by Brian Mahany
With the FATCA compliance deadline looming on the horizon, more and more countries are entering into agreements with the U.S. Treasury. Foreign banks will soon be required to disclose the identities of account holders with ties to the United States. Even the Swiss have signed an intergovernmental agreement with the IRS.
Beginning next year, foreign banks that don’t comply face significant monetary penalties. Although the IRS has no jurisdiction over offshore banks, it can make it next to impossible to do business here.
Under the Foreign Account Tax Compliance Act – FATCA for short – foreign financial institutions will soon begin analyzing and collecting data on foreign account holders. Those with ties to the United States will be disclosed to the IRS. While many countries have signed agreements with the United States, or are close to doing so, several countries have shown no inclination to cooperate. Prominent on the list of countries with no interest in cooperating is China.
China and several of the other Pacific Rim countries have not yet signed agreements with the the United States. If nothing is in place by 2014, the IRS could begin imposing penalties. China, however, doesn’t seem concerned.
Officially, China says that the FATCA law violates Chinese privacy protections, although one has to question how much privacy really exists in China. Perhaps more important is the one-sided nature of FATCA. The compliance costs on Chinese banks are high yet the law primarily benefits only the IRS. The current FATCA program requires that foreign banks disclose information about American account holders but does not require American banks to disclose the identities of Chinese nationals with American accounts. In other words, the agreements are one-sided.
Given the uncertain political climate in China and tight currency controls, one questions how many Americans are keeping money in mainland Chinese banks anyway.
Before rushing to safe keep all your money in Communist China, remember that even if China elects to ignore FATCA, they may still cooperate with the IRS on a case-by-case basis. China and the U.S. signed a Mutual Legal Assistance Agreement (“MLAT”) in June of 2000.
The stakes for having an unreported account are quite high. U.S. taxpayers with foreign accounts must annually file a Report of Foreign Bank and Financial Accounts (also known as an FBAR or TD-90-22.1 form). A willful failure to file an FBAR is a felony. Although the odds of getting caught with a Chinese account are lower, the IRS can still monitor wire transfers and credit card use. When combined with China’s stringent limitations on removing cash from the country, having a Chinese account may be more hassle than its worth.
Although the United States is the land of freedom and liberty, it’s ironic that the People’s Republic of China may be the only place where your accounts are free from disclosure. Time will tell.
If you have an unreported account, think twice before deciding to do nothing or moving your money again. There are amnesty and opt out programs that may help taxpayers avoid all or most of the penalties.
With so many options and looming compliance deadlines, anyone with an unreported account should consult with an experienced tax attorney immediately. The tax lawyers at Mahany & Ertl specialize in offshore reporting issues. For more information, 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 San Francisco, California. IRS tax services available worldwide.
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