On 10/2/09, the IRS confirmed it has begun exchanging tax information from certain foreign governments under the Foreign Account Tax Compliance Act (“FATCA”), to meet a September 30, 2015 deadline ( over 5 years after FATCA was passed as law in March 2010). To date
Australia has given the US tax information on 30,000 US taxpayers (with $5b in offshore assets) and as of 9/30/15 Canada has turned over 155,000 US taxpayers (and the UK has apparently given many more which amount has not been publicly revealed).

The automatic exchange of account information identified US taxpayers (assets/income) and was a part of the inter-governmental agreements that the Treasury Dept. negotiated with foreign governments. FATCA was part of the HIRE Act of 2010 and requires foreign financial institutions to send the IRS information on the accounts of US taxpayers or face stiff penalties (ie. 30% withheld on income from US sources which includes: interest, dividends, gross proceeds from securities sales, and pass-thru distributions from foreign entities).

Under FATCA, foreign countries and the US are allowed to reciprocally exchange tax information on both US and foreign taxpayers from both US and foreign banks, in accordance with existing tax treaties to prevent double taxation. In most cases, the agreements allow banks
the banks to first turn over the information to their own countries’ tax authorities before it is given to the IRS or tax authority in another country.

FATCA was enacted in 2010 by Congress to target non-compliance by US taxpayers using foreign accounts or entities to “hide assets”.

FATCA requires withholding agents to withhold on certain payments made to foreign financial institutions unless they agree to report the information to the IRS about financial accounts held by US taxpayers, or to foreign entities in which US taxpayers hold a substantial interest.

To facilitate the exchange of taxpayer information the US government entered into over 100 bi-lateral inter-governmental agreements (IGAs) that establish ground rules for tax information exchange. Model 1 IGAs (which applies to 112 foreign countries) require banks and other foreign financial institutions to make relevant annual reports of their US clients financial affairs to their own country’s domestic tax authority who then forwards the reports en masse to the IRS (or to the US govt who forwards it to the IRS).

Certain IGAs enable the IRS to directly receive this information from the Foreign Financial Institution, or allow a foreign jurisdiction tax administration to gather the information and provide to the IRS. Some IGAs allow the IRS to reciprocally exchange information about accounts maintained by residents of foreign jurisdictions in US financial institutions with their jurisdictions’ tax authorities.

According to the IRS with the beginning of the exchange of tax information in September 2015, the IRS will now have an improved means to verify the tax compliance of taxpayers using offshore banking and investment facilities and improve detection of those who evade reporting the existence of offshore accounts and the income attributable to those accounts.

Under the reciprocal IGAs the first exchange of tax information had to take place by Sept. 30, giving the IRS a deadline to facilitate data exchange. On 9/21/15 the US Treasury Dept. announced the deadline had been pushed back by one year to 9/30/16 for all of the 112 foreign jurisdictions that have signed a reciprocal Model 1 Inter-Govt. Agreement (IGA) to implement FATCA (see: IRS Notice 2015-66).

However, the foreign financial institutions are still obliged to report their US clients to their domestic tax authority. The 1 year extension does not apply to the countries who have exchanged information ie. Australia, Canada, UK which means hundreds of thousands of US taxpayers with accounts in these countries are now at risk of IRS audit and criminal investigation for off-shore tax evasion.

For US taxpayers in this “tax trap” once a foreign jurisdiction turns over account information to the the US, non-compliant US taxpayers can no longer take advantage of the US Offshore Voluntary Disclosure Program and are subject to investigation, civil tax audits, and criminal prosecution.


All US taxpayers with undisclosed off-shore accounts should immediately perform a due diligence review of the following:

1. Under the FBAR rules (current form Fincen 114), all foreign bank and financial accounts, over $10k are subject to annual reporting, (by filing Fincen Form 114), and must disclose their foreign account under their Form 1040/Schedule B/Part III. Failure to file Fincen Form
114, if willful subjects the taxpayer to criminal penalties (up to 10 years in jail for each year not filed), filing a false tax return (Form 1040), which is a 3 year felony, perjury and expensive fines and penalties (the penalty for the FBAR filing is 50% of the account balance per year,
and may be higher as in the case of a Florida taxpayer whose penalty was 150% of the account balance upheld at trial).

The FBAR Statute of Limitations is 6 years so all tax returns 2009-2014 must be reviewed.

2. Under the FATCA rules, Form 8938 must be filed with Form 1040 tax returns from 2011 forward for all foreign financial assets over $50k.

This filing is separate and apart from the FBAR filing and filing one of the forms does not relieve the taxpayer of responsibility to file the other form. Failure to file the form has both criminal and civil implications.

3. The IRS generally has 3 years to audit tax returns once filed. However, if the tax returns are incomplete,or fraudulent the IRS statute of limitations is suspended and they may audit indefinitely and impose an additional civil fraud penalty of 75% of the tax due (in addition to the
tax due with interest).

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