How to Deal With the IRS if You Have Undisclosed Foreign Bank Accounts
FATCA Compliance Services
Foreign Account Tax Compliance Act (“FATCA”)
The Department of Justice started pressuring Swiss Banks including UBS and Credit Suisse to reveal bank account information on their account holders who are U.S. citizens or U.S. residents. From their success in 2004 to crack open the Swiss banks, the U.S. government passed legislation in 2010 known as the Foreign Account Tax Compliance Act (“FATCA”). Following the mandate of (FATCA, U.S. tax authorities and foreign governments have entered into agreements known as Intergovernmental Agreement (IGA) to share financial data about each of their citizens. FATCA came into full effect on July 1, 2014 and has now become a huge tool for IRS as part of a crackdown on tax dodging by wealthy Americans requiring foreign financial institutions to disclose to the IRS more about Americans’ Offshore accounts. For any foreign financial institution that fails to comply, the stakes are high as that entity will be frozen out of U.S. capital markets.
Information from the Swiss Banks and other European Banks has now been flowing to IRS and is being used by IRS to uncover taxpayers who have not disclosed foreign income and foreign accounts. The IRS is now aggressively supplementing and corroborating prior leads, as well as developing new leads, involving numerous banks, advisors and promoters from around the world, with a new emphasis in Asia, India, Israel and the Middle East pressuring banks like HSBC and others to reveal U.S. accountholder information.
We can assist with IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.
The IRS has established a Special Unit to disseminate bank information received from foreign banks and compare it to the forms and information reported by U.S. taxpayers on their tax returns. In addition, this Unit is able to review previously filed FBAR’s to determine whether all income was reported on each income tax return. Starting in 2011, taxpayers who have foreign assets will be required to disclose those assets with the filing of their Federal Individual Income Tax Return. This reporting which is made on Form 8938, Statement of Specified Foreign Financial Assets, will serve as an additional tool for this Unit.
In advance of the expected large wave of enforcement to be commenced by IRS, the IRS had established programs for taxpayers to voluntarily come forward and disclose unreported foreign income and foreign accounts.
Options Available For U.S. Taxpayers with Undisclosed Foreign Financial Assets As Modified By The IRS On June 18, 2014
The four options are:
- Voluntary Disclosure Program;
- Streamlined Filing Compliance Procedures;
- Delinquent FBAR submission procedures; and
- Delinquent international information return submission procedures.
- Relief Procedures for Certain Former Citizens (U.S. Expats)
Voluntary Disclosure Program
Since September 28, 2018, the IRS discontinued the Offshore Voluntary Disclosure Program (OVDP); however, on November 20, 2018 the IRS issued guidelines by which taxpayers with undisclosed foreign bank account and unreported foreign income can still come forward with a voluntary disclosure. The voluntary disclosure program is specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets or foreign in income.
For all voluntary disclosures received after September 28, 2018, the IRS will apply the civil resolution framework outlined below.
In general, voluntary disclosures will include a six-year disclosure period. The disclosure period will require examinations of the most recent six tax years so taxpayers must submit all required returns and reports for the disclosure period.
The IRS will determine applicable taxes, interest, and penalties under existing law and procedures and assert penalties as follows:
- Except as set forth below, the civil penalty under I.R.C. § 6663 for fraud or the civil penalty under I.R.C. § 6651(f) for the fraudulent failure to file income tax returns will apply to the one tax year with the highest tax liability. For purposes of this memo, both penalties are referred to as the civil fraud penalty and carries a penalty rate of 75% against the amount of increase in tax.
- In limited circumstances, the IRS may apply the civil fraud penalty to more than one year in the six-year scope (up to all six years) based on the facts and circumstances of the case, for example, if there is no agreement as to the tax liability.
- The IRS may apply the civil fraud penalty beyond six years if the taxpayer fails to cooperate and resolve the examination by agreement.
