FATCA Penalties: The U.S. government is actively pursuing FATCA Penalties. The IRS has increased enforcement of offshore penalties, including FATCA related penalties in accordance with Form 8938. FATCA is the Foreign Account Tax Compliance Act. The law requires U.S. taxpayers to routinely disclose their specified foreign financial assets each year to the Internal Revenue Service. In addition, the IRS has increased enforcement of offshore fines and penalties. To combat foreign asset penalties, the IRS has also develop FBAR & FATCA amnesty programs, collectively referred to as offshore voluntary disclosure.
FATCA penalties can be either civil or criminal.
And, the problem with offshore banking arises when a person wants to increase their income without paying tax or without reporting that income in the United States.
Alternatively, if a person knowingly or with reckless disregard fails to report the accounts or investments properly to the IRS, that can also result in serious consequences.
That is a form of offshore evasion or offshore tax fraud that could lead to significant fines and penalties.
Common Offshore Banking Examples
We represent people on all ends of the offshore banking spectrum, from individuals who are legitimately investing offshore, to other individuals whose investments might not be kosher.
Offshore Bank Account
When it comes to offshore bank accounts, Internal Revenue Service (IRS), Department of Treasury (DOT), and Department of Justice (DOJ) as a whole have increased enforcement of offshore reporting and offshore income reporting.
From an IRS perspective, to the average person there are two main concerns when it involves offshore bank accounts
Reporting the Offshore Bank Account
For most individuals, if they meet the threshold requirement under IRS Rules and Regulations, they may have to report their bank accounts on multiple forms each year. The two most important and most common forms are the FBAR (Report of Foreign Bank and Financial Accounts) and FATCA (Foreign Account Tax Compliance Act) form 8938.
If a person does not properly report their offshore bank accounts on these forms, the IRS can hit them with excessive fines and penalties. Even if a person was considered non-willful they could get hit with a $10,000 per account, per your penalty.
Alternatively, if the person was considered willful (a.k.a. knowledgeable or acted with reckless disregard), the penalty can be upwards of 50% value of each account per year. And, in a multiyear audit — that could quickly result in a 100% penalty.
Offshore Income Earned on the Account
Many offshore bank accounts will generate some type of interest income. Moreover, depending on whether it is a bank account, or an investment account (or hybrid), it may also generate other types of additional passive income, such as dividends and capital gains.
The reason why the IRS is coming down so hard on individuals with offshore accounts is because often times these offshore accounts do not issue a 1099. Moreover, the account may not be directly in the name of the individual. As a result, the person may be receiving income that is not being taxed.
Therefore, if a person is using offshore bank accounts and generating income (even if it is considered tax-free in the outside jurisdiction), it still must be reported on a US tax return. If for any reason it is also exempt from U.S. tax, it still needs to be included on the US tax return but then identified as tax-free income (and will usually also include reference to the Treaty section that authorizes the exclusion of the income for tax purposes).
What comes to offshore banking, a major perceived benefit our tax loopholes, but in actuality most of these loopholes do not work (or at least not necessarily in the way the investment is “sold” to the U.S. Person”)
In many countries passive income such as interest income, dividends or capital gains is not taxed. Therefore, feasibly if a non-U.S. person lives in Hong Kong and earns interest income in Hong Kong, they do not have to pay tax on it. But, if the person is a U.S. person (which includes individuals who have legal permanent residency status in the U.S. or meet the Substantial Presence Test) then they have to report their worldwide income. This includes any income that might have been earned in a otherwise tax-free jurisdiction such as passive income in Hong Kong.
A foreign trust is a bit more complex. What is important to understand is that most foreign trusts are grantor trusts, and a foreign trust that is a grantor trust is taxed to the grantor.
Foreign Trust Assignment of Income Example
David is the grantor of a foreign trust. He is a successful dude, and he makes a lot of money. David is also very close with his nephews, and his nephews are getting ready to launch their own business. David decides create a foreign trust and direct the income to his nephews, the beneficiaries.
David’s nephews are the Trust’s only beneficiaries, and likewise would be taxed at a reduced tax rate (e.g., they are not in the same tax bracket as Dave). The IRS disallows David from indirectly assigning his income byway of forming a foreign trust in order to reduce the tax rate on the income; rather, David as the grantor is taxed on the income received by the Beneficiaries..
**Having David taxed on the income can come times be seen as a benefit (aka Intentionally Defective Grantor Trust) when David doesn’t want the beneficiaries have any tax issue regarding income. But, in this type of situation wherein David wants to assign the full income to his nephews (and have them receive the income and pay tax), it’s not going to work.
Tax Havens Such as the Cayman Islands, Bahamas, Panama, etc.
In recent years, the Internal Revenue Service, Department of Treasury an Department of Justice have all made offshore tax evasion a key enforcement priority. In addition, with the introduction enforcement of FATCA (Foreign Account Tax Compliance Act), more than 100 countries and 300,000 Foreign Financial Institutions have agreed to report US account holder information to the IRS.
Thus, while offshore banking in these particular countries might have been beneficial many years ago, under most circumstances it no longer is (at least is the purpose is financial secrecy). Even if you are receiving a better rate of investment on certain investments in these countries, you will be under the microscope of the IRS, which is no fun.
In addition, there amplified reporting requirements, which if you do not meet those requirements can lead to excessive fines and penalties.
Golding & Golding (Board-Certified Tax Law Specialist)
We specialize exclusively in international tax, and specifically IRS offshore disclosure.
We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
- Learn more about the Board-Certified Tax Lawyer Specialist credential
- Learn more about the Enrolled Agent credential
- Learn more about Golding & Golding’s Case Accomplishments
- Learn more about Golding & Golding Testimonials from prior clients
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants and Financial Professionals worldwide.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.