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Accidental Americans & FATCA – IRS FATCA Accidental Americans

FATCA Accidental Americans - IRS FATCA Accidental Americans (Golding & Golding)

FATCA Accidental Americans – IRS FATCA Accidental Americans (Golding & Golding)

Accidental Americans & FATCA – IRS FATCA Accidental Americans

Accidental Americans: When a person refers to FATCA Accidental Americans, they are referring to the Foreign Account Tax Compliance Act “FATCA,” and individuals living abroad.

Accidental Americans & FATCA

These individuals are U.S. Citizens by birth or became citizens through their parents — but the individual was unaware they were “American.” Therefore, these individuals are referred to as “Accidental Americans.”

Our Board Certified Tax Law Specialist Team of International Tax Lawyers summarizes Accidental Americans & FATCA.

FATCA Accidental Americans 

Many individuals and organizations truly believe FATCA is a bad law.

They believe that it is especially unfair for non-US residents, accidental Americans (born into citizenship), or other individuals who do not intend on currently residing in the United States to have to pay US tax.

Common Questions We Receive about FATCA Accidental Americans:

What is an Accidental American?

An Accidental American is generally a non-resident person who may not be aware that they are considered a U,S. Citizen until later in life.

What is An Example of an Accidental American?

An Example of an Accidental American is an non-Resident is born outside of the United States,  to U.S. Citizen parent. The person may qualify as an Accidental American, even if they have never entered the U.S.

What Happened with FATCA & Accidental Americans in France (2019)?

As provided by the Local:

More than 400 ‘accidental Americans’ in France sent a letter to the 124 elected Democrats in the US as part of their campaign effort to exempt themselves from having to pay taxes there. 

As provided by Reuters:

“More than 300 “accidental Americans” in France, French citizens who hold U.S. nationality only because they were born there, filed a discrimination lawsuit on Wednesday.”

What is the Danger of Being an Accidental American?

The main “danger” is that the person learns that he or she is out of U.S. Tax and Reporting compliance for one or many years — and may result in significant fines and penalties  — although several IRS Tax Amnesty Programs may help reduce or avoid penalties.

What is FATCA?

The Foreign Account Tax Compliance Act. It is used to enforce reporting of non-U.S. (aka Foreign) assets worldwide.  The failure to comply may result in fines and penalties.

Does FATCA Apply to non-Residents?

Yes, BUT the threshold requirements are higher, so less people have to report.

Do I Pay U.S. Taxes if I have Dual Citizenship?

Yes, but you may qualify for the Foreign Tax Credit, Foreign Earned Income Exclusion, or other exceptions, limitations, and exclusions.

Should I renounce my U.S. Citizenship?

It depends — BUT before renouncing, you should speak with experienced counsel to assess your travel and tax situation.

Accidental Americans Get the Raw End of the Deal

For this group of people, having to report their foreign income and foreign account information to the US government can be very onerous and over-burdensome and we do agree that some areas of this law should be revised.

Yet, whether a US person believes FATCA is a bad law or not, it is still important to remember that it IS the current law and should be followed. You do not want to be caught off guard and possibly hit with extensive fines and penalties. [In fact, in order to help some of these accidental Americans, the US has created the Streamlined Foreign Offshore Program and you may be able to get away with paying no penalty and no taxes. You should contact an experienced tax attorney to see if you qualify.]

Unfortunately, in addition to all of the legitimate tax professionals who want to help, you have to be wary of some tax professionals who have no intention of actually helping individuals – but are simply seeking to scare clients (“you are going to jail”) and take advantage of their fear by charging hourly fees and pushing clients into the wrong programs (OVDP vs. Streamlined) in order to charge more.

Confusion over FBAR & FATCA

Oftentimes, when a client contacts us at Golding & Golding, it is after they have conducted their own initial research online. They have usually spoken with some aggressive salesman-type of Attorney or CPA who misrepresented the current law and scared them into believing they are going straight to jail.

There are also some clients who have traversed the different expat and other forums and wrongfully believe that FATCA Compliance and FBAR Reporting are inapplicable laws and should not have to comply at all under any circumstances.

What is the Foreign Account Reporting Law?

Under current US tax laws, rules, and regulations, there are significant reporting requirements for individuals, estates, and businesses that have foreign accounts. These are individuals who generally fall into the category of being either a US citizen (accidental or not), Legal Permanent Resident (aka Green Card Holder), or Foreign National subject to US tax under the Substantial Presence Test.

