by Brian Mahany
Uncle Sam has been waging a full scale war against unreported offshore accounts. Although having a bank or brokerage account in a foreign country is completely legal, failing to disclose that account is not. Until now, the IRS has largely relied on a system of punitive penalties and public education to foster compliance. In a few months, however, foreign financial institutions are required to be the eyes and ears of the government. This post looks at the new regulations centered around “beneficial ownership.”
The Foreign Account Tax Compliance Act or “FATCA” presently requires individual taxpayers to report their offshore holdings. Beginning in 2013, banks worldwide will now be required to collect and turn over information as well. The law requires disclosure of accounts owned by U.S. taxpayers or in which these taxpayers have a beneficial ownership interest. The bank’s job is easy if the customer’s account is in his or her own name. For a variety of reasons, however, that is often not the case.
Some foreign accounts are in nominee names meaning the account is opened under the name of a third party. Often this is done in a deliberate attempt to hide the account from the government. Sometimes, however, nominee accounts are created to thwart vexatious litigation risks or because the U.S. taxpayer is merely a signatory on the account.
In the latter case, think of a daughter living in Chicago who is added to her aging mother’s account in Greece. The purpose is to be able to write checks to cover expenses for her mother in case of an accident or health problem. In this case, the account is in the mother’s name not to defraud the IRS but simply because it is the mother’s money.
Banks will soon be required to investigate and determine the beneficial ownership of account holders. Under the new FATCA rules, banks (and other financial institutions too) must check to see if:
a) If the account holder is a U.S. taxpayer,
b) If the account holder was born in the U.S.,
c) If the account holder receives mail in the U.S. or has a phone number there,
d) If the taxpayer routinely transfers money to the U.S., or
e) If anyone on the account – that includes signatories that don’t own the account – has a U.S. address.
Banks will even be required to check if mail is sent in care of another person located in a foreign country.
Obviously, banks are scrambling to sort out how they will go about complying with the new law. For each question answered, however, several new issues and questions arise.
The government is focusing its attention now on beneficial ownership of accounts and so-called nominee accounts. Separate from the FATCA rules, Treasury’s FINCen unit has also been developing new rules on nominee accounts.
Opening an account in someone else’s name is relatively simple. It won’t be long, however, before the government develops new methods to discover these accounts. Unless there is a valid business reason for creating a nominee account, taxpayers that attempt to evade detection by placing their money in the name of a third party are at tremendous risk of criminal prosecution. Because the Justice Department has indicted several foreign bankers in recent years, many foreign banks will be reluctant to accept such accounts.
Each willful failure to disclose a foreign account is punishable by 5 years in prison and each year that an FBAR form isn’t filed (foreign accounts are disclosed on a Report of Foreign Bank and Financial Accounts or “FBAR”) is a separate violation. The civil penalties are quite high too – 50% of the highest balance for each year the account wasn’t disclosed or $100,000. That means an unreported $100,000 account could yield penalties of $500,000 or more!
There is an amnesty program for taxpayers with unreported offshore bank accounts. The program, called the 2012 Offshore Voluntary Disclosure Program or “OVDI”, is a great deal for those facing possible criminal prosecution and large penalties – in other words, it is a great deal for people who deliberately hid money offshore or have unexplained nominee accounts. OVDI participants pay a one time 27.5% penalty and avoid prison and audit.
Many taxpayers, however, inherited accounts in foreign countries or simply did not even know of the offshore foreign reporting requirements. For these folks, amnesty may not be the best deal. Taxpayers that can demonstrate that their actions were not willful can opt out of amnesty and proceed with a traditional voluntary disclosure. Although there are no guarantees, the penalties are usually much lower.
If you have an unreported foreign account, time is running out. FBARs for 2011 were due on June 30th of 2012. Next year, foreign banks will begin ferreting out Americans with accounts in those banks. Because the IRS operates on a first contact basis, you must disclose these accounts first in order to take advantage of amnesty. If the IRS finds you first, all bets are off.
The tax lawyers at Mahany & Ertl have helped many foreign and American taxpayers with a wide variety of foreign reporting issues. FATCA, OVDI, FBARs and the proper reporting of ownership in foreign corporations, partnerships and gifts. All inquiries are protected by the attorney – client privilege and kept in complete confidence.
Mahany & Ertl – Giving Taxpayers A Voice. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. IRS legal services available worldwide.