by Brian Mahany
The United States Treasury Department has negotiated or is close to signing deals with over 50 foreign countries. Congress enacted the Foreign Account Tax Compliance Act (FATCA) two years ago. That law already requires individuals to report interests in foreign financial assets. (Don’t forget that U.S. taxpayers also have an independent obligation to file annual FBAR forms on their foreign accounts as well.) Mexico now joins many other countries that have come to agreements regarding the sharing of information and reporting of foreign accounts. Because so many Americans live in Mexico or send money to family there, the Mexican agreement takes on special importance.
FATCA is part of a growing crackdown on unreported cross border financial transactions. Although having property, bank accounts or investments overseas is completely legal, Uncle Sam wants all the details. Failing to report certain financial accounts can lead to penalties of up to 50% of the highest account balance per year and even if prison if the violation was “willful.”
Phase 2 of FATCA requires foreign financial institutions (FFIs) to identify and report account holders having ties to the United States. The definition of FFIs include not only foreign banks but also brokerage firms, hedge funds and even some foreign insurance companies if their products offer an investment component. Beginning in 2014, those entities will be required to disclose this information to the IRS. Mexican banks are included in the new law.
The agreement is a bilateral one meaning that U.S. banks will gather and supply similar information regarding Mexicans with U.S. accounts.
Federal law has long required U.S. taxpayers to report accounts in Mexico. This includes green card holders, dual nationals and Americans who have retired or live in Mexico. For individuals, annual reporting is typically done on a Report of Foreign Bank and Financial Accounts or “FBAR.” It is the failure to file the FBAR that triggers the largest penalties.
Unfortunately, many Americans are unaware of the law and have not properly reported their accounts. The FATCA reporting on banks will likely bring thousands of persons to light. Even if you close out your foreign account tomorrow or try to move it to another country, you are likely to get caught. Luckily there is an amnesty program called the Offshore Voluntary Disclosure Program (OVDI) that allows taxpayers to come into compliance and avoid the harshest of the penalties.
Because there are so many amnesty options, consulting with an experienced tax lawyer is the best way to avoid the high penalties. In some cases, all penalties may be avoided. Although phase 2 of FATCA is not complete, the U.S. already has two other information sharing treaties in place dating back to 1989 and 1992.
Under the current amnesty rules, the OVDI program is not available if the IRS finds you first or if your name is disclosed on a list provided pursuant to an information exchange request. In that case, all bets are off and you will be forced into a costly audit and possibly U.S. Tax Court. The lower amnesty penalties won’t be available either.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California. Offshore and foreign reporting services available worldwide. We also assist foreign banks and hedge funds with their FATCA compliance responsibilities.