H.R. 5799 – Is it a #FATCA Same Country Exemption For Americans Abroad? – Let’s See

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Introduction:

July 12, 2022 – Is there hope for Americans Abroad?

July 14, 2022 – An update

H.R. 5799 has been exciting news indeed! The purpose of this post is to see how H.R. 5799 actually changes the existing legislation. Does it actually deliver “Overseas Financial Access” for Americans Abroad? On June 21, 2022 this issue was considered in an IRS Medic video. The purpose of this post is to understand how H.R. 5799 would change IRC sections 1471(d) and 6038D. In order to understand this, I will take the amendments proposed in H.R. 5799, modify the text of those IRC sections and then analyze their impact. The new sections mandated by H.R. 5799 will appear in italics.

The Bottom Line (For Those Who Don’t Want To Read The Post)

With respect to Foreign Financial Institutions – When must FFIs harass suspected Americans?

JR Commentary: It appears that a Foreign Financial Institution has been given the authorization to opt to NOT report the “depository accounts” of certain Americans abroad without regard to the balance in the account. The $50,000 limit has been removed. The Foreign Financial Institution would have to be satisfied that the individual meets the residency requirement for the 911 Foreign Earned Income Exclusion. Notably this could apply only to “depository accounts” and would not apply to “custodial accounts”. The benefits to Americans abroad are minor. The administrative work required from the bank would likely be considered to be burdensome. The FFIs are still required to report custodial accounts.

This does not provide any assistance to the “Accidental Americans” who cannot comply with the demands for a U.S. Social Security Number or are unwilling to submit a W9.

With Respect to individuals – Reporting Requirements, Form 8938

JR Commentary: This section would relax the FATCA reporting requirements and could significantly water down the requirement to file Form 8938. What it seems to say is:

1. If the individual meets the requirements to use the 911 Foreign Earned Income Exclusion then with respect to BOTH depository and custodial accounts held by Foreign Financial Institutions in that same country … the obligation to File Form 8938 is considered without regard to the depository and custodial accounts held in that country. The way that “account” is defined in this section is:

“Except as otherwise provided by the Secretary, the term “financial account” means, with respect to any financial institution-

(A) any depository account maintained by such financial institution,

(B) any custodial account maintained by such financial institution, and

(C) any equity or debt interest in such financial institution (other than interests which are regularly traded on an established securities market).”

This could completely eliminate the Form 8938 requirement for many Americans who meet either the “bona fide residence” or physical presence tests in 911(d).

It is possible that this could provide some relief for those Americans abroad who are already filing Form 8938.

Now on to the post …

About FATCA

FATCA was a collection of amendments to the Internal Revenue Code. Generally, FATCA imposes requirements on both (1) Foreign Financial Institutions and (2) Individuals. H.R. 5799 contains provisions which affect both. The post is for the purpose of seeing exactly what the relevant statutes look like after the changes.

(1) Foreign Financial Institutions – IRC Sec. 1471

26 U.S. Code § 1471 – Withholdable payments to foreign financial institutions

https://www.law.cornell.edu/uscode/text/26/1471

26 U.S. Code § 1471 is the basic “FATCA Law” as it applies to Foreign Financial Institutions. Sec. 1471(d) is the definitions section. H.R. 4799 is intended to amend the “definitions” to provide a mechanism to remove certain accounts from the reporting obligations imposed on Foreign Financial Institutions.

What Does IRC Sec.1471(d) Look Like After The Proposed Changes?

(d) Definitions
For purposes of this section-

(1) United States account
(A) In general
The term “United States account” means any financial account which is held by one or more specified United States persons or United States owned foreign entities.

(B) Exception for certain accounts held by individuals
Unless the foreign financial institution elects to not have this subparagraph apply, such term shall not include any depository account maintained by such financial institution if-

(i) each holder of such account is a natural person, and

(ii) with respect to each holder of such account, the aggregate value of all depository accounts held (in whole or in part) by such holder and maintained by the same financial institution which maintains such account does not exceed $50,000.

To the extent provided by the Secretary, financial institutions which are members of the same expanded affiliated group shall be treated for purposes of clause (ii) as a single financial institution.

“(C) EXCEPTION FOR CERTAIN INDIVIDUALS WHO LIVE ABROAD.—

“(i) IN GENERAL.—Unless the foreign financial institution elects to not have this subparagraph apply, such term shall not include any depository account maintained by such financial institution if each holder of such account is—

“(I) a natural person, and

“(II) a qualified individual with respect to a foreign country in which such foreign financial institution is licensed to conduct business.

