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As New IRS Campaign Targets Foreign Banks, U.S. Taxpayers with Offshore Accounts Face Increased Danger

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    Accounts Face Increased Danger

    If you have visited our tax blog, you have likely heard us discussing a federal law known as the Foreign Account Tax Compliance Act, or FATCA. For those who may be unfamiliar with the legislation, here is a brief summary: under FATCA, U.S. citizens (including residents plus certain non-residents) must report offshore assets exceeding $50,000 by filing Form 8938 (Statement of Specified Foreign Financial Assets). As a backup to this self-reporting requirement – which many taxpayers, whether deliberately or inadvertently, fail to comply with – FATCA also requires foreign financial institutions (FFIs), such as non-U.S. banks and mutual funds, to report information about U.S. customers to the IRS. It appears that, despite facing heavy fines, many FFIs were failing to comply, spurring the IRS’ June announcement of new enforcement programs targeting FFIs. However, while FFIs may be the primary target of the campaign, taxpayers are also likely to suffer as more foreign banks begin turning over information to avoid fines. If you have unreported offshore accounts, now is the time to discuss your voluntary disclosure options with an international tax attorney.

    IRS Campaign Targets FFIs, Putting Taxpayers with Unreported Foreign Accounts at Risk

    Speaking on a tax panel hosted at New York University in June 2019, Kimberly Schoenbacher, who is the current Director of Field Operations for the LB&I Foreign Payments Practice, announced that the Internal Revenue Service is launching a new compliance campaign targeting FFIs that have failed to report U.S. customers. In other words, the campaign is focused on FFIs that have failed to file Form 8966 (FATCA Report), which is the form used to identify foreign account holders under FATCA. This form requires FFIs to report information including, but not limited to, the following:

    • The account holder’s name, address, country, and Taxpayer Identification Number (TIN)
    • The balance of the unreported account(s)
    • Any interest and/or dividends that have been generated

    If the IRS determines that an FFI has failed to file Forms 8966 where appropriate, two things will happen:

    1. First, the FFI will lose its status as a “Participating” FFI (PFFI), meaning an FFI which has entered into a reporting agreement with the IRS and has certified that it will be compliant. Instead, the entity will become a “Non-Participating” FFI (NPFFI), meaning the FFI will be labeled noncompliant. For a detailed explanation of PFFI status and how it is attained, refer to IRS Instructions for Form 8957 (FATCA Registration).
    2. As a result of its NPFFI or noncompliant status, the entity will be heavily fined with a 30% withholding tax applicable to U.S. FDAP (Fixed, Determinable, Annual or Periodic) income.

    In many cases, FFIs are foreign banks where U.S. customers have checking accounts or savings accounts – for instance, Swiss or Israeli banks. However, banks are not the only entities that meet the IRS’ definition of an FFI. Other entities that are considered FFIs, and may, therefore, be affected by the new campaign, include:

    • Foreign hedge funds
    • Foreign insurance companies, depending on what sorts of products and policies they offer
    • Foreign mutual funds
    • Foreign private equity funds

    International Tax Law Attorneys for FATCA Compliance and Voluntary Disclosures

    On the surface, it is FFIs which face the greatest danger from this new campaign. However, it may be individual taxpayers who are truly at risk. As the IRS “turns up the heat” on noncompliant FFIs, many will report their customers in order to avoid the 30% withholding tax. If you have received a FATCA letter from your bank, or if you are concerned about past failures to report offshore bank accounts, it is in your best interests to consult with a FATCA attorney now – before your disclosure options begin to dwindle. Noncompliant taxpayers risk heavy fines, and even criminal FATCA prosecution, unless they act swiftly and strategically.

    To arrange a reduced-rate consultation with the experienced FATCA tax lawyers at the Tax Law Office of David W. Klasing, contact us online today, or call our main office in Irvine at (800) 681-1295. Our tax firm has distinguished itself in the area of FATCA compliance, making our practice ideally suited to handling complex offshore disclosure issues.

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