Since January of 2014, those holding accounts in foreign banks throughout the world have received Foreign Account Tax Compliance Act (FATCA) letters from their financial institutions. These letters are sent to account holders whom the institution believes have a link to the United States that would give rise to tax reporting and payment obligations. These letters will request that the recipient provide information regarding their disclosures, if any, to the Internal Revenue Service (IRS). These disclosures typically include whether certain documents have been filed, including a Report of Foreign Bank and Financial Accounts (FBAR) and a 1040 personal return, and whether the individual has availed himself or herself of the Offshore Voluntary Disclosure Program (OVDP) administered by the IRS to resolve tax compliance problems.
If you have received such a letter, it is often essential that you seek the advice of a tax professional. Failure to do so can result in significant civil penalties or a referral for criminal tax prosecution. The Brager Tax Law Group can explain your legal situation and present potential solutions.
Why did I receive a FATCA letter?
If you have received a FATCA letter, you may already be on the IRS’ radar. FATCA requires foreign banks to identify accounts with a link to the US. Depending on the jurisdiction and the Intergovernmental Agreement (IGA) that is in effect, the bank or qualifying financial institution may be required to submit this information to the IRS or face significant fines and penalties. Understanding the agreements in effect in your jurisdiction can help you better understand the risks you face.
For FATCA purposes, there are two main models of IGAs: Model 1 IGAs and Model 2 IGAs. A Model 1 IGA is distinctive in that the banks can directly turn over an American account-holder’s information to the jurisdiction’s taxing authority. The foreign jurisdiction’s taxing authority will then pass that information along to the IRS.
In contrast, a Model 2 IGA, permits the direct transfer of information from the foreign bank or financial institution to the IRS. The IGA specific to your jurisdiction may also require special action for recalcitrant account holders or deem certain entities as “deemed-compliant foreign financial institutions” or “exempt beneficial owners.”
What are the potential consequences of FBAR non-compliance or other tax problems?
If a US taxpayer has failed to comply with his or her FATCA, FBAR, or other income tax reporting requirements, he or she could face significant penalties. When the non-compliant taxpayer’s account information is received by the IRS, he or she has likely already lost the right to participate in the various voluntary disclosure programs such as OVDP. A US taxpayer must avail themselves of the voluntary disclosure process prior to an investigation, or they will no longer potentially qualify for criminal amnesty or reduced civil fines.
Non-compliance with tax obligations can also lead to a civil tax action or criminal tax charges. A non-willful violation of FBAR obligations can result in a $10,000 fine for each violation. A willful FBAR violation can carry a penalty of the greater of $100,000 or 50% of the account balance for each violation. Criminal tax penalties can include significant prison sentences and fines that exceed the value of the accounts.
Contact the Brager Tax Group if you have received a FATCA letter
If you have received a letter from your foreign bank or financial institution, it is never advisable to ignore it or to do nothing. By delaying action, you may eliminate certain voluntary disclosure options that could have led to a more favorable resolution than would be possible otherwise. Furthermore, if you have received a FATCA letter you are already on notice that your account is likely to attract further attention from the IRS. Since you can no longer rely on secrecy in foreign banking, the actions you take could potentially create new civil or criminal liability.
However, if you act prudently and seek the advice of an experienced tax professional, he or she can then develop a strategy which may be able to correct your tax compliance issues with lesser penalties or fines. To discuss how the experienced tax professionals of the Brager Tax Law Group can assist you, call 800-380-TAX LITIGATOR or contact us online