New FATCA Reporting Rules May Hit Visitors' U.S. Annuities

What You Need to Know

Financial institutions would have to report life cash value and annuity surrender value.
The proposal could take effect for tax returns filed after Dec. 31, 2023.
Border-crossers often have trouble finding financial institutions willing to take on FATCA reporting obligations.

A proposed asset-tracking rule could affect international visitors in the United States who own U.S. life insurance policies or U.S. annuities.

The Biden administration wants to require U.S. financial institutions to send the IRS account balance information for any accounts maintained by “foreign persons.”

The account balance total would have to include the cash value of the foreign persons’ life insurance policies and the surrender value of their annuities.

The proposal probably would not affect permanent residents, or non-citizens who have authorization to live in the United States permanently, but it could affect international students, international scholars and others who may live in the U.S. for years but are still classified as foreign persons.

The proposal could take effect for tax returns filed after Dec. 31, 2023.

The Department of the Treasury describes the proposal in the general explanations report, or “Greenbook,” for President Joe Biden’s federal budget proposal for fiscal 2023.

The department put the financial institution information reporting proposal in a section about modernizing tax rules.

FATCA

The Foreign Account Tax Compliance Act, or FATCA, is the federal law that governs financial institution information reporting for U.S. accounts.

FATCA requires non-U.S. financial institutions with U.S. customers to send the IRS information about the customers’ accounts, in an effort to prevent tax evasion and money laundering.

The Biden administration proposal would extend FATCA by applying it to U.S. financial institutions with customers from outside the United States.

What It Means

Many financial institutions outside the United States have found complying with FATCA difficult. Because of fear of FATCA, they have refused to do business with U.S. customers.

In practice, that means that U.S. citizens who go away to Europe for work or college may have trouble finding full-service, low-cost bank accounts.

If U.S. financial institutions and insurers have similar problems with FATCA compliance, financial professionals may have a hard time finding life insurers willing to sell life insurance or annuities to foreign persons and take on FATCA reporting obligations.