If a person falls into one of these common categories (there are others), then under this current US tax law, they are required to report their foreign accounts and other foreign money to the US government if they meet certain threshold reporting requirements. There are two main reporting requirements as follows:

FBAR (FinCEN 114)

If it any point during the year a US person has more than $10,000 in annual aggregate total in foreign accounts (aka accounts outside of the United States) on any day the year, they are reported to report that information annually on an FBAR. It does not matter if the person owns the money, is a joint account holder with a non-US person, or merely has signature authority over the account – they are required to report. This form is not filed directly with your tax return but is a separate form that is filed electronically directly to the Department of Treasury.

FATCA Form 8938

in addition, starting in 2011 under the new FATCA (Foreign Account Tax Compliance Act) law, individuals may also have a reporting requirement directly on their tax return with Form 8938. Unlike the FBAR, the FATCA form has different threshold requirements, which will vary depending on whether a person is married filing jointly, married filing separate, or single. It will also vary depending on whether a person is a US resident for foreign resident. In fact, the threshold requirements for reporting are much higher (you must have more money to report) when you reside abroad (outside of the United States).

You May Disagree With FATCA

We understand that many individuals disagree with FATCA. They think the law is unfair and does not provide enough exceptions or exclusions for individuals who reside outside of the United States. In all honesty, that is probably true – why does somebody who resides abroad with no ties to the U.S. have to continue reporting their foreign money to the United States? (Please see below regarding the benefits of a US passport.)

It is not as if there is a “tax” on reporting; in other words, while a person must pay tax on their worldwide income and the failure to do so could lead to fines and penalties; the fact that the penalties are so high for failing to simply report the account information is something that should be revised at the government level.

In addition, if somebody happens to be an Accidental American aka they have no intent of being an American and meet certain qualifications such as not traveling to the United States or earning US source income – then the current tax law definitely seems unfair and they should be relieved of the penalty. (Please note – the government did enact the Streamlined Foreign Offshore program for these individuals.)

We agree that the government should change some of these unfair laws. Of course, if you disagree with the law, you should take action to try and change it, but it is important to keep in mind that if you knowingly violate the law in the meantime, you may be putting yourself and your family at risk.

FATCA – Breaking the Law

Every day, each person has the opportunity to decide whether they will abide by the law or break the law. In that same vein, each person has the opportunity to decide whether they want to comply with FATCA or disregard it. With that said, if you are going to break the law and knowingly not comply with FBAR or FATCA reporting, it is important to understand the potential repercussions, such as:

  • Frozen Accounts
  • Potential Fines And Penalties
  • Jeopardize Your Ability To Travel
  • Lose Your Passport
  • Customs Hold At The Airport
  • Lose The Right To Enter The United States

What are Some Benefits to You of FBAR & FATCA Reporting?

Your Peace of Mind

If you are a law-abiding citizen and do not ever knowingly break the law, then you are probably the type of person who wants to get into compliance the minute you find out that you are currently unintentionally breaking the law.

If you live outside of the United States but are subject to US Taxes, you may even qualify for the Streamlined Foreign Offshore Program (which means there are NO penalties) and you may even qualify for the Foreign Tax Credit (which offsets taxes you already paid to a foreign country and you may end up with NO tax liability as well).

Whether you are suffering: extreme fear or anxiety, loss of sleep, inability to concentrate, irrational fear of the IRS showing up at your doorstep – all of this can be alleviated by just getting into compliance.

You Get to Keep (or Apply For) Your Citizenship or Green Card

While reporting your FBAR/8938 comes with its share of headaches and fear, you can take solace in the fact that it comes with benefits as well. 

By submitting a properly prepared FBAR/8938, you will be in tax compliance and therefore, it will not impact your application for US naturalization, Green Card, or work visa – whereas the failure to file these forms may negatively impact your application.

If you don’t want to abide by the US tax laws for offshore asset reporting, you can always give up your US status (as outlined further below). Yet, many people want to keep their US citizenship and/or Green Card, even if they are accidental Americans. There are many benefits to keeping their US status, such as:

  • Overall protection of being a US Person (access to embassies, etc.)
  • Use of US Passport (aka “blue book”) which provides easy access for travel worldwide.
  • Ability to travel to the US either to visit family or for business without having to go through travel visa or equivalent each time (example: imagine a case where you have a suddenly sick/dying family member and you need to immediately jump on a plane to the US – that passport will come in handy).
  • Ability to purchase US property without issue.
  • Not be subject to the same strict tax laws for inheritance ($5.45 million exemption vs. $60,000 exemption) that a non-US person would be. 

