“If FATCA were a Greek God, it would be Zeus, ruler of heaven and earth, throwing lightning bolts at the ground and causing it to shake with such fury as a Magnitude 10 earthquake.”
–Anonymous critic of FATCA
What is this law that has become the subject of such heated debate and that is loathed so much?
Let’s begin with some basics. FATCA stands for “Foreign Account Tax Compliance Act.” FATCA is America’s global tax law. It was quietly enacted in 2010, and after four years of fine-tuning, is now in effect. What is most amazing about this law is not the impact that it has on Americans – although that is considerable – but its impact on the world.
Never before has a U.S. tax law attempted such an astonishing reach. And for those naysayers who predicted the demise of FATCA before it was even out of the womb, shrewd diplomacy by President Obama and his Treasury Department have proven them wrong.
What is all of the buzz about FATCA? What can it accomplish that tax treaties and other government-information gathering tools can’t? FATCA requires foreign banks to reveal the names and accountholder information of Americans with accounts over $50,000. Because non-compliant institutions could be saddled with onerous penalties and isolated from U.S. markets, financial institutions have become as submissive in their willingness to comply with FATCA as a Labrador Retriever who rolls on its back after being given a treat. Very simply, virtually every financial institution is complying.
Here are ten facts about FATCA:
1. FATCA Blew In On a Perfect Storm. FATCA grew out of a controversial rule. Much to the chagrin of the U.S. expat community, America taxes its citizens – and even its residents – on their worldwide income regardless of where they live. Thus, regardless of where you live in the world – Japan, China, Hong Kong, Germany, Brazil – and how long you lived there – five, ten, fifteen, twenty years – if you are a U.S. person, you must pay U.S. taxes on your worldwide income.
Here is some historical background. In 2009, the IRS struck a deal with UBS for $780 million in penalties and the names of all U.S. clients who held accounts with UBS. Recently, Credit Suisse took a guilty plea and paid a record $2.6 billion fine.
Since then, over a hundred Swiss banks have entered into deals with the Department of Justice. As a result, banking is more transparent today than could ever have been imagined twenty years ago.
FATCA was enacted in 2010, when only some of these developments were unfolding. The objective was to punish financial institutions that refused to surrender U.S. accountholder information by cutting off their access to critical U.S. financial markets. If you have any reason to doubt how successful that was, you need only peruse the long list of banks that have “signed on” to FATCA.
2. Countries Around the World are Complying. More than 80 nations – including all of the industrialized nations in the world and thus, those that matter the most – have agreed to the law. So far, over 77,000 financial institutions have also signed on. Countries must fully support the law or face serious repercussions. Even tax havens have joined up. The IRS website features a searchable list of financial institutions. Countries on board can be found at FATCA – Archive.
3. Even Our Arch Nemeses Russia and China Have Agreed to FATCA. If you think money anywhere can escape the IRS, you are sadly mistaken. Even notoriously antagonistic countries like China and Russia have signed on. Which one is more amazing? In light of recent events and the chilling diplomacy that exists between the countries, probably Russia. The U.S. and Russia were negotiating a FATCA deal until March, 2014, but Russia’s annexation of Crimea caused the house to come tumbling down and for the U.S. to suspend talks.
This meant Russian financial institutions were all but guaranteed to be isolated from U.S. markets. Unwilling to sit back and allow this to happen on his watch, President Vladimir Putin signed a law in the eleventh hour allowing Russian banks to send American taxpayer information to the U.S., thus satisfying the U.S. Treasury.
4. FATCA is America’s Big Stick. There is a famous proverb that says, “Speak softly and carry a big stick.” It means do not boast or use verbal threats but do make others aware that you are prepared to use physical force if necessary. It was used by President Theodore Roosevelt as an expression of his view of foreign policy. Today, FATCA is America’s big stick.
Indeed, FATCA’s onerous 30% withholding tax and exclusion from U.S. markets sends a strong message to those who may be tempted not to comply. Very simply, the combination of these two penalties packs a powerful “one-two” punch that would be nothing short of catastrophic for a foreign financial institution with U.S. clients. Specifically, foreign financial institutions must withhold a 30% tax if the recipient doesn’t provide information about U.S. account holders. The choice is clear, and it’s no small wonder why everyone is complying.
5. The Bloodhound Is Hot On the Trail Of American “Identifiers”. Foreign Financial Institutions (FFIs) must report account numbers, balances, names, addresses, and U.S. identification numbers. For U.S.-owned foreign entities, they must report the name, address, and U.S. Tax Identification Number (TIN) of each substantial U.S. owner. It is no longer a question of “if” the financial institution will find this information, but what it will do with this information “when” it does. Thus, it is not a matter of “if” but “when.” For those wondering what the financial institution will do when it discovers this information, it will likely result in a letter. Whatever you do, don’t ignore it!
