Since September 11, a confluence of factors has resulted in the establishment of much stronger international tax compliance rules (FATCA) and enforcement procedures for U.S. taxpayers. Two very different federal priorities,

(1) preventing and prosecuting the financing of terrorist activities, and

(2) enforcing U.S. tax compliance in foreign jurisdictions,

ultimately produced laws with a long list of provisions that are continuing to make sweeping changes in the way international financial institutions and the general public do business abroad.

In addition to national security, at stake for the federal government is an estimated $385 billion in tax revenues lost each year, partly as a result of non-compliant international reporting by U.S. taxpayers.

In 2002, in the wake of 911, Patriot Act provisions strengthened U.S. efforts to prevent, detect and prosecute international money laundering and financing of terrorism. The act called for special scrutiny of foreign jurisdictions, foreign financial institutions and classes of international transactions or types of accounts susceptible to criminal abuse. That was only the beginning.

Although overseas tax evasion is hardly new, over the past three years, the cumulative effect of key events have changed the financial world:

  • In 2009, UBS AG agreed to deferred prosecution, paid a $780 million fine and turned over 4,000 names of its U.S account holders in order to avoid criminal charges for helping wealthy Americans hide assets.
  • High profile cases made news in which more than a dozen U.S. taxpayers pleaded guilty or were charged with tax fraud for maintaining undisclosed accounts. Even more came under criminal investigation.
  • At least 33,000 U.S. taxpayers entered offshore voluntary disclosure programs to avoid potentially higher penalties and criminal prosecution for non-disclosure of overseas accounts. In January 2012, the Internal Revenue Service (IRS) announced that it was re-opening the last such program that ended in September 2011.
  • In addition to IRS and Justice Department efforts to combat overseas tax evasion, other countries began attempts to close their tax gaps by going after non-compliant taxpayers.
  • In February 2012, U.S. prosecutors filed criminal charges against Switzerland’s oldest bank, Wegelin & Co., charging that it helped wealthy Americans hide more than $1.2 billion in foreign accounts. The indictment was the first time the U.S. government has charged a bank rather than individuals, and showed that the government will prosecute banks if they do not turn over names of U.S. account holders.


The U.S. Declares War on Overseas Tax Evasion

The federal government’s expanded efforts to combat overseas tax evasion resulted in the most far-reaching law of its kind in recent history. In March 2010, President Obama signed into law the Foreign Account Tax Compliance Act (FATCA) provisions included in the Hiring Incentives to Restore Employment Act (HIRE). Under FATCA, foreign financial institutions (FFIs) will be required, among other things, to provide information about each of their U.S. owned or controlled accounts, disclose information to the IRS and withhold U.S. taxes on these accounts if necessary. If a covered financial institution tries to evade the requirements of the new law, it risks losing its U.S. correspondent banking relationships, among other consequences.

In general, the stated aim of FATCA is to enforce overseas tax compliance while leveling the playing field for those Americans who abide by U.S. tax law rather than using foreign financial institutions (FFIs) to hide assets. Given the global nature of the financial world, enforcing these laws would not be possible without FFIs.

Under the agreement the FFIs must:

(1) “Undertake certain identification and due diligence procedures” related to its account holders;

(2) Report to the IRS annually, and

(3) “withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.

The 30-percent withholding tax applies regardless of the amount of gain, or whether there is a gain or loss on the sale (unless the appropriate disclosures are made). Financial institutions who do not comply risk losing their corresponding banking relationships.

FFIs include banks, brokerage firms and certain offshore insurance companies

FATCA also:

  • Eliminates the withholding exemption for bearer bonds.
  • Provides for new income tax return reporting requirements for “specified foreign financial assets”.
  • Adds an annual information reporting requirement for passive foreign investment companies.
  • Increases the statute of limitations for civil tax examinations to six years for omission of income from foreign sources; making the civil statute of limitations and the criminal statute of limitations equal

New FATCA Regulations

Initially, parts of the law would have gone into effect in 2012. In response to concerns about the administrative burden inherent in the law, IRS Commissioner Doug Shulman announced in July 2011 that implementation of FATCA would be phased in. He provided a timeline, ending in 2015, when withholding would have been fully phased in.

That changed in February 2012, when the Treasury Department released long-awaited proposed regulations for implementing the law, and announced agreements with five European nations to assist the U.S. in carrying out provisions aimed at combating overseas tax evasion.

In response to requests from financial institutions for additional time to build the systems necessary for information reporting under FATCA, the proposed regulations delay FFI reporting obligations on income paid to U.S. accounts until 2016 (for income earned in 2015) and on gross proceeds paid to U.S. accounts until 2017 (for proceeds received in 2016). The proposed regulations do not affect ongoing federal enforcement efforts aimed at tax evasion.

FATCA requires participating FFIs to report the name, address, taxpayer identification number, year-end account balance and payments (income and gross proceeds) of all U.S. accounts.

FFIs are required to perform electronic searches of their pre-existing accounts of $50,000 and above. For certain cash value insurance contracts the amount is $250,000 and above.

