New U.S. reporting rule is roadmap to assets of expats

Individuals who are required to file federal tax returns, and who have financial assets in Costa Rica will soon face a new requirement coming in IRS Tax Form 8939. The latest drafts of the form and its instructions have been published on the Web site of the Internal Revenue Service. Foreign banks will also be obligated to assist the IRS in the hunt for financial assets under the requirements of federal law known as FATCA  signed by President Barack Obama March 18, 2010.

Expats should not confuse the proposed IRS tax form with the long standing Report of Foreign Bank and Financial Accounts or FBAR that must be filed with the U. S. Treasury Department once a year for bank accounts that exceed $10,000. IRS Form 8939 is much more detailed, and is nothing short of a complete roadmap to the entirety of a person’s foreign financial holdings.

The current draft requires calculating the values of financial assets that it defines as bank accounts, stocks, securities, interests, and financial instruments. Detailed information about the assets such as names of trusts, corporations, and account numbers must also be provided.

Thresholds for unmarried taxpayers who are required to file the form vary between $50,000 and $200,000 depending on residence. Those who actually live abroad full time get a bit of a break as their threshold is the higher one. Thresholds also have nothing to do with income so even those with unproductive or inactive assets would fall within its requirements.

America’s tax collectors are also getting a new weapon to track the foreign financial assets of tax filers. The same federal law that authorizes the new tax form also places requirements on banks worldwide to forward the details on the accounts of U.S. tax filers. The current time frame requires every bank in the world defined as foreign financial institutions to sign the agreement with the IRS by June 30, 2013.

The IRS will in 2014 begin to order banks in the United States to withhold assets for foreign financial institutions that fail to sign the agreement. Institutions that enter into the IRS agreement will be required to turn over details of account holders with U.S. filing requirements on an ongoing basis.

Slipping through the cracks in Costa Rica with a corporate bank account is not likely to succeed. Local banking regulations have for years required corporate account holders to identify beneficial owners and the IRS rules would ensnare any company with 10 percent ownership or more held by a United States person. Since the requirements are being applied worldwide, expats who leave Costa Rica or shift their assets elsewhere could expect to encounter the same requirements.

Those who have amassed substantial foreign assets and have failed to pay the required taxes in previous years could also face problems. At the very least the IRS will be able to quickly determine who has failed to file financial reports with their individual tax returns for active corporations earning income in Costa Rica.

Dual citizenship in Costa Rica is also likely to be of little value in escaping FATCA. The law requires the banks to turn over information for any “United States person,” The legal definition includes those with dual nationality, as well as citizens of Costa Rica who hold legal residency in the United States.

Those who visit the U. S. Embassy in Costa Rica will notice there is a bin for residents to deposit the required form I-407 to abandon their United States residency. Renouncing United States citizenship is a more complicated process that requires getting current with the tax returns for previous years.

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