Foreign Financial Account “Due Diligence” Under FATCA

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The recent agreement between the United States and Great Britain provides an example of inter-governmental cooperation on exchange of taxpayer financial account information. The agreement is mutual, meaning that the information regarding U.S. taxpayers accounts will be provided by the British Government and information regarding U.K. taxpayers will be provided by the U.S to the British.

What kind of information will be provided? Well that will depend upon the account balance at the end of the year beginning 2013. For preexisting individual accounts with a year end balance of $50,000 or less there is no information that needs to be provided. Interestingly, $50,000 is the point at which a Form 8938 Statement of Foreign Financial Asset must be filed for income tax purposes. Foreign Bank Account Reports (FBAR’s) must be filed if the aggregate account balance is $10,000 or more at any time in the tax year. For accounts with balance greater than $50,000 but less than $1,000,000 (Lower Value Accounts) a search of electronic records by the financial institutions is allowed. The search will look for indications of U.S. residence or citizenship. For accounts with year end balances greater than $1,000,000 (Higher Value Accounts) the foreign financial institution must perform an electronic record search and a paper record search, in most cases, and include direct reporting by relationship managers.

An interesting note is that all accounts under the same taxpayer identification number will be aggregated and joint accounts will be reported separately for each account holder named.

What all this means is that more and more taxpayers with foreign financial accounts will find themselves subject to audits and enforcement. The U.S. – U.K. inter-governmental agreement demonstrates that the problem of cross-border tax non-compliance is pervasive and that the U.S. is not alone in seeking to reverse the tax leakage. Several other agreements have been negotiated and many more are expected. It is a wise move to come forward before being caught. The Offshore Voluntary Compliance Program (OVDP) provides an opportunity to avoid the draconian penalties for willful non-compliance with the Foreign Bank Account Report (FBAR) rules. A finding of “willful” conduct can result in the imposition of a penalty of 50% of the aggregate account balance per account per year., The OVDP program minimizes that risk substantially. It also virtually assures waiver of criminal prosecution for tax evasion, and willful failure to file FBAR’s if the taxpayer complies with the program requirements.