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The Scary Facts of FATCA

October 27, 2015

The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 to combat tax evasion by U.S. persons holding unaccounted income in offshore accounts. The aggressive implementation of FATCA by the Internal Revenue Service is quickly leading to the end of bank secrecy.

The IRS has so far established FATCA agreements with more than 75 countries, including the commonly used tax havens Switzerland and Ireland. Under the agreement, any bank operating in a cooperating country can be asked by the IRS to provide information about the bank account(s) of their customers who are U.S. citizens. The Foreign Financial Institutions (FFIs) are also required to report directly to the IRS certain information about financial accounts held by U.S. citizens.

Even if a U.S. citizen has a dual citizenship or doesn’t live in the U.S., s/he is required to report their worldwide income to the IRS every year. Some persons must file Form 8938, Statement of Specified Foreign Financial Assets and also file Report of Foreign Bank and Financial Accounts (FBAR) separately.

Failure to file a tax return or FBAR can trigger a serious penalty. Even if the U.S. citizen is not evading taxes in the U.S., s/he can be charged with a fine and/or jail time, if found guilty of holding back information from the IRS.

Tax evasion can lead to a penalty of $250,000 and imprisonment for five years. Filing a fraudulent tax return generates a penalty of $250,000 and jail time of three years.

Failure to file the FBAR is considered a criminal offense with a fine of $500,000 and imprisonment of 10 years. Non-willful civil FBAR non-compliance can lead to a fine of $10,000. For willful civil FBAR non-compliance, the penalty is the greater of $100,000 or 50% of the account for each year the person fails to file the FBAR. The IRS is known to rarely reduce or waive penalties, and is expected to be bolder now with FBAR penalties.

To encourage voluntary disclosure of unaccounted money held overseas, the IRS runs the Offshore Voluntary Disclosure Program (OVDP). This allows those with unaccounted money overseas to come out clean with much reduced penalties or none at all.

Those with dual citizenship are now required to follow every tax rule of the U.S. to avoid penalties. The fear of harsh penalties is making many U.S. citizens with dual citizenships renounce their U.S. citizenship. On the other hand, the IRS has recovered billions of unaccounted money from tax havens, and more in penalties after the strict implementation of FATCA.


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