The romanticized image of high-living Americans stashing money away in foreign accounts near sunny beaches or snowy mountains is one of fantasy in 2014. In the fairy tale, no one ever questions where the money went, but today, those same people would likely have to report their offshore accounts to the Internal Revenue Service.
Indeed, the foreign banks themselves may even have a legal duty to report the accounts to Uncle Sam, a concept that leaves many scratching their heads over the international reach of the federal government. Enter FATCA, the Foreign Account Tax Compliance Act, a relatively recent U.S. law that requires foreign financial institutions or FFIs to report such offshore account information to the IRS.
FATCA in operation
One mechanism for making FATCA work is for the U.S. to enter into cooperation agreements with foreign governments. The U.S. Department of the Treasury maintains a list of the many countries and other foreign jurisdictions with which we have intergovernmental agreements in place to ensure enforcement of the FATCA FFI reporting requirements, meaning basically that the foreign banks in countries with FATCA treaties with the U.S. now must release the account information to the U.S.
Another mechanism for making FATCA work is by applying financial pressure directly on FFIs that do not comply by taxing at 30 percent certain payments originating in the U.S. to those noncompliant foreign banks.
Why Uncle Sam cares
By relentlessly pursuing information about the existence of foreign accounts containing the money of U.S. citizens and legal residents, the federal government is trying to crack down on both tax evasion and money laundering (placing illegally obtained funds into normal circulation to dilute their tainted nature). Most taxpayers have no issue with the feds combating those problems, but the mistake people can make is to assume that because they themselves are such small potatoes, any reporting requirements could not possibly apply to them, a dangerous assumption to make.
This is not like the federal estate tax, which most Americans figure if they are not millionaires they do not have to worry about. Reporting requirements kick in for offshore accounts at only $10,000 aggregate, even if they are not generating any income. Noncompliance with this reporting requirement in some situations can bring serious civil penalties and charges of offshore tax crimes.
The main IRS report for foreign account reporting is the Report of Foreign Bank and Financial Accounts, known as the FBAR. FBARs must be filed by U.S. citizens or residents, or certain legal entities formed in the U.S. like partnerships, corporations, limited liability companies or LLCs, trusts or estates, which have "financial interest in or signature authority over" one or more financial accounts outside the U.S.
The rule: an FBAR must be filed for any year in which the aggregate value went above $10,000 for all foreign financial accounts at any time during that year. Aggregate value of course means all of them together, so if you have three or four small accounts you inherited from family overseas, or a couple of small accounts in foreign financial institutions for convenience because you live or do business abroad part of the year, even if no one account ever exceeds $10,000, but together they do (at even only one point in time during the year), an FBAR is required.
FBARS must be filed electronically and there is no provision in the law for the IRS to grant extensions for FBAR filing deadlines.
Civil and criminal penalties
FBAR violations may bring civil or criminal penalties, or both, depending on the circumstances. The harshest civil penalty for willfully failing to file the FBAR is either $100,000 or half the amount in the account per year, whichever is more. A non-willful violation carries a $10,000 penalty per violation. An FBAR violation that is only negligent, non-willful or part of a pattern of negligent activity is not the type of behavior that brings criminal charges - only civil penalties.
However, if failing to file or filing a false FBAR is willful, the individual could be subject to harsh criminal penalties:
It is extremely important if you find yourself under investigation for an FBAR violation to retain legal counsel with specific experience defending tax crimes that hinge on whether the taxpayer's behavior was "willful." The issue of whether an FBAR violation was willful can be a hotly contested issue and it can make all the difference to have a knowledgeable tax defense lawyer representing you before the IRS and U.S. Department of Justice in such a case.
Not only are the penalties for violating these laws harsh in themselves, but also the lifelong repercussions of having a criminal record can be devastating, even for white-collar crimes related to taxes. Such a record can limit employment opportunities, tarnish personal reputations, create ineligibility for professional licenses and much more. In addition, even a person with no prior criminal record of any kind may spend years in prison if convicted of willfully failing to file FBAR's.
This article has barely touched on the topic of offshore tax accounts and related reporting requirements as well as potential civil and criminal penalties for noncompliance. The FBAR is the most well known reporting requirement and it is more complex than presented here, and there are several others, including Form 8938, depending on the types of assets held abroad and their valuation.
It cannot be overemphasized how important it is to retain skilled legal counsel to help you comply safely and smartly with IRS reporting requirements, or to help you handle late or missed reports, or to assist in responding to and fighting civil or criminal penalties. One such law firm is Orlando, Florida-based the Law Offices of Horwitz & Citro, P.A.
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