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Foreign accounts: effect of FATCA already being felt

The heightened regulation by the IRS of offshore accounts does not only affect Americans who have those accounts. It also greatly affects banks and other foreign financial institutions who offer them.

For the past two years, account holders and financial entities have been struggling to understand how to meet the requirements of the Foreign Account Tax Compliance Act (FATCA). Although full enforcement of the FATCA does not take effect until January 2014, it is already the source of considerable confusion and substantial stress for taxpayers and financial institutions alike.

FATCA will require foreign banks and other financial institutions to provide the IRS with a report each year on U.S. taxpayers with assets of over $50,000 in such an institution at year's end. The report does not necessarily have to be made directly to the IRS. It could be made to the foreign institution's national tax authority - in other words, to the equivalent of the IRS in a given country.

Either way, however, the effect of this reporting is the same. It undercuts traditional privacy protections and threatens financial institutions with hefty penalties for failing to disclose account information. At present, there is a great deal of uncertainty about steps financial entities must take to identify accounts held by Americans.

FATCA will also require additional reporting by account holders themselves. The relevant form is IRS form 8938. The penalty for failing to file is $10,000, and the IRS is poised to impose an additional penalty of 40 percent for underreporting income.

Many tax lawyers believe that FATCA is based on a false premise, namely that Americans with offshore accounts are trying to evade taxes. In practice, though, most people with these accounts have them for legitimate reasons, such as doing business in Europe.

Like it or not, though, FATCA is coming. Though the full implementation is still over a year away, its effect is already being felt.

Source: "A Long-Distance Relationship With the I.R.S.," The New York Times, Conrad de Anelle, 12-2-12

Our firm handles situations similar to those discussed in this post. To learn more about our practice, please visit our page on IRS offshore account enforcement.

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