Even after reading the above benefits, if you still really do not want to be subject to US tax laws, then you can always renounce your citizenship or relinquish your Green Card.

Renounce Citizenship – Relinquish Green Card

We do not live in a lawless society and there are rules people have to follow – or else chaos would ensue. As attorneys, we believe in the U.S. Legal System and all of the direct and indirect benefits a person may receive for simply being a U.S. Person.

If you truly disagree with the law and feel you should not have to report, there are two main options you can legally pursue:

  • Renounce your Citizenship
  • Relinquish Your Green Card

**If a person has significant assets, there may be the 877A “Exit Tax” associated with the renouncement/relinquishment.

FATCA – Unfair, But Worth Potentially Getting in Trouble?

Overall, the way that the law is written is unfair to many individuals, especially those who live overseas or are accidental Americans. Still, is it worth it to avoid the law, knowingly violate it, and risk significantly higher fines and penalties and even a possible criminal investigation? While the chances of getting caught may be much lower than many egregious tax professionals advertise online, people still do get caught.

Ultimately, it is a personal choice and your own risk-level.

FATCA – Closing Your Account

One final issue to keep in mind is that many foreign banks are proactively reporting US account holders to the United States. As a law firm that represents numerous individuals annually with FATCA-related issues, we can tell you that these letters are very real and becoming more and more common.

These letters often state that unless a person certifies under penalty of perjury (or the foreign equivalent) of their US status, the foreign financial institution or bank is going to close the account, freeze the account, and/or not provide you any access to the money. We see many clients who have their accounts frozen and have no access to their money unless they comply with US tax laws.

Some foreign banks choose to close out your account rather than deal with your potential FATCA mess. Thereafter, the foreign financial institution may send you a check for the money that you had in the account. Moreover, because the check may be substantial, there are other FinCEN Forms or international banking forms that may be filed when you are issued that check. A large check coming from a foreign bank will be an immediate red flag and your risk of audit will increase.

How are you going to explain to the US government (if you are audited), that you received a $700,000 check from a foreign bank that you never reported the money or declared it – even after receiving a FATCA Letter?

Be Careful

In the end, the decision to comply or not comply should be up to each individual who may be subject to foreign reporting. It depends on each person’s risk management level and what they’re willing to shoulder or not. That person should weigh the risks versus the rewards, the pros versus the cons.

For some people, they could care less and have no concerns that the US government is going to come to a foreign country to get them. Alternatively, there are many individuals who reside abroad and enjoy traveling back and forth to the United States on a US passport and may not want to risk the loss of the passport and other fines and penalties associated with it.

If you are considering coming into compliance, then you should speak with an experienced offshore voluntary disclosure attorney to get a better idea of your specific situation and what your best route for compliance may be.

Getting into FATCA and FBAR Compliance

There are 5 main versions of the program. Here are the 5 Main Options:

(New) Updated Traditional IRS Voluntary Disclosure Program

When OVDP (Offshore Voluntary Disclosure Program) ended back in September 2018, the Internal Revenue Service was unclear as to whether a New “Offshore” Voluntary Disclosure Program would be introduced. Instead of a “new program,” the traditional voluntary disclosure program was expanded.

You can use the disclosure program to submit FBARs for your Foreign Bank Accounts, FATCA, PFIC, along with your Domestic Income

Resource: Summary of the Traditional IRS Voluntary Disclosure Program

Resource: Golding & Golding’s 8-Step Guide to See if you Qualify

SFCP – IRS Streamlined Filing Compliance Procedures

IRS Streamlined Filing Compliance Procedures are a stand-alone “streamlined” version of the traditional OVDP. The “stand-alone” streamlined filing procedures were created in 2014 by the Internal Revenue Service.

The purpose of the procedures are to assist taxpayers who were noncompliant with offshore reporting requirements – but were also non-willful.

If the Taxpayer can certify under penalty of perjury of being non-willful, the IRS reduces the penalty structure, and even waives the penalty for applicants who qualify as foreign residents.

Resource: Golding & Golding’s IRS Summary of IRS Streamlined Filing Compliance Procedures

SDOP – IRS Streamlined Domestic Offshore Procedures

SDOP is the Streamlined Domestic Offshore Procedures, and it is the program designed for for U.S. persons residing in the United States (or do not meet the technical “Foreign Resident Test”) 

Resource: Golding & Golding’s IRS Summary of IRS Streamlined Domestic Offshore Procedures

SFOP – IRS Streamlined Foreign Offshore Procedures

SFOP is the Streamlined Foreign Offshore Procedures. These are the Procedures for U.S. persons residing outside the United States is referred to as the Streamlined Foreign Offshore Procedures.

