by Brian Mahany
Almost every week the U.S. treasury announces another FATCA agreement. While the naysayers and opponents in the banking industry – and they are powerful – continue to believe that the law won’t be implemented, more and more countries sign on.
FATCA is an acronym for the Foreign Account Tax Compliance Act. It already mandates U.S. taxpayers to report foreign financial accounts including bank accounts, brokerage accounts, foreign real estate owned in corporate form and even some insurance products. In about a year, foreign financial institutions will be required to determine which of their account holders have connections to the U.S. and subsequently, will require this information be turned over to tax authorities.
According to an article in the IFC Review, Luxembourg’s Finance Minister Luc Frieden announced that his country was negotiating an inter-governmental agreement between the two nations. Negotiations began on November 19th and are expected to conclude by the middle of 2013.
What does this mean? In a few months, Americans with accounts in Luxembourg will have their information disclosed to the IRS. There is nothing illegal about a foreign account but failing to tell the IRS could be a felony.
The penalties on foreign banks and corporations that don’t properly report are severe. The penalties for U.S. taxpayers are even more onerous. The Bank Secrecy Act requires those holding foreign accounts to annually report those on an FBAR or Report of Foreign Bank and Financial Accounts. An intentional failure to file is a felony and can result in IRS penalties of the greater of $100,000 per account per year or 50% of the yearly high account balance.
To add to the confusion, the definitions of foreign financial institutions and accounts varies between the two offshore reporting laws.
Although quite a few people have attempted to hide monies in Swiss or Cayman banks, most of our clients simply don’t understand the law. This ignorance is especially bad for foreign born Americans, expats living overseas, “accidental Americans” and dual nationals who often send money “home.”
Luxembourg isn’t exactly a bustling hub of foreign banking activity but there are probably tens of thousands of Americans who have unreported monies in Luxembourg. That means a new FATCA agreement will net thousands of people with unreported accounts.
Now is the time to take care of unreported accounts. The IRS currently offers several programs which can save you significant penalties and offer a no audit, no prosecution alternative. The main amnesty program is called the Offshore Voluntary Disclosure Program, often called “OVDI” or “OVDP.” For most taxpayers, participation means a one time 27% penalty based on the highest account balance over the last several years. There are many alternatives offering even lower penalties and in some cases no penalties.
Simply doing nothing is the worst option you can choose. The IRS operates on a first contact policy. If they find you first or if your name is turned over by a foreign bank then amnesty is off the table. At that point, expect an audit and fight.
Exploring the options requires a fair amount of knowledge; we recommend a tax attorney or CPA well versed in foreign reporting issues.
The tax lawyers at Mahany & Ertl have helped many taxpayers with a wide variety of offshore reporting issues – voluntary disclosure, FBAR filings, FATCA, foreign real estate transactions, foreign gifts and foreign partnership and trust returns are some of the services we offer. In most cases, we can offer a reasonable flat fee alternative to typical hourly billing.
For more information, try using our search bar in the upper right hand corner of our blog, Due Diligence. We have hundreds of articles – just type “FBAR”, “FATCA” or “OVDI.” Need immediate assistance? Contact attorney Bethany Kroes at 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 coming soon, San Francisco, California. Services available worldwide.