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Sending Money to a U.S. Bank from Abroad? Beware of a Wire Transfer Audit – and Potential FATCA Penalties

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    Wire Transfer Audit & Potential FATCA Penalties: This Page at a Glance

    Understanding how international financial holdings affect American taxpayers is a difficult process, even when you’re only discussing standard income or foreign bank account holdings. But when the overseas holdings involve foreign trusts, things become significantly more complex. As a trustee, grantor, or beneficiary of a foreign trust, you do not want to make a mistake that could cause significant unplanned negative tax ramifications.

    The way in which you must report foreign trusts to the IRS varies, depending on the type of trust that’s involved. Before setting up any kind of foreign trust, you may want to contact an experienced tax attorney who has the knowledge required to help set up the trust for the greatest level of tax benefit.

    Note: Foreign trust have traditionally been used as an offshore asset protection strategy by U.S. estate planners.  Beware of U.S. advisers that are not well versed on the U.S. income tax ramifications of utilizing a foreign trust.

    Multiple categories of trusts are available, and these categories play a role in how the IRS treats the foreign trust from a tax perspective. The tax effects also depend on whether the taxpayer established the trust (called the settlor or grantor), serves as a trustee, or will be person who will benefit from the finances in the trust (called the beneficiary).

    Based on the taxpayer’s relationship to the foreign trust, the tax laws and forms that could be required include: Form 8966 (which is the FATCA Report), Form 3520, Form 5471, Form 8621, Form 8398, and FinCEN Form 114 (the FBAR).

    A tax attorney that has experience with international holdings and income tax law can provide advice and answers to questions you may have over these complex tax situations regarding foreign trusts.
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    Making a wire transfer is a fast and convenient method of electronically moving funds from one bank account to another, generally ensuring the recipient’s access within just one or two days of the transfer. However, for taxpayers with foreign income, international wire transfers can prompt examination (auditing) by the Internal Revenue Service (IRS), potentially resulting in serious legal and/or financial consequences. Before you use a wire transfer to send money to a United States bank from a foreign account, be sure that you understand the possible tax repercussions under the Foreign Account Tax Compliance Act (FATCA). Depending on the circumstances, a wire transfer could expose you to civil penalties – or even criminal tax and criminal foreign information reporting liability. However, if you act quickly to seek guidance from an experienced FATCA tax attorney, there may be steps you can take to become compliant and reduce the potential for civil and criminal repercussions.

    What is the Foreign Account Tax Compliance Act (FATCA)?

    The Foreign Account Tax Compliance Act was enacted in 2010. Though less than a decade has passed since its inception, FATCA has significantly altered the international tax law landscape by requiring foreign banks and other “foreign financial institutions” (FFIs), including mutual funds, hedge funds, and private equity funds, to disclose to the U.S. government certain foreign accounts and assets that are held by U.S. customers. Specifically, FFIs must disclose the account owner’s name, taxpayer identification number (TIN), and address, as well as the account number and balance, among other pieces of financial information.

    Failure to comply with FATCA will subject the noncompliant FFI to a 30% withholding tax on certain payments. Needless to say, this incentivizes foreign banks and institutions to follow the IRS’ rules. In 2015, for instance, Australia exposed 30,000 accounts to the IRS. Some of these accounts were held by U.S. citizens, while others were associated with business entities.

    To date, the United States has entered intergovernmental agreements (IGAs) with over 100 jurisdictions, including but not limited to well-known tax havens such as Bermuda, Luxembourg, Singapore, the Isle of Man, and the Cayman Islands. (For interested readers, a complete list of FATCA IGAs is available through the Department of the Treasury.)

    The ultimate purpose of FATCA – a law which, from the outset, has been aggressively enforced by the IRS and Department of Justice (DOJ) – is to expose and curb offshore tax evasion. By forcing FFIs to turn over account data, FATCA reveals the identities of U.S. taxpayers with undisclosed accounts in foreign countries. FATCA requirements are triggered when the account’s value, or value of combined multiple accounts, exceeds the current reporting threshold of $50,000.

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    How International Wire Transfers Can Trigger an IRS Audit

    All of this is important information for U.S. citizens with foreign bank accounts; but how does it relate specifically to international wire transfers?

    The simple answer is that banking institutions – which are bound not only by FATCA and numerous IGAs, but also the Bank Secrecy Act (BSA), the Patriot Act, and “Know Your Customer” (KYC) and anti-money laundering (AML) requirements – must report “suspicious activity,” which happens to include large transfers from foreign funding sources. (To quote an overview of suspicious activity reporting by the Federal Financial Institutions Examination Council, or FFIEC, which is a governmental bank regulation agency, “A transaction monitoring system… typically targets specific types of transactions,” such as “those involving large amounts of cash, [and/or] those to or from foreign geographies.”).  Also be aware of restrictions of movement of cash from countries like Iran to the United State under OFAC.  The IRS is also aware of attempts to repatriate a foreign account through cryptocurrency brokerages.

    These suspicious activity reports (SARs), as well as the FATCA-related disclosure of accounts, can cause the IRS to initiate an audit or even a criminal investigation of the individual or entity associated with the foreign account. In plain language, sending money to the U.S. from abroad tips off the IRS that a foreign account exists – and if that account has not previously been reported to the IRS by the account holder, he or she may face an array of civil or criminal consequences due to noncompliance with FATCA, including but not limited to fines, restitution orders, supervised release, and perhaps worst of all, incarceration in federal prison.

    There are a few ways for taxpayers to approach (or rather, avoid) these issues. The best and safest route is, of course, to comply with FATCA and related laws from the very outset, beginning when the account is created. Depending on the taxpayer’s financial circumstances, this may entail filing the following tax forms, among others:

    • FinCEN Form 114, more commonly called the FBAR (Foreign Bank Account Report)
    • Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation)
    • Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations)
    • Form 8858 (Information Return of U.S. Persons with Respect to Foreign Disregarded Entities)
    • Form 8938 (Statement of Specified Foreign Financial Assets)

    If the taxpayer knows that he or she has already acted to conceal the account, but has yet to be contacted by the IRS regarding an audit or criminal investigation, he or she may be able to rectify the situation by entering the Offshore Voluntary Disclosure Program (OVDP). By participating in the 2014 OVDP, which is the most recent version of the program available, the taxpayer could lower his or her fines while greatly reducing the threat of criminal prosecution. Unfortunately, with the program the OVDP is running out of time – and so are taxpayers with secret offshore accounts.

    International Tax Attorneys Handling FATCA, FBAR, and OVDP Cases

    There can be serious consequences for failing to disclose foreign accounts to the IRS – not only for banks and financial institutions, but also business entities and individual taxpayers. Even inadvertent errors can trigger costly penalties, while willful tax evasion makes criminal prosecution all but inevitable. However, that does not mean the situation is completely hopeless. By acting swiftly and strategically with guidance from an aggressive, experienced tax attorney, it may be possible to limit the penalties substantially.

    The keyword here is “swiftly.” The OVDP is ending in September 2018, and moreover, taxpayers lose OVDP eligibility once they have been contacted by the IRS concerning an audit or investigation. Therefore, the ideal course of action is to speak with an OVDP attorney immediately. For a reduced-rate tax consultation concerning an undisclosed offshore account, contact the Tax Law Office of David W. Klasing online, or call our tax law firm right away at (800) 681-1295.

    Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices in San BernardinoSanta BarbaraPanorama City, and Oxnard! You can find information on all of our offices here.

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