What is FATCA and When Will it go Into Effect?
FATCA is the legislation passed by the U.S. Congress to force transparency from foreign financial institutions harboring U.S. taxpayers’ accounts. It is designed to curtail and deter tax evasion on an international level. FATCA is set to take effect in July of 2014. It requires foreign financial institutions to report information about their U.S. account holders to the Internal Revenue Service. This group includes U.S. citizens and “green card” holders living in both the U.S. and abroad. Failure to comply with FATCA may lead to severe consequences such as those financial institutions losing access to U.S. markets. U.S. account holders who are not known to the IRS may have a 30% automatic withholding rate on payments such as interest and dividends. Those account holders who will have to pay the 30% penalty will have to either forfeit the money or file a U.S. tax return to claim a refund which would set off red flags to the IRS. If there is a finding that the failure to pay the U.S. taxes was willful evasion, the penalties could be even more severe or they may even face criminal charges.
What Constitutes Willful Evasion?
While there are many factors the IRS uses to determine what is willful behavior to evade taxes, some key evidence may include but is not limited to: having the money held in a trust, foundation (or both), having an account in a known tax haven jurisdiction, transferring the money or assets from one institution that is under scrutiny to one that is perceived to be under less scrutiny.
Which Countries Are Complying With FATCA?
Almost 20 countries or other jurisdictions such as well-known havens including the Cayman Islands, the island of Jersey, and Switzerland have signed agreements with the U.S. to facilitate with the ease of transfer of tax information under FATCA. Others who have already signed the agreement include the United Kingdom, Spain, Japan, Germany, and Mexico. While there are other countries or jurisdictions who have also signed agreements with the U.S., there are numerous others who have either initialed agreements with the U.S., are finalizing negotiations, are in dialogue with the U.S. or are exploring options with the U.S. India is currently one of the countries engaging in dialogue with the U.S. and is exploring their options.
What Should I Do If I Have Offshore Accounts?
It is first wise to examine what assets and accounts you have abroad. U.S. taxpayers with international ties should already be filing two forms. If a taxpayer has a bank account in a foreign country with a balance of more than $10,000 any time during a year, they should have made the appropriate disclosure in the prescribed form to the IRS by June 30th of every year. This is called Foreign Bank Account Reporting (“FBAR”). The penalty for not making the disclosure can be as much as $10,000 per violation per year and can go up to 50% of the bank balance. The other is Form 8938, required by FATCA for reporting foreign financial account attached to the tax return. While the FBAR and Form 8938 differ in several ways, it is important to note that the FBAR requires you to report indirect interests as well such as signature authority over any account while Form 8938 requires the reporting of more direct holdings and assets. Furthermore, since trusts are a unique and complicated creature in and of themselves it is extremely important to understand that the reporting of a foreign trust that a beneficiary is not aware of or receives money from may also be required under FATCA and should also be disclosed by such beneficiary in the FBAR.
The IRS has a continuing Offshore Voluntary Disclosure Initiative (“OVDI”) for taxpayers that should be taken advantage of by those U.S. Citizens, “expats”, and “green card” holders with foreign accounts. The OVDI levies penalties but offers protection from criminal prosecution since there are some people who willfully evade U.S. taxes but want to come “clean” with the IRS and others just are not aware of such complex rules and want to disclose their earnings and foreign accounts now to prevent any unforeseen penalties and criminal charges later once under the radar of the IRS. Under OVDI, tens of thousands of taxpayers have admitted to having undeclared accounts and paid stiff penalties since 2009. They have successfully launched and collected hundreds of millions of dollars from two previous initiatives. It is imperative to consult an experienced attorney and tax specialist to deal with such complex matters as being a foreign account holder while having an obligation to pay U.S. taxes should never be taken lightly and should be dealt with preemptively before you come under the radar of the IRS when you will have much graver issues to deal with at a point when it may be too late.
Disclaimer: This article is not intended to be legal advice. Legal advice depends on each and every person's particular circumstance. This article is for informational purposes only and must not be used for avoiding any penalties that may be imposed under the Internal Revenue Code. Arora Law Firm and Radhika Arora, Esq. specifically disclaim any responsibility for positions taken by readers in their individual cases or for any misunderstanding on the part of readers of this article.
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