by Brian Mahany
It seems like every week we are reporting on another country that is poised to join FATCA. For those that don’t know, FATCA is short for the Foreign Account Tax Compliance Act. Passed by Congress several years ago, the act requires foreign financial institutions to identify and disclose the identities of account holders with ties to the United States. Since Congress can’t regulate businesses outside our borders, the law has a stiff tax component making it difficult for foreign banks to transact business here unless they comply.
Many countries have signed intergovernmental agreements with the U.S. Treasury Department to come into compliance with FATCA. Some countries are sitting on the fence and others – particularly in the Asian Pacific, are quite cool to the idea.
The Cayman Islands is the newest country to signal its intent to participate. The Cayman Minister of Finance told the Legislative Assembly last week of the government’s decision to sign an agreement with the U.S. Under the model adopted by the Caymans, banks and financial institutions will make disclosures to the Ministry of Finance who will subsequently provide the information to the IRS.
As an international financial center, the Cayman Islands offers a wide variety of financial services. Many people think that FATCA only applies to foreign bank accounts. That’s not accurate. The Bank Secrecy Act requires U.S. taxpayers to annually disclose foreign financial accounts. These holdings must be reported annually on a TD F 90-22.1 form also known as an FBAR (Report of Foreign Bank and Financial Accounts).
FBARs are generally required for not only bank accounts but brokerage accounts, hedge fund holdings, CD’s and even some securitized investments and insurance products. By now, most Americans with foreign accounts and dual nationals are beginning to realize that foreign bank accounts must be reported but great confusion still surrounds the reportability of the myriad of other financial products in the marketplace.
The stakes are certainly high. Failure to file an FBAR could be a felony and always carries the risk of huge civil penalties. How big? The greater of $100,000 or 50% of the highest account balance per account per year. With over 10,000 hedge funds registered there and hundreds of captive insurance companies, there are bound to be problems.
If you are a Cayman financial institution or hedge fund or are an American business or taxpayer with holdings in the Cayman Islands, contact us immediately. There are still ways to avoid possible prosecution and penalties but time is running out with implementation of FATCA just months away. Already, some banks such as HSBC are cooperating with the IRS.
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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