FATCA is an IRS International Tax Law that is designed to reduce offshore tax evasion and tax fraud. FATCA requires U.S. Taxpayers to disclose unreported foreign bank accounts, foreign financial accounts, and foreign income to the IRS; otherwise the Taxpayer may be subject to extremely high fines, penalties, and outstanding tax liabilities.

While FATCA has many components to it, when it comes to FATCA Reporting for Individuals, Estates and U.S./Foreign Business Owners, the most common requirement is filing FATCA Form 8938 (which is a part of the IRS tax return) to disclose foreign accounts, foreign income, and specified foreign assets.

Accounts subject to FATCA compliance include:

• Foreign Bank Accounts
• Foreign Savings Accounts
• Foreign Investment Accounts
• Foreign Securities Accounts
• Foreign Mutual Funds
• Foreign Trusts
• Foreign Retirement Plans
• Foreign Business and/or Corporate Accounts
• Foreign Insurance Policies
• Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
• Foreign Accounts held in a PFIC (Passive Foreign Investment Company)

               

FATCA Letter

Unfortunately, the majority of people only learn about FATCA reporting requirements when they receive a letter (“FATCA Letter“) from their Foreign Bank or Foreign Financial Institution requiring the U.S. Taxpayer to show proof that they are in FATCA compliance. 

Sean M. Golding, JD, LLM, EA - International Tax Lawyer for Offshore Voluntary Disclosure

Sean M. Golding, JD, LLM, EA – International Tax Lawyer for Offshore Voluntary Disclosure

By the time a person receives a FATCA letter and/or learns of the reporting requirements, the Foreign Financial Institution (FFI) may have already suspended, frozen, or canceled the account.

Or, if the FFI has not yet taken action agains the account, they will threaten to do so by if the Taxpayer cannot show proof that he or she has complied with FATCA.

FATCA Reporting – Criminal Prosecution?

Depending on the quality of websites you visit (read: Fear Mongering and Scare Tactic websites), you may have been led to believe that if you failed to properly report your accounts under FATCA, you are going to jail. More than 9 out-of-ten times, this is not true.

*The fear-monger Attorneys usually have less than 15 years of experience, operate out of a Virtual Office/Executive suite, and tout prior IRS experience — with the reality that usually their “IRS Experience” does not include any experience in FATCA or IRS Voluntary Offshore Disclosure.

You may have been wrongfully led to believe that a FATCA investigation will result in:

– The IRS and Department of Treasury will be kicking in your door at any minute to interrogate you;

– Resign yourself to the fact that your only option is to do a hard 20 in federal prison; or

– Escape into the middle of the night under a cloak of darkness and assuming a new identity.

Take a deep breath, and realize that you most likely will not be subject to anything more than penalties. And, while the penalties may be severe — you can fight them. 

**Please be careful about contacting CPAs, Enrolled Agents, or inexperienced international tax attorneys (or any inexperienced attorney) who aggressively market their services using fear and scare tactics in an attempt to sell you.

                           

The Basics of Foreign Reporting Requirements

To better understand FATCA, it is important to understand Offshore/Foreign reporting in general.

Who is Required to Report?

You may need to file additional forms to the IRS and/or Department of Treasury in order to report foreign accounts, foreign income (including foreign real estate rental income), foreign life insurance, foreign investments, or ownership interest in a foreign business, if you are a/an:

  • US Citizen
  • Legal Permanent Resident
  • Foreign National who meets the Substantial Presence Test (aka work or other type of Visa)
  • Expats
  • A Long-Term Green Card Holder who did not properly relinquish their Green Card

We have represented numerous clients worldwide with issues similar to yours:

– Expats who relocated overseas and did not know they had to report their non-US accounts.

– U.S. Citizens who live overseas and may or may not earn significant income, but have accounts in a foreign country.

– Legal Permanent Residents of the United States who relocate back to a foreign country but are unaware that they are still required to report the foreign accounts.

– Non-Residents who meet the substantial presence test and therefore are required to report foreign bank and other accounts to the US government.

Foreign Income

If you fall into one of the categories listed above, then you are required to report your worldwide income to the IRS. This means that even if you do not have any US-based income, you are still required to report your worldwide income (even if it is the type of income which is not taxed in your home country such as interest and dividend income in most Asian countries). And, if you have enough foreign income to meet the minimum threshold for having to file a US tax return, then you are required to do so even if it is based on your foreign income alone.

