In 2016 two epic events have made battling offshore tax evasion a key priority to the IRS. Both the Panama Papers, which disclosed how hundreds of thousands of wealthy clients of international banks used anonymous shell companies to hide assets from governments around the globe, and the implementation of the Foreign Account Tax Compliance Act (“FATCA”); under which over 150,000 foreign financial institutions in over 80 countries are disclosing Americans with off-shore holdings, are both galvanizing the IRS to expand the geographic scope of their hunt for undeclared offshore accounts.
The IRS which has been focused on Switzerland as the biggest tax haven is now looking at financial institutions in the Caribbean, the South Pacific, Hong Kong, India, Israel, Luxembourg and Panama. US taxpayers with accounts in these jurisdictions must be vigilant in their reporting.
After many years of delay FATCA is being implemented (it was first enacted in 2010). In 2016, under FATCA foreign banks/financial institutions must annually report to the IRS. On accounts over $50k that are owned by US persons or be subject to a 30% withholding tax on certain US-source payments made to them. To enforce FATCA, the IRS has entered into disclosure pacts with many countries, whereby the foreign financial institutions disclose data on US account owners to their own governments, which will then provide the information to the IRS.
In response to the Panama Papers disclosures the US Treasury Dept proposed regulations to eliminate foreign owners from hiding behind anonymous companies. The proposed
regulations (which are not yet enacted until they are either adopted as temporary regulations or final regulations) will require foreign-owned single member US Limited Liability Companies to disclose their owner.
The proposed regulations would treat US LLCs that are 100% owned by a foreign person as corporations for the limited purposes of reporting and record disclosures and maintenance. The LLC would have to annually file Form 5472 to disclose transactions between the LLC and its owner(s) or other related parties, including sales, distributions, and Contributions. The IRS would turn the information over to foreign governments (under inter-governmental exchange agreements) and use the tax information for IRS purposes which may include tax audits and assessment of US taxes.