Foreign Funds Trapped By Sanctions and OVDI

by Sanford Millar

The United States has sanctions regulations in force against over twenty countries, affecting the ability of U.S. persons to transact business in numerous ways. Among the enforcement mechanisms is the ban on financial transactions, including processing of money transfers from sanction country persons. An example is a person who is citizen Country A, a country now subject to sanctions, who opened an account at a financial institution in Country B prior to implementation of U.S. sanctions under his/her country A passport. Assume country B financial institutions honor the U.S. sanctions. Also assume the Country A person obtains permanent residence in the U.S. but does not report the account in Country B on either his/her income tax return, nor does he/she file a Report of Foreign Bank Account (FBAR). Finally, assume that the individual, who is now a U.S. taxpayer wishes to transfer the financial assets from Country B to a financial institution in the U.S., but the Country B financial institution refuses the request because the account was opened under the Country A passport and the sanctions are still in place. What should the now U.S. taxpayer consider doing.

The now U.S. taxpayer has U.S. compliance problems. First, To get relief from the sanctions under a possible sanctions exemption, the individual must satisfy the Country B financial institution and its regulators, that he/she is a U.S. person and the transaction is exempt. If the institution will accept the change in status to that of a U.S. person from country A status, the same institution may very well demand proof of compliance with U.S.income tax and FBAR reporting rules as required under the Foreign Account Tax compliance Act (FATCA) “due diligence”. This is where the individual is now trapped. In order to certify compliance with U.S. income tax and FBAR reporting he/she may well want to consider entering the Offshore Voluntary Disclosure Program (OVDP). The OVDP will require income tax reporting of income and dividends for all years beginning with Permanent Residence and the filing of late FBAR’s. IF there is no reportable income or dividends the account(s) must still be reported for FBAR purposes for each year in which aggregate account balances exceed $10,000. Other options may exist to establish exemption from the sanctions such as obtaining a license or license waiver from the Office of Foreign Asset Control (OFAC) of the U.S. Treasury, but the process will still in all likelihood require proof of income tax and FBAR reporting.

For those U.S. taxpayers whose foreign accounts were opened under Sanctions Country identification the process of transferring those funds to the U.S. may be somewhat time consuming and produce another reason to enter the OVDP. but blocked account access can be worse. Failure to come forward may ultimately mean imposition of civil and/or criminal penalties for “willfull” failure to file FBAR’s and tax evasion. Ultimately FATCA may result in disclosure of the account to the IRS and the funds may still be blocked.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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