by Brian Mahany
We get calls every day from foreign account holders and CPAs asking about offshore reporting. The questions are often technical. Yesterday, however, I was taken aback when someone asked why Congress passed the Foreign Account Tax Compliance Act (FATCA). The answer is quite simple. Congress wants your money.
The perception is that wealthy Americans hide income from the IRS in foreign bank accounts. Many do. The problem is that most people with foreign accounts are people who were born outside the U.S. Many Indians send money home to family in India, for example. We know many Canadian Americans who live on one side of the border but work on the other. Businesses often have factories or sites in multiple countries. And some Americans simply don’t trust the American dollar or banking system and want to diversify.
Opening an offshore bank or foreign brokerage account is completely legal. Uncle Sam, however, requires you to tell them about your account. Once a year individuals and businesses must disclose their foreign accounts using an FBAR form (Report of Foreign Bank and Financial Accounts).
This year individuals with certain earnings thresholds are required to comply with FATCA as well. Congress passed the FATCA law because too many people were failing to file FBARs. The FATCA law requires individuals to file this year and beginning in 2013, foreign banks will also have to disclose the identities of U.S. taxpayers with accounts. In effect, the IRS is making banks worldwide do the IRS’ homework.
There are hundreds of thousands if not millions of taxpayers with unreported foreign accounts. Most people haven’t complied with the law because they simply don’t know about the law. Ironically, the ones who do understand are usually the ones who have consciously decided to evade taxes. The majority are not avoiding taxes, they simply don’t know the law.
The problem with all of this is that the IRS tends to treat both groups in the same fashion. Penalties for failing to comply with FATCA are steep – $10,000 per year – and the FBAR penalties are simply draconian – 50% of the highest balance for each year the account was unreported. Those penalties can quickly wipe out someone’s entire savings.
Several foreign governments including Canada and India are not happy with the IRS. They feel that many of their citizens or natives are innocent of any willful intent yet still caught up in the IRS’ dragnet.
Taxpayers who can prove that they did not violate the law willfully may get a break, however it usually involves an audit and long drawn out process. Taxpayers that just want to “get it over” or who have criminal exposure may be better off going through the IRS amnesty program (the 2012 Offshore Voluntary Disclosure Program, sometimes called “OVDI). That too, however, involves big penalties.
Once banks and financial service providers begin reporting account holders to the IRS under FATCA the U.S. Treasury will finally be able to identify many of the people with unreported accounts. The problem is the price. As we said before, many foreign born Americans, dual nationals, green card holders, Americans living abroad and even Americans with legitimate foreign accounts are likely to face huge penalties for simply not understanding the law.
The tax attorneys at Mahany & Ertl help people with a wide range of tax problems including offshore reporting, FBARs, FATCA, foreign partnerships, voluntary disclosures and OVDI. For more information, contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at All inquiries are kept in strict confidence and protected by the attorney client privilege.
Mahany & Ertl – Giving Taxpayers A Voice. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Minneapolis, Minnesota & Portland, Maine. Tax services available worldwide.