Honduras Joins Dozens of Countries That Agree to Enforce FATCA
With a July 1st deadline just weeks away, many countries are finally signing agreements with the U.S. Treasury to implement FATCA. Two weeks ago, Honduras joined the quickly growing list.
The Foreign Account Tax Compliance Act – FATCA for short – was passed by Congress in 2010 as a method of increasing financial transparency and combatting offshore tax evasion. The new law was implemented in two parts.
Part one required individuals to better detail their foreign financial holdings. U.S. taxpayers have long been required to report most foreign bank accounts, brokerage accounts and many other financial holdings. Enforcement was spotty until the IRS began examining Swiss banks in 2008. Since then, the many tax authorities worldwide are also seeking increased reporting.
FATCA for individuals commenced several years ago and largely mirrors existing reporting requirements under the Bank Secrecy Act. Some of the definitions are different but most taxpayers who had to report their foreign accounts under existing FBAR rules now must also report on the new IRS FATCA form, form 8938.
Beginning July 1st, the second phase of FATCA begins. That phase requires banks and foreign financial institutions to examine their accounts and report those with ties to the United States. By signing a treaty with the U.S., Honduran banks and insurance companies will soon be checking their accounts and reporting those owned by Americans, those with addresses in the United States and even those who have other ties here.
It’s important to note that owning a foreign account is legal but only if properly reported. If you have an account in Honduras that has not been properly reported, its probably too late to close the account in the hopes of avoiding scrutiny. Honduran banks will be doing a look back at accounts that had a valuable of $50,000 or more.
On March 31st, the Republic of Honduras signed an “intergovernmental agreement” with the United States. The new pact requires the Honduran National Banking and Insurance Commission to insure that Honduran financial institutions implement the new FATCA requirements.
Like most of the existing FATCA intergovernmental agreements, the coverage of the new reporting is quite broad and includes annuities and life insurance policies with a cash or savings component. Honduras elected to negotiate a reciprocal agreement meaning that US banks will be required to examine their accounts for possible ties to Honduras.
What is the bottom line for U.S. taxpayers with Honduran accounts?
As previously noted, having a Honduran investment, insurance policy or bank account is legal. If you haven’t properly reported that account, however, you could face huge civil penalties from the IRS. FBAR penalties range from $10,000 for “non-willful” violations up to the greater of $100,000 or 50% of the highest historical balance of each noncompliant account! In a few cases, criminal penalties and prison may also apply.
There is still time to come into compliance and avoid the highest penalties. For some taxpayers, that means the IRS Offshore Voluntary Disclosure Program (OVDP). The OVDP amnesty, program, however still carries significant penalties. For many taxpayers, a better approach may be an opt out. That means negotiating directly with the IRS and demonstrating that the failure to report a Honduran account was based on ignorance.
The offshore reporting rules are extremely complex. Because the penalties are so draconian, we strongly recommend that taxpayers consult with an experienced tax attorney before contacting the IRS or simply filing old missing returns. (According the IRS, the latter strategy does not prevent penalties.)
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Need more information? Contact tax lawyer Bethany Canfield at or by telephone at (414) 223-0464. All inquiries are kept confidential. Initial consultations are free.