Whistleblower Lawyer Blog
FATCA is being implemented in a number of countries outside the U.S., with the result that U.S. individuals who hold foreign bank or financial accounts and have not disclosed these accounts in the U.S., are about to be reported to the IRS.
(This post is by our colleague Richard Rubin of Rubin Law (www.rubinlaw.us), a tax attorney with significant experience in U.S. cross-border matters, including FATCA and U.S. international compliance.)
Bank accounts in countries outside the U.S. can cause headaches when owned by U.S. taxpayers. While owning foreign accounts has always entailed a reporting headache for U.S. taxpayers, the problem has recently heightened as a result of the FATCA legislation that is being implemented in a number of countries outside the U.S.
FATCA is a set of U.S. tax reporting rules that impact U.S. citizens, Green Card holders and other U.S. tax resident individuals who have accounts with non-U.S. banks or financial institutions.
An acronym for the Foreign Account Transactions Compliance Act, FATCA requires banks and financial institutions in countries outside the U.S.to provide the IRS with details of accounts that are owned by U.S. taxpayers. Although the mechanism varies slightly by country, in most countries where FATCA has been implemented banks and financial institutions are required to report these details to the Revenue Authority of that country, and the Revenue Authority is required to pass this information along to the IRS.
Foreign banks are generally required to report accounts known to be owned by U.S. citizens and Green Card holders, as well as accounts owned by anyone who is potentially U.S .tax resident, as indicated for example, by an associated U.S. address, U.S. telephone number, or U.S. person with signing power or other authority over the account.
For those U.S. tax residents who have duly reported their non-U.S. bank and other accounts on their U.S. tax returns (and on their Foreign Bank Account Reports or “FBAR’s”), FATCA has little practical significance. Conversely, FATCA is directly relevant to U.S. tax residents who have not reported their non-U.S. accounts. FATCA is also potentially relevant to individuals living outside the U.S. if they intend immigrating to the U.S. or otherwise becoming U.S. tax resident.
Compared to the Revenue Authorities of most other countries, the IRS tends to take non-compliance far more seriously, as is evident from the IRS penalties that are generally imposed for non-compliance, especially non-reporting of foreign bank accounts. As a result, individuals who are required to report their non-U.S. bank accounts, but have not done so, typically face heavy penalties and in some cases criminal prosecution when the IRS disovers their foreign accounts through FATCA reporting.
FATCA is at varying stages of implementation in a number of countries. Take for example South Africa: in June 2014 South Africa signed an agreement with the U.S.(a so-called Intergovernmental Agreement or “IGA”), in terms of which South Africa undertook to implement FATCA according to a timetable. Although the dates originally agreed have been extended, in February 2015 South Africa enacted legislation giving effect to FATCA. As things currently stand, South African banks and institutions are obliged to commence reporting client account details with effect from June 2015.
While certain implementation issues and dates remain to be clarified, one thing is clear; that in time to come South African banks and institutions will routinely be rendering details of accounts held by U.S. taxpayers.
As with most other jurisdictions, South African institutions are required to provide details of accounts known to be owned by U.S. citizens or Green Card holders, as well as accounts owned by anyone who is potentially U.S. tax resident, as indicated for example, by an associated U.S. address, U.S. telephone number, or U.S. person with signing power or other authority over the account. In some cases, an “in-care-of” or “hold mail” address is sufficient to require reporting, if this is the sole address on file with the South African bank.
Individuals who obtain Green Cards are often unaware that if they spend even a short period in the U.S. they typically become U.S. taxpayers; and being unaware of their U.S .taxpayer status, they generally don’t file U.S. tax returns or FBAR’s, with the result they also fail to report their non-U.S. accounts. In cases such as these, FATCA reporting may cause the individual’s foreign bank to render their account details to the IRS before the individual gets to file the necessary returns and make the necessary disclosures.
In most cases the headache of unreported foreign accounts can be relieved – and generally cured – by taking appropriate corrective measures. This often includes some form of Voluntary Disclosure to the IRS, and in certain cases may include other forms of disclosure.
There are a number of categories of Voluntary Disclosure, and the various U.S. options entail different qualifying criteria as well as different consequences. In certain cases, the risk of criminal prosecution may favor a solution that focuses on reducing the chances of criminal indictment; while in others, the risk of criminal prosecution is sufficiently low allowing focus on a solution that reduces or eliminates civil penalties.
While the remedy always depends on the specific facts, one principle is almost universally true: that doing nothing about foreign unreported accounts is not a solution.
(We asked our colleague Richard Rubin of rubinlaw.us to share his observations on FATCA.)