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David Klasing
Why your clients should be concerned about FATCA

In less than a month the statute will begin compelling foreign financial institutions to report information about U.S. clients and their accounts. The IRS is poised to review the data.

June 16, 2014
By David Klasing, CPA, J.D.

Taxpayers who haven’t disclosed assets in a foreign account should be worried about the looming implementation of the Foreign Account Tax Compliance Act (FATCA) on July 1. With the surge of countries that are cooperating with the United States as a result of FATCA, it is only a matter of time before those taxpayers’ names come across the desk of an IRS agent.

To understand why FATCA is so important for practitioners and their clients, it is necessary to take a closer look at the statute, which was signed into law in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147. FATCA requires U.S. citizens to report all financial interests exceeding $50,000 that are held outside of the United States. Beginning July 1, 2014, it also will compel foreign financial institutions (FFIs) to report information about their U.S. clients and their accounts to the IRS. The rule has some citizens and banking institutions shaking in their boots due to steep fines for noncompliance—and even the possibility of jail time.  

There are two types of intergovernmental agreements (IGAs) that have emerged from the FATCA legislation. Under a Model 1 IGA, which has been the most popular among cooperating nations, the FFI reports the required account information to its country’s tax agency. That information is, in turn, relayed to the United States. Under a Model 2 IGA, the  foreign financial institution reports directly to the U.S. government.

Regardless of how the agreement is structured, the basic facts are the same: Banks must provide U.S. citizens’ account information or face 30% withholding on certain U.S. source payments made to them. That threat alone will be an incentive for banks to hand over taxpayers’ information to the IRS.

Over 30 countries have already entered into IGAs with the United States. These nations include all of the other G7 members (Canada, France, Germany, Italy, Japan, and the U.K.), and every day seems to bring announcements that more countries are cooperating with FATCA’s provisions. When July 1 rolls around, the U.S. government will have the information it needs to go after plenty of Americans who haven’t disclosed their overseas accounts.

FATCA sets civil penalties that are more severe than under prior law. Before FATCA, a taxpayer who filed a tax return that contained an understatement attributable to nondisclosed foreign financial assets faced a 20% penalty and the statute of limitation for violations was three years. FATCA increased the penalty for understatements attributable to nondisclosed foreign financial assets to 40% and extended the statute of limitation to six years. Finally, a minimum $10,000 penalty will be assessed against the taxpayer—and it can reach up to $50,000 per year—in addition to any taxes that are owed stemming from the discovery of undisclosed accounts.

What about prison? Taxpayers who don’t disclose foreign bank accounts are guilty of willful tax evasion under Sec. 7201. The government can put taxpayers found guilty of willful tax evasion behind bars for up to five years per tax year that they filed a false return. The criminal statute of limitation is five years, which means that violators could spend 25 years in a federal prison if they have been failing to disclose foreign financial assets for a long period of time. As if that weren’t enough, the government can in addition impose a fine of up to $250,000 per violation.

Even if taxpayers try to come into compliance going forward, they still can face penalties if they failed to disclose accounts in previous years. What can these taxpayers do? Many taxpayers have been taking advantage of a government program that allows citizens to disclose their foreign bank accounts, pay back taxes and penalties associated with the accounts, and in exchange, avoid criminal prosecution.

This program, the Offshore Voluntary Disclosure Initiative, is time-sensitive because citizens are ineligible for the program if the government already is investigating the name or account information of a prospective participant. Once July 1 rolls around and banks from all over the world start sending the required records to the IRS, a large number of Americans with undeclared overseas assets could immediately become ineligible for the program and face the full amount of prison time. Tax practitioners should be prepared to help taxpayers comply with the law and address their options regarding punishment for past noncompliance.

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David Klasing, CPA, J.D., is an attorney at the Tax Law Offices of David Warren Klasing.