Articles Posted in Tax Litigation and Tax Controversy

Since FATCA’s passage, critics of the law have assailed its provisions and the IRS’ interpretations of the law. However one of the most oft-repeated charges against the account disclosure statute was that the IRS, itself, was not ready for the law and could not handle the influx of data including complex tax filings. A December 2011 New York Times article lamented that the IRS was not prepared for the fierce reaction from overseas or differences in how each tax agency handles their process. For instance, at the time there was concern regarding how manual verification would work in tax systems like Japan’s which relies on electronic screening rather than manual actions.

Thus, foreign financial institutions were originally granted something of a temporary reprieve from FATCA and its obligations. Facing foreign pressure the IRS first delayed the registration deadline for foreign financial institutions until June 30, 2014. Then in May 2014, the IRS announced in Notice 2014-33 that the 2014 and 2015 tax years would be transition period for enforcement and administration purposes relating to entities only. Individual investors are still be required to comply with all FATCA provisions. The transition period does not delay FATCA implementation or effective dates.

However the promise of even greater detection and enforcement powers for the IRS is here. Recently, the IRS announced that its International Data Exchange Service had come online. Increased international FATCA compliance due to lower barriers to reporting should improve the IRS’ foreign account detection efforts.

Nobody wants to file and pay taxes. However, the only thing worse than filing and paying taxes each year may be making a filing mistake that opens one up to an IRS tax audit or a criminal tax prosecution. Many times taxpayers may realize that they made an error on their initial filing. However what the individual does next could determine the consequences he or she may face. If, in a panic, the taxpayer attempts to conceal the error, she may have very well compounded her liability and make the possibility of facing severe tax consequences more likely. However, if the taxpayer discloses the error and corrects it she may be required to pay a relatively small penalty, but that could be the extent of the consequences.

Such was not the case for 46-year-old e-commerce entrepreneur, Gregg Kaminsky, who failed to pay taxes on money held in an undisclosed Swiss account and on income earned from the virtual world known as Second Life.

“I’m not a greedy criminal who set out to break the law”

In the past, having an interest in or signature authority over a foreign financial account did not attract the level of attention and scrutiny that it does today. This is because in the past foreign banking secrecy laws prevented even the disclosure of the identity of the account holder or holders and their links to the United States. Today, this no longer holds true. The IRS and the US government have expended significant resources in promoting and creating international regulatory and reporting regimes. FATCA provides a basis for the mandatory disclosure of certain asset types. Report of Foreign Bank Accounts (FBAR) through the Banking Secrecy Act (BSA) creates a disclosure obligation when the aggregate balance of a foreign financial account or accounts exceed $10,000.

What are the Penalties for Failure to comply with FBAR reporting requirements?

The penalties for failing to comply with FBAR requirements can be particularly harsh regardless of whether the violation is willful or non-willful. If your failure to comply with FBAR is considered non-willful, meaning that it did not involve an intentional or voluntary disregard of a known legal duty, you could face the potential penalty of $10,000 per an undisclosed account for every tax year where the account went unreported. If the violation involves a willful act, including willful blindness, then because there is a six year statute of limitations the penalty can rapidly eclipse the account balance. The penalty for a willful failure to comply with FBAR can result in the penalty of the greater of $100,000 or 50% of the account balance. Consider that if the original account balance was $200,000 a 50% penalty each year over the course of six years would result in the imposition of a penalty of $600,000 – triple the original balance.

At one point, banking secrecy laws in traditional tax havens were considered to provide ample protections in concealing the identity of the account holder. Wealthy individuals, companies, partnerships and a variety of other entities utilized these secrecy laws to open accounts where millions of dollars of otherwise taxable income could be surreptitiously funneled away to a foreign jurisdiction. For decades, this was considered business as usual by some individuals and the continued viability of these tax evasion strategies was not seriously questioned.

That has changed. The law today is clear: US taxpayers must disclose foreign assets of certain types and exceeding certain values or face penalties under FATCA. Furthermore, the failure to disclose certain foreign accounts in a Foreign Bank Account Report (FBAR) can result in additional penalties. The IRS and the US government have expended significant resources in eroding the protections provided by foreign banking secrecy laws. The risks of detection and civil or criminal prosecution has never been greater. In short, aside from being in clear violation of the US Tax Code, the benefits of secret foreign accounts no longer outweigh the risks of detection.

What is FATCA?