In this powerpoint presentation, tax attorney Mike DeBlis discusses the mechanics of FATCA, the ripple effect that this law has had on those with unreported foreign assets, and why it is one of the most controversial laws that no one has ever even heard about.
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The FATCA Hurricane Hits Ground
1. The FATCA Hurricane Hits Ground
Michael DeBlis III Esq., LLM
Partner
DeBlis Law
2. Michael DeBlis III, Esq.
• Trial Lawyer
• Actor
• Author
• NCDC Graduate
• Marathon runner
3. Foreign Account Tax Compliance Act
(FATCA)
• Recognizing that there is a substantial amount of money stored
overseas that has gone unreported – and that will continue to go
unreported if left up to the taxpayer to voluntarily disclose –
Congress passed FATCA. FATCA requires foreign financial
institutions (FFIs) to report specific information regarding their U.S.
accountholders to the IRS.
• It was passed in 2010 to clamp down on the use of foreign bank
accounts by U.S. taxpayers to hide money that is otherwise subject
to taxation in the United States.
• FATCA is the U.S. government’s newest enforcement tool in the
fight against international tax evasion.
4. Foreign Account Tax Compliance Act
(FATCA)
• Clearing up a major misconception: It is not illegal for a U.S. taxpayer to
have an overseas bank account. Overseas financial accounts are
maintained by U.S. taxpayers for a variety of legitimate reasons.
• History: If the average American that owns a foreign bank account isn’t a
“tax cheat,” what are his reasons for having one?
– Reason # I: In the not too distant past, wealthy Americans and
wannabe wealthy Americans found it convenient and/or fashionable
to put much of their wealth in offshore financial institutions. Although
it was not the only player in this game, Switzerland attracted much of
the American wealth which was banked offshore. There are many
countries in the Caribbean as well as Israel who were more than
willing to provide this service, but Switzerland was the biggest name in
the industry.
5. Foreign Account Tax Compliance Act
(FATCA)
– Reason # 2: Convenience and access. In this global
marketplace, many U.S. citizens have relocated abroad.
Thus, maintaining an account with a local bank in order to
conduct day-to-day affairs is an absolute necessity (i.e., to
pay rent, phone, insurance, wifi, and electric bills, buy
groceries, and so forth).
– Reason # 3: They may have inherited a foreign bank
account from a relative back in “the old country.”
6. Foreign Account Tax Compliance Act
(FATCA)
• The Problem
– The U.S. taxes its citizens on their worldwide
income, regardless of where it is earned. Own a
business in Sri Lanka? You must report the profits on
a U.S. tax return. Work for a Belgium company in
Costa Rica? You must report the earnings on your
U.S. tax return. Very simply, U.S. taxpayers must
report all of their income, even income earned
outside of the United States.
– However, prior to 2010, many individuals with
overseas accounts failed to mention this fact when
they filed their 1040s. They also failed to file a
Foreign Bank Account Report (FBAR) to disclose the
existence of their foreign account.
7. Foreign Account Tax Compliance Act
(FATCA)
– The FBAR is a tool used by the U.S. government to identify
persons who may be using foreign financial accounts to
break U.S. law. Information contained in FBARs can be
used to identify or trace funds used for illegal purposes or
to identify unreported income maintained or generated
abroad.
– An FBAR is a creature of the Bank Secrecy Act (BSA) and
not the Internal Revenue Code. It has been on the books
since time and memorial.
– The BSA gives the Department of Treasury the authority to
collect information from U.S. persons who have financial
interests in or signature authority over financial accounts
maintained at foreign financial institutions.
8. Foreign Account Tax Compliance Act
(FATCA)
• Who must file an FBAR?
– A U.S. person must file an FBAR if that person
has a financial interest in or signature
authority over any financial account(s)
outside of the U.S. and the aggregate
maximum value of the account(s) exceeds $
10,000 (USD) at any time during the calendar
year.
– The government did not begin enforcing
FBARs with the gusto that it does today until
after 9/11.
9. Foreign Account Tax Compliance Act
(FATCA)
• What are some of the reasons why the average American
living abroad did not report their foreign bank accounts to the
IRS?
– Some taxpayers did not know what an FBAR was, let alone
that it applied to them. These folks did not know that they
had an obligation to report their foreign income on a U.S.
tax return. For example, many thought that they had
satisfied their tax obligations by virtue of having reported
their foreign-source income on a foreign tax return and
paying taxes to the foreign government.
– Others knew exactly what their U.S. tax obligations were
but thought that It was unlikely that the IRS would ever
know the difference.
10. Foreign Account Tax Compliance Act
(FATCA)
• What is it about this pestilent law that engenders such strong
emotions?
– From the perspective of foreign banks:
• It turns foreign banks and financial institutions into
enforcement arms of the Internal Revenue Service
(IRS). This allows the IRS to make sure they are
collecting every possible dollar from U.S. taxpayers who
have offshore assets.
• Although they seemingly have two “options” – disclose
account information on clients who are U.S. persons or
pay a whopping 30% of all payments they receive from
America to the IRS – most foreign financial institutions
would argue that they have only one real choice if they
want to be around long enough to report next year’s
quarterly earnings. And that is to succumb to Uncle
Sam’s heavy-handed demands and turn over U.S.
accountholder information.
