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A FATCA update and reminder of the FBAR filing deadline

President Obama signed the Foreign Account Tax Compliance Act in 2010, but it has taken several years for the implications to become clear. The legislation was part of broader legislation that focused on job creation through tax incentives. FATCA, however, included penalties designed to capture all the tax owed on foreign bank accounts belonging to U.S. citizens and green card holders.

As a part of the legislation, Foreign Financial Institutions (FFIs) must report information to the Internal Revenue Service on accounts held by U.S. taxpayers. The U.S Treasury later published two models to assist foreign banks in compliance.

Model Intergovernmental Agreements

Germany recently became the latest country to reach an agreement. German banks would send information on U.S. account holders to its government, which would then provide the data to the IRS. Several other European countries, including The UK, France, Italy and Spain have reached similar agreements. Japan signed the second model and its banks will provide information directly to the IRS.

Penalties for banks that fail to disclose accounts held by U.S. persons that contain more than $50,000 in assets include large fines or a label of “recalcitrant.”

For individuals who have foreign investment accounts in a birth country or maintain signature authority for an elderly relative in another country, it is important to comply with the disclosure requirements

June 30: The filing deadline for disclosing foreign bank accounts

Disclosure of all foreign accounts with an aggregate value over $10,000 during the calendar year must be made on a Foreign Bank and Financial Account (FBAR) Form, which adds another acronym. The FBAR reporting requirement also applies to those with signatory authority, such a power of attorney for elderly parents.

In one case, a foreign bank froze an elderly couple’s account, because their U.S. citizen son was listed as a signatory in case anything happened to them. U.S. citizens living abroad may also face difficulties as banks put in place their own reporting requirements.

Penalties for failure to file an FBAR include civil and criminal penalties

For those who do not file a FBAR, penalties are draconian. Even oversight will often come with a civil penalty. In the case that the IRS can prove the failure to disclose was willful, the fine increases to 50 percent of the value of the account up to $100,000. Prison time is another possible consequence of a willful failure.

For those who failed to disclose a foreign signatory account on a past FBAR, the IRS allows a taxpayer to amend a prior FBAR. An Offshore Voluntary Disclosure Program (OVDP) also exists for those who did not file FBARs in previous years. By coming forward through OVDP a taxpayer can disclose an account, pay taxes owed and penalties to avoid criminal prosecution. Before amending a prior FBAR or seeking to participate in OVDP, consult an experienced tax attorney for advice.