6. The Ubiquitous FBAR Is Still Required. By now, you have probably asked yourself the question, “What is the connection between the FBAR and the Form 8938, on the one hand, and FATCA on the other?” An excellent question with a simple answer: duplicate reporting. FBARs predate FATCA. FATCA merely adds to the burden, but it doesn’t replace FBARs or Form 8938s.
Believe it or not, FBARs have been in the law since 1970 (as part of the Bank Secrecy Act) but did not rise to this level of “prominence” until 2009 when the U.S. government began to focus its enforcement efforts on discovering hidden offshore bank accounts.
U.S. persons with foreign bank accounts exceeding $10,000 must file an FBAR by June 30 of the year following the tax year that is being reported. The FBAR is not any ‘ole run-of-the-mill form. On the contrary, failure to file an FBAR or misstating information on a filed FBAR could result in criminal and civil penalties.
Fines can be as high as $500,000 and can even result in imprisonment of up to ten years.
As far as civil FBAR penalties are concerned, there are two types: willful and nonwillful. Willful FBAR violations can draw the greater of $100,000 or 50% of the account for each violation – with each year being separate. Even a non-willful civil FBAR penalty can mean a $10,000 fine. You don’t have to be a mathematician to see how quickly the numbers add up.
For these reasons, the FBAR is not to be taken lightly.
7. FATCA is Forcing Compliance. U.S. accountholders who aren’t compliant have only a limited time to get to the IRS. The IRS recently overhauled its programs, making its Offshore Voluntary Disclosure Program (OVDP) more heavy-handed. As of August 4, 2014, the offshore penalty within the OVDP has increased from 27.5% to 50% for individuals who have accounts with one or more banks that appear on a list on the IRS website.
While it might appear as though you are being condemned to a life of despair by the IRS, all hope is not lost. To the extent that your FBAR transgression was the result of nonwillful conduct, the new IRS’s Streamlined Program may be just what the doctor ordered. Of course, other qualifications must be satisfied before you can be considered eligible to make a submission under the streamlined procedures.
If getting it right with the IRS through the streamlined procedures has piqued your interest, here is some more information. Unlike the old streamlined procedures – i.e., the “ghosts of streamlined past” – the new streamlined procedures apply to both foreign and U.S.-based Americans.
Finally, taxpayers always have the option of filing amended returns and delinquent FBARs in what is known as a “quiet disclosure.” However, this is where I make the following disclaimer: Do not throw caution to the wind!
A quiet disclosure could result in an audit (or what the IRS affectionately refers to as an “examination”) that is as probing as a rectal examination. That examination, in turn, could give rise to civil FBAR penalties and even criminal prosecution.
I don’t mean to sound like “the boy who cried wolf.” At the same time, caution is clearly in order.
8. Banking Will Never Be the Same. Do you remember Dr. Emmett Brown’s famous line from the movie, “Back to the Future?” It was the last line uttered in the movie and set the stage for the sequel. It went something like this, “Roads? Where we’re going, we don’t need roads.”
In the same way that Dr. Brown’s time machine was a revolutionary invention that made time travel possible for the first time, FATCA is also a revolutionary invention, albeit in a different sense. It is revolutionary in the sense that it makes banking transparent worldwide – for the first time.
With Swiss bank deals, prosecutions, summonses, and FATCA, the IRS has quicker, more accurate, and more complete information than ever before.
9. Forget Repeal or Dismantling FATCA. Republicans have mounted a repeal effort, but it lacks the zest and gusto – no different than an entrée that lacks the spices and seasoning that makes it scrumptious – that is needed to force any real repeal of FATCA. Therefore, it should come as no surprise that few have rallied behind it and that it’s not getting any traction. Some say FATCA will be like prohibition, lasting for a time but doomed. We’ll have to wait and see. But for now, FATCA is here to stay.
Still, two Canadians recently filed a lawsuit to block FATCA and to prohibit the Canadian government from surrendering the names of U.S. persons living in Canada to the IRS.
The suit claims the Inter-Governmental Agreement upon which Canada can rely to turn over private bank account information is illegal. The legal claim challenges the constitutionality of the agreement that the Canadian government struck with the United States.
10. Don’t Count on Other Passports. Some dual nationals or U.S. Green Card holders think they can bypass FATCA altogether – and other U.S. tax rules – by using a non-U.S. passport and non-U.S. address with their foreign bank. Don’t be tempted! You will only make matters worse, since this is yet another badge of willfulness. Your bank and the IRS will find out eventually, even if not right away. Very simply, it’s no different than waiving a red flag in front of a bull at the rodeo.
Please see Mike DeBlis’ rebuttal post: Getting It Right On FATCA
Original Post By: Michael DeBlis