The U.S. government and the IRS have been aggressive in pursuing funds of U.S. citizens that are deposited in offshore banks. This has been especially true with the Foreign Account Tax Compliance Act (FATCA) enacted in 2010. The law forces foreign banks and governments to disclose information about money deposited by U.S. citizens. However, a recent report by the Tax Justice Network indicates that the U.S. doesn’t practice what it preaches. Tax Attorney Rob Wood explains the situation in this report, based on his Forbes article “U.S. Ranks As Top Tax Haven, Refusing To Share Tax Data Despite FATCA.”
Wood says that there is some controversy about this, just as there is now fear among American citizens and “green card” holders about the worldwide reach of the IRS. Americans are required to file returns reporting income earned anywhere in the world. That is true even if an American is required to report income in some other country. The FBAR form has become an important document for American taxpayers. The form is not hard to fill out, but the penalties can be severe for failure to file. (Wood discussed FBARs in this Forbes article.)
Wood explains that all of the efforts by the IRS to sniff out foreign bank accounts over the last ten years is the background against which the Tax Justice Network’s report must be considered. There are differing views about how much the IRS is cooperating with other countries. Wood points out that the implementation of FATCA over the past three years has required a huge effort to get agreements in place with over 100 nations to share data.
As to how much heat the FATCA report will generate, Wood suggests that the story will fade away. The IRS and the federal government have said that they are being very careful in the sharing of data, in part because some countries are not careful with such data and are not as sensitive to privacy as might be desired. Still, Wood says, the government will have to develop a more transparent and cooperative approach.
Wood explains that there are two IRS programs worthy of mention. The Offshore Voluntary Disclosure Program (OVDP) and the Streamlined program are two disclosure techniques available to U.S. taxpayers. Wood says that many taxpayers have innocently failed to make some required disclosures because they were unaware of a requirement and because the rules are very complicated. Of course, there are also people who knew what was required but thought that no one would find out. Willfulness is an important consideration in making a filing. The two programs are different in scope.
Wood says that the OVDP requires eight years of amended tax returns, eight years of other forms (such as FBARs), taxes, interest, and penalties— sometimes very steep penalties. For example, on a Swiss bank account, a taxpayer might have to pay a 27.5% penalty on the highest balance over the eight year period. In the case of funds kept in “bad banks,” the penalty can go as high as 50%.
The Streamlined program is very different, Wood explains. It is a newer program than OVDP. It involves three tax returns, six FBARs, paying unpaid taxes, and possibly no penalty on the aggregate account balance (for those who lived outside the U.S. during the three years) or 5% for those who lived in the U.S. The Streamlined program sounds much better, but it may not be available depending on a taxpayer’s facts and conduct with regard to the foreign funds. Willfulness comes into play. Using the Streamlined program requires the taxpayer to sign a statement that rules out willfulness in past conduct. Taxpayers need to be very careful before signing that statement, lest the IRS discover willful conduct.
For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network. The Legal Broadcast Network is a featured network of the Sequence Media Group.