- Willful FBAR penalties will be asserted in accordance with existing IRS penalty guidelines under Internal Revenue Manual Sections 4.26.16 and 4.26.17.
- A taxpayer under this voluntary disclosure program is not precluded from requesting the imposition of accuracy related penalties under I.R.C. § 6662 (which carries a penalty rate of 20%) instead of civil fraud penalties or non-willful FBAR penalties instead of willful penalties (both of which are much higher). Additionally, taxpayers can appeal an agent’s determination to the IRS Office Of Appeals. That being the case, hiring qualified tax counsel experienced in voluntary disclosure early on should increase the chances of securing a lower penalty amount.
Streamlined Filing Compliance Procedures
The streamlined filing compliance procedures are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. The streamlined procedures are designed to provide to taxpayers in such situations (1) a streamlined procedure for filing amended or delinquent returns and (2) terms for resolving their tax and penalty obligations.
Taxpayers will be required to certify that the failure to report all income, pay all tax, and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22.1), was due to non-willful conduct.
If the IRS has initiated a civil examination of a taxpayer’s returns for any taxable year, regardless of whether the examination relates to undisclosed foreign financial assets, the taxpayer will not be eligible to use the streamlined procedures. Similarly, a taxpayer under criminal investigation by IRS Criminal Investigation is also ineligible to use the streamlined procedures.
Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns in an attempt to address U.S. tax and information reporting obligations with respect to foreign financial assets (so-called “quiet disclosures” made outside of the OVDP or its predecessor programs) may still use the streamlined procedures.
The Streamlined Procedures are classified between U.S. Taxpayers Residing Outside the United States and U.S. Taxpayers Residing in the United States.
U.S. Taxpayers Residing Outside the United States
Requires that taxpayers:
- Meet the applicable non-residency requirement described below (for joint return filers, both spouses must meet the applicable non-residency requirement);
- Certify that the failure to report the income from a foreign financial asset and pay tax as required by U.S. law, and failure to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, resulted from non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
- File 3 years of back tax returns reflecting unreported foreign source income;
- File 6 years of back FBAR’s reporting the foreign financial accounts; and
- Calculate interest each year on unpaid tax.
In return for entering the streamlined offshore voluntary disclosure program, the IRS has agreed:
- Waiver of charges of criminal tax evasion which would have resulted in jail time or a felony on your record; and
- Waiver of other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance).
- Waiver of the 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and
- Waiver of any OVDI penalty.
Non-residency requirement applicable to individuals who are U.S. citizens or lawful permanent residents (i.e., “green card holders”): Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days. Under IRC section 911 and its regulations, which apply for purposes of these procedures, neither temporary presence of the individual in the United States nor maintenance of a dwelling in the United States by an individual necessarily mean that the individual’s abode is in the United States.
Non-residency requirement applicable to individuals who are not U.S. citizens or lawful permanent residents: Individuals who are not U.S. citizens or lawful permanent residents, or estates of individuals who were not U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the last three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not meet the substantial presence test of IRC section 7701(b)(3).
U.S. Taxpayers Residing in the United States
Requires that taxpayers:
- Certify that the failure to report the income from a foreign financial asset and pay tax as required by U.S. law, and failure to file an FBAR (FinCEN Form 114, previously Form TD F 90-22.1) with respect to a foreign financial account, resulted from non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
- File 3 years of back tax returns reflecting unreported foreign source income;
- File 6 years of back FBAR’s reporting the foreign financial accounts;
- Calculate interest each year on unpaid tax; and
- Apply a 5% penalty based upon the highest balance of the account in the past six years.
In return for entering the streamlined offshore voluntary disclosure program, the IRS has agreed:
- Waiver of charges of criminal tax evasion which would have resulted in jail time or a felony on your record; and
- Waiver of other fraud and filing penalties including IRC Sec. 6663 fraud penalties (75% of the unpaid tax) and failure to file a TD F 90-22.1, Report of Foreign Bank and Financial Accounts Report, (FBAR) (the greater of $100,000 or 50% of the foreign account balance).
