Example Summary of Foreign Account Tax Compliance Act of Individuals
At Golding & Golding, we tend to find that providing our readers with examples is an easier way to learn. And, with the continued enforcement of the Foreign Account Tax Compliance Act (FATCA) in over 110 countries and by more than 300,000 Foreign Financial Institutions — there’s no time like the present for an updated example of how the Foreign Account Tax Compliance works in 2018
Foreign Account Tax Compliance Act
Oftentimes, once a person learns about FATCA (Foreign Account Tax Compliance Act), and the fact that they may be out of IRS FATCA compliance, their mind fills with endless questions:
- How will the IRS find me if I live outside of United States?
- I have not traveled to the United States in many years?
- What if I give up my Citizenship (or Green Card)?
- Should I just close the foreign accounts?
- Did I use a U.S. ID card to open the account?
- Will I get arrested?
- Will the IRS take my passport?
Golding & Golding, Tax Specialist
Each year we are contacted by thousands of people, and many of them have been impacted one way or the other by FATCA.
At Golding & Golding, we pride ourselves on steering clear of any scare-mongering for fear-mongering. The reality is, that there are many people who reside oversea (who are considered U.S. persons) who will never be contacted in their entire lifetime by the IRS regarding FATCA noncompliance.
With that said, it is important to note that with more than 110 countries entering into FATCA Agreements with the U.S, and more than 300,000 Foreign Financial Institutions having agreed to comply with FATCA, there is an increased likelihood (than in years past) that you may be contacted regarding FATCA.
The following is an example how a person residing overseas gets stuck in the web of FATCA, followed by a summary of what options may be available to resolve the issue, and limit any problems in the future.
*This example is typical in our practice, and each and every time we have developed a cost-effective strategy to bring the person safely into compliance.
FATCA Case Study: David
David is originally from California and relocated to Taiwan in the early 2000s. Prior to settling down, David lived in many different countries including a stint in London, Australia, and Hong Kong…before meeting the love of his life in Taiwan.
Prior to his expatriation to Taiwan, David was a finance guru for a large U.S. based hedge fund. After relocating to Taiwan, David launched his own consulting business.
David is a friendly, outgoing, extroverted and gregarious person, and his business quickly flourished.
David Does Not Conduct Business in the U.S.
When David decided to move to Taiwan, he wanted to steer clear of any issues with the United States.
David is a U.S citizen, and while he does not travel to the United States often, if he expatriated and relinquished his citizenship, it would require him to pay a steep expatriation tax.
Since David’s goal was to detach himself from the clutches of the United States, the last thing David wants to do is to pay money to the United States for the privilege of leaving the United States. Therefore, David is still a US citizen.
David Has Foreign Bank Accounts
David has multiple bank accounts in Taiwan. When he opened the accounts, he traveled with his wife to do so, so that he would not have to only have his name on the account in case anything happened to him. As an added bonus, he figured that if the accounts were in his wife’s name with him having signature authority, then there would be no issue involving his U.S. Status.
Over the span of about 15-20 years, David opened around 10-15 bank accounts, with some of them being investment/bank account hybrid accounts, and other accounts devoted solely to receiving money his business.
Overall, David has about $7 million scattered amongst the different accounts.
David Does Not File U.S. Tax Returns
Upon landing in Taiwan, David joined an expat group, and received some bad advice. The advice was that as long as he only conducts his outside of United States (and keeps his salary below $100,000) he did not have to file taxes.
David was a bit skeptical, since David had never heard this rule before, but David recalled hearing something about excluding foreign income, and since he wasn’t doing any business with the United States, he decided not to look into it any further.
Therefore, David did not file any U.S. Tax Returns since arriving in Taiwan.
FATCA Enforcement, Bank Notice
In the last few years more than 100 different countries have entered into reciprocal FATCA agreements with United States; Taiwan is one of them (and had an agreement in substance for several years). David knew something about FATCA but did not believe it applied to him, since he believed he was not required to file tax returns, and the bank accounts were not directly under his name.
