ATB sheds light on tax reporting obligations for American citizens – An insight about US Foreign Account Tax Compliance Act
KUWAIT: The newly-implemented US Foreign Account Tax Compliance Act (FATCA) has proved to be complex and challenging to US citizens abroad, who were previously unaware of their tax reporting obligations, as well as to foreign financial institutions (FFIs) that are affected by this multifaceted law. As of April 29th this year, Kuwait has officially signed the tax compliance agreement (IGA) with the United States and it is expected for all participating FFIs to comply with FATCA requirements in order to send US citizens’ account information for 2014 by next September. Due to recent developments, many are still overwhelmed and confused by the complex nature of FATCA but it is vital that citizens take swift action to become tax compliant if they have not yet done so.
ATB was established to assist US Citizens and Green Card holders with preparing and filing their tax returns annually, including FATCA and Foreign Bank Account Reporting (FBAR) obligations. Individuals can face serious consequences for not complying with FATCA and their other tax obligations. Therefore, in an interview with Kuwait Times, American Tax Bureau (ATB) officials share insight about the most frequently asked questions related to FATCA that are received from clients on a daily basis. For a private, confidential consultation with a licensed tax professional, call ATB at +965 2226 6990 to schedule an appointment or for more information, visit www.americantaxbureau.com.
Kuwait Times: Under the FATCA law, what are the requirements for people with a US citizenship?
ATB: FATCA requires FFIs such as local banks, stock brokers, hedge funds, insurance companies, trusts, etc. to report accounts of US persons directly to the United States, or to the government of the bank’s country for further transmission to the US through Intergovernmental Agreements (IGAs). The FFIs that do not agree to comply with FATCA are subject to a 30 percent withholding on their US investments. FATCA also requires US citizens who have foreign financial assets in excess of $50,000 (higher for bona fide residents overseas – $200,000 for single filers and $400,000 for joint filers) to report those assets every year on a new Form 8938 to be filed with the 1040 federal tax return.
KT: What are the procedures for FATCA compliance and what is the usual timeline for completion?
ATB: The procedures are most easily broken down into two parts:
FATCA (Form 8938) compliance – New since 2011, certain US persons, including US expatriates, are required to report details of holdings in Foreign Financial Assets as part of their federal tax return.
If any tax is due, payments should be made by no later than April 15thevery year to prevent penalties and interest. The second deadline applies to taxpayers living outside the US (must pass one of two eligibility tests) which automatically extends to June 15th every year. If you file an extension by June 15 (for those given the automatic extension) it allows you an extra four months to file, pushing your deadline to October 15th. Unfortunately, an extension of time to file your returns does not mean an extension to pay your taxes.
Foreign Bank Account Reporting (FBAR) compliance – If you are a US citizen with a bank account in a foreign country (also including signatory rights) with a balance at any point during the year of $10,000 or more, you are required to report this balance annually to the US Treasury Department by electronically filing Form 114 with the IRS by June 30th. Failure to report an account meeting these criteria can result in significant penalties, including fines up to $500,000 and criminal prosecution. Even a non-willful civil FBAR penalty may trigger a $10,000 fine. Willful FBAR violations can draw the greater of $100,000 or 50 percent of the account for each violation-and each year is calculated separately.
KT: How many clients in Kuwait have approached ATB regarding their tax obligations under FATCA?
ATB: Out of the 2,500 clients that currently use our services, more than half actually require FATCA assistance. Our Tax Professionals are fully trained and licensed to deal with any forms related to FATCA as well as provide consultation to those seeking more information for their own unique situation. Businesses are also required to comply with FATCA and we receive business consultation requests every week. ATB has clientele all around the GCC, as well as the US and the UK.
KT: What are the consequences if people want to renounce their US citizenship?
ATB: Every renouncing individual, whether qualifying under the exceptions or not, will always be subject to the Compliance Test. Form 8854 must be filed with a renounced individual’s final year return in order to be considered fully renounced. On this form, the renouncing individual must affirm under penalties of perjury that they are compliant with US tax filing obligations for the period of five years preceding expatriation in addition to a $2,350 renunciation fee, more than four times what it used to cost back in 2010.A person who renounced would still be required to pay any outstanding amounts due over those five years up to the date of renunciation. Depending on the individual’s annual income for each of those five years, it’s possible they would only have to report their finances and not owe any tax but it is advised that they seek the help of a Tax Professional in order to determine if they have to pay taxes or just report. The renunciation fee does apply regardless of whether tax is owed or not.
