databases and locate clients with US tax residency under force of citizenship, Green Card, etc., collect this information and provide it to the US authorities. A financial entity that does not comply may find itself exposed to deduction at source for all US activities. The law also requires US citizens to report their financial assets outside the US under certain criteria, in addition to the FINCEN reporting obligation.
In 2014, Israel and the US signed a treaty according to which both countries will provide one another with information on each country’s citizens. The treaty became valid on August 29, 2016. The combination of this treaty and FACTA trumps the right to privacy in source states, and enables the aggregation of information from many entities through the countries rather than financial channels. For this reason, the ITA published ordinances concerning the application of FACTA. Of course, the treaty and law came with much resistance, forcing the Supreme Court to decide in its favor.
W-9 form
What is a W-9?
A form used by institutions and other entities to determine whether the interacting entity has US tax residency. These entities can be: individuals with US citizenships, US companies, partnerships established in the US, etc. The entity must be identified by name, TIN, type of entity, and provide additional details so that the recipient can determine the existence of US tax residency.
Who might request the form?
The form is primarily used by financial entities in determining whether the communicating entity has US tax residency and is required to file. The form is also used to collect information in order to avoid unnecessary deduction at source. Thus, for instance, a US partnership is not required to deduct at source for US citizens, and one way to avoid that is by having the partner fill this form.
Under FACTA, offshore financial entities must identify and classify their US citizen clients and report them to the tax authorities. This is why many institutions including banks, insurance companies, pension companies, etc., use the form to determine who among their clients is a US citizen.
Alien entities (individuals, companies, etc.) are not required to file this form, as there are other forms for foreigners.
Click here to see how to fill in the form.
Form 8938
FACTA introduced the requirement to report financial assets held outside the US. Reporting is done via form 8938 and is attached to the tax report – the 1040 form in case of a US citizen. This does not replace FBAR filing, but rather adds to it.
Who is required to file?
US citizens and Green Card holders are required to report their offshore financial assets if the accumulated balance of said assets/accounts does not exceed $300,000 throughout the year, or $200,000 by year’s end. An American couple is required to file once they exceeded $600,000 a year, or $400,000 by the end of the year.
What is being reported
The following offshore assets and accounts must be reported:
Bank accounts and investment accounts
Pension funds
Education fund
Executive insurance
Provident funds
Savings policies
Shares managed outside the account, such as shares in private companies, etc.
Units in partnerships outside the account, for instance a partner in a law or accounting firm.
Reporting is done in terms of value rather than cost, which may cause a problem revaluating certain properties. In addition, since the form is added to the taxpayer’s other forms, no dual reporting is required when using forms such as 3520, 8621, 5471, etc.
Repercussions of non-compliance
Like with many informative forms, the IRS imposes extremely high potential penalties. A late fee can add up to $10,000, or even $50,000 in cases of negligence. Other penalties for incomplete reports can add up to 75% of the missing tax payment. There is also the possibility of criminal penalties.