Foreign Accounts

If you meet the requirement for being a U.S. “Taxpayer” (even if you do not meet the threshold for having to file a US tax return), you are still required to file an annual FBAR (Report of Foreign Bank and Financial Accounts). The threshold is as follows: if at any time during the year, you have more than $10,000 in foreign accounts (whether the money is in one account or spread over numerous accounts), you are required to file an FBAR.

In addition, if you have significant amounts of money overseas, then you may also have to file additional forms such as an 8938 (FATCA Form) or 8621 (Passive Foreign Investment Company, which includes Foreign Mutual Funds along with as many other passive investments). There are many other forms you may have to file, but we determine those on a case-by-case basis.

Fines & Penalties

Unless you are a criminal, chances are the IRS or Department of Justice will not be banging down your door to come drag you to jail. With that said, the fines and penalties can be very steep and depending on your particular circumstances, may include penalties upwards of 100% of the value of your foreign account. If the IRS believes you were willful (aka intentional), then they may launch a criminal investigation against you and the penalties and fines can get much worse from here, including Liens, Levies, Seizures…and worse.

Customs Holds and Passport Revocation

With the implementation of FATCA (Foreign Account Tax Compliance Act), the United States is heavily cracking down on offshore tax evasion and unreported foreign accounts in general. The IRS and US government have the power to both revoke your passport as well as possibly hold you at the airport (aka “customs hold”) to question you on the spot (usually outside the presence of your attorney).

Getting Into Compliance

Getting into compliance should be mandatory on your “to-do” list. Even though our firm, Golding & Golding, is based in Newport Beach, we represent clients worldwide. A majority of our clients live overseas in over 45 countries. We have helped numerous clients get into compliance and are regarded as one of the top Offshore Disclosure Law Firms worldwide.

To that end, there are three main methods of compliance:

(1) Streamlined Compliance

This program is for individuals who were unaware of any requirement to file an FBAR and/or report their income on a US tax return. The penalties under the streamlined program are significantly reduced and may possibly be waived depending on whether a person qualifies under the strict definition of foreign resident for offshore disclosure purposes. Thus, if you live overseas, you may benefit from the Streamlined Foreign Offshore Program and pay zero penalties (and perhaps even zero additional taxes). 

(2) OVDP

This program is mainly for individuals and businesses who were willful; they were aware that they were supposed to report their foreign accounts but intentionally hid or kept the account/income information secret.

(3) Reasonable Cause Statement

This is not a particular program; instead, it is a method for getting into compliance while attempting to avoid any penalty. There are many pros and cons to this method depending on your specific situation, so please carefully evaluate your specific situation with your attorney before making a decision. This is a riskier method so we highly recommend that you find an international tax attorney who has a lot of experience in preparing a Reasonable Cause Statement. 

Offshore Income vs. Foreign Income

Many people do not understand the difference between offshore money and foreign money – and the IRS does not make it any easier, by interchangeably using the terms without definition.

While there are some nuances to these two different terms, for purposes of IRS disclosure, Offshore Reporting, and Foreign Accounts are the same — to report foreign money.

In other words, offshore funds does not mean you have money in a Hidden Account in the Cayman Islands, Swiss Bank, etc. or Foreign Trusts in Malta, Luxembourg, or any other tax haven. It just means you have money abroad, that is not located within the United States.

Too often, people believe FATCA does not apply to them because they may have money in Japan or Hong Kong or Australia — or another non-tax haven country, but that is not true. Rather, if you have money overseas and it is not reported, then that money is “foreign” money which should be disclosed through one of the “Offshore” Disclosure Programs (aka OVDP, Streamlined Program, or Reasonable Cause).

Under FATCA, Does the IRS Want to Arrest and Prosecute People?

We are one of the few international tax law firms in the world that focuses exclusively on matters involving FATCA and Offshore Voluntary Disclosure. We are based in Fashion Island, Newport Beach, CA, and we have represented numerous taxpayers worldwide in over 50 countries in the Offshore Voluntary Disclosure Program (OVDP) and Streamlined Offshore Disclosure Programs (SDOP and SFOP).

