Five Things You Need To Know Before Filing Your Taxes

Recently by Simon Black: Trust Me, This Is Good News

If you’re a US taxpayer, you’ll want to heed the following before dropping off your 1040 this year.

You see, in 2010, Congress and President Obama passed a series of new rules known as the Foreign Account Tax Compliance Act, or FATCA. FATCA affects every US taxpayer who does anything overseas, as well as every single financial institution on the planet. It may be the most arrogant piece of legislation ever written.

Congress had the audacity to pass a law regulating foreign banks on foreign soil. It requires every ‘foreign financial institution’ on the planet (though that term is very loosely defined…) to enter into an information sharing agreement with the IRS, or else face steep consequences.

Banks that don’t jump into bed with the IRS risk getting locked out of the US financial system. This is a big deal.

If you’ve ever sent a foreign wire before, you probably know that almost every bank on the planet has a ‘corresponding’ account with one of the major banks in New York.

Banco General in Panama, for example, has corresponding accounts with both Chase and CitiBank. When someone wires US dollars to Banco General, the money first hits one of those corresponding accounts in New York. If Banco General gets shut out of those accounts, it risks being cut off from the global banking system.

Needless to say, this legislation is going to rapidly reduce the significance of the US banking sector in the long run as other countries seek new financial pathways that re-route funds around New York. Congratulations, Congress!

In addition, FATCA also requires new disclosures for US taxpayers with ‘foreign financial accounts’, and it starts this year. Before you file your taxes, here are five things you need to know:

[Editor’s note: The following does not constitute tax advice, rather a friendly reminder of what the requirements are. Always consult with your tax advisor.]

1) If you had a ‘Foreign ‘Financial Asset’ in 2011, you may need to file form 8938 this year.

The term ‘Foreign Financial Asset’ covers a lot of ground and is ambiguously defined. They use terms like financial asset, financial account, and foreign financial institution to define each other.

It’s like saying, “What is dark? The opposite of light. So what is light? The opposite of dark.”

Ultimately, the onus is on the taxpayer to figure it out.

In general, foreign bank accounts and foreign brokerage accounts must be reported in Part I of the form.

In Part II of the form, taxpayers must also report interests in foreign entities that they own. For example, if you own 100% of a Cook Islands LLC, this would count as a foreign financial asset and must be reported in Part II.

*The exception here is if you are already reporting this company on form 5471 or 8865. This depends on if/how you elected to classify the entity on form 8832. For example, if you elect to classify a foreign entity as a corporation, you should report it on form 5471, not the FATCA form 8938.

2) GOLD is a bit tricky.