February 15, 2019

What is FACTA and is Cayman preparing for it?


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The following is a government release:

Cayman’s Government, Private Sector prepare for FACTA

As the Cayman Islands Government’s Foreign Account Tax Compliance Act (FATCA) Task Force evaluates the suitability of a government-to-government reporting arrangement with the US, it also acknowledges that the local financial services industry is making its necessary preparations for managing FATCA.

“Government is aware of FATCA developments, including the recent publication of the US Treasury’s Model 1 Intergovernmental Agreement to Improve Tax Compliance and to Implement FATCA,” said Mr Samuel Rose, representing the Task Force. “The Model 2 Intergovernmental Agreement, now in development with the US Treasury, Japan and Switzerland, also is expected to be released soon.”

Mr Rose said the Cayman Islands Government will continue to monitor these and other possible FATCA developments, as the collective basis upon which it will make its decision on whether to enter into a government-to-government reporting arrangement with the US.

FATCA also contains language directed specifically toward foreign financial institutions (FFIs) that requires them to be prepared to meet FATCA’s proposed compliance obligations, regardless of whether a government has a reporting agreement in place.


“Government understands that the FFIs in the Cayman Islands are well on its way to ensuring that they is taking the necessary measures to comply with FATCA”, said Mr Rose, who is the deputy chief officer in the Ministry of Finance (Financial Services).

The Cayman Islands Premier, the Hon. McKeeva Bush, also recognised industry for its proactivity in ensuring its readiness for FATCA.

“Government is keeping track of the discussions surrounding FATCA, and evaluating both information and dialogue in order to make the best choice for our jurisdiction regarding a reporting arrangement,” he said. “We will be in a position to decide on the best way forward once the Model 2 IGA is published and we have been able to fully evaluate all the options.

“As Government continues this process, it is encouraging that FFIs in the Cayman Islands are moving ahead with their particular preparations, in accordance with US requirements,” the Premier also noted.

Government’s FATCA Task Force comprises the Office of the Financial Secretary; the Attorney General’s Chambers; the Tax Information Authority; the Cayman Islands Monetary Authority; and the Ministry of Finance (Financial Services).


But what is FACTA?

A Forbes article appearing on their website on Nov 3, 2010 and written by Josh Ungerman said:

FACTA Further Erodes Taxpayer Protections Afforded by the Statute of Limitations


The President signed the HIRE Act into law on March 18, 2010 providing tax incentives to businesses who hired new employees.  To offset the projected revenue loss, Congress added the Foreign Account Tax Compliance Act (FACTA).  While the big thrust of FACTA is to impose a withholding and disclosure regime on foreign entities and financial assets, it also makes significant adjustments to the existing statute of limitations applicable to US taxpayers with offshore activities.

Pre-FACTA, US taxpayers were subject to the traditional 3-year statute of limitations which limited the ability of the IRS to propose assessments after the expiration of 3 years.  The 3 years could be extended to 6 years in the case of a 25% or greater omission from gross income and an unlimited statue of limitations applies in the case of civil fraud.  Finally, for certain undisclosed foreign transactions a suspension of the 3-year statute of limitations applied until the foreign information was provided to the IRS.  The most common trap under the pre-FACTA law was the failure to file Forms 5471 and Form 8865 with respect to a 10% or more interest in a controlled foreign corporation and a controlled foreign partnership, respectively.  The suspension of the statute of limitations only applied to “any event or period” to which the undisclosed information related.


FACTA makes three significant changes; the last of which is a ticking time bomb for unaware taxpayers.

First, FACTA imposes an additional new 6-year statute of limitations on an omission of income on undisclosed foreign financial assets.  The dollar threshold is merely $5,000 of unreported income from undisclosed foreign financial assets.  This is a nice de minimus exception that will not snare in taxpayers with insignificant amounts of unreported income from foreign financial assets.  The recent IRS Voluntary Disclosure Initiative program that closed on October 31st of last year would have been much better received by taxpayers and professionals if the IRS had exercised similar restraint to avoid running taxpayers with low levels of unreported income through its program that included a 20% FBAR (“miscellaneous”) penalty on the highest amount in the undisclosed foreign account from 2002-2008.

Second, the suspension of the 3-year statute of limitations is expanded to (1) annual reports required to be filed by a Passive Foreign Investment Company (PFIC), (2) the election of a PFIC shareholder to have the PFIC treated as a qualifying electing fund and (3) reports of foreign financial assets (a new form to be attached to and made a part of a tax return).

Third, the suspension of the 3-year statute of limitations will now apply with respect to the entire tax return and presumably all items on the tax return regardless of whether they are related to a foreign activity.  That’s right, potentially the entire return will have an unlimited statute of limitations until the foreign information is supplied and at that time, the 3-year statute of limitations will begin to run.  A very disturbing thought indeed.  So where is the de minimis exception in the statute?  There is not one, yet.  The IRS should promulgate regulations that adopt the old fashioned “clue” test courts have applied in the 25% gross income omission 6-year statute of limitations cases.  Otherwise, it is not out of the realm of possibility that the IRS may take the submission that the statute of limitations never begins to run when there is an omission in the provision of foreign information, no matter how small or insignificant.