We can tell you that there is almost nothing to be afraid of. The purpose of these international tax law programs is to “generate revenue” for the United States. The IRS raises revenue by mandating that individuals, businesses, and trusts that have not otherwise complied with US tax law involving overseas and foreign accounts to enter one of the voluntary disclosure programs, or risk facing significant monetary penalties and possible prison time for noncompliance (which can be resolved by entering one of these programs).

*With that said, if you were willful and knowing, intentionally, or with reckless disregard failed to file tax returns, report foreign income and/or disclose foreign accounts or foreign assets – you may be subject to a criminal investigation and should consider OVDP. If you were non-willful, than you may qualify for Streamlined Offshore Disclosure Procedures or a Reasonable Cause Submission.

                  

Getting into Compliance

There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.

We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlikes the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.

After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.

If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.

Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.

1. OVDP 

OVDP is the Offshore Voluntary Disclosure Program — a program designed to facilitate taxpayer compliance with IRS, DOT, and DOJ International Tax Reporting and Compliance. It is generally reserved for individuals and businesses who were “Willful” (aka intentional) in their failure to comply with U.S. Government Laws and Regulations.

The Offshore Voluntary Disclosure Program is open to any US taxpayer who has offshore and foreign accounts and has not reported the financial information to the Internal Revenue Service (restrictions apply). There are some basic program requirements, with the main one being that the person/business who is applying under this amnesty program is not currently under IRS examination.

The reason is simple: OVDP is a voluntary program and if you are only entering because you are already under IRS examination, then technically, you are not voluntarily entering the program – rather, you are doing so under duress.

Any account that would have to be included on either the FBAR or 8938 form as well as additional income generating assets such as rental properties are accounts that qualify under OVDP. It should be noted that the requirements are different for the modified streamlined program, in which the taxpayer penalties are limited to only assets that are actually listed on either an FBAR or 8938 form; thus the value of a rental property (reduced by any outstanding mortgage) would not be calculated into the penalty amount in a streamlined application, but it would be applicable in an OVDP submission.

An OVDP submission involves the failure of a taxpayer(s) to report foreign and overseas accounts such as: Foreign Bank Accounts, Foreign Financial Accounts, Foreign Retirement Accounts, Foreign Trading Accounts, Foreign Insurance, and Foreign Income, including 8938s, FBAR, Schedule B, 5741, 3520, and more.

What is Included in the Full OVDP Submission?

The full OVDP application includes:

  • Eight (8) years of Amended Tax Return filings;
  • Eight (8) Years of FBAR (Foreign Bank and Account Reporting Statements);
  • Penalty Computation Worksheet; and
  • Various OVDP specific documents in support of the application.

Under this program, the Internal Revenue Service wants to know all of the income that was generated under these accounts that were not properly reported previously. The way the taxpayer accomplishes this is by amending tax returns for eight years.

Generally, if the taxpayer has not previously reported his accounts, then there are common forms which were probably excluded from the prior year’s tax returns and include 8938 Forms, Schedule B forms, 3520 Forms, 5471 Forms, 8621 Forms, as well as proof of filing of FBARs (Foreign Bank and Financial Account Reports).

OVDP Penalties

The taxpayer is required to pay the outstanding tax liability for the eight years within the disclosure period – as well as payment of interest along with another 20% penalty on that amount (for nonpayment of tax). To give you an example, let’s pick one tax year during the compliance period. If the taxpayer owed $20,000 in taxes for year 2014, then they would also have to include in the check the amount of $4,000 to cover the 20% penalty, as well as estimated interest (which is generally averaged at about 3% per year). This must be done for each year during the compliance period.

Then there is the “FBAR/8938” Penalty. The Penalty is 27.5% (or 50% if any of the foreign accounts are held at an IRS “Bad Bank) on the highest year’s “annual aggregate total of unreported accounts (accounts which were previously reported are not calculated into the penalty amount).

For OVDP, the annual aggregate total is determined by adding the “maximum value” of each unreported account for each year, in each of the last 8 years. To determine what the maximum value is, the taxpayer will add up the highest balances of all of their accounts for each year. In other words, for each tax year within the compliance period, the application will locate the highest balance for each account for each year, and total up the values to determine the maximum value for each year.

Thereafter, the OVDP applicant selects the highest year’s value, and multiplies it by either 27.5%, or possibly 50% if any of the money was being held in what the IRS considers to be one of the “bad banks.” When a person is completing the penalty portion of the application, the two most important things are to breathe and remember that by entering the program, the applicant is seeking to avoid criminal prosecution!

