FATCA reporting is here. Are you in compliance?
The Foreign Account Tax Compliance Act, or FATCA, was established to prevent tax evasion by US taxpayers. It is the result of the UBS scandal of 2007, where a whistleblower revealed that the bank helped customers evade US taxes.
FATCA is a reporting procedure where foreign financial institutions (FFIs) search their customer accounts for signs of US indicia, or an indicator of a connection to the United States. FFIs must forward information about accounts with an indicia either to the FFIs’ government authorities which in return transfer such information to the IRS, or, in some countries, directly from the FFI to the IRS.
US taxpayers are obligated to report their assets held in foreign financial institutions (if meet the specific threshold) on Form 8938 Statement of Specified Foreign Assets, and then include this informational return with their income tax return. A taxpayer can face penalties up to $10,000 if the taxpayer is required to file Form 8938 but do not file a complete and correct Form by the due date. Failure to do so can result in the IRS sending a letter telling the taxpayer they are deficient on one or more tax returns and subject to additional penalty of $10,000 for each 30-day period after receiving the notice.
The issue for some taxpayers with accounts in FFIs who may have a US indicia is that they may not know if their account information qualifies as being reportable to the IRS under FATCA and has been forwarded to the IRS. This leads to uncertainty about whether they need to file or if they have neglected to file in previous years.
How can a taxpayer become compliant if they have not filed the necessary Form 8938 with their taxes?
If a US taxpayer receives a letter indicating a tax deficiency due to non-filing of Form 8938, what is the best way to get in compliance with FATCA and the IRS? THEVOZ Attorneys has identified three strategies:
- Amendment: The taxpayer simply files an amended tax return with Form 8938 included. Note that the amended tax return must be mailed in; eFile is not an option. The taxpayer may have to pay penalties assessed by the IRS if determined that omitting the Form was willful, therefore it is important to carefully consider this option before moving forward.
- Delinquent International Information Return Submission Procedure (DIIRSP). This option is available for taxpayers who have not filed one or more required international information returns; has reasonable cause for not timely filing the information return; is not under civil or criminal investigation by the IRS; and has not already been contacted by the IRS about the delinquent information return. The reasonable cause statement must be attached to each delinquent information return filed. No penalties will be assessed ff the IRS accepts the reasonable cause explanation.
- Streamlined foreign offshore procedure. This option is for taxpayers who are reasonably certain they are not compliant, possibly for several tax years, and want to get voluntarily compliant. These taxpayers may not have received a delinquency notice but are aware they have accounts in FFIs that may require disclosure on a Form 8938. The streamlined procedure is for taxpayers who are deficient due to an oversight or a lack of knowledge. These are deemed non-willful noncompliant taxpayers. The streamlined procedure requires complete, voluntary disclosure of income tax returns, including assets held in FFIs, for the three prior years. These taxpayers must also file six years of Foreign Bank Account Reports (FBARs), a document disclosing any accounts in foreign banks the taxpayer may have controls over and that have an aggregate value of $10,000 or more in any of those six years. THEVOZ attorneys can work with these non-willful noncompliant taxpayers to successfully navigate the streamlined procedure. The process requires significant amounts of paperwork that must be correctly completed, and a review of tax returns being submitted is advised, also. It is important to be thorough and complete in the Streamlined filings, to maintain the status of non-willful noncompliant. The reward is that the taxpayer will be required to pay any taxes owed with interest but may not be required to pay penalties for failure to file or failure to pay, etc.
- Offshore Voluntary Disclosure Program. The FATCA reporting program may reveal several high-dollar accounts in FFIs, accounts controlled by someone with US indicia, that have not been disclosed to the IRS. Further, the IRS may suspect the account holder did know, or should have known, what their reporting obligations were and yet they failed to comply. These taxpayers are deemed “willfully noncompliant.” There is a program for these taxpayers, called the Offshore Voluntary Disclosure Program or OVDP, but it is rigorous. The taxpayer must first obtain pre-clearance from the IRS to take advantage of the program. OVDP requires the taxpayer to disclose all relevant financial tax and financial documents and information to the IRS. OVDP is difficult to successfully navigate and requires the services of a tax attorney, but the rewards of getting compliant for willful non-compliant taxpayers is that they may not face criminal sanctions for noncompliance or non-payment. The taxpayer will, however, be required to pay all back taxes promptly.
It is important to note that not all US taxpayer accounts held in FFIs require disclosure to the IRS. We can help you determine if your accounts fit that description.
Understanding the FATCA international information return reporting process and how it can affect non-resident US taxpayers is an important first step to getting fully compliant with the IRS. THEVOZ Attorneys can assist taxpayers with understanding their obligations under FATCA and remain compliant on their US taxes.