An Overview of FATCA

With the federal government facing a growing number of U.S. residents trying to hide their funds from federal authorities, Congress enacted the Foreign Account Tax Compliance Act. Under the various provisions of the law, those U.S. residents who fall under the U.S. tax net are required to report their foreign bank accounts each year. This portion of the law was nothing new. U.S. taxpayers have long been required to self-report foreign bank accounts with balances that reach or exceed $10,000 by way of Foreign Bank Account Reporting (FBAR) laws. But a new provision contained in the FATCA legislation changed the way that foreign governments and their financial institutions interact with the United States government with regard to information sharing.

Interestingly, the FATCA legislation does not impose a new tax, despite the law being the revenue-raising portion of the Hiring Incentives to Restore Employment (HIRE) Act, back in 2010. Instead, the goal of the statute is to enlist foreign banks in the search for the assets of “U.S. persons”.

The FATCA legislation has two central provisions. First and much like FBAR laws already in effect, U.S. persons who own or have signatory authority over an account at a foreign financial institution must report via the IRS Form 8938, Statement of Specified Foreign Financial Assets. Second, foreign financial institutions must enter into an agreement with the Internal Revenue Service that involves the bank combing through their customer records and passing along the names, tax identification numbers (TIN), contact information, and a list of transactions of those account holders that are identified as being “foreign”. Overseas banks that do not comply are subject to a huge financial hit: a mandatory withholding of 30% of the gross amount that is paid by a U.S. payor.

To achieve the requirement set out by FATCA, the IRS promulgated Form W-8BEN. Under most circumstances, every customer of a foreign bank that is considered to be “foreign” must fill out the form. A foreign bank customer is not required to report their status on a W-8EN if their foreign financial institution is located in a country that has entered into an Intergovernmental Agreement (IGA) with the United States. IGA’s have become an increasingly popular method of coming into compliance with FATCA regulations and are also a cause of great concern for taxpayers who have foreign accounts that have yet to be declared.

The ABC’s of IGA’s 

There are generally two types of Intergovernmental Agreements. First, the IGA Model 1 agreement requires foreign financial institutions to report the information described above (pertaining to their foreign account holders) to their respective governments, who then will transmit the information to the IRS. Second, an IGA Model 2 agreement removes the foreign government as a middleman and mandates that the foreign bank send the required information directly to the IRS. 67 nations have officially signed Model 1 agreements and seven have officially entered into the Model 2 agreement. Another 39 nations have come to agreements with the U.S. in substance and are waiting to sign formal agreements.  A complete list of the countries that have entered into FATCA IGA’s with the U.S. can be found here.

From Israel, to Switzerland, to China, nations around the world are lining up to enter into agreements with the United States. Most of the IGA’s that are signed include a reciprocal provision that involves the IRS sharing tax and income information with their foreign counterparts.

The Automatic Exchange of Incriminating Information

The reality of a nation entering into an IGA with the United States is harsh: every bank within that jurisdiction must comply with the reporting requirements set out by the IGA and FATCA. Collecting information from governments and financial institutions located around the globe requires an intricate system that allows for the easy exchange of information between nations. The Treasury Department and the IRS have developed a system that can meet those requirements.

The technology that recently became active is called the International Data Exchange Service (IDES). This service will allow foreign banks to register and send information directly to the IRS electronically. To protect U.S. taxpayer information, account data will be encrypted at the local and transmission levels. The system was scheduled to be in an open-testing phase earlier this year and is now up and running. Every day that the IDES is up and running, loads of information is being transferred into the hands of the IRS. And as for the account information belonging to those with undeclared foreign bank accounts, the IDES is transmitting evidence of a criminal activity. Willfully failing to notify the government of your foreign account is a felony and can result in hefty fines and lengthy federal prison sentences.

For Americans with foreign bank accounts that were waiting until the absolute last minute to either disclose their foreign account or seek the assistance from a tax attorney: that day is today. The IRS is still accepting applicants into the Offshore Voluntary Disclosure Program, a program that allows taxpayers to pay reduced-penalties, fees, and back taxes in order to avoid the possibility of time in a federal prison. There is one catch: you are not eligible for the program if the IRS or Department of Justice has an open investigation or examination against you with regard to any tax matter. This means that as soon as incriminating information comes through the new IDES system and ends up on a IRS agent’s desk, you likely will be disqualified from the program that has helped many taxpayers stay physically and financially free.

The tax law and accounting professionals at the Tax Law Offices of David W. Klasing have several years of experience helping taxpayers stay both out of jail and financially healthy. The IRS and Department of Justice have seen taxpayers get away with overseas accounts for years and are now relentlessly pursuing taxpayers who come into their crosshairs. Don’t step into the ring with the IRS or DOJ without a zealous advocate in your corner. Contact the Tax Law Offices of David W. Klasing today online or by phone at (800) 681-1295 for a reduced-rate consultation