For private banking accounts, manual paper searches apply to private value accounts of over $1 million.

Also under the proposed rules, certain FFIs can avoid the process of withholding without entering into an agreement if they are “deemed compliant” To claim deemed compliant status, they must either become “certified” as a participating FFI or “registered” by registering with the IRS and satisfying certain procedural requirements. Certified deemed compliant FFIs generally include: some small local banks, retirement funds and non-profit organizations. Registered deemed compliant FFIs include banks, brokers and financial advisors with local jurisdiction clients, non-reporting members of participating FFI groups, and certain restricted investment funds. All of these financial institutions must have appropriate procedures in place to comply with the law.

Taxpayers with undisclosed accounts offshore must now decide whether to risk steep penalties and prosecution or come in from the cold.

While the regulations expand the category of deemed-compliant FFIs, most global institutions with multi-national investors will need to become participating FFIs and enter into FFI agreements to avoid withholding.

FFIs in non-partner countries will be able to register through an online system available by Jan. 1, 2013. Those who do not will be subject to withholding on certain payments connected to U.S. investments.

The phase-in was also good news for taxpayers who need time to determine their compliance status, and put their affairs in order.

FATCA Partner Nations

In February, the Treasury Department released a joint statement with France, Germany, Italy, Spain and the United Kingdom, that outlined an agreement to aid the U.S. in cracking down on taxpayers who hide
assets in overseas accounts.

In the future, other countries will be able to join as FATCA partners. In these countries, financial institutions would report U.S. accountholder information to their governments, which would in turn report the information on a regular basis to the U.S. government. Under FATCA, as originally written, all foreign financial institutions are required to enter into agreements directly with the Internal Revenue Service to report on the value and gross proceeds of U.S. taxpayers’ overseas accounts.

The agreement with the five EU countries and the proposed rules, are a concession to financial institutions which have argued that key provisions related to reporting requirements were too burdensome.

Foreign financial institutions also found it problematic that under the law as written, they would effectively be acting as an arm of the U.S. government.

FFIs in non-partner countries will be able to register through an online system available by Jan. 1, 2013. Those FFIs who do not will be subject to withholding on certain payments connected to U.S. investments.

Clark Kent to Superman

A significant amount of responsibility for carrying out FATCA mandates sits on the individual shoulders of bankers who must now add crime fighter to their job descriptions. While these provisions target FFIs, local lenders and retail account managers are considered The Gatekeepers with respect to international transactions passing through their banks.

At some level, they will be asked to police account holders and prevent customers from misusing the institution. Mistakes could mean penalties and consequences for the financial institution. As The Gatekeepers, they are responsible for preventing their financial institutions from being used for the purpose of tax evasion. Within this broader mandate is a daunting list of due diligence responsibilities, which could include document requests, checklists, intake questionnaires and new documentary evidence requirements. They are not alone. Brokers, accountants and attorneys involved in foreign transactions will have their own responsibilities.

A significant amount of responsibility for carrying out FATCA mandates sits on the individual shoulders of bankers who must now add crime fighter to their job descriptions.

Banks and other financial institutions in the U.S. and abroad should be holding regular informational seminars (at least twice yearly) for lenders and retail account managers. Those seminars should include Know Your Client guidelines, including, sources of income, marital status, tax compliance history and the client’s business, business needs and industry. Meanwhile, bankers should be seeking out compliance officers to ensure that they understand the new rules. By knowing the client, part of the due diligence battle required to protect the financial institution is won.

Local banks should use important organizations like the Florida International Bankers Association (FIBA), the Office of Foreign Asset Control (OFAC), the Financial Crimes Enforcement Network (FINCEN) and the Association of Certified Anti-Money Laundering Specialists (ACAMS) as resources.

Aggressive IRS Enforcement Erodes Secrecy

The IRS, in its FY 2012 budget request, touted a number of major accomplishments for FY 2010. It more than doubled its offshore presence with the opening of new offices in Asia and Central America. The agency also increased the numbers of law enforcement personnel at its existing offices throughout the world.

Its first successful Voluntary Disclosure Program that ended in October 2009, provided information on banks and professionals, including foreign professionals who help U.S. taxpayers hide accounts. More than 15,000 Americans with offshore accounts, some worth hundreds of millions of dollars entered the program and have provided valuable information in the ongoing federal fight against tax evasion. An additional 3,000 came forward after the 2009 program ended. The second such program, the 2011 Offshore Voluntary Disclosure initiative, ended in September 2011. So far, another 15,000 disclosures have resulted from that program, bringing the total number to at least 33,000.

Voluntary Disclosure

Taxpayers with undisclosed accounts offshore must now decide whether to risk steep penalties and prosecution or come in from the cold.

On Jan. 9, 2012, the IRS announced the reopening of its successful Offshore Voluntary Disclosure Program (OVDP), designed to encourage people hiding offshore accounts to pay what they owe and avoid potentially ruinous penalties and possible criminal prosecution. While similar to the agency’s two previous programs, the new OVDP includes several important differences for taxpayers.