- Waiver of the 20% accuracy-related penalty under Code Sec. 6662 or a 25% delinquency penalty under Code Sec. 6651; and
Delinquent FBAR Submission Procedures
Taxpayers who do not need to use either OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who (1) have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1), (2) are not under a civil examination or a criminal investigation by the IRS, and (3) have not already been contacted by the IRS about the delinquent FBARs can file the delinquent FBARs with a statement explaining why the FBARs are filed late. Be aware that the IRS has discretion whether to abate penalties for the failure to file the delinquent FBARs. To qualify for this relief you must have properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.
Delinquent International Information Return Submission Procedures
Taxpayers who do not need to use either OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who (1) have not filed one or more required international information returns, (2) have reasonable cause for not timely filing the information returns, (3) are not under a civil examination or a criminal investigation by the IRS, and (4) have not already been contacted by the IRS about the delinquent information returns can file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file. As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.
Relief Procedures for Certain Former Citizens (U.S. Expats)
The Relief Procedures for Certain Former Citizens introduced by the IRS in September 2019 apply only to individuals who have not filed U.S. tax returns as U.S. citizens or residents, owe a limited amount of back taxes to the United States and have net assets of less than $2 million. Only taxpayers whose past compliance failures were non-willful can take advantage of these new procedures. For those expat-individuals who missed the opportunity to come forward in the IRS’ Offshore Voluntary Disclosure Program (“OVDP”), this is a huge opportunity. Many in this group may have lived outside the United States most of their lives and may have not been aware that they had U.S. tax obligations.
Eligible individuals wishing to use these relief procedures are required to file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and their year of expatriation. Provided that the taxpayer’s tax liability does not exceed a total of $25,000 for the six years in question, the taxpayer is relieved from paying U.S. taxes and they will not be assessed penalties and interest.
These procedures are only available to individuals. Estates, trusts, corporations, partnerships and other entities may not use these procedures.
These procedures may only be used by taxpayers whose failure to file required tax returns (including income tax returns, applicable gift tax returns, information returns (including Form 8938, Statement of Foreign Financial Assets), and Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TD F 90-22.1)) and pay taxes and penalties for the years at issue was due to non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
Other Things To Consider
Recent closure and liquidation of foreign accounts will not remove your exposure for non-disclosure as the IRS will be securing bank information for the last eight years. Additionally, as a result of the account closure and distribution of funds being reported in normal banking channels, this will elevate your chances of being selected for investigation by the IRS. For those taxpayers who have submitted delinquent FBAR’s and amended tax returns without applying for amnesty (referred to as a “quiet disclosure”), the IRS has blocked the processing of these returns and flagged these taxpayers for further investigation. You should also expect that the IRS will use such conduct to show willfulness by the taxpayer to justify the maximum punishment.
Additionally, starting with the 2011 Tax Return Filing Season: U.S. taxpayers who have an interest in foreign assets with an aggregate value exceeding $50,000 must include new Form 8938 (Statement of Specified Foreign Financial Assets) with their Federal income tax return. This reporting will serve as an additional tool for the IRS to determine prior noncompliance of taxpayers who have undisclosed foreign accounts or unreported foreign income. The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR (Report of Foreign Bank and Financial Accounts). Failing to file Form 8938 when required could result in a $10,000 penalty, with an additional penalty up to $50,000 for continued failure to file after IRS notification. A 40% penalty on any understatement of tax attributable to non-disclosed assets can also be imposed.
If the IRS has already selected you for an audit or you are being investigated, these programs are not available to you. To find out how you must now protect yourself, click here.
Click here for FAQ’s on applying for amnesty.
