A look back at FATCA’s first four years

Texans with international business and financial interests may be familiar with a federal law called the Foreign Accounting Tax Compliance Act, or FATCA. Following its initial adoption in 2010, the statute recently completed a four-year ramp-up period and is now in full effect.

FATCA background information

American tax law requires U.S. taxpayers - both U.S. citizens and permanent residents - to pay taxes on their global income, regardless of where they reside. In response to this controversial aspect of the IRS code, some taxpayers attempt to conceal income overseas to minimize their taxes. In the past, these efforts were often successful due to the inability of the United States government to compel disclosure from foreign governments and institutions.

By enacting FATCA, however, the federal government took a new and decidedly more effective approach to cracking down noncompliance by American taxpayers with offshore accounts. This was achieved by threatening to shut foreign companies out of the U.S. marketplace if they refused to provide the IRS with information about the American taxpayers they do business with.

As detailed in a recent Forbes report, FATCA has been highly successful in making it more difficult for U.S. taxpayers to hide assets overseas. More than 80 nations as well as over 77,000 banks and other financial institutions have agreed to comply with the law rather than face the potentially devastating financial consequences of refusing to cooperate with the IRS. As a result, there are few remaining options for U.S. taxpayers seeking to hide assets offshore.

FBAR still required, even under FATCA

Even though FATCA reporting requirements are now in full effect, the new law does not replace the pre-existing obligations required by the Report of Foreign Bank and Financial Accounts, which is more commonly known as FBAR. That law requires that any U.S. taxpayer with foreign assets totaling more than $10,000 must report those assets to the IRS.

For both FATCA and FBAR, the penalties for noncompliance can be severe - even if the violation is unintentional. Taxpayers whose noncompliance is found to be deliberate can face far harsher penalties, including lengthy prison sentences and fines totaling hundreds of thousands of dollars, if not more.

Voluntary disclosure may help minimize negative consequences

In many cases, it is possible for taxpayers to avoid or minimize the negative consequences of noncompliance by taking proactive measures to correct the situation. For example, the Offshore Voluntary Disclosure Program offers taxpayers with undisclosed offshore assets to accept reduced penalties in exchange for voluntary disclosure of those assets.

While it is wise to address issues of tax noncompliance proactively rather than waiting for them to be discovered by the IRS, it is also important to get legal advice before doing so. A lawyer with an in-depth understanding of the federal tax code can advise taxpayers of the options available to them and help them minimize any potential negative consequences that they may be facing.

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