At the end of the day, the IRS now has more ways than ever to argue that the statute of limitations remains open for 6 years or never even begins to run at all with respect to certain foreign omissions.  This new regime applies to returns filed after March 18, 2010 and returns filed on or before March 18, 2020 if the statue of limitations under IRC section 6501 was still open.  Accordingly, if a 2006 tax year return is open under the pre-FACTA 3-year statute of limitations, it may also be subject to the new FACTA extension or suspension rules.  The IRS will certainly attempt to take advantage of taxpayer snafus and stumbles to keep the entire tax return (all items) open for an indefinite period.

Has the IRS previously taken extreme positions in the statute if limitations arena?  Without looking very hard, concrete examples are on the books today.  In the Intermountain Tax Court decision (134 T.C. No. 11 (May 6, 2010)) the government unsuccessfully argued that a basis enhancement/boost equated to an income omission.  If that is too subtle a case, a case currently in the US Tax Court, (Appleton, Docket No. 7717-10), demonstrates that the IRS is willing to go so far as to argue that tax returns filed in the US Virgin Islands, which are US possessions, by US citizens are insufficient to trigger the running of the 3-year statute of limitations.  This issue will be the subject of the author’s next blog.  Hopefully, the US Tax Court will again push back the ever increasing appetite of the IRS to eviscerate the protections and certainly provided by the 3-year statute of limitations.

For more on this story go to:


Another story of note is also published here from Boquete Guide says, “According to the accounting firm Deloitte the Treasury dept will release the proposed regulations by the end 2011* and the law will go into effect Jan 1 2013.

It’s getting very close.

The HIRE Act and The Foreign Account Tax Compliance Act (FATCA)

May 19, 2011 By Lee

Congress in the US passed a law, in 2010, the Hiring Incentives to Restore Employment Act, aka the HIRE act. It was on it’s face designed to help an economic recovery with incentives to encourage business to add employees. On the face and for most people and small businesses a good thing. However as in many good things government does to “help” it’s citizens this law has a potentially sinister side to US expats and US taxpayers who have interests in off shore businesses. Even if they are not trying to hide assets it will add a burdensome reporting requirement.

“The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts.

Under FATCA, U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on a new form attached to their tax return. Penalties apply for failure to comply with this new reporting requirement. Reporting is required in taxable years beginning on or after January 1, 2011.

In addition, FATCA will require foreign financial institutions to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. This new reporting regime applies with respect to payments made by foreign financial institutions to covered accounts on or after January 1, 2013.”


Reporting by U.S. Persons Holding Foreign Financial Assets

FATCA requires any U.S. person holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return. Reporting applies for assets held in taxable years beginning on or after January 1, 2011. Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.

Reporting by Foreign Financial Institutions

“Beginning in 2013, FATCA will also require foreign financial institutions (“FFIs”) to report directly to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. To properly comply with these new reporting requirements, an FFI will have to enter into a special agreement with the IRS during 2012. Under this agreement a “participating” FFI will be obligated to:

(1) undertake certain identification and due diligence procedures with respect to its account holders.

(2) report annually to the IRS on its account holders who are U.S. persons or foreign entities with substantial U.S. ownership; and

(3) withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual account holders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity account holders failing to provide sufficient information about the identity of its substantial U.S. owners.

It is important to note that the details of the new reporting and withholding requirements pertaining to FFIs must be developed through Treasury regulations that have not yet been issued. Because the new requirements will go into effect in 2013, it can be expected that the regulations defining the new requirements will be issued during 2011 and early 2012.”


The regulations are not all there yet but the essence of this law has already made many international financial institutions shun American Citizens since they do not care to be pawns of the US Government. It will limit options for investment by US citizens. If I read it correctly Foreign Financial Institutions will now need to either not allow a US citizen to open an account or need to identify those people to the IRS.

According to the accounting firm Deloitte the Treasury dept will release the proposed regulations by the end 2011 and the law will go into effect Jan 1 2013. Deloitte

According to the accounting firm KPMG.

“FATCA withholding is effective for affected US payments after 2013. This withholding is not imposed for purposes of collecting withholding taxes but, rather, to compel foreign financial institutions (FFIs) and other affected foreign entities to disclose information about their U.S. account holders and owners. Beginning on 1 January 2013, affected foreign entities (and their common control affiliates) must either:
Identify and report to the IRS information about direct and indirect US account holders; or
Pay a 30 percent penal withholding tax on all US investment income and gross sale proceeds from U.S. stocks and securities.”

The goal is flush out international tax evaders, not the legal ones like Halliburton or General Electric, but the illegal ones like perhaps you. Gone are the days of banking secrecy, uncle wants your money and he wants it now.

I have been asked if this means transfers from the US to a Panama account will have 30% withheld. I do not see any hint of this in the law. I see earnings for off shore investments and businesses being sought not the converse.


As more is published about this I will return to the topic. I think the summary for now is that US taxpayers are indentured to pay income taxes for life, regardless of where they live and uncle Sam wants it’s share of any off shore earnings as well as domestic. Any illusions of privacy are rapidly disappearing in this increasingly shrinking world.

I do not see this effecting most retires unless they choose to avoid letting the IRS know about bank accounts offshore. It will probably inhibit financial institutions from wanting to do business with US taxpayers because they need to elect to cooperate, an expense, or not, potentially a bigger expense.

For more on this story go to:


*Please read the whole FACTA document at


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