For those taxpayers who have filed for amnesty and are having difficulty with their case or do not have the confidence in their representative to secure the best possible result, we offer a service whereby we would evaluate your case and discuss your options. We have found that the Revenue Agents working these cases have made errors that favor the IRS. Let our experience work for you to avail you of the benefits of this amnesty program with the lowest liability possible. Contact an IRS lawyer today.
Given the wealth of foreign account information released to the IRS and the IRS’ expansion of resources to enforce compliance, this may be the last opportunity for taxpayers to resolve unreported foreign income issues without criminal prosecution. Once the IRS has commenced an investigation, a taxpayer cannot enter into a Voluntary Disclosure Program. We recommend that taxpayers in this situation act immediately and seek assistance from an IRS attorney with expertise in the Voluntary Disclosure Program for undisclosed foreign accounts.
For prompt evaluation of your case, we encourage you to contact us using our toll-free number at 866.494.6829.
America’s Manifest Destiny Still Lives On Today As FATCA Imposes Our Will On Banking Worldwide
In the 19th century, Manifest Destiny was a widely held belief in the United States that American settlers were destined to expand throughout the continent. Historians have for the most part agreed that there are three basic themes to Manifest Destiny: the special virtues of the American people and their institutions; America’s mission to redeem and remake the west in the image of agrarian America; and an irresistible destiny to accomplish this essential duty. This spirit has endured into the 21st century with the application of FATCA over worldwide banking activity.
Never heard of FATCA? You will.
FATCA—the Foreign Account Tax Compliance Act—is America’s global tax law. It was quietly enacted in 2010. And after a four-year ramp up, it is finally in full effect. What is most amazing is not its impact on Americans—although that is considerable—but its impact on the world. Yes, the whole world.
Never before has an American tax law attempted such an astounding reach. And it is clear FATCA has succeeded, after shrewd diplomacy by President Obama and his Treasury Department. FATCA requires foreign banks to reveal Americans to the Department Of Treasury and the IRS with accounts over $50,000. Non-compliant institutions could be frozen out of U.S. markets, so everyone is complying.
Ten Essential Facts About FATCA:
1. FATCA Blew In On a Perfect Storm. FATCA grew out of a controversial rule. America taxes its citizens—and even permanent residents—on their worldwide income regardless of where they live. In 2009, the IRS struck a groundbreaking deal with the Swiss banking giant UBS for $780 million in penalties and American names. Recently, Credit Suisse took a guilty plea and paid a record $2.6 billion fine. Since then, all 106 Swiss banks accepted a U.S. Department Of Justice (DOJ) deal and with many other subsequent developments, banking is now more transparent than could ever have been imagined. FATCA was enacted in 2010, when only some of those developments were unfolding. The idea was to cut off companies from access to critical U.S. financial markets if they didn’t pass along American data. And boy did that idea work.
2. Everyone Around the World is Complying. More than 80 nations—including virtually every one that matters—have agreed to the law. As for those few rouge nations that remain that have not signed on, I would question how safe is your money anyways in those countries. So far, over 77,000 financial institutions have signed on too. Countries must throw their agreement behind the law or face dire repercussions. Even tax havens have joined up. The IRS is so proud of this accomplishment that it maintains a searchable list of financial institutions on its website. Click here to check out this list.
3. Even Russia and China Agreed to FATCA. If you think money anywhere can escape the IRS, think again. Even notoriously difficult China and Russia are on board. Which is more amazing? Probably Russia. The U.S. and Russia were negotiating a FATCA deal until March, 2014, but Russia’s annexation of Crimea caused the U.S. to suspend talks. That meant Russian financial institutions faced being frozen out of U.S. markets. Russia took last minute action to allow Russian banks to send American taxpayer data to the U.S. when President Vladimir Putin Signed a Law in the 11th Hour to Satisfy U.S. Treasury. By the way, now that the embargo on Cuba has been lifted, the U.S. Treasury will be looking for Cuba to promptly sign on to FATCA as a condition for opening banking relationships.
