by Brian Mahany
The news wires have been buzzing this week with new stories about offshore reporting. Most commentary has been directed at the banking side of FATCA, the new Foreign Account Tax Compliance Act. The first phase of FATCA is in effect this year – it essentially adds another layer of reporting requirements for individuals – and steep fines for noncompliance – with “foreign financial assets.” The banking side of the regulations, however, will end all banking secrecy. Unfortunately, millions of Americans and foreign U.S. taxpayers may find themselves in a lot of trouble when that happens.
Lest you think I am being alarmist, Business Insider had this to say about FATCA last week, “Banking privacy is dead. Completely, totally dead. Murdered, really.” Strong words, but true.
Whereas the individual side of the law requires all of us with foreign “financial assets” to report them with our tax returns this year, foreign banks anywhere on the planet will soon have to report them to the U.S. or face a huge penalty. Essentially, the penalty is a 30% “tax” on any transfers to banks that refuse to cooperate.
The enforcement mechanism is actually ingenious, although many believe a misuse of government power. Let’s say that some tiny bank in central India simply refuses to cooperate. Although the bankers there can safely sleep at night without worrying about Navy seals or IRS agents carting them off to jail, those same banks will suddenly find it much more difficult to do business with other larger banks who do cooperate. No one is quite sure what the landscape will look like a year from now but other large nations are signing on meaning Uncle Sam is not alone.
It’s not just the larger nations. A couple weeks ago we reported that France, Germany and the U.K. had signed on. Now we have news that the once popular tax haven of the Isle of Man is going to cooperate too.
Although the IRS has become very effective at finding offshore accounts, many taxpayers still don’t even know that their foreign brokerage account, offshore bank and foreign financial assets have to reported. Others know but have decided the risks of getting caught are lower than the fines if they are caught. With many banks now simply canceling accounts belonging to Americans because of FATCA, the world is suddenly getting smaller. More importantly, the banks that don’t cancel accounts will soon be reporting their depositor information to Uncle Sam and other governments.
If this isn’t complicated enough, FATCA does not replace the long standing FBAR filing requirement for businesses and individual U.S. taxpayers. Some people erroneously believe that the FATCA forms replaced FBARs. They did not. (For those wondering “What is an FBAR” – it’s the annual Report of Foreign Bank and Financial Account filed in June with the IRS.)
By now, many readers may be wondering are foreign accounts even legal? Of course. But the IRS wants to know where you have your assets. Generally those foreign assets are not taxable but the income from them is (dividends, capital gains, interest, etc.) The penalties for willful noncompliance is prison and civil penalties can be as high as 50% of the highest balance for each past year the accounts weren’t reported.
Those penalties are huge! The IRS is now in its third amnesty program (the Offshore Voluntary Disclosure Program sometimes called “OVDI” or “OVDP”) to get people to come into compliance. The penalties are still steep, however. For most amnesty participants the penalty is 27.5% of just 1 year’s high balance and a “Get Out of Jail” free card. Some taxpayers may qualify much lower penalties. Taxpayers who insist they did not act willfully can go through the traditional voluntary disclosure process. That’s an audit and a negotiated resolution but without any guarantees.
Thinking about an opt out of the amnesty or going the voluntary disclosure route? Talk to a tax attorney who is familiar with the IRS offshore rules first.
Most of the problem with unreported accounts can be traced to dual nationals, Americans living overseas or recent immigrants to the U.S. who simply don’t understand the foreign reporting laws. Adding to the problems are the untrained “mom and pop” tax preparers and some tax return software that simply didn’t catch the offshore income or accounts. (Some financial professionals dropped the ball too – you may have a right of recovery from them or their insurance if their mistake lead to you paying high fines and penalties.)
If you have unreported accounts or financial assets you can’t wait any longer. Amnesty and voluntary disclosures only work for people who contact the IRS first. The clock is running down and there really is no reason to ignore the problem. The tax lawyers at Mahany & Ertl have helped many people with foreign tax reporting, FBAR, FATCA compliance, OVDP, opt outs, amnesty and voluntary disclosures.
For a completely confidential consultation, contact attorney Brian Mahany at (414) 704-6731 (direct). All calls are protected by the attorney – client privilege, even if you don’t hire us. In most cases our services can be handled on a flat fee basis.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. Services available worldwide.