Due Diligence

by Brian Mahany

Although we are not fans of Foreign Account Tax Compliance Act (or FATCA for short), we begrudgingly acknowledge that the law is probably here to stay. More importantly, with so many independent tax exchange agreements signed, the chances of keeping an unreported foreign bank account secret from Uncle Sam are not good. With or without FATCA, you are likely to get caught.

FATCA was part of Obama’s HIRE Act. The goal of the law is to require foreign banks to inform the IRS of the identity of account holders who are U.S. taxpayers, American citizens or have some connection to the United States. Although owning a foreign bank or brokerage account is entirely legal, failing to report the account is a crime.

Foreign accounts must be reported annually on a Report of Foreign Bank and Financial Accounts, more commonly called an FBAR. Beginning last year, certain account holders were also required to file a so called FATCA form, IRS form 8938.

We have many criticisms of the FATCA law. First, the definition of a qualifying foreign financial asset is different for FATCA and FBAR purposes. In other words, you may have to file one, two or none of those forms. The more complex the tax code, the more people make mistakes. Unfortunately, mistakes involving foreign accounts can be expensive. How expensive? Read this article to understand how one 79 year old woman is looking at 6 years in prison and penalties approaching $22 million!

The harsh penalties don’t account well for the difference between those who deliberately evade taxes through offshore accounts and the vast majority of people who simply don’t understand the complex foreign reporting requirements -American expats living overseas, dual nationals, Americans who inherited foreign accounts and green card holders.

The law puts so much burden – and risk – on foreign banks that many are simply turning away American depositors. That means it is very difficult for expats to open bank accounts.

With all these problems, it is easy to see why we have concerns with the law. We believe it is here to stay, however.

In the interest of reporting all opinions, we mention a recent article published by the American Banker. To be fair, the article was an opinion piece written by Nigel Green, someone we well respect. The title of the article, “Foreign Banks Rejoice: Overreaching US Tax Law In Trouble,” speaks for itself.

Green says that the IRS has convinced only a handful of countries to sign on and that the final regs are late. While technically accurate, the article doesn’t paint the full picture.

The IRS has signed memorandums of understanding with many countries including the some of the powerful European nations. The final intergovernmental agreements may not be signed but our allies have signed on in principal. Even the Swiss are coming on board.With the industrialized G7 nations aboard, there is enough momentum to force banks to comply.

The regs have also been delayed but are finally ready. The kickoff date for the banking side of the law was pushed back from 2013 to January 2014. We think that was done more to work out some of the kinks in such massive legislation and less because the law is in trouble.

We agree with Green, however, that the law is not popular. Former U.S. Senate foreign policy analyst James Jatras reportedly called FATCA “the worst law most Americans have never heard of.” While not the worst, it is certainly bad for banks and expats and continues to generate new unintended consequences.

If you are a foreign financial institution with questions on FATCA, we can help. We also represent U.S. businesses and taxpayers with a wide range of foreign reporting questions. FBARs, FATCA, the offshore voluntary disclosure program and others to name a few.

Last year, the CPAmerica organization of CPA firms named us their exclusive provider of legal services for FATCA and foreign reporting issues. That makes the folks that the experts turn to when they have questions. We have also teamed up with soft ware solutions provider Finomial to assist foreign financial institutions. If you have a FATCA problem, give us a call.

For more information, contact attorney Bethany Kroes at bckroes@mahanyertl.com or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence.

Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and our satellite office in San Francisco, California. Services available worldwide.

[Want more information immediately? We have posted hundreds of articles on a wide variety of foreign reporting topics on our Due Diligence blog. Just type in "FATCA"  - or any other tax topic - in the search engine bar located in the upper right hand corner of our blog home page.]