IRS FATCA Audits for Individuals – FATCA Audit Defense & Avoidance
FATCA is the Foreign Account Tax Compliance Act. For individuals, it typically requires U.S. persons to report specify foreign financial assets on a Form 8938.
What happens if the form is not filed?
IRS FATCA Audit
What a person is being audited by the Internal Revenue Service, and the person has foreign accounts, assets, investments and income, by design it nearly always becomes an eggshell audit.
The reason is because oftentimes, U.S. persons are unaware that they have even have U.S. status, or that their foreign accounts/assets have to be reported to the U.S. government.
In addition, due to the different laws regarding how income is taxed in the US versus other countries, many times individuals have not have reported for an income because they were under the misunderstanding it was not taxable in the U.S.
The audit becomes a dance of sorts, with the taxpayer trying to safely manuever through intentional willfulness, reckless disregard, and willful blindness — to come up on the side of mere negligence.
Key Issues to be Careful of During a FATCA Audit
Here are a few common issues to be examined during a FATCA Audit:
When was the Account Opened?
Even if the account was opened before the person was considered a US person (so for example, the opening of the account predates the date of U.S. residency or citizenship) it still needs to be reported on form 8938 — if it otherwise meets the threshold filing requirements.
Stated another way, just because the account was opened before a person became a U.S. person does not mean the account is excluded from FATCA reporting.
Is it Jointly Owned with a Spouse?
When a person has a joint account, and that joint account is with a spouse, the individual filing in the form 8938 must identify the Account as being a joint account. This is true, even if the money really only belongs to one spouse, or one of the spouses does not reside in the U.S. (although the latter may impact reporting thresholds.)
Does the Asset/Account Earn Income?
If the asset or account generates income, then the income must be identified on form 8938. In addition, the type of income and the amount of income must be specifically identified, and parsed out by income and category.
Is there a Tax Liability for the Income?
The IRS also wants to know whether or not the income is resulting in a tax liability the the the U.S. person on the tax return.
The reason why the IRS wants to know all of these questions (besides being pesky and intrusive), is so that they can keep track of the value of the specified foreign assets along with insuring the taxpayer is compliant
Were Other Inernational Forms Reported Properly?
Generally, when a person has a Form 8938 FATCA requirement, they may have other international reporting requirements as well, such as an FBAR, Form 3520-A, Form 5471, Form 8865, and more.
Generally, FATCA penalties are considered civil penalties and will not result in any criminal penalties.
Form 8938 penalties will vary, depending on your particular facts and circumstances. You may even be able to obtain a penalty waiver using Streamlined Foreign Offshore Procedures or Reasonable Cause (if the IRS agent is feeling friendly) and avoid being penalized upwards of $60,000 (for multiple years of non-compliance)
Reasonable Cause Limitation
While the IRS refuses to clearly identify what specific facts and circumstances will qualify for reasonable cause, they are quick to include a major hurdle for you in trying to qualify reasonable cause… and the limitation does not seem very reasonable.
For example, if you come from a country in which exposing your own financial information to another government (such as the United States) would be illegal in that foreign country – that will not justify failing to comply with form 8938 requirements.
In fact, the IRS has specifically stated that the above referenced example of violating your own countries law is not sufficient to meet the reasonable cause standard. As provided in Form 8938 Instructions, Page 9, “Effect of foreign jurisdiction laws: The fact that a foreign jurisdiction would impose a civil or criminal penalty on you if you disclose the required information is not reasonable cause.”
FATCA Can have a Criminal Component
Recently, on September 11, 2018 the former Chief Business Officer and former Chief Executive Officer of Loyal Bank Ltd, pleaded guilty under FATCA for committing FATCA Fraud.
Specifically, the CEO of the offshore bank (with offices in Hungary and Saint Vincent & Grenadines) pleaded guilty to conspiring to defraud the United States by failing to comply with the Foreign Account Tax Compliance Act (FATCA).
Baron was extradited to the United States from Hungary in July 2018.
Access Golding & Golding’s FATCA criminal webpage.
Getting Into IRS Offshore Compliance
It is human nature to want to avoid making a proactive submission to a government agency such as the IRS before the IRS ever discovers the non-compliance. But, typically that is best path forward.
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