FATCA Wilfulness Problems For US Taxpayers

If you are a US taxpayer with overseas bank accounts or investments, you need to take immediate steps to show you are reporting your overseas earnings to avoid tax penalties under Foreign Account Tax Compliance Act (FATCA).

Now FATCA is in full swing with foreign financial institutions filing reports on the financial activities of their US clients, any failing to confirm their tax status faces the risk of being reported to the Internal Revenue Service (IRS).

Foreign financial institutions will have no choice in making the report because if they don’t, they risk the IRS imposing strict financial penalties that could lock them out of the US banking system.

The first clue a financial institution is looking at a US customer’s FATCA status is a letter explaining the bank or investment house has to identify customers who are US taxpayers.

Complying with FATCA

The letter generally asks for copies of two important US tax filings –

A Form W-9 (Request for Taxpayer Identification Number) and/or Form W-8 (Statement of Beneficial Owner) to meet FATCA compliance procedures.

Evidence of compliance with reporting obligations under the Bank Secrecy Act by filing annual FBAR’s and post-2011 IRS Form 8938 (Statement of Specified Foreign Financial Assets).

Ignoring this call for tax-reporting confirmation will trigger the foreign financial institution to make a non-compliance report to the IRS.

This triggers the foreign financial institution to list the customer as ‘recalcitrant’ under FATCA rules – which in turn flags them as a wilful non-discloser with the IRS and US Department of Justice.

Recalcitrant taxpayers

Not only will this result in close scrutiny of the US taxpayers financial affairs by the IRS, the foreign financial institution will withhold 30% of any account and investment transactions by the customer until their recalcitrant status is resolved.

For US taxpayers receiving a letter asking for confirmation of their tax reporting status, any delay in response that leads to them being listed as recalcitrant will automatically lead to wilfulness penalties in the US.

The FBAR penalty for wilful failure to file a return is the greater of $100,000 or 50% of the highest account balance a year for six years, plus the threat of criminal prosecution.

The message is clear for US taxpayers with overseas financial interests – put your tax affairs in order straight away or face the wilfulness penalties that will inevitably follow.

So far, almost 105,000 foreign financial institutions in more than 220 financial jurisdictions have signed up to FATCA, so the chances of escaping detection if you cannot prove W9 or FBAR compliance is small.