You may not realize it, but banking secrecy as we’ve known it is dead. Seventy-eight countries have entered into or have agreed to be treated as if they have entered into an automatic account reporting agreement (IGA) with the U.S. More are engaged in current discussions. The reason is FATCA (the Foreign Account Tax Compliance Act). FATCA was signed into law in the U.S. in March 2010. FATCA requires Foreign Financial Institutions (FFI) to act as reporting agents for the U.S. Treasury or face the certainty of an existential threat in the form of 30% withholding on their “withholdable” U.S. source flows of funds and risk the loss of U.S. correspondent banking relationships.
FATCA requires participating foreign financial institutions (PFFI) in partner country financial institutions (IGA 1A PFFIs) and IRS registered foreign financial institutions in countries without an IGA 1A (PFFI) to annually report to the U.S. Treasury through their own governments or directly to the IRS in much the same way that U.S financial institutions already report.
Beginning in March of 2015, financial institutions with qualifying U.S. owned and controlled accounts in PFFIs will be required by local law to report the accounts’ actual beneficial ownership, U.S. taxpayer identifying number and physical address as of December 31, 2014 to the U.S. Treasury. The same information will be reported for IGA 1A PFFIs in September of 2015. Accounts closed after June 30, 2014 will also be reported. For years 2015 and 2016, interest and dividends earned on the accounts will also be annually reported to the U.S. Treasury. Beginning in 2017, the gross proceed resulting from the sale of an asset that could produce withholdable payments will also be reported (i.e. shares of stock). After 2017, all of the above will be reported annually to the U.S. Treasury.
U.S. taxpayers with previously unreported qualifying offshore financial accounts in PFFIs have a limited time to voluntarily regularize their reporting status with the U.S. Treasury before it begins receiving information from PFFIs. FATCA enhanced certain penalties for underreporting income and extended the civil statute of limitations on international transactions from three years to six years. It requires the PFFIs to maintain the account records of U.S. taxpayers for six years to give IRS ample time to audit U.S. taxpayers based on the information that it receives from the PFFIs.
Regularizing their status provides out-of-compliance U.S. taxpayers with financial accounts in PFFIs limited choices of how to regularize. They may choose to:
1. Do nothing and risk almost certain contact from IRS;
2. “Quietly” file previously unfiled returns or amend previously filed inaccurate filings risking further inquiry from IRS.
3. Enter into the IRS Streamlined Disclosure program if they have not previoU.S.ly filed certain returns and otherwise qualify for the program.
4. Enter into the IRS Offshore Voluntary Disclosure Program (OVDP); or
5. Enter into the OVDP and then opt out of it.
Each method of regularizing compliance carries costs and risks. There is no “cookie cutter” approach to resolving regularization in these cases. An analysis of each particular case is the first step to peace of mind followed with decisive action.