The U.S. tax legislation is largely incorporated under the Tax Code, which includes tens of thousands of sections of the law. Those who do not work in the fields of accounting and tax consulting, will not be able to keep up with the multitude of rules, sections and guidelines. In truth, familiarity with all the provisions of the law is not possible for those who are not among these professionals. However, it is important to know at least one law: the FATCA law.
In the article before you, we will explain the origin of the law, examine the main obligations derived from it and examine in what ways it may be relevant to you.
FATCA Law Legislation
The Foreign Accounts Tax Compliance Act is referred to in short as the FATCA Act. This is a federal law that has a broad influence on all states of the United States, and even on foreign countries.
The law was enacted in 2010 in an attempt to increase the enforcement of the reporting and tax liability obligation among U.S. citizens. In 2013, the law came into force and established three main obligations:
Reporting on financial assets as part of the annual tax return report. The law is imposed on taxpayers who are obligated to report an annual tax (i.e., their income exceeds the income threshold set by law). According to the law, there is an obligation to report in a separate form attached to the tax return form all their financial assets from abroad.
Reporting of financial assets as part of the FBAR report. U.S. citizens, people with permanent residency status, and U.S. corporations, whether they are obligated to report annual tax or not, are legally obligated to report to the U.S. Treasury Department financial accounts held outside the United States if the cumulative amount in them exceeds the threshold set by law during the tax year.
Reporting by financial institutions around the world on accounts that are managed by them, and which American citizens have an interest in.
We will explore each of these obligations and examine its impact on Israeli citizens with dual U.S. citizenship.
Reporting of financial assets as part of the annual tax report – Form 8938
The FATCA was enacted in an attempt to combat the budget deficit in the United States. U.S. government officials believed that increasing the enforcement of tax laws would increase state revenues and reduce, in direct correlation, the deficit. The first step in the process of optimizing the tax enforcement mechanism is the imposition of a reporting obligation on foreign financial assets, as part of the annual tax reporting obligation. In this way, the law sought to expose capital and assets that are kept outside the United States in order to avoid tax payments.
Indeed, the FACTA law imposed a specific tax reporting obligation on foreign financial assets. By law, in addition to the annual tax return form, a taxpayer whose holdings in any financial assets outside the United States exceed the statutory threshold must report those assets in a separate form attached to the annual report – Form 8938 (also known as the Statement of Specified Foreign Financial Assets).
It should be noted that not every taxpayer who submits an annual tax return must also submit form 8938. Only a taxpayer who submits the annual tax report and is a U.S. citizen, permanent resident (under certain conditions) or a local corporation held over 80% by American citizens or alternatively 50% of his income is from passive sources, will be obligated to file the report.
Furthermore, the report refers only to financial assets such as stocks, bonds, options, securities, foreign financial instruments, and only to income above the threshold set by law. In the case of a taxpayer who does not reside in the United States, the law states that the person will have to report as much as $200,000 at the end of the year or $300,000 at some point during the year.
Reporting of financial assets as part of the FBAR report
The additional obligation imposed under the FATCA law is the obligation to report foreign accounts to the U.S. Treasury Department. Reporting obligation in the FBAR report will be established in the following conditions:
- The reporter is an American citizen, an individual with a permanent residency status or an American corporation.
- The reporter has an interest (ownership/partnership/signature permission) in foreign financial accounts, one or more.
- The cumulative sum in the foreign accounts exceeds $10,000 at some point during the tax year.
Financial account:
- Current accounts
- Deposits and savings accounts
- Pension funds
- Securities portfolios
- Executive Insurance
- Provident funds
- Training funds
- Life insurance with a savings component
A reporter who fulfills the above conditions is required to submit an FBAR report and include detailed information about the foreign financial accounts in which American citizens have an attachment.
Reporting by financial institutions around the world on accounts of American citizens
One of the most extensive obligations of the FBAR Law is the obligation imposed on financial institutions around the world (banks, insurance companies, pension funds, etc.). The law imposes on financial institutions around the world an obligation to identify accounts managed by their establishment and whose owners are U.S. citizens. Given an indication that this is an “American” account, the institution must, by law, transfer the information to the U.S. Internal Revenue Service.
The law establishes a particularly harsh sanction for institutions that refuse to comply with the law – withholding 30% of any of the institution’s income originating in the United States.
Under the law, the United States signed financial exchange agreements with a large number of countries. Israel is also a signatory to an information exchange treaty with the United States. Therefore, the banks in Israel work to identify accounts in which there are American stakeholders (owners / partners / signatories).
Upon identification of a “suspicious” account, the customer will be asked to sign a form declaring his citizenship and that he meets his annual tax reporting obligation. In the absence of signing the form, the bank may freeze the account or withhold tax at a rate of 30%.
Reporting obligations set forth in the FBAR Law
| 8937 | FBAR | Reporting by foreign financial institutions | |
| Who needs to report? | U.S. entities that meet the income thresholds set forth in the law. | U.S. entities that meet the income thresholds set forth in the law. | Financial institutions (usually through the local tax authority). |
| What is the reporting threshold? | For citizens who do not reside in the United States – $200,000 at the end of the tax year, or $300,000 at any point during the tax year. | $10,000 cumulatively. | The amount of bills is not important. |
| What are they reporting? | Financial assets – stocks, bonds, securities, foreign financial instruments, etc. | Financial accounts – current accounts, deposits and savings, securities, etc. | Assets and financial accounts. |
| In what framework do you report? | Annual tax reporting. | FBAR Reporting | – |
| When is the last due date? | April 15th | April 15th | Throughout the year |
Are you still confused about the reports you have to file? Having trouble filling out forms as needed? MasAmerica’s team of experts will be happy to assist.
This should not be seen as legal advice. It is recommended to consult with the team of MasAmerica before any action. The service is provided by a professional team, who speak English and Hebrew fluently, and includes lawyers and accountants with American licensees.
