If you follow the news its hard to ignore the escalating tensions in the Ukraine… Russian troops in Crimea, U.S. troops on “training maneuvers” on the Russian border in Poland and demands for escalating economic sanctions. Through all the drama, however, is the quiet work being done by Russian lawmakers to comply with FATCA.
FATCA – short for the Foreign Account Tax Compliance Act – is a new law designed at combatting offshore tax evasion. Beginning this July, foreign financial institutions must review their accounts and identify those with ties to the United States. Banks that don’t comply can be penalized.
Under the new law, Americans with unreported Russian accounts could receive huge civil penalties from the IRS. Another law, the Bank Secrecy Act, penalizes U.S. taxpayers that fail to report their offshore accounts up to the greater of $100,000 or 50% of the highest unreported historical balance of each unreported account.
With Obama and Putin engaged in a full scale war of words, why would the Russians comply with FATCA? Good question. FATCA, after all, costs banks millions of dollars because of the stringent compliance and due diligence requirements. There are also legitimate privacy concerns – some nations say that complying with the new disclosures is a threat to their sovereignty.
So why are the Russians scrambling to comply? MONEY.
Despite all the rhetoric and tough talk in Moscow, most nations worldwide have agreed to comply. If Russia doesn’t comply, its banks are at a serious competitive disadvantage.
Equally as important, Russia has its own problems with offshore tax evasion. When the banking crisis hit Cyprus last year, the largest group of foreign victims were wealthy Russians. Just like some Americans hid money in Swiss accounts, many wealthy Russians parked money in Cyprus.
What does this have to do with FATCA? Plenty.
Obama and the IRS have received worldwide flack over FATCA, although most countries are desperate for more tax dollars and the idea of global financial transparency is quite appealing to most countries. While privacy advocates, taxpayers and banks decry FATCA, the G20 group of developed nations is working on a global version of FATCA. Russia, a member of G20, is losing billions each year to tax evasion just like the United States.
This week the Moscow Times reports the Russian government has submitted legislation to amend Russia’s privacy laws and permit Russian banks to comply with FATCA. Because of legislative timing issues, that legislation isn’t expected to be in place in time to permit banks to comply. Just like their counterparts in Washington, Russian legislators have resorted to a number of stop gap measures and have attached FATCA authorizing legislation to a variety of unrelated measures.
Although FATCA’s tough due diligence requirements begin on July 1st, banks are required to register by May 5th. The Russian National Financial Markets Council reportedly sent a letter to the Central Bank seeking clarification of the responsibility and ability of member banks to comply with laws proposed but not yet enacted. Russian banks are caught in a Catch-22. Comply ahead of anticipated legislation or wait and miss the IRS deadlines?
To date, the IRS has demonstrated a willingness to work with banks if it appears there is progress towards FATCA compliance. That still hasn’t appeased Russian bankers, however.
While the cold war rhetoric grows louder each day, banks and the Russian government quietly move closer to FATCA compliance. The politicians may talk tough but money apparently speaks loudest.
Have a unreported foreign account? Speak to an IRS tax attorney from Mahany & Ertl today. The initial consultation is free and confidential. We also represent and assist foreign banks, brokerage firms and other financial institutions. For more information, contact attorney Bethany Canfield at or by telephone at (414) 223-0464.
Post by Brian Mahany, Esq.