The Outrageous Reach of FATCA What it means to you, and what to do about it

How do you get paid $104 million by the United States Internal Revenue Service? Well, if you are former Swiss banker Bradley Birkenfeld, you do it by blowing the whistle on the secret offshore accounts of thousands of American citizens. His testimony earned him a two and half-year prison sentence, a $30,000 fine, and a cheque for $104 million upon his release from prison in 2012. The reward was made possible by the introduction of the IRS Whistleblower Informant Award.  The landmark case eventually came to be seen as the launch pad for the Foreign Account Tax Compliance Act, or FATCA.


If you are an American living abroad, you will probably have already heard of FATCA. Signed into law in March 2010, it is only now coming into full effect. It is intended to ensure that no taxable income is stashed away offshore, and Governments and foreign financial institutions around the world are coming into compliance one after the other. Unsurprisingly, other Governments keen to tax their own citizens on their worldwide income and earnings have been watching FATCA closely, almost as if the only thing that ever held them back was the impracticality of policing and collecting.


The incentive for foreign financial institutions to comply with FATCA is a simple as it is brutal: Fail to comply and be subjected to a 30% withholding tax on any revenue generated in the United States. In today’s cross-border financial markets, this is a risk that no bank is willing to take. In fact, a large number of expat Americans have reported being locked out of their accounts, with the bank opting to get rid of American clients to avoid the potential penalties and onerous reporting requirements. 


For the UAE, May 2015 was the month that all banks were required to submit reports on their American clients to the Central Bank, who in turn forwarded these reports to the United States Justice Department and the Internal Revenue Service (IRS).  


FATCA’s Astounding Reach

If you are a US citizen or Green Card holder, regardless of where you live, you are required to file annual US tax returns and pay all US taxesThis applies to Green Card holders even if the Green Card has expired and the individual has not returned to the US for many years.  


Thinking of relinquishing your Green Card, or even renouncing your US citizenship? Both of those scenarios now require that the individual undertakes certain steps from both an immigration and tax perspective in order for them to be legally recognized. In simple, before your relinquish or renounce you will be required to pay the IRS and satisfy them that you have been compliant for the last five years.


Just ask Boris Johnson! The flamboyant, US born Mayor of London put up a very public fight when the IRS hunted him down for capital gains tax on the sale of a UK property. Having left the US at the age of 5, Mayor Johnson is what has now become known as an ‘accidental American’ in US tax terms.  After labelling the demand ‘outrageous’ for an accident of birth and refusing to pay up, he did just that earlier this year. He was encouraged to pay the IRS after suggestions that he could face arrest on his next trip to the US, and decided it was not worth risking the wrath of US tax authorities 


What Are You Required To Do?

You are required to file an annual tax return, as well as an annual Report of Foreign Bank and Financial Accounts (FBAR) on all accounts held overseas.  


The approach adopted by the IRS and Justice Department in auditing and assessing tax penalties for overseas Americans is both rigorous and stringent. To aid them in their efforts, FATCA has now effectively turned every bank and financial institution around the world into and extended arm of the IRS. The final layer of policing is left to the individual, with the IRS whistle-blower informant award ensuring that no stone is left unturned in the international tax witch-hunt that is currently underway.


Doing Nothing Can Be Disastrous

Failing to file the FBAR can result in civil penalties and possibly imprisonment, all depending on whether the failure to file is deemed to be willful or non-willful. Horror stories are starting to surface, with penalties potentially reaching 50% of the balance in an unreported foreign account, per year, for up to six tax years. In other words, an unreported account with a balance of $100,000 can potentially lead to penalty of $50,000 times 6, or $300,000!  Yes, you read that right, the penalty is greater than the balance of the account.


If you have never filed, or stopped filing after leaving the US, there are a number of ways to plug back into the system. Which option is best for you is down to your individual situation, and depends on a number of variables.  


What complicates things slightly for delinquent taxpayers is the fact that they have to deal with not just the IRS, whose primary concern is to collect the overdue taxes, but also the Department of Justice. The curious case of Bradley Birkenfeld is a perfect example of this, with the DOJ sentencing him to prison and a fine for his role in the tax evasion, and the IRS rewarding him with $104 million for his help with their $780 million collection.


The IRS would prefer that delinquent taxpayers join one of the programs that they have in place, such as the Offshore Voluntary Disclosure Program (OVDP). With the OVDP, the IRS will not recommend prosecution, so in that sense it does provide some level of protection from criminal liability. The OVDP involves 8 years of amended tax returns and FBARs. On top of paying the taxes that you owe, you also pay interest as well as a 20% penalty on those taxes. There is an additional penalty of between 27.5% and 50% on the highest offshore account balance.  


If this sounds like an expensive option, well, that's because it is. You do however get the extra bang for your buck, with the OVDP protecting you in case things come up that you didn't particularly hope would. 


For many, the easiest way of becoming compliant is what the IRS calls a 'quiet disclosure'. Delinquent taxpayers either start filing from this point moving forwards, or amend and send in previous years tax returns and FBARs in the hope that this will not lead to further examination by the tax authorities. A word of extreme caution, quiet disclosures are notorious for not staying quiet, inviting scrutiny from the IRS with no protection whatsoever.  


Professional advice is not only recommended, but is absolutely essential given the current US tax landscape and the extremely punitive penalties that may result from incorrect filing or reporting. 


About Adham Bashir

Adham Bashir ACSI is a Wealth Manager at DeVere Acuma. He has worked with high net worth individuals in the UK for many years, and is an Associate Member of the Chartered Institute for Securities and Investments. He now works with DeVere Acuma as a specialist in investments, advising individuals on wealth creation and wealth preservation strategies.




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