Wire Transfer Audits and FATCA
What Every Taxpayer Needs to Know
FATCA: The Foreign Account Tax Compliance Act was signed into law by President Obama on March 18, 2010. There are two purposes for FATCA.
The United States government began to track the movement of funds as anti-money laundering and national security measures in the 1970’s. Following the September 11, 2001 attack on the World Trade Center in Manhattan, the United States Treasury intensified its efforts to track the money of foreign terrorists. IRS found that it needed the cooperation of foreign financial institutions.
As IRS gained expertise in tracking foreign money after “9/11”, IRS discovered that many sophisticated taxpayers were avoiding income taxes and “parking” their untaxed income offshore to avoid computerized tax surveillance. Again, IRS found that it needed the cooperation of foreign financial institutions to deal with this additional tax compliance issue.
The United States responded to both urgent needs by requiring foreign financial institutions to report the assets and income of United States citizens to IRS and U.S. Treasury computers. The huge effort the United States has poured into FATCA is reflected in the IRS’ FATCA webpage.
In this website, foreign financial institutions are reminded of their obligation to register with IRS and agree to report to the IRS certain information about their U.S. accounts, “including accounts of certain foreign entities with substantial U.S. owners.” Generally, “foreign financial institutions that do not both register and agree to report certain information about U.S. accounts, face a 30% withholding tax on certain U.S.-source payments made to them.” Based on Treasury regulations and the IRS website, foreign financial institutions are providing information such as the following to IRS computers:
Account holder’s name
Account holder’s U.S. tax identification number
Account holder’s address
Account balance or value
Is the account holder “recalcitrant/non-consenting”
Gross proceeds paid form the sale or redemption of property
Gross proceeds paid to custodian accounts
With Inter-Government Agreements (IGAs) signed with 113 jurisdictions, a brief internet search suggests that many if not most foreign financial institutions are complying with FATCA. For example, a review of the IRS website showed that over 100 foreign financial institutions situated in a very small tax haven in the Caribbean had account numbers with IRS. My guess is that all financial institutions in this tax haven had registered with IRS, although it was not possible to determine if all registrants were in full tax compliance with FATCA.
2. The Patriot Act and the Bank Secrecy Act
Under the Patriot Act and the Bank Secrecy Act banks issue suspicious activity reports when a wire transfer comes into a depositor’s account and the bank believes they have detected a violation of Federal law or activities related to money-laundering. Federal law requires that a financial institution and its directors, officers, employees and agents who report suspected or known criminal violations or suspicious activity may not notify any person involved in the transaction that the transaction has been reported.
3. Foreign Financial Disclosure Forms
IRS also uses Foreign Financial Reports to combat money-laundering and international terrorism and to determine if United States Persons have complied with the tax their United States tax obligations. These forms include:
(1) FinCEN Form 114: Foreign Bank Account Reports
These are so-called FBARs: Foreign Bank Account Reports the generally report and foreign financial accounts over which a U.S. Person has an ownership interest or has the authority to direct payments (signature authority). This form is filed with the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury.
(2) Form 8938: Certain Foreign Financial Assets
This form reports foreign financial assets and is attached to the United States income tax returns of citizens and residents of the United States and certain entities.
(3) Form 5471: Certain Foreign Corporations
This form reports the income of foreign corporations over which a U.S. Person has an interest. Under the recently enacted Tax Cuts and Jobs Act, in certain circumstances the income of certain foreign corporations may have to be included in the income of the U.S. Person.
(4) Form 926: Transfers to Foreign Corporations
This form reports transfers of money and property to certain foreign corporations.
(5) Form 8858: Foreign Disregarded Entities
Sometimes citizens and residents of the United States operate businesses abroad through so-called disregarded entities, such as limited liability companies organized under the laws of a county than the United States.
(6) Form 3520: Foreign Trusts and Receipt of Gifts/Inheritances from Non-Resident Aliens
This form reports gifts from people who are non-resident aliens to people who are citizens and residents of the United States. This form also reports the creation of foreign trusts by United States citizens and financial transitions (such as loans) between foreign trusts and United States citizens and residents.
Generally, IRS may impose criminal penalties on United States citizens and residents who intentionally fail to timely file these financial disclosure forms. The civil penalties arising from the unintentional failure to file these forms is also significant. Generally, these civil penalties are:
Civil penalties are $10,000 per form, per year. For example, if Forms 8938: Certain Foreign Assets have not been filed for five years, the civil penalty negotiations begin at $50,000 or $10,000 TIMES 5 years. The penalty rises if this form is not filed within 90 days after IRS requests this form.
If a Form 926 is not timely filed, the penalty is 10 percent of the fair value of the unreported transfer up to a maximum of $100,000. The penalty computation varies depending on whether the failure is intentional or unintentional.
In addition, the statute of limitations is tolled. It does NOT begin to run on the entire return and taxpayers are exposed to audits for “old” years where financial records may be hard to obtain.
