Nowadays, it seems that we cannot read the news without hearing about China becoming a financial and economic powerhouse. With all of the growth in commerce between China and America, American companies are becoming commonplace in mainland China, and consequently the number of U.S. taxpayers that have opened overseas accounts in China has exponentially increased in recent years.
You may have assumed in the past that due to the strained U.S. and China relations over economic policy that the Chinese government would never agree to the disclosure of American offshore accounts held in China. However, China is currently deeply contemplating the decision provide full disclosure in compliance with FATCA.
Congress created the necessary leverage to persuade financially secretive countries like China to increase their financial transparency with the United States when it enacted the Foreign Account Tax Compliance Act (FATCA). The purpose of FATCA is to expose U.S. taxpayers guilty of tax evasion and who failed to file Report of Foreign Bank and Financial Accounts (FBAR) forms for their offshore financial accounts. U.S. taxpayers are required to file an FBAR form (TDF 90-22.1 / FinCen 114) for every offshore financial account with a balance of $10,000 or more at any time during the calendar year.
FATCA requires foreign financial institutions to report to the IRS all accounts in excess of $50,000 that belong to U.S. citizens and green card holders, regardless of whether they live in the U.S. or abroad. Any foreign financial institution that does not comply with FATCA will incur a 30% gross withholding tax on all financial transactions involving U.S. financial institutions.
Hong Kong financial institutions are supportive of Beijing complying with FATCA though an information sharing agreement. Hong Kong institutions are supportive because of their historic service of international customers and relationship with the U.S. government. However, many of these Hong Kong Financial institutions have affiliates in Mainland China that may not be able to comply with the FATCA by the July 1st deadline previously set by Congress. Many of these mainland affiliates are waiting for the Chinese central government to sign onto an Intergovernmental Information Sharing Agreement with the U.S. before they can begin compliance with FATCA.
Congress has determined that the remainder of 2014 and 2015 shall be a transition period for the IRS and international financial institutions to begin compliance with FATCA. This has been construed by analysts as an attempt to allow time for Chinese financial institutions to come into compliance and for the Chinese government to sign onto FATCA. So, how long until your Chinese bank begins reporting to the IRS?
Are you going to gamble and hope that your Chinese bank decides not to comply and thus fails to report your accounts to the IRS? The wiser course of action is to limit your civil and criminal liability and thus avoid serving prison time and the loss of your offshore wealth by making an offshore voluntary disclosure.
You do not want to simply move your funds to another offshore bank, or continue to fail to file your FBARs (TDF 90-22.1 of FinCen 114). Moving your foreign account to avoid detection is a badge of fraud that the IRS will point to in establishing that your actions are willful. Willfully failing to file an FBAR may subject you to three to five years of prison per violation. In addition, the most severe civil penalty charges willful violators 50% of the balance of the undisclosed account for each year of willful non-compliance. In effect, after 2 years of non-compliance, you could very likely be penalized up to the full value of your offshore account.
We can help you make a voluntary disclosure under the 2012 Offshore Voluntary Disclosure Initiate (OVDI) before it’s too late. Our competitive advantage is that we are a law firm with all of the functionality of a certified public accounting firm in the tax arena, and thus we are a one-stop shop for making offshore voluntary disclosures. We have over five years and over 100 voluntary disclosure scenarios under our belt and have a national reputation for excellence in this practice area.
Act now! Do not wait and hope that you hear about China signing onto FATCA before you decide to protect yourself. The stakes are too high, with potential prison time and penalties potentially larger than the value of your offshore accounts. For more information, please contact The Tax Law Offices of David W. Klasing.
