I am writing this post from the 12th annual Offshore Alert conference in Miami Beach. The big topic this year? FATCA and offshore tax evasion. While the entire world gears up to enforce the new Foreign Account Tax Compliance Act (FATCA), experts and Senate staffers are finding many holes in the new legislation.
For those not already aware, FATCA is legislation passed by Congress in 2010 aimed at combatting tax evasion using foreign financial accounts. FATCA requires both individuals and banks to disclose offshore accounts belonging to U.S. taxpayers no matter where they reside.
Since the IRS’s 2009 amnesty program (the Offshore Voluntary Disclosure Initiative), 43,000 taxpayers have come forward to report their foreign accounts. Unfortunately, the IRS believes that millions more still are not compliant. That is important because the penalties for failure to report a foreign bank account can be the greater of $100,000 or 50% of the highest historical balance of any unreported account. In willful cases, taxpayers could face prison.
FATCA will soon require offshore financial institutions – that includes banks, brokerage firms and insurance companies located outside the United States – to review their account base and report those account holders with apparent ties to the United States. On paper, the new legislative regime seems very effective. Fortunately or unfortunately – depending on your view point, there are many holes in FATCA.
One of the most glaring deficiencies concerns paper records. Banks are required to review and perform due diligence on electronic data. A few smaller banks and those in less developed countries still maintain paper records. Are those banks required to perform the same due diligence on paper records? That question has yet to be answered.
Another problem is called “structuring.” The new FATCA regs require banks to review records for any account containing more than $50,000 USD. (Individuals, however, must still report if the aggregate balance of their offshore accounts exceeds $10,000.) Some taxpayers are spreading their accounts around multiple banks, each account below the $50,000 threshold. (Given the amount of John Doe subpoenas and increased cooperation by banks and bankers, we think that strategy is fraught with danger for any taxpayer who goes down that path.)
Perhaps is the biggest enforcement challenge is nominee accounts. The true tax evaders have learned the safest way to avoid detection is to open accounts in the name of another person or entity. We have heard one taxpayer who opened an account in Switzerland under the name of Seychelles trust. The Seychelles trust was in turn owned by an international business company based in Hong Kong.
Nominee accounts have been effective at thwarting Uncle Sam, yet that too is fraught with peril. The IRS considers nominee accounts as an affirmative act of tax evasion. If one is caught hiding money in the name of a fictitious entity expect criminal prosecution.
It will take years to fix the loopholes and creative tax evaders will always find or create a new loophole. Even without FATCA, however, the Justice Department and IRS have proven themselves very adept at finding offshore accounts. Time is running out for taxpayers and hard decisions must be made. Comply and face potential penalties or spend the next several years looking over your shoulder. That choice is a no brainer to us yet thousands of people still sit on the fence hoping that FATCA will go away. Unfortunately, it appears that most world powers are considering their own FATCA model.
Tax transparency is here to stay. For now, there are still many of cracks in the program.
If you have an unreported foreign bank account, time is running out to comply. Speak to an experienced IRS tax attorney today. Our initial consultations are free and confidential. For more information, contact attorney Bethany Canfield at or by telephone at (414) 223-0464.
Mahany & Ertl – America’s Tax Lawyers. IRS services provided worldwide.