  • The penalty for high net worth individuals has increased. Those who chose not to participate in the two previous opportunities to come into compliance will pay for that decision. The new penalty structure requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities and the value of foreign assets during the eight full tax years prior to the disclosure. That is an increase from 25 percent in the 2011 program and 20 percent in the 2009 ODVP.
  • Unlike previous programs, no end date was announced — yet. The IRS could withdraw the OVDP, change the terms at any time or continue it for months. Stay tuned. The agency will probably announce a deadline. Historically, voluntary disclosure programs are given an end point to encourage people to participate before the deadline.

Just as under the 2011 program, some taxpayers can qualify for a 5 percent penalty under certain circumstances, including some individuals who did not open the accounts, but inherited them. Taxpayers with smaller offshore accounts will be subject to a 12.5 percent penalty. Individuals whose overseas accounts or assets did not exceed $75,000 in any calendar year covered by the new program will qualify for the lesser 12.5 percent penalty rate.

Those who came in after the close of the 2011 program will be processed under the new OVDP.

Why Choose Voluntary Disclosure

Why disclose overseas income and financial assets, particularly if you’ve managed to fly under the federal radar for years? Aside from the ethical considerations, the risk of detection has increased significantly as the IRS strengthens its enforcement efforts. Continuing to hide or simply not report overseas assets is a gamble many have lost, along with large sums in
penalties as a result.

Just as importantly, IRS enforcement is about to take a giant leap forward under FATCA. Also, it is possible that the IRS will continue enhancing the maximum penalty percentage so that by 2015 when FFIs begin reporting, the maximum penalty could reach 50 percent, the amount applied to those who “willfully” fail to file the required Report of Foreign Bank and Financial Accounts (FBAR).

Those who participate in the program by coming into compliance are treated better by the IRS than those who don’t. People who voluntarily disclose their overseas accounts and assets generally receive lesser penalties and greatly reduce their risk of incarceration. After an investigation has begun, the option of voluntary disclosure is off the table.

Voluntary disclosure is also a win win for the IRS, which saves money on investigations when people choose to come forward. It also adds dollars to the government’s coffers.

OVDP Success

The agency’s move to reopen the program was not unexpected given the success of previous voluntary disclosure programs. As the agency announced the reopening of the program, it also touted the collection of more than $4.4 billion so far from its two previous offshore voluntary disclosure programs. The IRS has collected some $3.4 billion so far from people who participated in the 2009 program. The agency has collected an additional $1 billion from payments required under the 2011 program. However, the number will increase as the agency continues to process 2011 cases.

Who is Affected by Penalties for Non-Compliance

Many people are surprised to discover that they are considered U.S. taxpayers under the Internal Revenue Code. Anyone who fits any of the following descriptions is a U.S. taxpayer:

  • A U.S. passport holder
  • Green Card holder
  • Individual who spends 183 days in the U.S. in one year or
  • 122 days a year for 3 consecutive years

How To Participate in OVDP

Voluntary disclosure is a process that can not only bring you into compliance but offer you peace of mind. However it is also complicated. To protect your financial interests, voluntary disclosure requires an attorney and a CPA, both of whom specialize in international tax matters and have considerable ex- perience with voluntary disclosures. The accountant who advised you when you were non-compliant is in a conflict of interest with respect to Voluntary Disclosure, and should not assist you with that process. Likewise, even a good, qualified CPA will not attempt to assist you without an attorney. A CPA will not be bound under the terms of attorney-client privilege, unless he or she is hired by your attorney.

With a new program, the IRS has signaled that it is not only willing to negotiate, but has laid out the terms. For many people with a lot to lose, 2012 is the year to come into compliance – before penalties rise or the agency widens its net.


With 2013 fast approaching, the sand in the hourglass is running out for all of us affected by FATCA — financial institutions, attorneys, accounting professionals and those individuals with undeclared overseas accounts. Now is the time to make sure we know what is expected of us and our clients, and to prepare to meet the challenges presented by this new law.

Stanley Foodman

Stanley FoodmanStanley is a recognized forensic accounting and litigation support practitioner, with more than 35 years of experience in the industry. He represents clients on international and domestic tax matters, including tax compliance, corporate taxation, estate and trust tax, high net worth individuals and wealth planning in the Caribbean, Central and South America. A pioneer in the field, he has served as an expert witness and forensic accountant for some of the nation’s most complex high-profile international tax, criminal defense and divorce cases. He has been sought out as an expert in commercial and family law litigation cases in county, circuit and federal district courts in various jurisdictions. A frequent speaker, Mr. Foodman has also appeared on Bloomberg Small Business, and his articles have appeared in national law and banking journals.

About Foodman CPAs & Advisors

Foodman CPAs & Advisors is a full service accounting and litigation support firm, specializing in forensic accounting and international tax. Con- sistently ranked among the top accounting firms in South Florida, Foodman represents clients locally, nationally and internationally. For more information, please call us at 305.365.1111.