FBAR and FATCA
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FBAR & FATCA
FBAR & FATCA: When it comes to International Tax, the IRS has developed many, many acronyms. Two of the most common acronyms are FBAR & FATCA. FBAR is Foreign Bank Account Reporting aka Foreign Bank and Financial Account Reporting (FinCEN Form 114). FATCA is the Foreign Account Tax Compliance Act. FBAR has been around since the 1970s and was developed as part of the U.S. Anti-Money Laundering Regime (AML). FATCA was developed in or about 2010, with the goal of reducing and eliminating offshore tax evasion. More than 110 countries and over 300,000 Foreign Financial Institutions (FFIs) have entered into FATCA Agreements, otherwise referred to as IGAs.
The following is a case study example of how individuals can get stuck in the FBAR/FATCA matrix:
Case Study Example
David is a U.S. Legal Permanent Resident (Green Card Holder or LPR Status) and Chinese Citizen who currently resides in the United States.
He has had his Green Card for nearly 20 years and alternates between living in the United States and living abroad.
He has numerous accounts worldwide with upwards of $1-$3 million at any given time.
The money is scattered amongst different accounts, including Investment Accounts, Banking Accounts, Mutual Funds, and Insurance Policies.
David Received a FATCA Letter
Although David’s primary residence is in the United States, when he opened up his foreign bank accounts he used an address in Hong Kong as his main address.
In addition, since he is a Chinese citizen, David did not disclose that he is a US Resident for Tax Purposes when he opened the accounts. (In other words, he does not complete a W-9).
Recently, David’s wife, Irene (who resides primarily in Hong Kong) informs David that they received a FATCA Letter at their home from the foreign financial institution. The letter requests that David and his wife (as a Green Card Holder) confirm their US residence status.
After combing through different expat forums, they decide to do nothing.
David and Irene’s Information is Sent to the IRS
Multiple foreign banks have already provided the IRS with David and Irene’s information regarding their foreign accounts as part of their standard FATCA and CRS reporting process.
Unfortunately for David and Irene, they had already been selected for audit on an unrelated matter at around the same time that the IRS received the notice from Hong Kong.
Specifically, David and Irene were being audited because of deductions taken as part of a consulting business they operate.
David and Irene are Audited
David and Irene are audited by the IRS.
They receive a notice from the IRS in the form of a Request for Documents (IDR) requesting various different documents.
In addition, they are asked the name of their CPA or other tax preparer.
David and Irene believe they can talk their way out of the issue, and that because they reside overseas they will be fine.
After doing more research, David realizes that Hong Kong entered into a IGA (Intergovernmental Agreement) with the United States and that his money overseas is subject to possible levy or seizure.
It Gets Worse
While in Hong Kong, David and Irene use a licensed CPA who prepared their taxes.
The CPA was aware that David and Irene had foreign accounts but did not put that information on the tax return.
David and Irene were also aware of this but decided to roll the dice and take their chances.
They intentionally checked off “No” for Question 7 on Schedule B.
Therefore, David and Irene will not qualify for the Streamlined Program or make a claim for “Reasonable Cause.”
Instead, David and Irene are considered willful.
It Gets even Worse
David and Irene are initially being audited for three years, so the total value of the penalty they could get hit with is 100% value of the foreign accounts — which is just the FBAR penalties. (50% per year, up to a 100% maximum)
And, since David and Irene have more than $5,000 of unreported foreign earnings from certain investments, the amount of time the IRS has to audit them expands to six years.
Fianlly, if the IRS discovers the Fraud, there is no Statute of Limitations — and the IRS can go back and audit them as far as they would like.
Passport Revocation, Customs Holds & Loss of Green Card
If David and Irene decide that they are not going to pay the fine and just “hide out” in a foreign country, their ability to travel may be severely impaired.
That is because (working in conjunction with foreign countries) the United States could try to place a hold on David and Irene’s passports and/or ability to travel.
It could result in David and Irene losing their passport (if it is US-based) and/or be subject to a customs hold at the airport, and forced to answer questions from the US government.
Moreover, the U.S. could also deny the renewal of the Green Card or deny Naturalization, due to Tax Fraud and Evasion.
The IRS Special Agents Also want to Investigate
Since David and Irene had over $3 million of unreported foreign accounts at the time of Audit, nearly $100,000 in annual unreported foreign income, and used a CPA that also was in trouble, David and Irene may also receive a visit from the IRS Special Agents.
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