4. Wire-Transfer Audits
IRS audits of unreported foreign income are triggered by (1) information received from foreign financial institutions; and (2) suspicious activity reports made by foreign financial institutions to United States citizens and residents. In our practice, we call these audits “wire-transfer audits.” A key objective of these “wire-transfer” audits is to impose the penalties arising from the failure of the taxpayer to comply their obligation to timely file foreign financial disclosure forms. See above discussion.
Wire transfer audits are serious. In short, IRS is looking for the criminal violations of the tax laws. IRS is looking for taxpayers who have attempted to “game” the system by failing to report their full income and “parking” the unreported money abroad. IRS is also looking for money belonging to international terrorists Thus, IRS personnel do NOT disclose their ultimate objectives. They do not, for example, typically mention the wire transfers their triggered their audit.
M. Robinson & Company has significant experience helping exposed taxpayers. Based on our experience, we have learned:
First, it is best to be proactive and to contact IRS before IRS contacts the taxpayer. See Voluntary Disclosure, immediately below.
Second, if IRS commences a wire-transfer audit before the taxpayer has made a voluntary disclosure it is usually best to cooperate fully with IRS. As noted above, IRS already knows about the unreported foreign cash flows. These cash flows may be sufficient to support an indictment. Foreign tax situations, however, are often complicated and IRS has limited time and personnel. IRS will often reward a cooperative taxpayer with a lesser penalty, such as a civil fraud penalty, instead of a criminal penalty. If the Justice Department indicts the taxpayer, we have also found that given full cooperation Justice Department officials are more likely to accept a plea bargain that avoids significant jail time. Finally, judges tend not impose significant jail time where the taxpayer has shown full cooperation, made prompt payment of taxes due, and demonstrated sincere contrition.
These are difficult and expensive cases. In our experience it is essential that we maintain client confidentiality and the attorney/client privilege through Kovel letters. We also work cooperatively with criminal defense attorneys since our expertise is in tax audit defense.
5. Voluntary Disclosure
There are a number of voluntary disclosure programs available. They include:
Domestic Voluntary Disclosure Programs
Offshore Voluntary Disclosure Programs
The penalties under voluntary disclosure range from zero to 50 percent depending upon:
Whether the taxpayer’s failure to pay was willful or non-willful.
Whether all foreign-source income was timely reported.
Whether the taxpayer was physically present outside the United States for more than 330 full days during one of three look-back years.
It may also be possible to avoid all penalties based on the facts and circumstances of each case. Indeed, we have successfully avoided all penalties in several appropriate cases based on the facts and circumstances. We have also assisted a taxpayer pay a 20 percent penalty where the taxpayer’s deceased husband had intentionally violated the bank secrecy laws of the United States.
6. Complimentary 20-Minute Telephone Conference
We provide prospective clients with a complimentary 20 minute telephone conference to determine whether we can help them and whether the prospective client should come to the office for a compensable meeting. This telephone conference is subject to the attorney/client privilege – even if the prospective client does NOT become a client of our firm.
 See, generally, https://en.wikipedia.org/wiki/Foreign_Account_Tax_Compliance_Act#Background (last visited February 18, 2018)
 For a clear primer on the Bank Secrecy Act of 1970, see the FDIC article, “Bank Secrecy Act, Anti-Money Laundering, and Office of Foreign Assets Control,” https://www.fdic.gov/regulations/safety/manual/section8-1.pdf (last visited February 19, 2018).
 “The BSA was originally passed by the U.S. Congress in 1970 and signed by President Richard Nixon into law on October 26, 1970. … It has been amended several times, including provisions in Title III of the USA PATRIOT Act….” See, generally, https://en.wikipedia.org/wiki/Bank_Secrecy_Act (last visited February 19, 2018).
 See, generally, https://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act-fatca (last visited February 18, 2018).
 https://www.irs.gov/businesses/corporations/information-for-foreign-financial-institutions (last visited February 19, 2018)
 See generally, Treas. Reg. 1.1471-4.
 A list of the jurisdictions which have signed IGAs under FATCA can be found in the FATCA Resource Center on the U.S. Treasury Department’s website, https://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx (last vistied February 19, 2018).
 The Patriot Act was signed into law by President George W. Bush on October 26, 2001. “With its ten-letter abbreviation (USA PATRIOT) expanded, the full title is “Uniting and Strengthening America By Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.” See, generally, https://en.wikipedia.org/wiki/Patriot_Act (last visited February 19, 2018).
 See Footnote 2, above.
 For details on these disclosure forms, see the instructions for each form briefly listed below.
 See, generally, Sections 951 and 951A of the Internal Revenue Code as amended by the Tax Cuts and Jobs Act.
 The statute of limitations does not begin to run on the entire return until the missing international information reporting forms are filed.
 See, generally, Section 6663 of the Internal Revenue Code.
Acknowledgement: I acknowledge the assistance of Attorney Patricia Weisgerber, an associate at M. Robinson Tax Law, who reviewed this Blog and made numerous helpful suggestions.