Resource: Golding & Golding’s IRS Summary of IRS Streamlined Foreign Offshore Procedures

DIRP – Delinquency Procedures for Offshore & Foreign Accounts and Assets

If you do not have any unreported income resulting in having to amend your tax returns — and all you have is unreported foreign assets, accounts or investments with no unreported income, you may be in luck. In these instances, in which you do not otherwise need to file for traditional offshore disclosure or the Streamlined Filing Compliance Procedures — you may qualify for the Delinquency Procedures and avoid any penalties.

Resource: Golding & Golding’s IRS Summary of Delinquent International Informational Return Submission Procedures

RC – Reasonable Cause for Offshore & Foreign Accounts and Assets

Reasonable Cause may be an option for some taxpayers. Specifically, if you were completely non-willful in your failure to disclosure, and were unaware that there was any reporting requirement, then the thought of paying any penalty may sound absurd.

Resource: Golding & Golding’s Summary of IRS Reasonable Cause for Offshore & Foreign Accounts & Assets

Fixing Lesser Experienced Law Firm mistakes.

IRS Voluntary Disclosure is complex enough for experienced practitioners who focus exclusively in the area of law, never mind relative newcomers who are trying to handle more than just offshore voluntary disclosure as part of their everyday tax practice.

We know, because those cases usually end up on our door-step. 

Resource: Examples of recent cases we had to takeover from less experienced Attorneys can be found by Clicking Here (Case 1) and Clicking Here (Case 2).

IRS Offshore “Potential” Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

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.

A Penalty for failing to file Form 8938

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

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

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

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

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

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

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.

How to Find Experienced & Reputable Offshore Voluntary Disclosure Counsel

Nearly all the experienced Attorneys in this field will have 5 Main Attributes:

  • Board Certified Tax Law Specialist
  • Master’s of Tax Law (aka LL.M.)
  • Dually Licensed as an Enrolled Agent or CPA
  • Around 20-Years of Private Practice experience
  • Extensive Litigation, Trial and related high-stakes experience.

Why is This Important? Because People Can be Whomever They Want to be Online

And that is the problem.

In recent years, we have had many clients come to us after being horribly represented by inexperienced tax counsel. While we are sure it is a problem in many fields, it seems to run rampant in IRS offshore voluntary disclosure.

These Attorneys ‘manipulate’ their past legal experiences, such as working for the IRS —  to make themselves sound more experienced than they are. You later find that they never worked as an attorney for the IRS, or even in the offshore disclosure department.  

The IRS has nearly 100,000 employees, and just being one of them does not make an attorney qualified to be an effective and experienced offshore voluntary disclosure tax attorney specialist.

IRS Offshore Disclosure is complex enough for experienced practitioners who focus exclusively in the area of law, never mind relative newcomers who are trying to handle more than just offshore voluntary disclosure as part of their everyday tax practice.

International Offshore Disclosure Lawyer Fees – How Much are They?

As in life, you get what you pay for.

To get the best representation possible, you need an experienced Board Certified Tax Law Specialist, with advanced degrees and advanced certifications.

If you want to hire a newer private-practice attorney that just opened shop a few years ago, hoping to save a little money on fees,  where they sold you on some “over-hyped” Kovel Letter – you’re putting yourself at risk.

Those cases usually end up on our doorstep down the line after the attorney made significant mistakes on the submission (sometimes costing the client significant amounts of time and fees that could have been avoided)

Understanding How Tax Prep & Legal Fees Work in Offshore Disclosure

A summary of Offshore Disclosure Lawyer and Tax/Accountant Fees.

Offshore Disclosure — Flat-Fee, Full-Service

All Non-Willful cases should be Flat-Fee, Full-Service for both Tax and Legal.

*If you were willful in not submitting the FBAR, the submission and analysis is much different depending on whether the IRS has contacted you yet, if you are under investigation, etc. and you should speak with experienced counsel.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our International Tax Lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70 different countries. Managing Partner, Sean M. Golding, JD, LL.M., EA and his team have represented thousands of clients in all aspects of IRS offshore disclosure and compliance during his 20-year career as an Attorney. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo and various Law Journals nationwide.

Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
International Tax Lawyers - Golding & Golding, A PLC