FATCA – Offshore Reporting Developments

Susan M. Durham, CPA

The IRS and Treasury have made a lot of progress in the last five years addressing tax evasion through the use of offshore accounts. Their newest tool is the Foreign Account Tax Compliance Act (“FATCA”). This act was part of the Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-47) which was enacted on March 18, 2010.

A Bit of History
US taxpayers have been hiding income and assets overseas for years. The IRS has had little success in pursuing these individuals because overseas financial institutions were generally not required to report income to the IRS. Also, bank secrecy laws in local jurisdictions precluded some foreign financial institutions from providing information to taxing authorities. For decades, these jurisdictions were attractive havens for individuals wanting to hide money from spouses, business partners or the IRS.

The IRS had a bit of success in the late 90s and early 2000s with some John Doe summons and the Qualified Intermediary program; however, the 2008 UBS scandal changed the game. A UBS private banker, named Bradley Birkenfeld, came forward under the IRS’s whistleblower program in 2007 and details of UBS’s tactics for helping US taxpayers evade US tax became the stuff of legend. The Department of Justice pursued UBS on several fronts and in February 2009 UBS agreed to a deferred prosecution agreement of the criminal charges, a fine of $780 million and, most importantly, the disclosure of an unknown number of accounts. This prompted the IRS to conduct a Voluntary Disclosure program in 2009 which motivated US taxpayers with offshore accounts to come forward and avoid criminal prosecution in exchange for hefty penalty and interest. The program netted 14,700 disclosures and ended in October 2009. Even though the program was successful, the IRS realized that they must do better at preventing US taxpayers from hiding income offshore.

FATCA is Born
The FATCA legislation affects two fronts: (1) increased foreign financial institution reporting and (2) increased individual disclosure.

For foreign financial institutions, the new law forces them to report material US ownership or accept a 30% withholding on a broad category of payments, and is applicable to payments made after 12/31/2012. Foreign financial institutions that do not want to enter into agreements with the IRS will have their own receipts subject to the 30% withholding from participating foreign financial institutions. The rules regarding the registration, procedures and administration are still in process and are outside the scope of this article; however, the intent is to make it more difficult to hide assets offshore. The long term goal is to have substantially all financial institutions that want access to US capital participating in the system.

For individuals, the HIRE Act added §6038D to the Internal Revenue Code. This new section requires individuals holding specified foreign financial assets with an aggregate value exceeding $50,000 for a tax year to attach to their return specific required information for each asset. For calendar year taxpayers, the vast majority of individuals, 2011 is the first reporting year. The definition of a specified foreign financial asset is broad, and some of the information required overlaps with other foreign bank account reporting. Reporting is done on Form 8938, which at this time is still in draft form. The penalties for failure to report specified foreign financial assets are steep and the statute of limitations may be extended in certain circumstances.

As mentioned above, the regulations are still evolving regarding the new law. However, the IRS has more weapons in its arsenal to pursue US taxpayers who attempt to avoid tax by moving money offshore.

To ensure compliance with requirements imposed by the IRS, please note, any advice contained in this publication was not intended, or written, to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This publication is distributed with the understanding that the publisher and distributor are not providing legal, accounting or other professional advice and assume no liability whatsoever in conjunction with the information contained within this publication.