Speaking at a recent tax conference, IRS Commissioner John Koskinen told the audience that there will be “inevitable glitches” in the new FATCA reporting system. The system is designed to process massive amounts of data from foreign banks, brokerage firms and insurance companies.
FATCA – short for the Foreign Account Tax Compliance Act – enters it final phase on July 1st. The law was originally part of President Obama’s stimulus package and is expected to generate billions in new revenues while combatting tax evasion. Already in effect for individuals, the new law will soon require foreign financial institutions to review their customer accounts and report those with ties to the United States.
Twice postponed, both foreign and U.S. banks have asked the IRS for yet another 6 month delay of the final phase of FATCA. Both the administration and IRS say there will be no further delays, however. They plan on moving forward with the July 1st start date.
Everyone knows what happened when Obama’s new healthcare website was launched. It was a disaster and already the IRS’ own watchdog called the Treasury Inspector General for Tax Administration (TIGTA) has expressed doubts about the IRS’ ability to meet the looming deadline. In a report issued last September, the Inspector General said the agency was not ready to go live with the new registration system. Although the system is geared towards banks, TIGTA says that the system is necessary to insure tax compliance by individual taxpayers.
While we think FATCA is here to stay in some form, the Justice Department and IRS have proven themselves very adept at finding unreported foreign accounts without the new law. In our experience, most taxpayers with undeclared bank or brokerage accounts are not using these accounts to evade taxes. Most of the noncompliance comes from foreign born Americans, dual nationals, green card holders working in the U.S. and retired Americans living overseas. Unfortunately, the draconian penalty statutes tend to treat everyone as a criminal.
Few people are criminally prosecuted for unreported foreign accounts. (The exceptions are those who are intentionally evading taxes and those with accounts under nominee names.) The civil penalties for the willful failure to report a foreign account are huge and quite commonplace: up to the greater of $100,000 or 50% of the highest account balance per each noncompliant account. Have 2 or 3 offshore accounts and the penalties really add up.
There are amnesty options and in many instances, all or most penalties can be avoided. Unless you have remained current with the IRS’ foreign reporting requirements, speak to an experienced tax lawyer. Expat tax services and accountants are great for current reporting requirements but past due and unfilled FBAR forms require a tax lawyer.
Commissioner Koskinen says that the IRS will be patient and understanding of foreign banks and insurance companies that make a good faith attempt at compliance. Unfortunately, there are a few folks within the IRS who have not been very understanding of taxpayers who simply had no knowledge of the FBAR reporting requirements.
Post by Brian Mahany, Esq.