“(ii) QUALIFIED INDIVIDUAL.—For purposes of this subparagraph, an individual is a qualified individual with respect to any foreign country if such individual would be a qualified individual under section 911(d) if the only foreign country taken into account under such section were such foreign country.”.

(b) Effective Date.—

(1) IN GENERAL.—The amendments made by this section shall take effect on the date of the enactment of this Act.

(2) MODIFICATION OF AGREEMENTS.—At the request of any foreign financial institution, the Secretary of the Treasury (or the Secretary’s delegate) shall, as promptly as is practicable, modify any agreement which is in effect between the Secretary and such foreign financial institution under section 1471 of the Internal Revenue Code of 1986 to take into account the amendments made by this section.

(D) Elimination of duplicative reporting requirements
Such term shall not include any financial account in a foreign financial institution if-

(i) such account is held by another financial institution which meets the requirements of subsection (b), or

(ii) the holder of such account is otherwise subject to information reporting requirements which the Secretary determines would make the reporting required by this section with respect to United States accounts duplicative.

(2) Financial account
Except as otherwise provided by the Secretary, the term “financial account” means, with respect to any financial institution-

(A) any depository account maintained by such financial institution,

(B) any custodial account maintained by such financial institution, and

(C) any equity or debt interest in such financial institution (other than interests which are regularly traded on an established securities market).

Any equity or debt interest which constitutes a financial account under subparagraph (C) with respect to any financial institution shall be treated for purposes of this section as maintained by such financial institution.

(3) United States owned foreign entity
The term “United States owned foreign entity” means any foreign entity which has one or more substantial United States owners.

(4) Foreign financial institution
The term “foreign financial institution” means any financial institution which is a foreign entity. Except as otherwise provided by the Secretary, such term shall not include a financial institution which is organized under the laws of any possession of the United States.

(5) Financial institution
Except as otherwise provided by the Secretary, the term “financial institution” means any entity that-

(A) accepts deposits in the ordinary course of a banking or similar business,

(B) as a substantial portion of its business, holds financial assets for the account of others, or

(C) is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities (as defined in section 475(c)(2) without regard to the last sentence thereof), partnership interests, commodities (as defined in section 475(e)(2)), or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.

(6) Recalcitrant account holder
The term “recalcitrant account holder” means any account holder which-

(A) fails to comply with reasonable requests for the information referred to in subsection (b)(1)(A) or (c)(1)(A), or

(B) fails to provide a waiver described in subsection (b)(1)(F) upon request.

(7) Passthru payment
The term “passthru payment” means any withholdable payment or other payment to the extent attributable to a withholdable payment.

JR Commentary: It appears that a Foreign Financial Institution has been given the authorization to opt to NOT report the “depository accounts” of certain Americans abroad without regard to the balance in the account. The $50,000 limit has been removed. The Foreign Financial Institution would have to be satisfied that the individual meets the residency requirement for the 911 Foreign Earned Income Exclusion. Notably this could apply only to “depository accounts” and would not apply to “custodial accounts”. The benefits to Americans abroad are minor. The administrative work required from the bank would likely be considered to be burdensome. The FFIs are still required to report custodial accounts.

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(2) Individuals – Changes To Sec.6038D With The Proposed Changes

26 U.S. Code § 6038D – Information with respect to foreign financial assets

https://www.law.cornell.edu/uscode/text/26/6038D

26 U.S. Code § 6038D is the basic “FATCA Law” as it applies to individuals. It is the section of the Internal Revenue Code that created the reporting obligations expressed in Form 8938.

What Does IRC Sec.6038D) Look Like After The Proposed Changes?

26 U.S. Code § 6038D – Information with respect to foreign financial assets
U.S. Code

(a)In general
Any individual who, during any taxable year, holds any interest in a specified foreign financial asset shall attach to such person’s return of tax imposed by subtitle A for such taxable year the information described in subsection (c) with respect to each such asset if the aggregate value of all such assets exceeds $50,000 (or such higher dollar amount as the Secretary may prescribe).

