First Taxpayer Convicted for FATCA Noncompliance, More IRS Enforcement Expected

The acronym “FATCA” refers to the Foreign Account Tax Compliance Act. FATCA, which was passed by Congress in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is a two-part law. First, FATCA requires individual U.S. taxpayers to report foreign income above certain thresholds, similar to (but separate from) the FBAR (Foreign Bank Account Report) requirement. Additionally, FATCA requires foreign banks and other foreign financial institutions (FFIs) to disclose to the U.S. government checking, savings, and business accounts opened by American citizens or entities. Though FFIs can (and have) received hefty financial penalties for noncompliance with FATCA, the Department of Justice has been uncharacteristically slow to advance criminal prosecution in FATCA-related tax cases. Perhaps due in part to recent criticism from the Treasury Inspector General for Tax Administration (TIGTA), that is now changing. The September 2018 conviction of Adrian Baron, former CEO of St. Vincent-based FFI Loyal Bank, marks the beginning of a new – and dangerous – era for taxpayers who have failed to disclose their offshore bank accounts to the IRS.

What is FATCA, and How is it Different from the FBAR Requirement?

In order to understand why (or to what) Baron pleaded guilty in Brooklyn federal court last month, it is necessary to have some background knowledge about the scope and purpose of FATCA.

FATCA is often confused with FBAR, which is a component of the Bank Secrecy Act (BSA), because both share similar objectives: to compel the disclosure of worldwide income, on which U.S. persons – including citizens, resident aliens, and business entities – are taxed. However, there is a key distinction between the FATCA and FBAR requirements: a taxpayer is required to file an FBAR if his or her foreign income ever, even temporarily, surpasses $10,000. In comparison, FATCA requirements are not triggered until such income surpasses a $50,000 threshold. That means all taxpayers who are subject to FATCA must also file an FBAR, which has a lower reporting threshold, by default.

It is also a common misconception that filing an FBAR relieves the taxpayer of the duty to file FATCA-related tax forms, or vice versa. In fact, these are distinct obligations. Filing an FBAR, which is also known as FinCEN Form 114, does not negate the duty to file Form 8938 (Statement of Specified Foreign Financial Assets) under FATCA, nor is the opposite true, once the pertinent thresholds are exceeded.

Our international tax law attorneys have written about the FBAR and FATCA on numerous occasions. For additional information, we would suggest perusing our FATCA archives, which include articles about FATCA bank letters, FATCA for dual citizens, and related topics.

CEO of Caribbean Bank Facing 5 Years in Prison for Enabling Offshore Tax Evasion in Groundbreaking FATCA Case

Prior to his July 2018 extradition from Hungary to the United States for prosecution, Baron acted as CEO of Loyal Bank, which previously operated out of the Caribbean. (Today, Loyal Bank is in liquidation, according to a notice on its website, which states that, as of August 2018, “Joint Liquidators will be taking steps to realize the Bank’s assets and assess its liabilities.”) It was in this capacity that Baron – unwittingly collaborating with an undercover agent – would take steps to enable the scheme which eventually led to his downfall in court.

In 2014, Loyal Bank formally registered as a designated FFI, meaning the bank, like hundreds of others around the globe, would be subject to the provisions of FATCA. Despite this fact, Baron took steps to facilitate a banking scheme that would enable the agent, posing as an individual with interest in stock manipulation tactics, to open – and conceal from the IRS – business accounts with Loyal Bank. Despite opening several accounts on the agent’s behalf during the summer of 2017, the bank at no point requested or obtained the necessary FATCA information from the account holder, nor did the bank use the agent’s name on any of the documents or debit cards associated with the account. In short, Baron willfully helped his “client” to avoid FATCA tax requirements – which would have resulted in substantial tax losses to the U.S. government, had the client been a real customer and not a disguised investigator.

The undercover operation came to an end in March 2018, when Baron was criminally charged, culminating in his extradition several months later. At sentencing, Baron will face a prison term of up to five years.

Have an undisclosed Foreign Bank Account?  Have unreported foreign income?  Get Help from an International Tax Attorney Now before it’s too late!

The successful prosecution of Adrian Baron likely marks the start of an era of heightened FATCA enforcement. Between criticism from TIGTA, the ending of the OVDP (Offshore Voluntary Disclosure Program), increased IRS enforcement of offshore income disclosure laws, and the recent appointment of former criminal tax attorney Chuck Rettig as IRS commissioner, taxpayers can and should expect greater risk of IRS criminal investigation (or an equally perilous eggshell tax audit) where noncompliance is detected or suspected. This risk appears especially great for taxpayers whose foreign accounts are located in the Caribbean, Hong Kong, India, Israel, Lichtenstein, Luxembourg, or Singapore, as each of these jurisdictions have been singled out for scrutiny by the Department of Justice in the past.

If you need to report a foreign bank account or unreported (evaded) foreign income, now is the time to begin building your tax strategy. The sooner you consult with an FBAR tax lawyer, the sooner you can begin to reenter compliance, and the greater chance you will have to receive reduced penalties. For a reduced-rate consultation concerning an FBAR or FATCA-related tax issue, contact us online today, or call the Tax Law Office of David W. Klasing at (800) 681-1295.


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