                         

2. Streamlined Domestic Offshore Disclosure

The Streamlined Domestic Offshore Disclosure Program is a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance.

What am I supposed to Report?

There are three main reporting aspects: (1) foreign account(s), (2) certain specified assets, and (3) foreign money. While the IRS or DOJ will most likely not be kicking in your door and arresting you on the spot for failing to report, there are significantly high penalties associated with failing to comply.

In fact, the US government has the right to penalize you upwards of $10,000 per unreported account, per year for a six-year period if you are non-willful. If you are determined to be willful, the penalties can reach 100% value of the foreign accounts, including many other fines and penalties… not the least being a criminal investigation.

Reporting Specified Foreign Assets – FATCA Form 8938

Not all foreign assets must be reported. With that said, a majority of assets do have to be reported on a form 8938. For example, if you have ownership of a foreign business interest or investment such as a limited liability share of a foreign corporation, it may not need to be reported on the FBAR but may need to be disclosed on an 8938.

The reason why you may get caught in the middle of whether it must be filed or not is due largely to the reporting thresholds of the 8938. For example, while the threshold requirements for the FBAR is when the foreign accounts exceed $10,000 in annual aggregate total – and is not impacted by marital status and country of residence – the same is not true of the 8938.

The threshold requirements for filing the 8938 will depend on whether you are married filing jointly or married filing separate/single, or whether you are considered a US resident or foreign resident.

Other Forms – Foreign Business

While the FBAR and Form 8938 are the two most common forms, please keep in mind that there are many other forms that may need to be filed based on your specific facts and circumstances. For example:

  • If you are the Beneficiary of a foreign trust or receive a foreign gift, you may have to file Form 3520.
  • If you are the Owner of a foreign trust, you will also have to file Form 3520-A.
  • If you have certain Ownerships of a foreign corporation, you have to file Form 5471.
  • And (regrettably) if you fall into the unfortunate category of owning foreign mutual funds or any other Passive Foreign Investment Companies then you will have to file Form 8621 and possibly be subject to significant tax liabilities in accordance with excess distributions.

Reporting Foreign Income

If you are considered a US tax resident (which normally means you are a US citizen, Legal Permanent Resident/Green-Card Holder or Foreign National subject to US tax under the substantial presence test), then you will be taxed on your worldwide Income.

It does not matter if you earned the money in a foreign country or if it is the type of income that is not taxed in the country of origin such as interest income in Asian countries. The fact of the matter is you are required to report this information on your US tax return and pay any differential in tax that might be due.

In other words, if you earn $100,000 USD in Japan and paid 25% tax ($25,000) in Japan, you would receive a $25,000 tax credit against your foreign earnings. Thus, if your US tax liability is less than $25,000, then you will receive a carryover to use in future years against foreign income (you do not get a refund and it cannot be used against US income). If you have to pay the exact same in the United States as you did in Japan, it would equal itself out. If you would owe more money in the United States than you paid in Japan on the earnings (a.k.a. you are in a higher tax bracket), then you have to pay the difference to the U.S. Government.

                           

3. Streamlined Foreign Offshore Disclosure

What do you do if you reside outside of the United States and recently learned that you’re out of US tax compliance, have no idea what FATCA or FBAR means, and are under the misimpression that you are going to be arrested and hauled off to jail due to irresponsible blogging by inexperienced attorneys and accountants?

If you live overseas and qualify as a foreign resident (reside outside of the United States for at least 330 days in any one of the last three tax years or do not meet the Substantial Presence Test), you may be in for a pleasant surprise.

Even though you may be completely out of US tax and reporting compliance, you may qualify for a penalty waiver and ALL of your disclosure penalties would be waived. Thus, all you will have to do besides reporting and disclosing the information is pay any outstanding tax liability and interest, if any is due. (Your foreign tax credit may offset any US taxes and you may end up with zero penalty and zero tax liability.)

*Under the Streamlined Foreign, you also have to amend or file 3 years of tax returns (and 8938s if applicable) as well as 6 years of FBAR statements just as in the Streamlined Domestic program.

                      

4. Reasonable Cause Statement

When a Person, Estate, or Business is out-of-tax compliance for failing to report Foreign Income and/or Foreign Assets, the applicant has relatively few options for timely and safely getting into tax and foreign reporting compliance — before fines and penalties are issued.