11. Foreign Account Tax Compliance Act
(FATCA)
– From the perspective of U.S. taxpayers with
unreported foreign accounts:
• It treats every taxpayer with a foreign bank account
as though they are “Al Capone.” How so? The IRS
punishes such taxpayers with penalties that are so
exorbitant that it could leave them with nothing
more than the shirt on their backs. For example,
willful FBAR penalties are the greater of $ 100,000 or
50% of the closing balance in the account as of the
last day of filing the FBAR. Considering the fact that
FBAR penalties are assessed per account, and not per
year, this could drive a taxpayer’s FBAR penalties into
the stratosphere!
12. Foreign Account Tax Compliance Act
(FATCA)
• Critics weigh in
– Those that denounce the law criticize its complexity, its
expansive reach, and the high cost of compliance.
Argument: “With FATCA, the U.S. government has found a
very effective way to bully foreign governments and
financial institutions into giving it previously unobtainable
information on U.S. taxpayers.”
– Those that like it (and there are a few) argue that it will
blow the lid off of “the old way of exchanging tax
information between countries on request,” which they
view as too lenient on tax cheats. FATCA, they predict, will
revolutionize the exchange of information, by making it
“automatic,” thereby removing any safe harbors for those
who have, shall we say, less-than-pure motives.
13. Foreign Account Tax Compliance Act
(FATCA)
• The Carrot and the Stick
– FATCA gets its teeth from two provisions:
• Non-compliant foreign financial institutions face a
mandatory 30% withholding on payments from U.S.
based financial institutions. (Ouch!)
• The FATCA also beefed-up the ability of the Department
of Justice to prosecute financial institutions criminally
who were assisting U.S. taxpayers with tax evasion.
14. Foreign Account Tax Compliance Act
(FATCA)
• The first cut is the deepest!
– Landlocked Switzerland doesn’t get to experience the effects of hurricanes
often.
– Switzerland’s financial industry was landfall for “Hurricane FATCA” which was a
category 5+ storm.
– Under FATCA, Swiss banking powerhouse UBS was forced to turn over the
names and information of 4,000 U.S. taxpayers. In order to settle a corporate
criminal action for failure to comply, UBS paid a $780 million dollar fine. Many
Swiss institutions got the point and came into compliance.
– To prove its power to bankers who didn’t comply after UBS, the DOJ’s next
target was Switzerland’s oldest bank, Wegelin & Co. The shot proved
fatal. Wegelin paid $74 million in fines, restitution and forfeitures, and ceased
to do business to avoid criminal liability.
15. Foreign Account Tax Compliance Act
(FATCA)
• The end of Swiss bank secrecy as the world once knew it
– In August of 2013, Switzerland raised the white flag.
– To avoid further prosecutions, Switzerland signed a non-
prosecution agreement with the U.S. government (NPA’s) for
banks that have facilitated American tax evasion. In theory, such
agreements guarantee banks immunity from prosecution. But the
devil is in the details.
– In December, 100 Swiss banks joined in the proposed amnesty
deal with the DOJ. There is still ongoing debate over the fairness
of the Justice Department’s NPA proposal. However, it appears
Switzerland and many other countries got the message
clearly. The United States will no longer tolerate the non-
disclosure of U.S. taxpayer information.
16. Foreign Account Tax Compliance Act
(FATCA)
• It appears that the DOJ may have attempted to slide a couple of extra provisions
into the non-prosecution agreement, including:
– Cooperate fully with the DOJ, the IRS, and any other domestic or foreign law
enforcement agency designated by the DOJ regarding all matters related to
the NPA.
– Assist the DOJ or any designated domestic or foreign law enforcement agency
in any investigation, prosecution, or civil proceeding arising from or related to
the NPA.
– Provide testimony as needed to enable the U.S. to use the information and
evidence provided by the bank under the NPA.
– Provide the DOJ all requested information, documents, records, or other
tangible evidence, not protected by legal privilege, regarding the covered
conduct.
– To retain all records relating to its U.S. cross-border business for a period of 10
years from the NPA’s termination date.
– The agreement also describes the circumstances under which the DOJ may
determine that a bank has violated the NPA and may be prosecuted.
17. Foreign Account Tax Compliance Act
(FATCA)
• The Swiss Grow a Backbone
– Seventy-three Swiss banks responded in a joint letter saying
they would not sign the NPA as proposed.
– The Banks’ objections are fairly simple:
• Since when does the United States Department of Justice have the
authority to make a foreign institution cooperate in investigations
by other foreign governments?
• The fact that the NPA contains language basically saying the DOJ
reserves the right to change its mind and prosecute anyway. So, is
that really a non-prosecution agreement or a license for a fishing
expedition that may lead to prosecution anyway?
18. Foreign Account Tax Compliance Act
(FATCA)
• As more countries are pushed to the brink to
share tax information, the focus will shift to
America’s willingness (or unwillingness) to
reciprocate. Who can forget the expression,
“What’s good for the goose is good for the
gander?”
• Hypocrisy? At present, the U.S. does not
provide the same detailed information about
foreign accountholders who bank with U.S.
banks to foreign governments that it requires
foreign financial institutions to provide.