4. FATCA is America’s Big Stick. Cleverly, FATCA’s 30% tax and exclusion from U.S. markets would be so catastrophic that everyone has opted to comply. Foreign financial institutions must withhold a 30% tax if the recipient is not providing information about U.S. account holders. The choice is simple, and that’s why everyone is complying.
5. Everyone is on the Lookout for American Indicia. Foreign Financial Institutions (FFI’s) must report account numbers, balances, names, addresses, and U.S. identification numbers. For U.S.-owned foreign entities, they must report the name, address, and U.S. TIN of each substantial U.S. owner. And in what is a kind of global witch hunt, American indicia will likely mean a letter. Don’t ignore it.
6. FBAR’s Are Still Required. FBAR’s predate FATCA, but get ready for duplicate reporting. FATCA just adds to the burden, including Form 8938, but it doesn’t replace FBAR’s. The latter have been in the law since 1970 but have taken on huge importance since 2009. U.S. persons with foreign bank accounts exceeding $10,000 must file an FBAR by each June 30. These forms are serious, and so are the criminal and civil penalties. FBAR failures can mean fines up to $500,000 and prison up to ten years. Even a non-willful civil FBAR penalty can mean a $10,000 fine. Willful FBAR violations can draw the greater of $100,000 or 50% of the account for each violation–and each year is separate. The numbers add up fast. Court Upholds Record FBAR Penalties, Exceeding Offshore Account Balance.
7. FATCA is Compelling Compliance. U.S. account holders who are not compliant have limited time to get to the IRS. The IRS recently changed its programs, making its Offshore Voluntary Disclosure Program a little harsher. Yet for those not willing to pay the 27.5% penalty—which rose to 50% August 4, 2014 for some banks—the new IRS’s Streamlined Program may be a good option for those who qualify. The latter applies now to both foreign and U.S.-based Americans. Some still want to amend their taxes and file FBAR’s in a “quiet disclosure” which could bring civil FBAR penalties or even prosecution. Thus, caution is clearly in order.
8. Banking Will Never Be the Same. FATCA is making banking transparent worldwide. With Swiss bank deals, prosecutions, John Doe Summonses, and FATCA, the IRS has quicker, better and more complete information than ever.
9. Forget Repeal or Dismantling FATCA. Republicans have mounted a lackluster repeal effort, but there’s no serious push to repeal FATCA. Some say FATCA will be like prohibition, lasting for a time but doomed. We’ll see, but it sure doesn’t look that way now.
10. Don’t Count on Other Passports. Some dual nationals or U.S. Green Card holders think they can bypass FATCA—and other U.S. tax rules—by using a non-U.S. passport and non-U.S. address with their foreign bank. Don’t succumb to this – you may just make it worse, handing the IRS another badge of willfulness. Your bank and the IRS will likely find out eventually, even if not right away.
Why You Should Do Something About It Before It’s Too Late
Until the government receives your name and account information and chooses to act on that information, you have the opportunity to avoid the possibility of time in a federal prison and reduce the potential civil penalties for failing to report your foreign account. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed, you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.
Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.
Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.
Don’t Believe The Seven Deadly Myths Of FATCA Non-Enforcement.
This May Be Your One Last Opportunity to Avoid Criminal Prosecution and Increased Civil Penalties!
Since July 1, 2014, the most feared U.S. legislation regarding international tax enforcement – Foreign Account Tax Compliance Act (“FATCA”) – is being implemented by most banks around the world. As part of this compliance, foreign banks from around the world are sending letters to account holders that they believe have, or had, a U.S. tax nexus (or other U.S. connection) requesting information to determine whether such account holders have disclosed their foreign bank accounts to the IRS. The letters from foreign banks generally require an account holder to disclose whether the account has been declared to the IRS through the filing of a Report of Foreign Bank and Financial Accounts (commonly known as the “FBAR”) form and/or a Form 1040 personal income tax return, participation in the various IRS Offshore Voluntary Disclosure Programs, or otherwise. Sometimes foreign banks request that the account holder submit an IRS Form W-9 or W-8BEN, which is generally required to be completed by U.S. account holders for tax reporting purposes.
