Since March of 2009 about 18,000 owners of offshore bank accounts have filed voluntary disclosures with the IRS. So what does FATCA mean to current holders of overseas financial accounts who have not filed FBARs (Foreign Bank Account Reports) on Form TDF 90.22-1, and who have not taken advantage of the IRS voluntary disclosure program? As pointed out previously the willful failure to file an FBAR can result in a civil penalty of 50% of the highest balance in the offshore bank account. The IRS can also bring criminal charges for failing to file an FBAR.
Many owners of Swiss bank accounts who were not at UBS decided not to take advantage of the previous tax amnesty which ended on Oct. 15, 2009 because they were afraid it would be too expensive. They hoped that the IRS wouldn’t find them, and that they would be protected by Swiss secrecy laws. Once FATCA becomes effective, however, the overseas financial institutions with agreements with the U.S. will request a waiver of the secrecy laws, and if the waiver is not forthcoming will close the account.
Why would a Swiss Bank (or for that matter a Panamanian Bank, an Israeli Bank, or Hong Kong Bank) enter into an agreement like this with the IRS? The problem may be illustrated by a hypothetical private Swiss bank which has two customers; one a U.S. taxpayer with an account of $5,000,000 and the other with a North Korean dictator which contains $500 million. If the Swiss private bank allocates 10% of the dictator’s portfolio to the U.S. stock market, and generates $5 million in dividends the U.S. companies paying the dividends will be required to withhold 30% ($1.5 million) on its payments to the Swiss bank on behalf of the Korean dictator. Guess what. Either the Swiss bank will close the account of the U.S. taxpayer, or it will enter into an agreement so that it is not subject to the withholding requirements.
Of course there will always be small foreign offshore banks which will avoid U.S. investments entirely making it possible to avoid the impact of FATCA, and maintain U.S. customers. Still it requires finding one and constantly monitoring it to make sure that its policies don’t change. It makes tax evasion much more of an active process rather than simply keeping an existing structure in place. Another problem is the continued consolidation of foreign banking institutions. Let’s assume you start out with an offshore bank account at a small foreign bank in India which makes no U.S. investments. One or two years later it gets acquired by HSBC which I am guessing will have an agreement with the IRS. Now, even if you close the account quickly you may be swept into the FATCA reporting regime.
Brager Tax Law Group has consulted with hundreds of clients who have offshore bank accounts. If you have a foreign bank account, and would like to discuss your options call for an appointment with our tax litigation lawyers.