Civil and Criminal Penalties Headed for Taxpayers Under FATCA

Written by Steve L. Waserstein, Carlos A. Nunez and Daniel Foodman

On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment ("HIRE") Act. The Foreign Account Tax Compliance Act ("FATCA") was enacted as part of the HIRE Act as an effort by the U.S. government to combat tax evasion by U.S. taxpayers with investments in offshore accounts.

FATCA is a runaway train of civil and criminal penalties headed for U.S. taxpayers with foreign accounts and other assets overseas. When foreign financial institutions begin reporting on U.S. customers, as they are required to do under FATCA, the likelihood of non-compliant taxpayers being hit with hefty civil and criminal penalties will increase significantly.

Foreign financial institutions ("FFI") - banks, brokerage firms and some offshore insurance companies - will be required to enter into an agreement with the IRS to report annually on U.S. owned or controlled accounts. If the taxpayer is not compliant with FATCA, FFIs will also be required to withhold and pay the IRS 30 percent of any payments of U.S. source income, plus gross proceeds from the sale of securities that generate U.S. source income.

Even though foreign financial institutions will not be required to begin complying with FATCA's reporting requirements until 2013, they are in the process of putting the necessary systems in place, and the IRS has stepped up enforcement of tax laws for U.S. taxpayers with accounts and assets overseas. Indeed, banks are already beginning to turn over information on accounts held by non-compliant taxpayers to the federal government.

It is important to note that taxpayers are already required under current law to report overseas income. Also, under current law, U.S. taxpayers with certain foreign financial accounts and foreign business interests are required to file a Report of Foreign Bank and Financial Accounts (FBAR) and Form 5471 if they are officers, directors, or shareholders in certain foreign corporations.

If an individual does not file the required disclosures, this failure will certainly come to light when the reporting requirements for foreign financial institutions begin in June 2013. Once these violations are revealed there will be no going back. Taxpayers will incur more penalties and an increased IRS statute of limitations of 6 years.

In addition to the current reporting requirements, FATCA imposes a new filing requirement, Form 8938, a Statement of Foreign Financial Assets, which requires U.S. taxpayers holding foreign financial assets of more than $50,000. Form 8938 must be attached to the taxpayer's annual U.S. tax return. Those assets include foreign bank accounts, personally held real estate, pension assets, brokerage accounts, interests in foreign partnerships and hedge funds. The failure to report will result in a minimum penalty of $10,000 and a maximum penalty of $50,000. In addition, a 40 percent understatement penalty will be assessed for underpayments of tax from non-disclosed foreign financial assets.

Taxpayers could also be subject to criminal penalties found in Sections 7201-7212 of the Internal Revenue Code with a potential sentence of imprisonment of up to five years, if convicted. For example, under Section 7201, anyone who willfully attempts to evade or defeat any tax imposed by title 26 of the U.S. Code or any payments, if convicted, will be guilty of a felony punishable by up to five years imprisonment, as well as be subject to court costs and a potential fine of up $250,000 for individuals, and $500,000 for corporations.

The list of civil and criminal penalties is a like an ongoing menu including a penalty of 75 percent of unreported income plus interest.

Although the government's Offshore Voluntary Disclosure Initiative ended in September of 2011, voluntary disclosure is still the only and best option for taxpayers who would like to get out of the path of FATCA's coming disclosures. While this legal process is not tax amnesty and is not free, it can limit taxpayers' civil penalty exposure and criminal penalties that could be potentially ruinous.

Founders Steve Waserstein, Carlos Nunez and Daniel Foodman, combine their tax, criminal, and accounting backgrounds to advocate and defend their clients' interests in connection with U.S. tax laws and compliance matters before the Internal Revenue Service and Department of Justice.

In summary, WNF Law, PL - Waserstein Nunez & Foodman represents an exclusive list of clients who require legal representation in its collective areas of expertise. Located in Miami, Florida at 201 S. Biscayne Boulevard on the top floor of the Miami Center (34th Floor). Please contact Brenda Bassett at 305 760 8500, Bsb@WNFLaw.com to learn more about WNF Law, PL or at its website www.WNFLaw.com.