What Is FATCA?
FATCA was signed into law in 2010 and codified in Sections 1471 through 1474 of the Internal Revenue Code. The law was enacted in order to reduce offshore tax evasion by U.S. persons with undisclosed offshore accounts. There are two parts to FATCA – U.S. taxpayer reporting of foreign assets and income on Form 8938 and reporting by a Foreign Financial Institution (“FFI”) of foreign bank and financial accounts to the IRS. It is the latter that is resulting in FFI’s sending out that dreaded letter to suspected U.S. account holders requesting U.S. taxpayer identification and information (referred hereafter as the “FATCA letter”).
FATCA generally requires an FFI to identify certain U.S. accountholders and report their accounts to the IRS. Such reporting is done either through an FFI Agreement directly to the IRS or through a set of local laws that implement FATCA.
If an FFI refuses to do so or otherwise does not satisfy these requirements (and is not otherwise exempt), U.S.-source payments made to the FFI may be subject to withholding under FATCA at a rate of 30%. Note that FATCA information reporting and withholding requirements generally do not apply to FFI’s that are treated as “deemed-compliant” because they present a relatively low risk of being used for tax evasion or are otherwise exempt from FATCA withholding.
Seven Deadly Myths.
As foreign banks march inexorably towards the implementation of FATCA, there are still many people who subscribe to any one or all of the seven deadly myths that could find themselves facing potentially crippling circumstances after July 1, 2014. For safety’s sake, we get down to brass tacks and present the facts below – in plain language – to debunk these myths.
Myth 1: No action required now.
This is false. As of July 1, 2014 all FFI’s must have implemented a FATCA Compliance Program to comply with its country’s Intergovernmental Agreement (“IGA”) with the United States. FFI’s must self-certify their FATCA status [Chapter 4 of the U.S. Internal Revenue Code] to their withholding agents by either providing a Global Intermediary Identification Number (GIIN) or new IRS Form W-8BEN-E/W-8IMY prior to this date.
Myth 2: Best to “wait and see” for a foreign country’s enabling legislation.
This is false. Wishing this to be the case does not make this so. To be clear, registration and reporting are distinct functions under FATCA. All FATCA registration is directly with the IRS and is occurring now.
Registration with the IRS is free of cost and mandatory for any FFI to become registered deemed-compliant under its country’s IGA. Only the IRS has the power to register a FFI and issue a GIIN. Enabling legislation by the foreign country is irrelevant to FATCA registration for FFI’s as no foreign country revenue authority has – or will ever have – the power to register a FFI and issue a GIIN. Again, we emphasize, this must be done directly with and by the IRS.
The truth is, a foreign country’s enabling legislation is simply intended to provide the legal framework for compliance with, not avoidance of FATCA (and other automatic tax information exchange agreements), and the development of the regulatory framework for operating the agreement.
Myth 3: IRS registration may breach confidentiality.
This is false. Withholding agents already require W-8s from all FFI’s to avoid withholding liability. This is a long-established practice and the Form W-8 has simply now been revised to include FATCA status. A FFI must self-certify, under penalty of perjury, its FATCA status to withholding agents using the new W-8 before July 1, 2014. To obtain a GIIN, a FFI must file Form 8957 via the IRS Foreign Financial Institution Registration System (FRS) (or manually). Once the GIIN is obtained, it can be verified by withholding agents via FRS or submitted via Form W-8. There are no material differences between the information disclosed, or commitments made, under Form W-8 and Form 8957. Both forms are complementary and require basic identifying information about the FFI. Specific investor information is never disclosed.
Myth 4: Certain foreign investment funds may be exempted as sponsored entities.
