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Comply with FATCA or face penalties

Published:Wednesday | September 18, 2013 | 12:00 AM


THE FOREIGN Account Tax Compliance Act (FATCA) is an important development in the United States' (US) efforts to improve tax compliance with the Internal Revenue Services (IRS), by focusing on foreign financial assets (FFA) and offshore accounts in order to catch tax dodgers and tax cheats.

It also involves even those persons living overseas and unaware that they should file tax returns and pay Uncle Sam.

There are two aspects of FACTA with respect to compliance. One that puts the onus on the persons filing income tax returns to provide certain information 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.

Penalties for persons filing income tax returns

A United States citizen, green-card holder, corporation or 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.

Failure to file the required form and provide certain relevant information of FFA may subject the taxpayers to civil and criminal penalties.

Civil penalties

Failure to file the required form if the threshold is met may result in a US$10,000 civil penalty as well as an additional US$10,000 continuation penalty for each 30-day period after the taxpayer is notified by the IRS of the failure to file (not to exceed US$50,000).

In addition, a 40 per cent understatement penalty will be levied for underpayment of tax from non-disclosed foreign financial assets.

The IRS may elect not to impose penalty if the failure to file is due to reasonable cause and not due to wilful neglect. Taxpayers should note that the fact that a foreign jurisdiction would impose a civil or criminal penalty on the FFIs for disclosing the required information is not considered reasonable cause by the IRS for not filing.

Criminal penalties may also apply

Taxpayers could also be subject to criminal penalties with a potential sentence of imprisonment of up to five years, if convicted. The law, in its current form, is that anyone who wilfully attempts to evade or defeat any tax imposed or any payments due, 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 to US$250,000 for individuals.

Taxpayers should note that a failure to file the required tax form with the tax returns on certain assets may keep the statute of limitations open for all items on a return until three years after the form is filed.

Several penalties may apply at the same time

One should be mindful of the fact that taxpayers are already required under current law to report overseas income on their tax returns and overseas financial accounts on the Report on Foreign Bank and Financial Accounts (FBAR), and report foreign business interests by filing Form 5471, if they are officers, directors, or shareholders in certain foreign corporations. The IRS will apply penalties for failure to file FBAR and Form 5471 in addition to FATCA penalties.

Penalties imposed on the financial institutions

With respect to FFIs, the objective of FATCA is the reporting of foreign financial assets and all the required information on their account holders whenever the US$50,000 threshold is met. Withholding of 30 per cent is a cost to the FFIs for not reporting the required information on the account holders.

To avoid this, a foreign financial institution may register with the IRS, obtain a Global Intermediary Identification Number and report certain information on US accounts to the IRS as required.

FFIs that enter into an agreement with the IRS to report on account holders may be required to withold 30 per cent on certain payments to foreign payees if such payees do not comply with FATCA.

US financial institutions and other US withholding agents must both withhold 30 per cent on certain payments to foreign entities that do not document their FATCA status and report information about certain non-financial foreign entities.

US financial institutions and other types of US withholding agents are required to withhold 30 per cent of certain US source payments made to foreign entities, if they are unable to document such entities for purposes of FATCA.

While FATCA is considered costly to taxpayers and financial institutions, those factors will not be considered as any good excuse for non-compliance, hence, everyone should try their best to comply since the consequences of the non-compliance penalties may not just be fines, but up to five years imprisonment.

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