Tax Law Center Blog

By Parag P. Patel, Esq. | Updated August 30, 2016

The IRS has tightened its enforcement of the Foreign Account Tax Compliance Act (“FATCA”). FATCA was enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs), i.e., foreign banks, to report to the Internal Revenue Service (“IRS”) information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. FATCA requires all U.S. paying agents to withhold tax, at a rate of 30 per cent, from payments of U.S. source income to non-U.S. persons who are classified as FFIs unless that FFI is located in a country which has entered into an intergovernmental agreement (“IGA”) with the IRS to report information on relevant account holders to the IRS.

An IGA is a bilateral agreement with the U.S. to simplify reporting compliance and avoid FATCA withholding. Since the implementation of FATCA, the IRS has permitted numerous nations to benefit from having status as IGA, even if they did not have a finalized IGA in force.

In IRS Announcement 2016-17, however, the IRS pressures nations that have been lagging on this process to substantially complete it by year-end, or risk their FFIs to be subject to the 30 percent withholding in coming years. Hence, foreign banks in jurisdictions that cease to be considered as having an IGA in effect will not be able to rely on the IGA and will have to enter into FFI agreements to comply with their FATCA obligations, including reporting information to the IRS and withholding.
Each country with an IGA that is not yet in force and that wishes to continue to be treated as having an IGA in effect must provide to Treasury by December 31, 2016, a detailed explanation of why the IGA is not yet in force and a plan (including dates) intended to be followed to sign the IGA.

This Announcement reflects the IRS’s aggressiveness to gather information on American-owned bank accounts in foreign nations, which has been repeatedly delayed due to the complexities that arose in the implementation of FATCA. The risk of the substantial withholding tax under FATCA for FFIs in non-IGA nations will incentivize lagging nations to sign IGAs. As a result, we expect many more nations to sign IGAs and start sharing bank information in the near future.

There are millions of Americans (citizens and green card holders) currently living overseas. Unlike almost every other tax regime in the world, the U.S. taxes Americans no matter where they live. Thus, every American should expect to have to file an annual tax return.

While many Americans have chosen not to stay tax-compliant while abroad, this choice is becoming increasingly risky and expensive. The following are excellent reasons Americans should remain compliant with the US Internal Revenue Service.

1. With the new Foreign Account Tax Compliance Act (FATCA), you will likely be involuntarily discovered.
It has become more difficult to open or maintain a bank account overseas without having to sign an IRS Form W-9 or other U.S. tax-related documentation. This increasingly common bank procedure is a result of the Foreign Account Tax Compliance Act, which requires foreign banks and other financial institutions, among other things, to gather and report information to the IRS about their U.S. customers or face stiff tax-withholding penalties on U.S. investments.
Many Americans have received letters from their bank advising them of the bank’s FATCA participation and reporting obligation. FATCA has left many with no choice but to stay compliant or come clean with the IRS if they are behind in their filings.

2. Staying tax-compliant doesn’t necessarily mean paying tax to the IRS.
While the U.S. government does not absolve Americans living abroad from filing tax returns, it does have some beneficial tax rules that often lead to no actual tax payment obligation. For instance, some people can use the Foreign Earned Income Exclusion to exclude foreign earned income (U.S. $101,300 for the 2016 tax year). Foreign Tax Credits can also be utilized to reduce or eliminate one’s U.S. tax payment obligation. However, is that in order to claim the Foreign Earned Income Exclusion or Foreign Tax Credit, you must timely file your U.S. income tax return.

3. Discovery of non-compliance means large penalties.
Tax delinquency can result in a punitive monetary penalties and, in some cases, even criminal penalties. In addition, under a recently enacted law, the State Department now has the authority to cancel your U.S. passport if your tax delinquency amount reaches a $50,000 threshold (to be adjusted in future years for inflation).

All of these potential consequences should give noncompliant Americans reasons to become compliant. Taxpayers who have failed to comply with their US tax filing and information reporting obligations should be aware of and seek appropriate legal counsel regarding which voluntary disclosure program(s) to pursue.

About the Author

Parag P. Patel, Esq. brings over three decades of experience to individuals and businesses facing complex tax problems. Holding advanced degrees from Georgetown University Law Center (J.D.) and New York University School of Law (LL.M. in Tax Law), the nation’s top tax programs, Mr. Patel delivers sophisticated and creative strategies in complicated federal and state audits, penalty abatements, and foreign asset/income reporting. His practice emphasizes international tax matters, specifically foreign financial account reporting (FBAR), voluntary disclosures, and penalty defense.

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