FATCA Repeal? What About IRS Forms 3520, 5471, 5472, 8621 & 8865?
- 1 What is FATCA?
- 2 What if is FATCA Repealed?
- 3 FATCA Reporting
- 4 Your Individual Reporting Requirement
- 5 IRS Offshore Voluntary Disclosure
- 6 When Do I Need to Use Voluntary Disclosure?
- 7 Golding & Golding – Offshore Disclosure
- 8 The Devil is in the Details…
- 9 What if You Never Report the Money?
- 10 Getting into Compliance
Whether you approve of Donald Trump or not, chances are he is going to make substantial changes to IRS tax law and tax enforcement. One looming question is whether he is going to make any changes to FATCA (Foreign Account Tax Compliance Act).
What is FATCA?
FATCA is the Foreign Account Tax Compliance Act. It was written into law back in 2010 and began enforcement in 2014. While numerous individuals worldwide disapprove of the program (especially US ex-pats and accidental Americans), it is the law.
FATCA has been accepted by more than 100 countries, and tens of thousands of Foreign Financial Institutions worldwide. In fact, even in countries in which the country itself did not enter into an IGA (Intergovernmental Agreement or aka” FATCA Agreement”) for FATCA compliance, certain Foreign Financial Institutions in these countries are still reporting to the United States.
While some countries have fought to oppose FATCA (Read: Israel), in the end, it looks like most countries will be implementing FATCA laws (Read: Israel).
What if is FATCA Repealed?
Donald Trump is pro-business, and is also pro-repatriating monies from overseas into the United States. While he informally proposed e a one-time tax or penalty in repatriating foreign earned money (whether or not this is true) the repatriation laws would be much more relaxed than they are under the current president. Even if Donald Trump was to repeal FATCA, it is very important to note it would not have a big impact on an individual’s reporting requirement.
FATCA can get very complex, but to keep it simple — there are two aspects to FATCA. First, is the reporting requirement of the Foreign Financial Institutions. Under FATCA, these Foreign Financial Institutions have agreed to report U.S. account holder information to the U.S. government. The second aspect of FATCA is an individual’s responsibility to report Foreign Accounts, and Specified Foreign Assets together on an IRS “FATCA Form” 8938.
The threshold requirements for filing the form varies, depending on whether a person resides in the United States or outside of the United States, and whether the person is filing Married Filing Jointly (“MFJ”) or Married Filing Separate (MFS)/Single.
Even if Donald Trump repeals FATCA, it does not change the individual’s responsibility to report their accounts, etc..
Your Individual Reporting Requirement
Whether or not FATCA exists, a U.S. person (U.S. Citizen, Legal Permanent Resident, some former Long-Term Legal Permanent Residents, and individuals who meet the Substantial Presence Test) still have significant reporting requirements. Some of these forms include:
- FBAR (Report Of Foreign Bank And Financial Account)
- 3520 (Receipt Of Foreign Gift, Trust Or Inheritance)
- 3520-A (Interest In A Foreign Trust)
- 5471 (Interest In A Foreign Corporation)
- 5472 (A Foreign Person With A US Corporation)
- 8621 (Passive Foreign Investment Company)
- 8865 (Foreign Partnership)
Whether or not FATCA is repealed, an individual still may have complete the above-referenced forms and whether the person has to file the form or not will depend on whether they meet the threshold requirement for doing so — which is not impacted by FATCA. The failure to file these forms could lead to extensive fines and penalties if a person is out of compliance.
Moreover, while FATCA form 8938 has a minimal threshold requirement of $50,000, the FBAR (which is very similar) only has a $10,000+ threshold requirement and even in non-willful scenarios, the FBAR penalty can reach as high as $10,000 per account, per year of non-compliance. Thus, even if FATCA is repealed, chances are it will not impact your reporting requirements much at all.
IRS Offshore Voluntary Disclosure
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.” It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
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.
Call Now; We Can Help.
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.)
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