New Law’s Reporting Requirements Make It Very Likely That the IRS Will Now Know About Your Foreign Account

Under the recently enacted Foreign Account Tax Compliance Act (“FATCA”), foreign financial institutions (“Financial institutions” is broadly defined to include banks, mutual funds, funds of funds, exchange-traded funds, hedge funds, private equity and venture capital funds, etc.) must disclose their customers to the IRS.  Institutions that do not agree to comply with the reporting requirements of FATCA will subject all of their customers (even non-U.S. customers) to 30% mandatory withholding on all transfers of funds from the U.S. to the foreign institution.

Given the severity of these provisions, it is expected that most foreign institutions will ultimately comply with these account disclosure requirements.  Note also that FATCA imposes additional disclosure requirements (via a new Form 8938) on U.S. individuals with foreign assets (e.g., foreign accounts, foreign-issued stocks or securities or any interest in a foreign entity).

Thus, you should assume that the IRS will eventually be informed of your foreign account, and criminal prosecution for non-disclosure and non-reporting will likely follow.  Successful criminal prosecution will result in a fine of 50% of the highest value of the account or entity, plus an additional $250,000 fine, plus a possible prison sentence.

You should your attorney as soon as possible if you have undisclosed foreign accounts or entities, so that you can enter the 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI) program and avoid criminal prosecution.

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