If you have been following the developments of the Foreign Account Tax Compliance Act (FATCA), you have likely observed that many U.S. trading partners were early signatories to Intergovernmental Agreements that facilitate information sharing with the United States. One of our largest trading partners and one of the world’s biggest financial hubs, Honk Kong, was one of the only countries of its influential magnitude that hadn’t entered into such an agreement. That all changed last week with the government in Hong Kong announcing their Model 2 IGA with the U.S. How could this agreement affect American taxpayers, and what do you need to know about the Offshore Voluntary Disclosure Program?
This news wasn’t a surprise to the majority of the global financial community, as talks between the nations had been ongoing for an appreciable duration. The agreement was also predictable due to the large amount of American corporations that have moved their operations to Hong Kong and China. With such a corporate presence, it is not surprising that Americans that travel abroad to work, open accounts with banks and other financial institutions in the region.
The Specifics of the Agreement
The IGA is of the “Model 2” variety. Thus, Hong Kong directs their banks and other financial institutions to communicate directly with the IRS. Therefore, American accountholder information will not go through the hands of Hong Kong government officials before being delivered stateside. This is contrasted with the “Model 1” agreements that typically require banks to hand over American accountholder information to the foreign country’s taxing authority, who in turn, will send that information along to the United States.
According to the new agreement, financial institutions in Hong Kong will be required to get permission from Americans with accounts before any information is sent to the IRS. With such a provision in effect, it is questionable as to how effective the IGA will be in achieving the end-goal of uncovering Americans with undeclared foreign bank accounts.
Finally, the IGA allows banks and other financial institutions in Hong Kong to ignore types of accounts that are “low risk”. Though the agreement does not specifically identify which types of accounts are exempted, banks are given a list of factors to consider in determining which of its accounts to include.
Understanding the Domestic Laws That Target Americans
While the FATCA laws and the IGA’s that followed are an effort to require banks to assist the IRS, there are corresponding domestic laws that require citizens disclose their foreign accounts. It is important to remember that U.S. residents are required by the Foreign Bank Account Reporting law to declare any foreign account that has a balance in excess of $10,000 at any point in the year. If there are any gains housed in those accounts, taxpayers are also required to factor them into their tax liability each year.
For those residents who choose not to disclose their foreign account(s), the Internal Revenue Service will not think twice before they open a full civil examination into your financial affairs. If the revenue agent spots anything that looks suspicious, they will refer your case to the IRS Criminal Investigations Division which will work closely with the Department of Justice to perform a complete criminal investigation. Taxpayers found to have willfully violated the laws regarding foreign account disclosure can be hit with civil fines and penalties and face the very real possibility of a lengthy prison sentence.
With the implementation date for FATCA having already passed in July, understand that time is of the essence. The Hong Kong IGA provides that the first batch of reporting will be in March of 2015. As soon as the U.S. has the information they need, it is only a matter of time until they turn up the heat on you.
The Offshore Voluntary Disclosure Program Provides a Way Out
Luckily, the IRS has identified the need for a way out. Therefore, the Service established the Offshore Voluntary Disclosure Program. In exchange for your cooperation and financial disclosures, the government will not criminally prosecute you for not disclosing your foreign accounts. Further, in exchange for the payment of lesser penalties, a taxpayer can avoid being hit with fines that otherwise may leave them financially debilitated.
Keep in mind, the IRS created the OVDP, which means that they can just as easily change the terms or take it away completely. To participate in the 2014 OVDP, the IRS cannot already be examining your taxes for any reason (not only for the failure to disclose foreign accounts). This evidences a need for you to consult with an experienced tax attorney. The smallest misstep could disqualify you from the program and leave you vulnerable.
The experienced tax and accounting professionals at the tax law offices of David W. Klasing are ready to proudly an effectively stand in your corner. With years of experience in successfully assisting taxpayers come clean with regard to their undeclared foreign bank accounts and other serious tax matters, they are the best allies that you could have protecting your financial freedom and personal liberty. Contact the Tax Law Offices of David W. Klasing at (800) 681-1295 today for a reduced-rate consultation.
