What do Americans in Switzerland need to know about US tax compliance?
As an American expat, you may have heard about US tax compliance laws like FATCA but you may not know what impact these tax laws have on you as an American abroad and what compliance with them is required. The FATCA legislation has forced foreign financial institutions to report assets held by Americans directly to the IRS. Tax compliance reporting requirements have always been important but FATCA has serious consequences that make compliance with tax laws more important now than ever.
What is FATCA?
FATCA stands for Foreign Account Tax Compliance Act and this legislation was passed in 2010. FATCA is a broad yet complex set of rules designed to increase tax compliance by Americans that have financial assets held outside the United States. This is largely a response to recent off-shore banking scandals that revealed that many Americans were keeping large financial holdings in Swiss bank accounts without reporting or paying the US tax due on those assets.
FATCA created some new self-reporting requirements and increased penalties for failure to comply fully with this tax law. This legislation requires all foreign financial institutions to determine which of their clients are “US Persons” and report information on those clients’ accounts directly to the IRS. Taxpayers who fail to get into full compliance with all of the special rules that pertain specifically to tax on non-US financial assets have increased penalties.
As an American in Switzerland, it is important to pay attention to the self-reporting tax requirements on foreign financial assets and know what sort of compliance is required. There were many tax reporting and filing rules in existence before FATCA but they were widely ignored until FATCA demanded it. These tax reporting and filing rules were nearly impossible for the US to enforce in previous years so it was ignored but FATCA’s new reporting mandate on foreign financial institutions has changed that and compliance is now a requirement.
Your financial institutions in Switzerland are required to report on “US Persons.” This is a broad group that includes US citizens, residents, green card holders, and controlled trusts. FACTA rules defined by the IRS include extensive criteria that banks have to use to screen all of their clients to determine which ones appear to be “US Persons”.
What do Americans in Switzerland need to do?
Since the 2011 tax year, the new IRS Form 8938 must be filed by all “US Persons” (regardless of where they reside) if the total foreign financial assets owned exceeded $50,000 on the last day of the tax year or more than $75,000 at any point during the tax year.
For “US Persons” residing in foreign countries, like Americans living in Switzerland, the reporting thresholds are $200,000 and $300,000, respectively.
IRS Form 8938 is required in addition to the long-standing FBAR (Foreign Bank and Financial Accounts Report) required for any financial assets abroad that exceed $10,000. You must also file Form 8621 (Passive Foreign Investment Company – PFIC) every year for each separate PFIC investment. Prior to FACTA, this was only required to be filed in years that distributions were made from the PFIC investment. The statute of limitations for IRS tax audits of returns listing foreign sourced income was extended to from 3 years to 6 years.
What are the penalties of non-compliance?
This depends on whether the IRS sees your non-compliance as being willful or non-willful. If the non-compliance is deemed to be “non-willful,” your failure to file tax Form 8938 carries a minimum $10,000 penalty. This is the minimum for lack of compliance and the penalty for non-willful non-compliance may rise to as much as 40% of the value of the asset or account in question in addition to tax and interest due. Non-compliance that is determined to be “willful” may also result in criminal prosecution.
As you can see, compliance is now more important than ever. FATCA has resulted in a dramatically increased enforcement of these tax rules and therefore Americans in Switzerland should become familiar with the very significant penalties associated with these and other reporting requirements commonly required of “US people” abroad.
What steps should Americans in Switzerland take to get into compliance?
US tax compliance rules like those included in FATCA are complex and can be difficult to decipher. Here are 3 practical steps you can take:
1. Take stock of which larger banks you have available to you. Your local bank may inform you that they are not going to do business with Americans to avoid the additional tax compliance and reporting burden so it’s good to know what your options are.
2. Take inventory of and document all of your non-US assets and identify which ones are subject to FATCA reporting by a foreign institution. While it is true that your Swiss financial institution must report to the IRS, you are responsible for your own compliance. Check to make sure that your non-US assets are not PFICs (passive foreign investment companies) or improperly reported foreign trusts. We have found that PFICs are much more common than people realize and can be hiding among your investments without you realizing it. You may think you’re secure and come to find out that you’re actually not and considering the penalties, that’s not a risk worth taking. Reach out to a US expat tax advisor in Switzerland to help you with US tax compliance.
3. Consider moving your investment accounts to US financial institutions so you don’t have to worry about FATCA tax compliance. It may make sense to do this if it makes economic and practical sense and cuts down on your required tax reporting. This doesn’t mean that you can’t invest in foreign companies and we don’t recommend pulling out of all international investments. You can still invest in foreign institutions via a brokerage held by a US financial institution.
For a long time, Americans living in Switzerland could get away with not ignoring with many tax reporting and compliance rules but all of that has changed. FATCA has really changed the financial and tax environment for Americans living in Switzerland and other foreign countries. For the first time, the IRS has easy-to-access information about your foreign assets and tax you may owe on them so now is the time to make sure that you’re in full compliance with these and other US tax laws.