FATCA: If you think you are flying under the RADAR, you are not !!!

If you’re a U.S. taxpayer with financial accounts outside the United States, you may unknowingly be sitting on a ticking tax bomb. The Foreign Account Tax Compliance Act (FATCA) is designed to ensure that U.S. citizens and residents with international financial accounts are reporting them to the Internal Revenue Service (IRS). Failing to comply with this law can result in severe penalties that could significantly impact your financial stability. If you're among those not disclosing your foreign accounts, you might be walking a thin line between compliance and financial disaster.

What is FATCA?

FATCA was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. It is a powerful tool used by the U.S. government to combat offshore tax evasion by requiring U.S. taxpayers to report foreign financial assets, and by requiring foreign financial institutions to report account information directly to the IRS. FATCA applies to U.S. citizens, resident aliens, and certain non-resident individuals with substantial financial ties to the U.S.

This law places an obligation on taxpayers to report their international financial assets if the total value exceeds certain thresholds. However, the real teeth of the law come from the requirement placed on foreign banks and financial institutions, which must report any accounts held by U.S. persons to the IRS.

FATCA Thresholds: Are You Affected?

FATCA applies to individuals and businesses, but the reporting thresholds vary depending on the filing status and location. Here’s a breakdown of the requirements:

U.S. taxpayers living in the U.S.

• $50,000 or more on the last day of the year or $75,000 or more at any time during the year for single filers.
• $100,000 or more on the last day of the year or $150,000 or more at any time during the year for married filers.

U.S. taxpayers living abroad

• $200,000 or more on the last day of the year or $300,000 or more at any time during the year for single filers.
• $400,000 or more on the last day of the year or $600,000 or more at any time during the year for married filers.

If you meet these criteria, you are required to file Form 8938 (Statement of Specified Foreign Financial Assets) along with your annual tax return. The form discloses your foreign accounts, assets, and investments. However, failing to file this form could open you up to serious consequences.

IRS Penalties for Non-Compliance

One of the most significant risks for U.S. taxpayers with undisclosed foreign accounts is the array of penalties that can be imposed by the IRS. The penalties for failing to comply with FATCA are severe and can quickly add up, potentially leading to financial ruin.

Penalties for Failing to File Form 8938:

• Initial Penalty: A failure-to-file penalty of $10,000 applies if you fail to report your foreign accounts or assets as required.
• Additional Penalties: If you continue to ignore the requirement after receiving an IRS notice, the penalty can escalate by $10,000 for every 30 days of non-compliance, up to a maximum of $60,000.
• Criminal Charges: In extreme cases, willful failure to report foreign accounts can lead to criminal prosecution, fines, and even imprisonment. If the IRS believes that a taxpayer has deliberately concealed their assets, they may pursue criminal charges, leading to a potential prison sentence of up to five years and substantial fines.

Failure to Pay Taxes on Foreign Income:

• Accuracy-Related Penalty: In addition to the penalties for failing to file Form 8938, you could also face an accuracy-related penalty equal to 40% of the underreported income. This penalty applies if you fail to report income earned on foreign accounts or assets.

FBAR Penalties:

Many taxpayers confuse FATCA with FBAR (Report of Foreign Bank and Financial Accounts), another reporting requirement for U.S. persons with foreign accounts. While they are distinct, FBAR (FinCEN Form 114) and FATCA overlap in their goals. FBAR imposes its own set of penalties for non-compliance, and these penalties can be added to those imposed under FATCA. The penalties for failing to file an FBAR can range from $10,000 for non-willful violations to as much as $100,000 or 50% of the account balance (whichever is higher) for willful violations. These can be applied on a per-year basis, significantly increasing the financial burden.

Foreign Banks and Financial Entities Are Watching

If you think you can fly under the radar, think again. FATCA has shifted the burden of reporting from taxpayers to foreign financial institutions (FFIs), requiring them to disclose information about U.S. account holders to the IRS. This international cooperation has made it significantly harder for taxpayers to hide their assets abroad.

Foreign Financial Institutions Must Comply or Face Penalties

Foreign banks and financial entities are now required to report the following details to the IRS:

• Name, address, and U.S. tax identification number of account holders.
• Account balances.
• Income earned on these accounts (interest, dividends, etc.).

This reporting is mandated under Intergovernmental Agreements (IGAs) between the U.S. and foreign governments, enabling the free flow of information. FFIs that fail to comply with FATCA face a 30% withholding tax on any U.S. source income they receive. This steep penalty has made non-compliance financially unviable for foreign banks, forcing them to cooperate with the IRS.

In some cases, foreign institutions may even refuse to open accounts for U.S. persons to avoid the hassle of FATCA compliance, limiting financial options for Americans living or investing abroad.

How the IRS Gathers Data from Foreign Institutions

Under FATCA, foreign institutions that wish to avoid the 30% withholding tax must register with the IRS and agree to provide detailed account information. These banks submit Form 8966 (FATCA Report), which contains the required account information for U.S. taxpayers.

This data-sharing effort goes both ways. The IRS has also entered into agreements with countries across the globe, facilitating the exchange of tax data. As of today, over 100 countries have signed IGAs with the U.S., making FATCA enforcement a truly global affair.

The reach of the IRS has extended beyond U.S. borders. FATCA has put an end to the days when U.S. taxpayers could hide assets offshore with little chance of discovery. International collaboration and the threat of penalties on foreign institutions have created a well-oiled system for the IRS to find unreported foreign accounts.

Voluntary Disclosure: Your Chance to Rectify Non-Compliance

For taxpayers who have not been compliant with FATCA, the IRS offers some avenues to come clean. It’s better to voluntarily disclose your foreign accounts than to be caught by the IRS, which could lead to much steeper penalties and possibly criminal charges.

One of the most commonly used programs for this purpose is the Streamlined Filing Compliance Procedures. This option is available to taxpayers who have failed to report their foreign assets but whose failure was non-willful. Under this program, you can catch up on your filings and avoid some of the harsher penalties that come with non-compliance.

However, it’s important to note that this program only applies to taxpayers whose non-compliance was not willful. If you knew about your obligations but deliberately failed to report your assets, the IRS may not be so lenient.

The Offshore Voluntary Disclosure Program (OVDP)

The Offshore Voluntary Disclosure Program (OVDP) was another option for individuals to come forward and disclose foreign accounts before being caught by the IRS. While this program closed in 2018, it still serves as a reminder that voluntary disclosure, when available, is always the best option for taxpayers who want to avoid the harshest penalties.

For those facing more serious exposure, the IRS has the discretion to grant more lenient terms in cases where the taxpayer voluntarily discloses their accounts, even after the formal closure of OVDP. The key takeaway is that proactive compliance is always better than waiting for the IRS to knock on your door.

The Risks of Non-Compliance Are Too High

As a U.S. taxpayer with international accounts, FATCA compliance is not optional. The IRS has developed sophisticated systems and collaborations with foreign institutions to root out non-compliance. The penalties for failing to report your foreign accounts can range from steep financial penalties to criminal charges, potentially leading to jail time.

If you are not currently compliant, now is the time to take action. The IRS has shown a willingness to reduce penalties for those who voluntarily disclose their accounts before being discovered. But once the IRS has you in its sights, the penalties can escalate quickly. Foreign financial institutions are actively reporting U.S. accounts, meaning the risk of discovery is too high to ignore.

By voluntarily complying with FATCA, you can avoid the worst outcomes, protect your assets, and get back on track with your financial obligations. Don't wait until it’s too late—make sure your international accounts are in order before the IRS comes knocking.