LEGAL MATTERS | Disclose foreign accounts before it’s too late
The Foreign Account Tax Compliance Act (“FATCA”) became law in March 2010. However, as with many things “government,” several extensions were provided for guidance and regulations to be promulgated.
FATCA targets tax non-compliance by U.S. taxpayers with foreign accounts and focuses on the reporting: (1) by U.S. taxpayers about certain foreign financial accounts and offshore assets; and (2) by foreign financial institutions about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest.
For those of you who follow my column, you will know that I have written about FBARs (Foreign Bank Account Report) before. Now, it is time to stop ignoring these new rules.
FATCA became active on July 1. This means that many foreign financial institutions have been asking all account holders to complete a questionnaire to be shared with the IRS or have their longstanding bank accounts closed immediately.
The questionnaire consist of the following questions: (1) Were you born in the United States (this is generally a good indicator of whether you are a U.S. citizen, even if you left the country the day after you were born and have never been back); (2) Do you or did you ever have a U.S. passport?; (3) Do you or did you have a Green Card (Permanent Resident Card); (4) Do you or did you ever live in the United States; (5) Do you or did you ever have a physical address/mailing address or mailing address in care of your name; and (6) Do you or did you ever have legal representation in the United States?
Depending on your answers to the above questions, the bank may close your account (and forward you the balance) or ask that you complete a W-8BEN and/or W-9.
As of July 1, the above personal information will be shared with the IRS, so if you have foreign financial accounts, it is time to disclose them. Even if you did not receive a questionnaire, but for example, the address on your bank statement is in the United States — the bank will know that it is obligated to disclose the information to the IRS.
Voluntary disclosure
At this point, most U.S. taxpayers are aware that they should disclose foreign accounts, although many still don’t because previously it was believed that the IRS had no way of finding out. Those days are over: The IRS has created custom computer programs to mine this information for targeting individuals who may have failed to report foreign accounts and foreign-earned income.
There is still some time left to voluntary disclose by either entering into an Offshore Voluntary Disclosure Program (OVDP) or begin disclosing on a going-forward basis as some taxpayers prefer. Only the OVDP will provide protection from criminal prosecution; however, plenty of professionals advise against entering into the program due to the inflexibility and the high fines.
It is important to be aware that if the IRS contacts you based on the information provided by your foreign financial institution, the OVDP is no longer available to you and you may suffer higher penalties. Not only will you be obligated to pay the taxes, interest and various penalties, you most likely will also need to pay a CPA and a tax attorney to negotiate on your behalf.
There are currently several programs available that both foreign-domiciled and domestically domiciled taxpayers can take advantage of. The programs are open-ended, but the IRS can choose to close them at any time.
Not too late…yet
Regardless of what you choose to do, if you have one or more foreign financial accounts, do something — don’t wait for the IRS to call your name. As of July 1, it became practically impossible to keep your head in the sand. Act now before it is too late.
I hear a lot of excellent excuses for why taxpayers don’t report. The interesting thing is that most of them do not involve any intent to defraud the U.S. government on taxes. Many of these accounts are “holdover” accounts — either from when the U.S. taxpayer worked in that country or, just as likely, the taxpayer is actually a citizen of that country and still goes back frequently, even though he/she may have a family and career in the United States.
The IRS provides a wealth of guidance. The most recent guidance can be found at www.irs.gov/Individuals/
