The IRS frequently releases publications to better inform the public and tax practitioners regarding the agency’s approach to an array of issues. A recent IRS announcement, Announcement 2016-27 – Update on Jurisdictions Treated as If They Have an IGA in Effect, indicates the IRS’s frustration with the pace of the implementation of IGA’s in certain foreign nations. The effect of the ruling is to increase the likelihood that taxpayers with undisclosed accounts in foreign nations will face offshore account enforcement. Taxpayers who have not yet complied with FATCA and other laws requiring the disclosure of foreign accounts should take action to correct their noncompliance. The failure to address this matter can result in significant fines and penalties and, in the case of willful conduct, can potentially result in criminal consequences.
The implementation of the Foreign Account Tax Compliance Act (FATCA) has been and is being accomplished through the negotiation and ratification of international governmental agreements (IGAs) between the United States government and foreign governments. Nations generally ratify either a Model 1 or Model 2 IGA. While there are certain differences in the method of reporting in Model 1 and Model 2 jurisdictions, the important takeaway for individuals is that when an IGA is in effect, it is highly likely that the taxpayer’s account information will be shared with the American government. If the taxpayer has failed to comply with his or her disclosure obligations, serious penalties are possible.
Due to delay in implementing IGAs and FATCA in some nations, in 2013, the IRS issued Notice 2013-43 (2013-31 I.R.B.113). this notice stated that in any nation where an IGA had been signed but not brought into effect, the IGA is treated as being in effect provided that the government is taking reasonable steps to implement the IGA. In 2014, the IRS issued Announcement 2014-17 (2014-18 I.R.B. 1001) and Announcement 2014-38 (2014-51 I.R.B. 951). These notices expanded on the notice from 2013 holding that in any jurisdiction where an agreement in substance was reached prior to November 30, 2014 and where the jurisdiction continues to indicate willingness to implement, the IGA would be treated as being in effect. Finally, in 2015, the IRS issued Notice 2015-66 (2015-41I.R.B. 541) that indicated the foreign financial institutions in nations covered by a Model 1 IGA that had not entered into force as of the end of September 2015, would be treated as complying.
This latest announcement sets forth the IRS’s position that the U.S. Treasury will begin to employ more aggressive tactics to encourage nations to bring IGAs into force. Starting January 1, 2017, the Treasury will start updating its list of nations that have not yet brought their FATCA IGA into force. Nations that wish to maintain their current treatment of having an IGA in effect must submit, by December 31, 2016, a detailed explanation of why the jurisdiction has not yet brought the IGA into force and provide a methodical plan to implement the IGA. Foreign financial institutions in nations where IGA “in effect” status is canceled will no longer be exempt from withholding. These FFIs are highly likely to pursue an FFI Agreement to achieve compliance and avoid a withholding penalty. This means that a risk of account disclosure exists even when a nation fails to implement a FATCA IGA. For account holders in jurisdictions when an IGA is in force, you still face the same risk of having your undisclosed account discovered due to disclosures made by the FFI. All the while, the U.S. Treasury appears poised to continue to apply the pressure on nations to bring IGAs into force.
If you are concerned about your failure to disclose foreign accounts, this fear is well-founded. The United States has already signed IGAs with more than 80 nations. Of these IGAs, 61 are currently in force. In addition, the U.S. government has reached agreements in substance with at least 30 nations. The risk presented by undisclosed accounts is only increasing due to increasingly aggressive actions by the U.S. government. To discuss how you can correct offshore account mistakes with a strategic tax lawyer, call the Tax Law Offices of David W. Klasing today at 800-681-1295.