IRS Generates $8 Billion from Voluntary Disclosure. Expect More FATCA Reporting in 2016 and Beyond
The Internal Revenue Service faces many challenges when it comes to enforcing compliance with U.S. tax laws for individuals with offshore assets and income sources. To strengthen these efforts, the IRS has implemented offshore voluntary disclosure programs (known as OVDP’s) as a way to encourage U.S. taxpayers to come forward to meet their tax obligations related to earning income abroad or having undisclosed offshore assets. The OVDP’s support comprehensive efforts to address tax evasion issues through targeted enforcement, prosecution and implementation of the Foreign Account Tax Compliance Act (“FATCA”). Results of voluntary disclosure programs and FATCA implementation have been encouraging to the extent that the IRS has vowed to expand FATCA and strengthen enforcement strategies. The programs have proven effective in helping taxpayers become current with their tax liabilities, raising IRS collections and discouraging offshore tax evasion for taxpayers with assets and income abroad.
FATCA was introduced in March 2010 as part of a strategy to crack down on U.S. taxpayers who use foreign financial institutions (FFI’s) to conceal their assets to avoid paying U.S. taxes. This piece of legislation effectively gives the Department of Justice (“DOJ”) and the IRS blanket authority to investigate suspect accounts held by individuals and businesses in offshore institutions. FATCA forces FFI’s to comply with stringent reporting requirements for any accounts that may be held by U.S. taxpayers in countries that have signed inter-governmental agreements(IGA’s) or, to disclose specific account holder information to the DOJ and the IRS. Serious sanctions and penalties may be imposed for non-compliance.
The intent of FATCA was to go after high net worth individuals who were taking advantage of offshore tax havens to shield assets from U.S. tax obligations. However, FATCA provisions include disclosing information on all accounts held in the name of U.S. citizens. This had unintended consequences, including closure of accounts when businesses and individuals failed to meet stringent documentation requirements and denial of new account applications that affected even those who had limited income and assets. Countries that have signed IGA’s include Spain, France, Germany, United Kingdom, Singapore, Switzerland and Japan.
The IRS has indicated that FATCA Offshore compliance and FATCA provisions will top 2016 priorities. These efforts will include facilitating exchange of FATCA information worldwide to root out unreported and under-reported income and untaxed assets. Aside from reporting requirements, FATCA also obligates FFI’s to withhold taxes and to report account activities that may indicate fraud and tax evasion.
Compliance with FATCA Provisions
U.S. citizens who have assets held in FFI’s should use Form 8938 to report those assets as part of their annual tax returns. The reporting thresholds vary depending on certain factors.
• If you live in the U.S. and you are single, you may have to comply with FATCA requirements when your offshore financial assets are valued at $50,000 at year-end or $75,000 anytime during the year.
• If you are U.S.-based, married but filing separately, the same thresholds as outlined above applies.
• If you are married and living in the U.S., the value of your specified foreign assets must be reported starting at a year-end valuation of $100, 000 or if the value met or exceeded the $150,000 level during the tax year.
• If you live abroad, married and filing jointly, the threshold is $400,000 at year-end or $600,000 at any time during the year.
• If you live abroad and you are single, the foreign asset filing threshold is $200,000 at year-end or $300,000 during the year.
Filing Form 8938 does not take the place of other reporting requirements such as the FBAR, the Report of Foreign Bank and Financial Accounts, and FinCen Form 114. Failure to file Form 8938 and the FBAR may lead to hefty penalties, starting with $10,000 for failure to file. When the IRS sends a notification and you fail to file your Form 8938, another $50,000 is added to your accrued penalties. You could also be liable for an additional 40% penalty based on underpayment of taxes due to non-disclosure of offshore assets. Also, being compliant with these filing requirements now does not cure past non-compliance.
Impact of FATCA Reporting Requirements
Under FATCA provisions, banks, investment houses, brokers, specified insurance companies and some non-financial entities are required to report account information to the IRS and DOJ if the account holders are U.S. citizens. This means that when you set up new accounts with offshore entities, you will be asked to provide information about your citizenship. FATCA reporting requirements apply even when only one spouse is a U.S. citizen or only one spouse lives abroad.
To clarify, the OVDP’s implemented in 2009, 2011 and 2012 were intended to encourage taxpayers with offshore assets to comply with their tax obligations and become current on tax liabilities accruing to ownership of assets in FFI’s and any income earned abroad. The 2009 OVDP resulted in 18,000 disclosures and a $3.4 billion collection that covered back taxes, penalties and interest payments. In 2011, the OVDP generated 15,000 disclosures and revenue collections of $1.6 billion for 75 percent of the accounts that were finalized in that year. In 2012, a third program generated 12,000 disclosures, bringing total collections for all OVDP opportunities to $8 billion as of October 2015 according to Douglas W. O’Donnell, commissioner for the Large Business and International Division, which is part of the IRS.
A separate report prepared by the Treasury Inspector General for Tax Administration pointed out that the IRS stood to generate about $21.6 million more in penalties alone with more efficient enforcement action on taxpayers who were disqualified or who withdrew from the OVDPs. Taxpayers who participate in voluntary disclosure programs qualify for reduced penalties. When FATCA reports reveal the existence of unacknowledged accounts before the taxpayer applies for OVDP participation, the IRS may deny access to reduced penalties and other benefits of voluntary disclosure.
The Future of FATCA
Since FATCA was implemented in 2010, it has proven effective as an offshore asset tracking strategy and in raising tax compliance for taxpayers with offshore accounts. IRS collection figures demonstrate the value of voluntary reporting as a key component of compliance efforts. As such, the IRS is expected to put more muscle into FATCA and offshore compliance strategies in 2016 and beyond. These efforts may include automatic information exchange for FATCA-related issues, greater cooperation with FFIs, foreign governments and the IRS to pinpoint potential target accounts and improved tax withholding compliance by offshore financial institutions.