Earlier today a tax consultant from the Netherlands contacted us. His question was quite simple. Can the U.S. government use information submitted on a FATCA return for other purposes? The IRS has long cultivated a reputation of keeping tax information completely confidential. While that may mean you and I can’t access financial information belonging to other taxpayers, it doesn’t mean the IRS can’t share with other law enforcement agencies.
Since the early 1970’s, US taxpayers have been required to report their offshore financial holdings. The Bank Secrecy Act requires U.S. taxpayers to report foreign bank accounts, brokerage accounts, precious metal accounts and certain other investments if the aggregate value of all foreign holdings exceeds $10,000. These accounts are reported on a Report of Foreign Bank and Financial Accounts or FBAR for short.
FBARs are a Treasury Department function, although the actual forms are processed by the IRS. That program is widely impacted by the post 9/11 Patriot Act. The government routinely uses FBAR information for anti-money laundering and other purposes.
FATCA – short for the Foreign Account Tax Compliance Act – is a relatively new law passed by Congress in 2010. It requires taxpayers to report information similar to that contained in the FBAR form. Beginning next year, however, the law will also require offshore banks and other financial institutions to collect and turnover data on US taxpayers.
So what can the IRS do with that information?
The FATCA legislation is silent. IRS regulations aren’t much help either. The answer is found in section 6103 of the Internal Revenue Code, “Confidentiality and Disclosure of Returns and Return Information“. First, we will look at the IRS regulations.
Section 1.1474-7 and 31.3406(f)-1 of the IRS FATCA regulations (“Confidentiality of Information”) suggest that FATCA disclosures can’t be used for anything except for FATCA compliance.
Wrong. There is an exception in those regs that refers to section 6103 of the Tax Code.
Unfortunately, section 6103(i) permits the IRS to disclose confidential tax return information to “any federal agency” for use in virtually any matter over which that agency has jurisdiction. This means that access extends well beyond tax administration. Now law enforcement agencies can access the information to investigate anything from money laundering to fighting foreign corruption and terrorism.
For some other federal law enforcement agency to access and use tax return information, the agency must obtain an ex parte order from a federal judge or magistrate. “Ex parte” means the agency does not have to give notice to the person or entity whose records are being sought. In other words, federal agents can secretly obtain the data.
A court order is essential to insure that cops can’t arbitrarily go on so-called “fishing expeditions” but the thresholds for obtaining such an order are dangerously vague and loose. This includes a mere finding that return information “may be relevant” to a crime.
While there are still some safeguards, expect that any information you or your bank provides to the IRS can be used for purposes beyond simple tax administration.
Most people who contact us have unreported accounts. We can certainly help with those concerns as well as taxpayers who have more sensitive concerns. All inquiries are subject to the attorney – client privilege, even if you don’t hire our firm.
Have questions about FATCA, FBAR and offshore reporting issues? Give us a call. We will gladly explain your responsibilities and explore your options. Our FBAR attorneys have helped many taxpayers with a wide variety of offshore reporting problems.
For more information, contact attorney Bethany Canfield at or by telephone at (414) 223-0464. The author may also be contacted at or by telephone at (414) 704-6731 (direct).
Mahany & Ertl – America’s Tax Lawyers. IRS tax services available worldwide.
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