Family offices are being warned it is “risky” to ignore the introduction of the Foreign Account Tax Compliance Act next year.
Tom Humphreys, head of the federal tax practice group at law firm Morrison & Foerster, said the US government is “marching along fairly deliberately to implement Fatca” on 1 January 2014. It has signed a number of inter-governmental agreements with countries recently.
Under the act, financial institutions across the world will be legally obliged to report the details of "US persons" holding more than $50,000 (€38,500) in their accounts to the US’s Internal Revenue Service.
“In terms of family offices, there is just going to be much more compliance. They are going to see their financial institutions asking for certification as to the identity and nationalities of the members of the family – whoever has an interest in the accounts. It could get fairly complicated,” said Humphreys.
Family offices with US persons will come under “a lot of scrutiny” if they have accounts in foreign jurisdictions that haven’t been reported, he added.
“What will happen ultimately is that their financial institution will report, either to the IRS or to their home country government, that the account is owned by a US person. Presumably the IRS will have a system of matching that and seeing if they have a tax return for that person. If they don’t, then that’s where they start an investigation.”
Before this happens, family offices would be better disclosing the account through the US’s voluntary compliance programme, he said. “The penalties are pretty substantial, but it is better than being indicted and going to jail.”
However, Humphreys also admitted that some individuals might not realise they are US persons, which could make it tricky for family offices.
“People could be residing in the US, but not earning an income there. Yet they still count as a US person,” he said. A US person is either a citizen or resident – a number of tests are used to establish who counts as a resident, based on how often or how long an individual has been in the country among other criteria.
Humphreys added: “A good start point for family offices might be to consider sending out a letter asking family members to confirm whether they are a US persons and, if so, to certify that they are filing their tax returns”.