IRS seeks to get information on overseas accounts

On that date, the feds expect foreign banks and financial institutions to start handing over information to the Internal Revenue Service on all of their U.S. account holders. Thousands of overseas financial institutions already have indicated they will comply.

The intent of the new requirement is to reveal who has offshore accounts, and to prevent people from evading U.S. taxes by stashing money in overseas banks or investments.

“Come July, this is going to affect a lot of people,” said Ryan Losi, executive vice president of Piascik & Associates, an accounting and tax planning firm in Henrico County.

“The hide and seek of the past 30 to 40 years of hiding money offshore is gone,” Losi said. “That game is over.”

The relevant law is the Foreign Account Tax Compliance Act, or FATCA, which Congress passed in 2010. It requires U.S. citizens, including those living outside the United States, to report their financial accounts held in foreign financial institutions to the IRS.

U.S. citizens have been required to report foreign income and assets for more than 40 years. Tax rules established in the early 1970s require the disclosure to the IRS of any foreign accounts in excess of $10,000, a threshold that still applies.

Yet Congress and the executive branch didn’t start to get tough on offshore money until after the Sept. 11, 2001, terrorist attacks, when federal agencies became more focused on tracking money in an effort to stop terrorism and the illegal drug trade.

“Really, it wasn’t until about 2002 and 2003 that there was much enforcement” of the rules, Losi said.

He said that he had worked with more than 65 clients in the past few years to help them comply with the reporting requirements.

Some were part of a program in which the government allows individuals to step forward and disclose their foreign accounts. That program is called the Offshore Voluntary Disclosure Program.

Since 2009, more than 40,000 Americans have joined the disclosure program, paying about $6 billion to the U.S.

“I have had a fair amount in Richmond because we have a number of folks that have immigrated here” and still had foreign bank accounts, Losi said.

Some reports have labeled the voluntary disclosure program as a type of amnesty, but Losi said that is not accurate because joining it doesn’t necessarily mean someone can avoid prosecution if criminal activity occurred.

Yet Losi fears that the new reporting requirements also could sweep up people who aren’t deliberately trying to evade taxes.

In many cases, Losi said the clients he has worked with have not even owed taxes, or have been due refunds, but they simply failed to fill out the proper paperwork, which are called Foreign Bank Account Reporting, or FBAR, forms.

“If you have $1 of unreported income, then they can go after you civilly and potentially criminally,” he said.

The penalties for people who fail to report foreign accounts could be severe.

The civil penalties for a “non-willful” failure to file can be $10,000 for each instance of a failure to file a report. Willful failure can result in civil fine of $100,000 or 50 percent of what is in the foreign account, whichever is greater.

Criminal penalties range from $100,000 to $250,000 and five-year to 10-year prison sentences.

Last week, the Internal Revenue Service offered an olive branch, announcing that it would waive the steep penalties for Americans living abroad who haven’t been paying their U.S. taxes.

However, to avoid those penalties, citizens must be able to show that they did not evade U.S. taxes on purpose. Americans living abroad can have all penalties waived, if they file three years’ worth of tax returns and pay any back taxes.

Americans living in the U.S. can come clean by disclosing overseas accounts and paying a penalty equal to 5 percent of the account’s assets.

Already, the government has pursued prosecutions against some people with unreported offshore accounts.

In January, Ty Warner, the billionaire creator of the Beanie Babies toys, was sentenced to two years of probation, a $100,000 fine, and 500 hours of community service for tax evasion on $25 million in income he put in Swiss bank accounts.

Warner had previously pled guilty and agreed to pay a $53 million civil penalty and about $27 million in back taxes.

Warner’s prosecution resulted in part from the disclosure of U.S. account holders by the Swiss banking giant UBS in 2009.

With the new rules going into effect in July, the U.S. government is putting pressure on all overseas banks to comply, and a growing number of foreign governments also are agreeing to work with the U.S. to require bank disclosures.

Last month, the Swiss banking giant Credit Suisse pleaded guilty to criminal conspiracy and agreed to pay $2.6 billion in penalties for helping wealthy American clients evade U.S. taxes.

Court filings cited two unidentified Credit Suisse clients who allegedly sought and received the bank’s help in hiding money, including one person from Charlottesville.

Nearly 70 countries have agreed to share information from their banks, the U.S. Treasury Department said last month. Participating countries include all the world’s financial giants, as well as many places where Americans have traditionally hid assets, including Switzerland, the Cayman Islands and the Bahamas.

That’s why Losi says the new regulations “are a new global standard for tax compliance.”

The new move is part of a larger effort to bring more transparency into the financial system, said Justin Hopkins, an assistant professor of business administration at the University of Virginia who researches the effects of financial reporting and governance policies.

“Transparency can be very beneficial,” he said. “Not only will it deter potential tax evaders, but it will also discourage other activities,” such as money laundering.

The upcoming regulations have led some commentators to predict economic disaster, with some speculating that foreign financial firms might halt activities with U.S. firms and clients rather than comply with the rule.

“One can imagine a world in which some foreign banks would be less interested in transacting with domestic (U.S.) banks,” Hopkins said.

However, “the overall effect on the U.S. economy is a much harder thing to pin down,” he said. “The U.S. is one of the largest financial markets in the world, so it is hard to imagine that companies would not transact with us just because of a regulation. That would be walking away from a lot of money.”

The U.S. government is pushing foreign banks into reporting their account holders by imposing penalties on banks that do not.

Under the law, foreign banks that don’t agree to share information with the IRS face steep penalties when doing business in the U.S. The law requires American banks to withhold 30 percent of certain payments to foreign banks that don’t participate in the program — a significant price for access to the world’s largest economy.

In May, the government said it will provide some grace period and won’t rigorously enforce many of the requirements this year and in 2015 as long as firms are making a good-faith effort to comply.

The Treasury Department said this month that more than 77,000 foreign banks have agreed to share information about U.S. account holders.

“The strong international support for FATCA is clear, and this success will help us in our goal of stopping tax evasion and narrowing the tax gap,” said Robert Stack, deputy assistant Treasury secretary for international tax affairs.