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INTERVIEW: Pressure Mounts On US Individuals To Disclose - Voluntarily - Their Foreign Accounts
Eliane Chavagnon
21 July 2014
In the lead-up to the implementation of the US Foreign Account Tax Compliance Act - which went live this month - much noise was made about the various burdens of the legislation on foreign financial institutions and whether the act is, overall, good or bad for the global financial services industry. Less focus seems to have been channeled, however, on how FATCA has heated up the pressure on individuals to come forward voluntarily with information about their foreign accounts. FATCA was signed into law in 2010 as part of the US Government’s plan to curb offshore tax evasion by encouraging transparency through the collection of information on accounts held by US citizens abroad. It came into force on July 1, 2014 – the same date that significant modifications to the US’s administrative Offshore Voluntary Disclosure Program took effect. While the two are very different regimes they “intersect and relate to each other”, Seth Entin of the law firm Greenberg Traurig told Family Wealth Report. The OVDP was rolled out in 2012 and offers individuals with undisclosed income from offshore accounts another opportunity to “get current with their tax returns” as stated on the Internal Revenue Service’s website. Recent modifications this month were designed to “accommodate a wider group of US taxpayers who have unreported foreign financial accounts”. Notably, if they can certify “non-willfulness” the IRS now has a “very attractive program for them”, Entin said . On the other hand, Entin noted that tax payers will have to declare under “penalties of perjury” that they were unwillful – something which isn’t always clear-cut. “That’s an issue that we as practitioners are going to have to confront,” Entin continued. “I’ve worked with clients who simply didn’t even know they were citizens or that the US requires compliance from citizens even though they don’t live in the US - those are the easier cases.” Meanwhile, as of August 3, 2014, the consequences of not coming forward and being detected by the IRS first will be greater: the financial penalty is rising from 27.5 per cent to 50 per cent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure. This increase applies if, prior to the taxpayer’s voluntary disclosure, it becomes public that a financial institution where the taxpayer holds an account - or another party facilitating the taxpayer’s offshore arrangement - is under investigation by or cooperating with the US Government. “But if someone wants to avoid criminal prosecution and prevent the penalties from being even worse than the 50 per cent, the voluntary disclosure is open to them even after August 3 - so long as the IRS doesn’t already have information on their non-compliance and the money is not from illegal sources,” Entin said. “It has been the case for decades that if the IRS has information on you, you can’t come forward,” he added. Intersection Now that FATCA has gone live, and changes to the OVDP have been made, there is a misconception among many that it’s too late to make voluntary disclosures, according to Entin. “The fact that FATCA came in - and even the fact that some modifications to the OVDP also coincidentally took effect on July 1 – doesn’t necessarily mean an individual can’t do a voluntary disclosure anymore,” he said. “People seem to be under the impression that since FATCA kicked in on July 1 therefore it’s too late.” With the green light on FATCA, FFIs have to start withholding if they have an account holder that doesn’t meet their compliance requirements. “But those names don’t go over to the IRS until next year. Just because the administrative rules of FATCA withholding and due diligence by a bank kick in doesn’t mean that everyone is suddenly in one foul swoop disclosed to the IRS and therefore it’s too late to do a voluntary disclosure,” Entin said. He warned that if an individual waits for FATCA to send information to the IRS, they won’t qualify for voluntary disclosure and the IRS can “throw the book at them” - both criminally and civilly. “Under the current rules a voluntary disclosure is always open to someone - so long as the IRS doesn’t have information about their non-compliance and their funds are not from illegal sources, such as money laundering,” he said. Incentive So if FATCA dictates that FFIs send client information to the IRS, what’s the incentive for individuals to come forward and participate in the OVDP? “If the banks are bringing them forward to the IRS, then they’re no longer voluntary and could be exposed to criminal prosecution and penalties,” Entin said. “The key is that the action by individuals has to be voluntary. If someone waits for FATCA to bring their information forward to the IRS then they have no protection of the OVDP.” Scott Kaplowitch, an accountant at the Boston, MA-based accounting firm Edelstein & Company, said his firm has done “more FBAR reporting this year than we’ve ever done.” which at any point during the year reached an aggregate balance of over $10,000.) “We’ve spent a lot of time with our clients educating them on this issue. We had a client who had no idea they had a filing requirement because they had money sitting in an ESCROW account in Mexico,” Kaplowitch said. “We are working with a lot of very sophisticated clients who do not understand the subtleties of the law related to offshore assets,” he added. Indeed, clients with significant wealth are more likely to be in the hands of advisors and accountants who can guide them through the rules and associated modifications. But in the words of Kaplowitch: “As accountants we can only file tax returns and FBAR and FATCA filings based on the information our clients give us.”