What’s coming our way with regard to the Foreign Account Tax Compliance Act (FATCA) in 2015?

2015 sees a number of impeding developments regarding FATCA compliance as the US presses on with its quest to target tax non-compliance by U.S. taxpayers with foreign accounts. Foreign Financial Institutions (FFIs) need to maintain focus on upcoming requirements, deadlines and impending developments with regards to FATCA. By 31 December 2014, firms that need to be compliant with FATCA or a US intergovernmental agreement (IGA) should have registered with the US Internal Revenue Service (IRS0).

Now that we have moved into 2015, there are three key dates that firms need to be aware of: 31 March 2015 is the first FATCA reporting deadline for FFIs in non-IGA jurisdictions and FFIs in Model 2 IGA jurisdictions. Firms will need to report the US account information to the IRS or relevant tax authorities.

It is important to note that the reporting obligations will increase in 2016 and 2017. 31 May 2015 or 30 June 2015 are typically the dates of the first FATCA reporting for FFIs in Model 1 IGA jurisdictions. Firms will need to report the US account information to the relevant tax authorities. Again, it is important to note that the reporting obligations will increase in 2016 and 2017. 30 June 2015 is when the review of pre-existing (30 June 2014) high-value individual accounts (over US$1m) must be completed.

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Filing FBAR

The US Treasury estimated that it will cost foreign banks and financial institutions $8 billion to comply with Fatca. This amount does not take into account the amount of time and cost that US citizens will need to take to comply with the demands of foreign banks and financial where they have accounts.

Those who have not filed an FBAR in prior years and who choose to file on their own should familiarise themselves with the Internal Revenue Service Streamlined Filing Procedures that can be found at the IRS website, www.irs.gov . If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding $10,000, the Bank Secrecy Act requires you to report the account yearly to the Department of Treasury by electronically filing a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR).

Who Must File an FBAR? United States persons are required to file an FBAR if: 1. The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and 2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported. United States person includes US citizens; US residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organised in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

Exceptions to the FBAR reporting requirements can be found in the FBAR instructions.

Signature Authority

Signature authority is the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account Reporting and Filing Information A person who holds a foreign financial account may have a reporting obligation even when the account produces no taxable income. The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR.

The FBAR is a calendar year report and must be filed on or before June 30 of the year following the calendar year being reported. Effective July 1, 2013, the FBAR must be filed electronically through FinCEN’s BSA E-Filing System. The FBAR is not filed with a federal tax return.

When the IRS grants a filing extension for a taxpayer’s income tax return, it does not extend the time to file an FBAR. There is no provision for requesting an extension of time to file an FBAR. Those required to file an FBAR who fail to properly file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation for non-willful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, for each violation.

Printed in part from an article at the Royal Gazette online 11/12/14

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Court Upholds Record FBAR Penalties, Exceeding Offshore Account Balance

Tax lawyers have been watching the case of Mr. Carl R. Zwerner of Coral Gables, Florida, wondering how it might impact others with foreign accounts. But now, the IRS and Justice Department seem to be smiling after chalking up another big victory in the fight over offshore accounts. Tax advisers are less happy, and Mr. Zwerner is almost certainly disappointed.

U.S. persons must report their worldwide income on their taxes. Plus, they must file an FBAR annually if their offshore accounts total over $10,000 at any time.  If you have both failures, the IRS wants you to go into the Offshore Voluntary Disclosure Program, also known as the OVDP. It involves reopening 8 tax years, and paying taxes, interest and penalties, but no prosecution.

But the penalties can be painful, especially the one equal to 27.5% of the highest balance in the offshore accounts. As a result, some people want to amend their taxes and file FBARs outside the OVDP. Some people are willing to pay the taxes they owe, but not the 27.5% penalty. The IRS calls this a “quiet disclosure” and says it will come after you if you try it.

That might include prosecution or large civil FBAR penalties. That’s where Mr. Zwerner comes in. His facts are complex, and he tried to come forward in 2009 even before the IRS had a special program. You’d think that might immunize him, but it didn’t.

The IRS went after Mr. Zwerner for $3,488,609.33 in penalties for FBAR violations. How did it get to that huge number? It’s 50% of the highest balance in the account each year. Mr. Zwerner fought the penalty in court, but a jury has upheld the IRS. The jury found Mr. Zwerner willful for 2004, 2005 and 2006, but not for 2007. See Florida Man Penalized Record 150% for Swiss Account.

That meant FBAR penalties of $2,241,809 for an account worth$1,691,054, less than the penalties. What was considered willful? Mr. Zwerner kept the accounts under two different entity names, and his tax return said “No” he didn’t have any foreign accounts. Still, there were some sympathetic facts here.

Mr. Zwerner is 87 years old. He had his tax counsel in 2008 contact IRS Criminal Investigation and make a voluntary disclosure. Mr. Zwerner disclosed the existence of his offshore account (including income generated by the account) on his timely filed 2007 tax return and paid the taxes.

But it was not done perfectly. His former tax lawyer asked the IRS anonymously, so in IRS parlance, Mr. Zwerner didn’t fully come forward. Still, he did file amended returns for 2004, 2005 and 2006 and FBARs. But in 2010, the IRS began an audit.

It didn’t go well, and the IRS pushed hard. In fact, it was going so badly that Mr. Zwerner tried to join the 2011 IRS program called the OVDI. However, the IRS refused to allow him to participate because he was under audit. These are unusual facts, but should have helped Mr. Zwerner, not hurt him.

Remember, the government carries the burden of proving willfulness. Yet there may be little sympathy for someone with large financial resources who fails to inquire about reporting requirements. Plus, willfulness can include conscious efforts to avoid learning about the FBAR reporting.

This article was reprinted from Forbes Magazine online 5/29/14.  This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

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