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FATCA and undisclosed foreign accounts

FATCA and Undisclosed Foreign Accounts

It has now been several years since the federal government started cracking down on taxpayers who keep undisclosed foreign accounts. Congress’s passing of the FBAR and FATCA laws marked the beginning of the end of the idea of a secure secret offshore accounts. Ever since, taxpayers that have knowingly undisclosed foreign accounts with a balance of $10,000 or more are committing a federal offense and have been sentenced to lengthy federal prison sentences especially where the motivation for the purposeful nondisclosure of the foreign account is to facilitate offshore income tax evasion.

undisclosed foreign accounts

FATCA Letters from Offshore Banks

When foreign banks began being targeted by the Department of Justice and the IRS, they sent letters to their customers. It seems that thousands more FATCA letters from Canadian banks and foreign financial institutions have been dispatched to US taxpayers recently. These letters serve two purposes: one explicit and one implicit. The first (at its stated) purpose is to collect information about the account holder’s tax status. This will be used to determine whether the bank needs to transmit data regarding the account holder’s account to the IRS as part of the provisions under the Foreign Bank Account Reporting Act (FBAR). The second (and potentially the most important) purpose of the letter is that of a warning. The letter serves as a beacon to the American account holder that the bank will be compliant with the IRS and the Department of Justice when it comes to the investigation and the enforcement of FBAR laws.

15 Banks’ Customers Now Subject to 50% Penalty

It is particularly important to take heed to the warnings implicit in these letters. Although there is a program available to taxpayers who wish to come clean with the government with regard to their previously undisclosed foreign accounts, the dirty details of the program may preclude participation by many taxpayers who choose to wait until the IRS approaches them first at which time they could face criminal prosecution.

The Offshore Voluntary Disclosure Program allows taxpayers to come forward and disclose their foreign bank account to the IRS and pay a penalty and any back-taxes related to the account. The penalties that are due vary based on whether the underlying non-disclosure was willful or not.  With the help of an experienced tax attorney, many OVDP participants are able to argue their way into the non-willful group, (streamlined disclosure) a classification that carries only penalty of 5% of the undisclosed account’s account balance. But be very careful of going streamlined.  If the IRS subsequently considers the taxpayer’s conduct to be willful, the penalty jumps to 50% per year per account up to a maximum of 250% of the offshore account plus the possibility of criminal conviction.   This is very possible where the taxpayer used a tax professional and that asked about the existence of foreign accounts and the taxpayer hid the existence from the tax advisor.


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What constitutes willful noncompliance?

Although the IRS has been reluctant to define “willful” and “non-willful”, they have provided some guidance to help taxpayers and tax attorneys. The IRS takes the position that any U.S. taxpayer that is an account holder from a bank that is specifically listed by the IRS as being known to be used for the purpose of keeping undisclosed, secretive accounts. Over the past year, that list of “known banks” has grown and now stands at 15 with the recent addition of Vadian Bank AG, a Swiss institution that recently agreed with the Department of Justice on a settlement of $4.3 million.

See the complete list here:

Penalties Are Increasing

As previously stated, penalties can range from 0% where there was no income tax noncompliance / underreporting and reasonable cause, to 5% for non-willful noncompliance (streamlined), 27.5% for the normal offshore voluntary disclosure even where actions were willful, to 50% (Foreign Financial Institutions labeled as facilitators and use of 2012 OVDI program). But there is nothing preventing the IRS from increasing those rates tomorrow. In fact, because the IRS controls the terms of the program, penalty increases are not simply possible, but are expected. The 27.5% penalty was at one time 20% and is expected to go up at any time.  Thus, whether you are at grouped into the willful or non-willful group, the longer you wait to participate in the OVDP, the bigger the risk that your penalty will skyrocket from its current position.

undisclosed foreign bank accounts

Taxpayers Being Disqualified from OVDP through Data Exchange

As if the very real possibility of penalty increases does not give taxpayers who have undisclosed foreign accounts, a reason to participate in the disclosure program as soon as possible, maybe the possibility that they will be disqualified tomorrow will. Though the provisions of agreements with foreign banks related to the FATCA legislation, an electronic data exchange protocol has been established and is now in full effect. What does this mean for taxpayers? It means that a foreign bank can send the IRS all of your foreign account information in a matter of a few seconds electronically. Once the information is received by the IRS and your case is assigned to an investigator, you are no longer eligible for the OVDP and can face criminal prosecution, hefty civil fines (up to 250% of the offshore income generating assets including real estate and businesses), penalties, and back-taxes. In order to avoid being disqualified from the program, it is in your best interest to contact an experienced tax attorney to find proper representation to your undisclosed foreign accounts as soon as possible.

Customs Holds Now Being Utilized

In the fight against undisclosed foreign accounts, most people likely think that the IRS is targeting taxpayers that are living domestically. And though this is true, the Service also investigates and levies taxes, penalties, fines, and criminal charges against those taxpayers living overseas. One of my employees, Qin Pi, CPA, M.S.-Tax  used to investigate expats living China that failed to pay U.S. taxes with the IRS as an attachment to the U.S. Consulate in China.  We know for a fact the whys and how’s expats are targeted!

When a taxpayer offshore has been determined by the IRS to be owning taxes, their information can be placed into the Treasury Enforcement Communication System (TECS). The TECS system alerts U.S. Customs offers when the taxpayer (and their assets) have entered the United States and allows the Department of Justice or the IRS to reach the taxpayer while they are inside the country. This news may be particularly troubling for taxpayers that could be deemed to have willfully failed to disclose a foreign account as such an offense carries criminal penalties including time in a federal prison.  God help a U.S. taxpayer that tries to smuggle in undeclared cash into the U.S. as it is likely to be confiscated and this is also a crime in and of itself.

US Taxpayers Should Contact an Experienced International Tax Attorney

At the end of the day, taxpayers have two choices: (1) contact an experienced international tax attorney and come clean about your undisclosed foreign accounts or (2) wait until your foreign bank turns their back on you (if they haven’t already). The latter option comes with a used prison jumpsuit and a very large tab that can be crippling to a person’s financial well being.

The international tax professionals at the Tax Law Offices of David W. Klasing have years of experience helping taxpayers come clean with the government through via Offshore Voluntary Disclosures Furthermore, our attorneys have represented clients through examinations and even criminal investigations in order to ensure that they received the most favorable outcome. When determining when you should come forward to disclose your foreign account, remember that the IRS and Department of Justice is moving at a rapid pace to investigate and convict Americans suspected of hiding money overseas. When you have any interaction with the government where your physical and economic freedom is on the line, do not go at it alone. Let us zealously advocate on your behalf. Contact the Tax Law Offices of David W. Klasing today for a reduced-rate consultation.