While the most common options include the Offshore Voluntary Disclosure Program or the Streamlined Offshore Disclosure Program, there is another alternative. It is called making a Reasonable Cause submission.

Reasonable Cause Process

An individual should never attempt offshore disclosure without the assistance of a qualified attorney. With that said, it is even more important to ensure that if you are even considering a reasonable cause submission, that you do so only with the help of an attorney. That is because only with an attorney do you receive the benefit of the attorney-client privilege.

Unlike the Streamlined Program or OVDP where there are strict procedures to be followed, a reasonable cause submission is different. It should be noted that a person can submit a reasonable cause application for any number of different reasons; it is not limited only to offshore money and reporting foreign accounts. It should also be noted that there are potentially high risks and penalties associated with this Reasonable Cause process, so you have carefully weigh your options. 

With a reasonable cause submission, the attorney will carefully evaluate and analyze the facts and circumstances of your case in detail. He or she should sit down with you either in person or via teleconference if you are non-local and assess the pros and cons of the potential submission in order to determine what the benefits and detriments may be to a reasonable cause disclosure. Thereafter the attorney will amend the returns, prepare the necessary forms, and draft a persuasive Reasonable Cause Letter.

At Golding & Golding, we are Tax Attorneys (with Masters of Tax Law) and Enrolled Agents credentialed by the IRS (Highest Credential awarded by the IRS), so we can handle your entire submission (Taxes, Legal, and Audit Defense) in-house, for a flat-fee.

Reasonable Cause Examples

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. Here are three examples in which paying any penalty for your undisclosed foreign accounts may seem unfair.

Example 1: 80-year-old Michael travels worldwide and has 3 accounts in different countries. He only uses the foreign money when he is in the foreign country at issue, he never transfers the money to the US, and there is usually a relatively small amounts of money in each account. The only issue for Michael was that at one point, Michael thought about purchasing a home overseas and left the money in the foreign account for a significant period of time (including 12/31). Foreign taxes were fully paid on the money deposited into the account and foreign taxes were paid on the income the account generated. His only mistake was that he did not report the account and/or the foreign income on his U.S. Tax Return.

Example 2: Michelle, a widow who had never been in trouble with the law, moved to the United States over 30 years ago but has a $1 million USD foreign pension from a private employer through the early 1970s. She has never accessed the account nor has she contributed (or anyone else contributed) since arriving in the United States. The account/earnings are not taxed in the US until distributed, there have been no distributions, and Michelle never reported the account on an FBAR or 8938.

Example 3: David has a foreign account, which he received as an inheritance. He never touched the money, and even though the account earns minimal annual income, there is no tax for passive income in this particular country. He has no other ties to the country and has not used any of the money. David’s son has special needs and he needs to access a large chunk of the money in a short period of time. He has not reported the account on an FBAR or 8938.

Reasonable Cause – Viable Option

As you can see from the aforementioned examples, it is not a cut and dry area of law. There are many factors that go into determining whether you would be a good candidate for a Reasonable Cause submission. You should contact an experienced attorney to consider your options. 

                             

5. Quiet Disclosure

Quiet Disclosure (otherwise known as “Silent Disclosure” or “Soft Disclosure”) of your foreign accounts and foreign income on an FBAR or late/amended tax return is a serious violation of U.S. Tax Law, which can subject you to very high fines, penalties and criminal investigation.

A Quiet Disclosure will only Make Matters Worse

In a quiet disclosure, the person does not enter the program but rather simply amends their tax returns to include the unreported foreign income (Schedule B), report the foreign accounts (8938 Forms) and file FBAR Statements with the Department of the Treasury.

Here’s the problem: you were originally non-willful (in that you were unaware of the requirement to file an FBAR) and you could have submitted with one of the four options above, but now you went ahead with Quiet Disclosure and intentionally/willfully failed to pay the penalty. You may have just bootstrapped your non-willful submission into full-blown tax fraud and tax evasion.

Why? Because you have now willfully evaded US tax, interest, and penalties by knowingly filing an untimely FBAR or Amended Tax Return without payment penalty for money you know you earned in the past but had not paid any US tax on.

Click Here to read our article/case study: “Quiet Disclosure Case Study Example – From Submission to IRS Audit…to Jail