This is false. Sponsored entity exemption would require all the sponsored FFI’s of the sponsor to use a single GIIN. If any FFI using the sponsored GIIN becomes FATCA non-compliant – for any reason – all FFI’s using the same GIIN would also become non-compliant.
Myth 5: Model 1 or Model 2 IGA’s displace U.S. Treasury Regulations.
This is false. They both work in tandem. A FFI is treated as FATCA-compliant, and not subject to FATCA withholding tax, to the extent it complies with its obligations under the IGA. The U.S. Treasury regulations are incorporated by reference into the IGA. Under the IGA, the foreign country is bound to use U.S. Treasury definitions to the extent those definitions are not defined by the IGA, and importantly, the foreign country is not permitted to use any other definition in local legislation that would “frustrate the purposes” of the IGA.
Myth 6: There is no person charged with the responsibility that a foreign bank complies with the IGA.
This is false. Under the IGA a FATCA Responsible Officer (FRO) must be appointed who is (a) as an officer of the registered deemed-compliant FFI with sufficient authority to ensure that the FFI meets the applicable registration requirements and (b) who certifies that the FFI will comply with its continuing FATCA obligations.
Myth 7: There is no incentive for FRO’s to ensure a foreign bank’s compliance under an IGA.
This is false. FRO’s have serious compliance responsibilities under FATCA. In fact, FATCA compliance revolves around the FRO, like Sarbanes Oxley compliance revolves around the CFO. Especially in the context of a FFI that does not typically have any staff, the role is even more essential. It’s a fallacy and wishful thinking that FROs can be lax or “lite” under the IGA. The IRS has consistently expressed its expectations that FRO’s deliver robust FATCA compliance and high-quality FATCA information from either procedure. Whoever says otherwise has not been paying attention and we all know how this story ended for Switzerland. Key considerations for a FRO under the IGA include:
- Willfully submitting any fraudulent or materially false document to the IRS is a Federal offence. [IRC §§7206(2) & 7207]
- FFI’s self-certification as a Reporting Financial Institution to withholding agents will entail signing the IRS Form W-8 under penalties of perjury.
The Truth About FATCA.
Whether out of lack of knowledge, preparedness or self-interest, those who are propagating these myths are not doing themselves or their U.S. clients any favors. As of July 1, 2014, FATCA went into full effect, which means that FFI’s now have to report the required FATCA information to the IRS. Many FFI’s are making a full effort to comply with FATCA. As part of this effort, FFI’s around the world have been sending out “FATCA letters”. A FATCA letter is basically a letter from your bank or other financial institution which introduces FATCA to their customers and asks them to provide answers to a various set of questions aiming to find out information specific to FATCA compliance. Often, instead of asking all of these questions directly a FATCA letter would simply list out a series of forms that contain these questions such as IRS Forms W-9 and W-8BEN.
The information furnished by the customer to the bank would then be used by the bank to report information on the customer’s foreign accounts to the IRS. If the customer refuses to answer the questions or provide the necessary forms, the financial institution would often close the account and report it as a “recalcitrant account” to the IRS. Once that is done, the government will look to see if your account ever had in excess of a $10,000 balance. If it did and you did not report it on an FBAR or on your federal income taxes, the case will likely be referred to the IRS Criminal Investigation Division. At that point, the government will begin to build a case against you. A U.S. citizen can be sentenced up to five years in prison for each year that they willfully failed to file an FBAR and can be penalized up to 50% of the balance of the foreign account for each year that they willfully failed to report (up to 250% of the account’s balance). The civil penalties alone can easily reach double the amount of the balance of the account in question.
Why You Should Do Something About It Before It’s Too Late
Until the government receives your name and account information and chooses to act on that information, you have the opportunity to avoid the possibility of time in a federal prison and reduce the potential civil penalties for failing to report your foreign account. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed, you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.
Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Francisco, San Diego and elsewhere in California qualify you for OVDP.
Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.
Follow
Follow