The Internal Revenue Service has released a draft version of the form that will be used by foreign financial institutions (FFIs) to report information about U.S. accounts under the terms of the Foreign Account Tax Compliance Act (FATCA). Passed into law in 2010, FATCA requires foreign financial institutions to report information about U.S. account holders on an annual basis. The Treasury Department has since negotiated Intergovernmental Agreements (IGAs) with more than 100 countries to implement the provisions of FATCA, including most of the world's top tax havens.
Form 8966 provides identifying information about the American taxpayer, including that person's name and taxpayer identification number. It reports information about the account, such as the account number, the account balance, as well as the amount of interest and dividends earned during the year. There is also a "Pooled Reporting" section that lists the total number of accounts, as well as the aggregate account balance, for individuals with multiple accounts.
The IRS will match the information received on each form with information reported by the taxpayer, similar to a W-2 or 1099, to ensure compliance. U.S. taxpayers are required to report their worldwide income on their tax return, including but not limited to interest earned in a foreign bank account. The existence of the accounts may also need to be disclosed on a Report of Foreign Bank and Financial Accounts (FBAR) or a Form 8938, if the values exceed certain thresholds.
Since FATCA was passed, there has been a rush by U.S. persons with foreign accounts and assets to come into compliance through one of the ongoing voluntary disclosure initiatives being offered by the IRS. The ongoing Offshore Voluntary Disclosure Program (OVDP) was announced in 2012, following the successful temporary initiatives offered in 2009 and 2011. Under the terms of the OVDP, taxpayers must file amended tax returns and pay taxes for an eight year period, as well as paying a 27.5% penalty based on the high balance of the foreign account(s).
Last year, the IRS announced much less onerous procedures for taxpayers who innocently failed to report foreign income and file FBARs, as opposed to willfully evading the reporting requirements. Under these new procedures, taxpayers are only required to file amended returns for three years, and the offshore penalty is reduced to 5%.
The IRS recently announced that more than 20,000 taxpayers have used these new Streamlined Procedures since the announcement last June. Unlike the OVDP, these new Streamlined Procedures do not guarantee immunity from criminal prosecution, so it is vital to consult with an experienced tax attorney to discuss the risks and benefits prior to participating in one of these programs.