FATCA: a law that will surely reduce tax evasion

Dayle O. Blair, Contributor

How will FATCA work?

THE FOREIGN Account Tax Compliance Act (FATCA) is an important development in the United States of America's efforts to improve tax compliance, with the Internal Revenue Services (IRS) focusing on Foreign Financial Assets (FFA) and offshore accounts in order to catch tax dodgers, tax cheats, and even those living overseas and unaware that they should file tax returns and pay Uncle Sam.

There are two aspects of FATCA, one that puts the onus on the persons filing income-tax returns and the other on Foreign Financial Institutions (FFI) to report to the IRS whenever a United States person has more than US$50,000 in FFA.

Persons filing income tax returns

A United States citizen, green-card holder, corporation, partnership, etc. filing a tax return is required to attach a tax form with certain relevant information, if certain thresholds are met, with respect to financial assets that are held offshore i.e. outside the United States.

Financial institutions

With respect to FFIs, the objective of FATCA is the direct reporting of FFA and all the required information on their accounts holders whenever the US$50,000 threshold is met.

What FFIs must do under FATCA?

FFIs must report details of all accounts held directly or indirectly by US taxpayers, carry out identity checks on account holders, file annual reports on any accounts held by US taxpayers that include: the name, address and taxpayer identification number (TIN) of all US-account holders.

If the account is held by a US entity, the name, address and TIN of each substantial US owner of the entity, the account number, the US dollar end-of-year balance in the account, gross deposits and withdrawals in the year, gross amount of dividend, interest, other income such as the sale of property paid to the account and the name and address of the branch that maintain the account.

What happens to FATCA information?

To minimise the reporting burden, the US and some countries like the UK, France, Spain, Germany, Japan and Italy plan to share information on US citizens.

This will set up an international tax network, with the US reciprocating, by providing information to the network on those countries citizens on their financial assets held in US financial institutions. Taxpayers in every county that join can cross compare information submitted on tax returns and other government documents, thereby, verifying that everyone is paying the correct amount of tax in their country.

What the IRS will do with the information received?

The IRS will
use the information provided by the taxpayers and the FFIs to review
and analyse the taxpayers' tax situations. Upon a review of tax
situation, if the IRS reasonably believes that the taxpayers have
unreported income or have failed to file tax returns, then the IRS will
assess the taxpayers for additional income, apply civil penalties and
interests where applicable, inform the taxpayers and, if criminal
penalties apply, then the IRS will forward the information to the
Criminal Investigation Division for prosecution.

With
respect to taxpayers filing a tax return and failing to report FFAs on
the required tax form, the IRS will assess a FATCA penalty of $10,000
(and a penalty up to $50,000 for continued failure to file after IRS
notification).

Given that FATCA is effective for
tax-year 2011 and beyond, the IRS can go back from 2011. Further,
underpayments for taxes attributable to non-disclosed FFA will be
subject to an additional substantial understatement penalty of 40 per
cent.

However, with the IRS now having this
information on taxpayers, it is a gold mine for the IRS, as it can use
the information not just for FATCA purposes, but also for Report of
Foreign Bank and Financial Accounts, underreporting of income penalty,
accuracy-related penalty, failure to file, failure to pay, interest, the
potential of having a fraud penalty apply at 75 per cent, and the
potential of substantial information-return penalties, if the foreign
account or assets were held as a trust or corporation and the required
information returns were not filed.

An example may
illustrate the point. In 2003, John Doe got an insurance payout of US$1
million after an accident in New York, he then packed up his belongings
and returned home to the Cayman Islands.

He placed the
cool million dollars in a fixed-deposit account, uses his New York
address to open an account at a Caymanian bank. He then received
US$50,000 per year in interest and pays no taxes as the Cayman Islands
do not tax income. In 2013, the IRS got wind of the account because of
FATCA. To become tax compliant with the IRS, it would require John to
pay over US$ 4.5 million in taxes, penalties and interest in 2013. John
may also owe taxes to the state of New York.

FATCA is
one of the most far-reaching laws that has ever envisioned by any
government and its effect are deadly and will surely reduce tax evasion
by not just Americans, but citizens of other nations, given the
international tax network where countries get to share tax information
on their citizens with each other.

Dayle O. Blair is
an attorney-at-law, certified public accountant and a certified
international tax adviser. He can be reached for comments at
dayleblairlaw@yahoo.com, globalaccounting@yahoo.com or 876-906-1016 or
876-625-9680.