Updated: Jan 13, 2019
Unless you have a foreign financial account or work in the financial field, you might not have heard of the Foreign Account Tax Compliance Act ("FATCA"). FATCA is one of the most powerful tools the Treasury department has at its disposal.
Our Tax system:
The US requires its citizens to pay tax on income they earn. When you earn income in the US you receive a W-2 or a 1099. The payor (your employer) provides one copy to you for you to report on your 1040, and the other copy goes to the IRS. This creates a check and balance system. So if you don’t report your income, the IRS will know.
But if you earn income outside of the US, how would the IRS know? Foreign payors aren't required to report how much they pay you to the IRS. After all, why would they? Hence, it then becomes unfair and illegal for US citizens to earn income offshore and escape US taxes, while US citizens who earned income in the US have to pay their share. One way for the IRS to locate unreported income is to look at foreign bank accounts. If you earned income offshore, you would likely deposit it in a foreign institution.
Until the enactment of FATCA, it was tough for the US to demand foreign financial institutions (“FFI”) to turn over their US clients registry. Again, why would the foreign financial institutions voluntarily turn over their files? he US had no authority to require disclosure and the paperwork would simply increase the FFI’s compliance burden. Furthermore the FFI’s customers would prefer the US government not knowing how much money they have saved up offshore (especially true if they didn’t include this income in their tax returns).
FATCA changed the game
Rather than demanding foreign banks turn over a list of Americans who have accounts at that bank, the US bullies (“strongly incentivizes) the banks into submission. This is done through political pressure and Intergovernmental Agreements ("IGA’s"). The IGAs basically inform foreign countries that if they want to do business with the US or its allies, the FFIs need to release the names of the US citizens with offshore accounts.
Why is this important to taxpayers?
Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. There are major penalties if you fail to report these financial assets. This requirement is in addition to the long-standing requirement to report foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
FATCA also requires certain foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest (similar to the 1099 and W2 regime). The reporting institutions include banks, investment entities, brokers, and certain insurance companies. Some non-financial foreign entities will also have to report certain of their U.S. owners.
What does this all mean?
If you have offshore accounts, it is no longer a question of "IF" the US will find out, but “WHEN” the US finds your account. At that point, you will face either outrageous civil penalties (later blogs will discuss the penalties in detail) or criminal sanctions. For some taxpayers. it is already too late, as indictments have been issued. For the rest, it is a race against time to petition for immunity.
At Le Tax Law, we specialize in international tax. If you have questions or concerns about your foreign assets let us get you into compliance. We'll be with you every step of the way.
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