Also, an additional US Exit Tax is required of those who qualify as a “covered expatriate” under one of three tests. One, if the individual has a net worth of $2 million USD or more at the time of renunciation. Two, if the individual had an average annual net income tax liability of more than $157,000 in the five years ending before the date of expatriation. Or three, the individual failed to certify that he or she had complied with all US Federal tax obligations for the five years preceding the date of expatriation.
KT: Can the US Embassy accept the renunciation of US citizenship for Kuwaitis and other nationalities?
ATB: Yes, the US Embassy is the only place someone can renounce their US nationality in Kuwait; however, the process can take more time than expected due to the frequently unknown prerequisites i.e. being five years tax compliant. Persons intending to renounce US citizenship should be aware that, unless they already possess a foreign nationality, they may be rendered stateless and lack the protection of any government. They may also have difficulty traveling as they may not be entitled to a passport from any country. Even if not stateless, former US citizens would still be required to obtain a visa to travel to the United States, or show that they are eligible for admission pursuant to the terms of the Visa Waiver Pilot Program (VWPP).
“Renouncing US citizenship is a voluntary act and not easily reversed. Those seeking renunciation must schedule an appointment through the US Embassy for a renunciation interview, which is followed by a time of reflection, before the renunciation ceremony. The Embassy can also discuss with you the consequences of any actions you may take upon your US citizenship.”
For more information on US renunciation in Kuwait, you can visit the US Embassy Kuwait website at http://kuwait.usembassy.gov/renunciation.html or contact ATB to be guided through the process step by step.
KT: What effect will the FATCA law have on US citizens who operate a business in Kuwait?
ATB: To enforce compliance, FATCA requires Foreign Financial Institutions (FFIs) to report directly to the IRS information about financial accounts held by US taxpayers (even if they hold only non-US assets), or held by foreign entities in which US taxpayers hold a substantial ownership interest. An FFI that refuses to disclose information to the IRS faces a 30 percent withholding tax on US source payments regardless of whether the recipient is a US taxpayer.
KT: What long-term effects will FATCA have on FFIs in Kuwait?
ATB: Banks and other FFIs in Kuwait must be in accordance with FATCA provisions by this September, as recently announced by the Ministry of Finance (MoF). FFIs are required to have needed documentation prepared for transfer to the MoF, the official entity that will be directly transmitting documentation to the US Internal Revenue Service (IRS), in the coming few months. This will require a complete reassessment and restructuring of information collection, training a qualified workforce, designing and developing a number of organizational structures as well having the technical and legal means to fully implement FATCA within their organizations. The provisions of FATCA are complex and will act so as to make it difficult for any FFI to operate unless it complies with the FATCA regime by registering with the IRS.
KT: Which nationalities are most affected by the FATCA laws?
ATB: As long as the individual was born in the US or is a US Passport or Green Card Holder, the FATCA laws apply, therefore it is irrelevant what other nationality they might possess.
KT: What steps can families with joint bank accounts and shared assets take if one member has US citizenship?
ATB: A joint account that has one US owner is treated as a US account and therefore the entire account is subject to the FATCA legislation; same applies to assets.
KT: What are the common inquiries received from dual citizenship holders about FACTA?
ATB: Many think that if they were just born in the US they don’t have to file their tax returns. However, as mentioned, this is not at all the case.
*Thinking income is not taxable if it was earned in Kuwait or anywhere outside the US – incorrect although Americans overseas do have the benefit of the Foreign Earned Income Exclusion (FEIE) which makes a much higher amount earned not taxable i.e. for 2014, the exclusion is up to $99,200.
*Having an income less than the threshold which is approximately $99,200 (every year it rises due to inflation), they don’t need to file their returns. When actually, they are not eligible for the FEIE unless they file their federal tax returns.
KT: Can an individual regularize their status by filing their income statement for the previous years?
ATB: There are a few different processes that enable an individual to become tax compliant even if they have never filed before. These include the Streamlined Offshore Program and the Voluntary Offshore Disclosure Program. Also, Foreign Bank Account Reporting (FBAR) might be necessary depending on the individual’s situation. American Tax Bureau is specialized in these programs and can help the individuals seeking to become compliant with which ever program is most suitable for their situation.
By Sajeev K Peter
Kuwait Times Exclusive