More than 300 people, many of them concerned American citizens, jammed into a tax seminar at the Marriott Beach Resort Tuesday afternoon to hear about the ramifications of the US Foreign Account Tax Compliance Act.
The seminar, which featured US tax attorneys from Washington and Texas as well as others, was presented by the Cayman Islands Government and Cayman Finance and was mainly intended for American citizens, green card holders and others subject to US taxes.
Premier McKeeva Bush said that when he and the delegation he led discussed FATCA with US Internal Revenue Service and US Treasury officials in Washington in March, it was made clear that the Act in no way singled out the Cayman Islands or any other jurisdiction.
“While this does not diminish the potentially onerous provisions of FATCA, it is important for us to note locally that the Cayman Islands are not being targeted,” he said.
Cayman Finance Director Dan Scott said FATCA was “one of the most important and far-reaching pieces of tax legislation to come out of the United States in recent memory”. He said it would impact a number of Caymanians who had ties to the US through citizenship or residency, as well as non-Caymanian US citizens working or living in the Cayman Islands.
“Because FATCA will affect so many people in so many different ways, the best advice I can give you is to educate yourselves on its provision and avail yourselves of the expertise at hand…” he said.
Enacted in March 2010 as part of the Hiring Incentives to Restore Employment – HIRE – Act, FATCA will require, as of January 2013, foreign financial institutions to agree to report information on bank accounts held by US taxpayers to the Internal Revenue Service or face a 30 per cent withholding tax on payments made to them from US financial institutions.
Tax attorney Thomas Yancey from the firm Sidley Austin in Washington noted that American citizens and those with various US residence status, including green card holders, are subject to US federal income tax regardless of where they live. Even people who have expired green cards are generally subject to US taxes.
All of these people must file an annual US tax return if their income level goes above specified thresholds based on their filing status. In 2010, these thresholds range from US$3,650 for a married person filing separately to US$20,900 for a married couple who are both over 65 and filing jointly.
For Americans who have been honestly filing their US tax returns and separate reports on foreign financial accounts, FATCA will have little effect since the same information being reported by foreign financial institutions will have already been reported by the taxpayer on form Form TD F 90-22.1 – known as FBAR. However, the foreign financial institution could ask for those it deems to be US persons to complete and sign a W-9 Request for Taxpayer Identification Number and Certification and to sign a waiver allowing it to report the information to the IRS.
Penalties for failing to file an annual FBAR are severe. For non-wilful failures, the civil penalty is US$10,000 per violation, subject to reduction for reasonable cause. For wilful failure, there’s a civil penalty of the greater of 50 per cent of the aggregate reportable account amounts or $100,000, per violation. There is also a criminal liability of up to $500,000 and up to 10 years imprisonment for wilful failure to file.
Mr. Yancey noted that US taxpayers who file tax returns can elect to take an exemption – which increases for inflation and is US$91,500 for 2010 – on their foreign earnings. However, if someone doesn’t file a return and the IRS starts investigating him or her, then they will not be eligible for the exemption and their entire income, now matter how much it was, would be subject to income tax, penalties for late filing and interest.
Some people might want to give up their US citizenship to avoid taxes, but Mr. Yancey explained that giving up citizenship does not relieve a person from past US tax liabilities and that the person would be subject to an exit tax under certain circumstances.
The attorneys spoke about a couple of voluntary disclosure programmes for taxpayers who haven’t filed or were behind in filing. They suggested people who were in this position seek guidance from a US tax attorney or tax accountant to determine their best course of action.
In some cases, for people who earned under the foreign earned income exclusion, a quiet disclosure could be an option. This entails simply filing all delinquent income tax returns and FBARs without contacting the IRS first. However, there is no guarantee this will not lead to further inquires from the IRS, especially if a taxpayer is already under investigation. Mr. Yancey said the statute of limitations for US tax offenses was generally three years from the date a tax return is filed. However, there is no time limitation on the assessment of tax, interest or penalties for a tax year if the return wasn’t filed. For wilfully failing to file a return or to pay tax, the statute of limitations for criminal prosecution is six years. For failure to file an FBAR, the statute of limitations is six years for civil penalties and five years for criminal penalties.