The Foreign Account Tax Compliance Act (FATCA) is set to impact advisers with American clients when it comes into force in 2013. David Treitel, tax director at US 
Tax & Financial Services Ltd, explains how best to manage the risks

An obscure new form recently published by the United States Internal Revenue Service (IRS) has dramatically increased risk for advisers everywhere who have ever advised US citizens.

With numerous Swiss investment advisers and eight large banks already under criminal investigation, the risk of getting it wrong when advising American clients could seriously damage reputations.

This new form known as ‘Form 8938’ requires huge numbers of Americans in the UK file annual reports with the IRS listing all savings and investments, including pension plans.

US persons (citizens and green card holders) always remain taxable by the US on worldwide income and worldwide gains, forever.

It is mandatory of these individuals to file annual returns reporting income and separately details of non-US financial assets.

Even if there is no US tax payable, omitting one of the many ‘information returns’ detailing non-US assets can lead to stiff financial penalties simply for failure to file.

Who is American?

All advisers keep detailed KYC (Know Your Client) documents, often including copies of passports.

A US passport is an obvious indication a client is a US citizen subject to US tax.

However, seeing many people have more than one passport, best practice is always to ask all clients if they, their spouse, any children or either parent was born in the US or if they have ever held a US green card.

Many individuals in such circumstances are often unaware there are US filing obligations.

Investment advice

It is all too easy to overlook US aspects. For example, a client might invest in a series of collective investments held in a SIPP.

From a US perspective this would be described as ‘passive foreign investment companies’ (PFICs) held in a ‘foreign grantor trust’.

Reporting such a SIPP could easily run to well over 100 pages of annual reporting to the IRS, with significant additional accounting fees on top of potentially unexpected tax consequences.

FATCA

New Form 8938 is part of FATCA and requires many individuals to report non-US financial assets directly to the US Government.

The type of accounts and assets which must be reported on new ‘Statement of Foreign Financial Assets’, Form 8938, include:

• Any financial account maintained with a foreign financial institution (i.e. non-US bank).

• Other foreign financial assets, held for investment but not maintained with a financial institution, 
including stocks not issued by a US person, interests in foreign entities, and various financial instruments issued by non-US persons.

• Foreign mutual funds, hedge funds and private equity funds.

US taxpayers living outside of the US need to complete this form if they hold more than $200,000 in such investments on the last day of the year, or more than $400,000 within the tax year.

The investment threshold is $50,000 for taxpayers living within the US and different thresholds apply to couples who file joint tax returns.

Keeping safe

From January 2014 under the FATCA regime, most banks and financial institutions globally will be required to look for every one of their ‘US person’ customers.

For financial institutions this will be a sizeable, complex and costly project.

Inevitably, all UK financial institutions will find more US customers (e.g. those born in the United States but who had not presented a US passport when an account was opened).

In today’s increasingly complex world it is simply smart to ask all clients to list all nationalities so other reporting regimes such as the US 
are not overlooked.

The key message for UK advisers from all this extra reporting is that many UK based individuals as well as financial institutions will start telling the IRS precisely what investments are held by US persons in the UK including investments in UK pension plans, ISAs and other wrappers.

Once the IRS have this information, investors will of course be expected to pay US tax on income or gains from each investment.

With approximately 250,000 Americans here today it is inevitable that most advisers will find an American amongst their clients.

The simple if unexciting way to minimise risk is to quiz clients 
to find out precisely who is affected and take specialist advice as needed.