David Receives a FATCA Notice from his Bank
In 2018, David receives a FATCA notice from the bank. It is nothing ominous, it is just that when David opened his account, he was required to provide identification and the identification he provided was his US passport.
The Bank wants proof that David has remained in compliance with all of its US tax requirements.
David Google Researches FATCA
David researches FATCA online, and quickly becomes fearful of this future. Unfortunately, David lands on various fear monitoring/scaremongering websites intended to scare individuals, and David becomes very concerned.
David next contacts some of these fear-mongering firms that offer free initial consultations and after about three of them, he comes to the conclusion that he is going to jail for at least five (5) years, he is going to lose all of his assets, and he is going to be fined millions of dollars.
David Has Options
Even the big bad Internal Revenue Service understands that not everybody is always aware of the requirements to report foreign income, accounts, assets, or Investments to the United States.
In fact, the IRS has developed various IRS Foreign Amnesty different programs designed to facilitate compliance of offshore and foreign reporting.
David’s best bet would be to research various different attorneys online, read their blogs, get a feeling which attorneys actually have experience in this area of law, and speak with some of the more experienced attorneys regarding what his options are.
Do Not Act Hastily
Nothing good ever comes from acting hastily.
We have been practicing law for many years. We understand the initial feeling (especially for an otherwise ethical person) to learn that he or she is out of compliance — and the immense fear that can take over a person’s body when they start reading misinformation and believing they are criminals, when they are not.
These firms want you to be fearful, and they prey upon this fear by offering free initial telephone consultations and then scaring you during the consultation in order to get you to sign a retainer…before it is too late.
Take a deep breath, conduct your research with due diligence (and a clear head) and you should be fine.
You Have Methods for Getting IRS Compliant
In reality, the IRS doesn’t issue penalties against every individual with undisclosed or unreported foreign money. In addition, the IRS offers various amnesty program to facilitate compliance.
Further, depending on your facts and circumstances you may qualify for various alternatives to amnesty, which may result in a complete penalty waiver.
IRS Offshore Penalty List
The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:
A Penalty for failing to file FBARs
United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
FATCA Form 8938
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 3520
Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A Penalty for failing to file Form 3520-A
Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A Penalty for failing to file Form 5471
Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 5472
Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A Penalty for failing to file Form 926
Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A Penalty for failing to file Form 8865
Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Fraud penalties imposed under IRC §§ 6651(f) or 6663
Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An Accuracy-Related Penalty on underpayments imposed under IRC § 6662
Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty
Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)
Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion
Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
What Should You Do?
Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.
We Specialize in FATCA & IRS Voluntary Disclosure
We have successfully handled a diverse range of FATCA cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
Unlike other attorneys who call themselves specialists but handle 10 different areas of tax law, purchase multiple domain names, and even practice outside of tax, we are absolutely dedicated to FATCA & IRS Voluntary Disclosure.
No Case is Too Big; No Case is Too Small.
We represent all different types of clients. High net-worth investors (over $40 million), smaller cases ($100,000) and everything in-between.
We represent clients in over 60 countries and nationwide, with all different types of assets, including (each link takes you to a Golding & Golding free summary):
- Foreign Mutual Funds
- Foreign Life Insurance
- Fixing Quiet Disclosure
- Foreign Real Estate Income
- Foreign Real Estate Sales
- Foreign Earned Income Exclusion
- Subpart F Income
- Foreign Inheritance
- Foreign Pension
- Form 3520
- Form 5471
- Form 8621
- Form 8865
- Form 8938 (FATCA)
Who Decides to Submit to IRS Voluntary Disclosure
All different types of people submit to OVDP. We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
…We even represent IRS Staff with getting into compliance.
Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist
Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure and closely related matters.
In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS.)
He is frequently called upon to lecture and write on issues involving FATCA & IRS Voluntary Disclosure.
Less than 1% of Tax Attorneys Nationwide
Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.
The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.
Our International Tax Lawyers represent hundreds of taxpayers annually in over 60 countries.