(b)Specified foreign financial assets
For purposes of this section, the term “specified foreign financial asset” means—
(1)any financial account (as defined in section 1471(d)(2)) maintained by a foreign financial institution (as defined in section 1471(d)(4)), and
(2)any of the following assets which are not held in an account maintained by a financial institution (as defined in section 1471(d)(5))—
(A)any stock or security issued by a person other than a United States person,
(B)any financial instrument or contract held for investment that has an issuer or counterparty which is other than a United States person, and
(C)any interest in a foreign entity (as defined in section 1473).
(c)Required information
The information described in this subsection with respect to any asset is:
(1)In the case of any account, the name and address of the financial institution in which such account is maintained and the number of such account.
(2)In the case of any stock or security, the name and address of the issuer and such information as is necessary to identify the class or issue of which such stock or security is a part.
(3)In the case of any other instrument, contract, or interest—
(A)such information as is necessary to identify such instrument, contract, or interest, and
(B)the names and addresses of all issuers and counterparties with respect to such instrument, contract, or interest.
(4)The maximum value of the asset during the taxable year.
(d)Penalty for failure to disclose
(1)In general
If any individual fails to furnish the information described in subsection (c) with respect to any taxable year at the time and in the manner described in subsection (a), such person shall pay a penalty of $10,000.

(2)Increase in penalty where failure continues after notification
If any failure described in paragraph (1) continues for more than 90 days after the day on which the Secretary mails notice of such failure to the individual, such individual shall pay a penalty (in addition to the penalties under paragraph (1)) of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of such 90-day period. The penalty imposed under this paragraph with respect to any failure shall not exceed $50,000.

(e)Presumption that value of specified foreign financial assets exceeds dollar threshold
If—
(1)the Secretary determines that an individual has an interest in one or more specified foreign financial assets, and
(2)such individual does not provide sufficient information to demonstrate the aggregate value of such assets,
then the aggregate value of such assets shall be treated as being in excess of $50,000 (or such higher dollar amount as the Secretary prescribes for purposes of subsection (a)) for purposes of assessing the penalties imposed under this section.
(f)Application to certain entities
To the extent provided by the Secretary in regulations or other guidance, the provisions of this section shall apply to any domestic entity which is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if such entity were an individual.

(g)Reasonable cause exception
No penalty shall be imposed by this section on any failure which is shown to be due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information is not reasonable cause.

“(h) Exception For Certain Financial Accounts Of Individuals Living Abroad.—

“(1) IN GENERAL.—In the case of a qualified individual with respect to any foreign country, subsection (a) shall not apply to such individual for any taxable year if such individual would not be required to provide any information under such subsection for such taxable year if the qualified foreign accounts in which such individual holds an interest were not taken into account as specified foreign financial assets for purposes of this section.

“(2) QUALIFIED FOREIGN ACCOUNT.—For purposes of this subsection, the term ‘qualified foreign account’ means, with respect to any qualified individual, any account described in subsection (b)(1) which is maintained by a financial institution which is licensed to conduct business in the foreign country with respect to which such individual is a qualified individual.

“(3) QUALIFIED INDIVIDUAL.—For purposes of this subsection, an individual is a qualified individual with respect to any foreign country if such individual would be a qualified individual under section 911(d) if the only foreign country taken into account under such section were such foreign country.”.

(i)Regulations
The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance which provide appropriate exceptions from the application of this section in the case of—
(1)classes of assets identified by the Secretary, including any assets with respect to which the Secretary determines that disclosure under this section would be duplicative of other disclosures,
(2)nonresident aliens, and
(3)bona fide residents of any possession of the United States.
(Added Pub. L. 111–147, title V, § 511(a), Mar. 18, 2010, 124 Stat. 109.)

JR Commentary: This section would relax the FATCA reporting requirements and could significantly water down the requirement to file Form 8938. What it seems to say is:

1. If the individual meets the requirements to use the 911 Foreign Earned Income Exclusion then with respect to BOTH depository and custodial accounts held by Foreign Financial Institutions in that same country … the obligation to File Form 8938 is considered without regard to the depository and custodial accounts held in that country. The way that “account” is defined in this section is:

“Except as otherwise provided by the Secretary, the term “financial account” means, with respect to any financial institution-

(A) any depository account maintained by such financial institution,

(B) any custodial account maintained by such financial institution, and

(C) any equity or debt interest in such financial institution (other than interests which are regularly traded on an established securities market).”

This could completely eliminate the Form 8938 requirement for many Americans who meet either the “bona fide residence” or physical presence tests in 911(d).

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Appendix: Sec. 911(d) – Qualification For The Foreign Earned Income Exclusion

Sec. 911(d) includes:

(d) Definitions and special rules

For purposes of this section—

(1)Qualified individual

The term “qualified individual” means an individual whose tax home is in a foreign country and who is—

(A)a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or

(B)a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.

https://www.law.cornell.edu/uscode/text/26/911

Notice that H.R. 5799 appears to afford both “bona fide residents” and those who meet meet the substantial presence test the benefits of this section. Therefore the scope of H.R. 5799 extends beyond “Americans Abroad”.

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