Understanding the Impact of the Foreign Account Tax

Compliance Act (FATCA)




To combat overseas tax evasion, the U. S. government in 2010 passed the Foreign Account Tax Compliance Act (FATCA) – the most far-reaching law of its kind in recent history. On August 30, South Florida Legal Guide invited three leading professionals to present their views on FATCA at a roundtable discussion at The Bankers Club in downtown Miami.

Publisher Jacob Safdeye introduced the panelists – Stanley Foodman, CPA, Foodman & Associates; David M. Garvin, Law Offices of David M. Garvin, P.A.; and Dennis G. Kainen, Weisberg and Kainen, P.L  – and editor Richard Westlund moderated the two-hour discussion. “This is a topic with profound implications for legal and accounting professionals whose clients have international bank accounts and other foreign assets,” said Westlund. “Understanding FATCA is essential to advising clients more effectively.” Here is an edited transcript of the roundtable.


Stanley Foodman, CEO
Foodman & Associates, P.A.
CPAs Accountants & Advisors

Stanley Foodman is a recognized forensic accountant and litigation support practitioner, specializing in international tax. He has served as an expert witness and forensic accountant for some of the nation’s most complex, high profile tax and other economic crime cases. He is a former auxiliary special agent for the Florida Department of Law Enforcement with specialization in economic crime – anti-money laundering, bank fraud, public corruption and discovery of hidden assets. He serves on the advisory board of the International Association for Asset Recovery (IAAR).  

David M. Garvin
Law Offices of David M. Garvin, P.A.

David M. Garvin is a Florida Bar Board Certified Tax Attorney whose practice has concentrated on the areas of federal tax and white collar defense for over 28 years.  He holds an LLM in tax and is also a Certified Public Accountant.  He has successfully defended taxpayers in high-profile cases including, Indianapolis 500 winner Helio Castroneves.  

Dennis G. Kainen
Weisberg and Kainen, P.L

Dennis G. Kainen has been a partner with Weisberg and Kainen for more than 20 years. He concentrates his practice on criminal defense and tax matters including civil tax controversy, criminal tax litigation, IRS voluntary disclosure as well as white collar and financial crimes. A member of the Board of Governors of The Florida Bar, he is also a past president of both the Dade County Bar Association and the South Florida chapter of the Federal Bar Association


Q. Please give us your perspective on FATCA.



 
 "All these matters border on potential criminal prosecution, and we think it’s in the client’s best interest to have counsel.”  

Stanley Foodman
Stanley Foodman: In 2010, the federal government estimated it had a tax gap of $345 billion annually, partly as a result of noncompliant international reporting by U.S. taxpayers.  Under FATCA, foreign financial  institutions (FFIs) will be required to provide information on accounts owned or controlled by U.S. taxpayers. If a covered institution tries to evade the requirements it risks losing its correspondent banking relationships. FATCA has been called the neutron bomb of international banking. It effectively makes banks the gatekeepers and arms of the Internal Revenue Service (IRS). Brokers, attorneys and accountants will have their own responsibilities under the law as well.

U.S. taxpayers who may have willfully been out of compliance for years, as well as those who have no idea they are out of compliance will also be at risk of federal penalty and possible prosecution. In July, IRS Commissioner Douglas Shulman announced that FATCA would be phased in, allowing more time for anxious banks to comply with the law. That was also good news for taxpayers who want to comply with the law.

Under FATCA, the FFIs must enter into individual agreements with the IRS by June 30 2013. Reporting to the IRS will begin in 2014, and withholding of taxes will start in 2015. While that may seem like a lot of time, it’s really not, because clients may have to do extensive work to get their affairs in order.  Already, some banks in Panama and other jurisdictions have asked U.S. taxpayers to leave their institutions, so in that sense FATCA is already having an impact.

Last February, the IRS announced its 2011 Offshore Voluntary Disclosure program with an expiration date of August 31 – later extended to September 9. While this may be the last amnesty program for the foreseeable future, the IRS will likely continue negotiating penalty amounts for those taxpayers who come forward under voluntary disclosure. In general, voluntary disclosure generally minimizes the risk of IRS criminal prosecution. It also provides some certainty as to the amount of penalties and interest, and provides peace of mind to the account holder.

 
"I ask clients which they value more: their freedom or their money.”  

Dennis Kainen
Dennis Kainen:
We represent a variety of individual clients. Some of them don’t know whether they have an obligation to file certain forms. Others have ignored filing those forms, or lied on their tax returns. Some have filed returns and others don’t know if they’ve filed. In South Florida, there are many people who have fled from other countries, and may not be in compliance with the IRS rules.

A typical client will come in and say, “I started coming to Miami in 1985, and I go back and forth to my home in Venezuela.” They don’t know whether or not they have stayed long enough in our country to become a U.S. person for our tax laws. Sometimes they just don’t know how long they’ve been here. Unlike many countries, in the US, no one stamps a passport to say that we’ve left, and that can cause confusion.

So, the first step we take is to determine if the client is a U.S. person or not for tax purposes. We gather the facts and the information and work with someone like Stanley who will assist us with the crunching of the numbers. Then, we’ll get the financial records, which is easier now since the U.S. beat up on UBS [obtaining the release of Swiss bank account information]. Once we gather the records we can identify the reporting requirements for that individual.

There are certainly lots of nuances, but if you have a foreign bank account that on any one day had a balance in excess of $10,000, you have a responsibility to file a Report of Foreign Bank and Financial Accounts (FBAR) by June 30 of the following year.  At this point, the practitioner must explain to the client that he or she must file this form.  It is a crime not to report your foreign bank accounts or other foreign entities. The client may say, “How will they know or find out?”  Again, we explain that this is the law and these are your responsibilities.   We say, “The decision is yours” and my responsibility is to tell you the law and how we can assist you in complying with the law.  

 
"Clients believe that if you are nice to the agent, they can make the problem go away, but that strategy never works.”

David Garvin
David Garvin:
I have been practicing criminal tax defense for 28 years, and hold CPA and LLM designations. My practice is mainly litigation with an emphasis on the criminal defense side. With regard to FATCA, we view this is an extension of the administration’s mandate to bring the maximum number of taxpayers into compliance with the new Internal Revenue Code.

Because of the gap between mandating regulations and putting them into effect, the IRS brought forth two voluntary compliance and disclosure programs, one in 2009 and the more recent one in 2011. As you may remember, UBS became a test case for the new rules. The Swiss bank tried to resist  releasing the names of U.S. taxpayers, but that didn’t work out. As a result, there were thousands of people leaving UBS or participating in the 2009 voluntary disclosure initiative.  However, with the 2011 initiative, the IRS increased the penalties from 20 to 25 percent on the FBAR and 20 percent on the income side.

Now, what’s happening is that individual clients come through the door and say, “I have a problem. I have reason to believe that my banker has turned over my records to the IRS. What should I do? Can I get into the voluntary disclosure program or not?”
We see the two voluntary disclosure programs as precursors to FATCA, which is just around the corner. The FFIs are going to be requested to enter agreements by June 30, 2013, signing on to be police officers in foreign lands. They will go through their existing accounts and determine which one need to be reported to the IRS.  Remember that an FFI is not just a bank – the rules cover an array of legal forms, including trusts.

An FFI will also have to police the flow of account holder funds to other FFIs. If other FFIs are trying to circumvent the institution’s agreement, that FFI will be required to withhold 30 percent of funds sent to the FFI that has not entered an agreement.  Certainly, there are a lot of issues for FFIs to consider as to whether they will be abiding by their obligations under the agreement and avoiding the possibility of aiding and abetting people who are circumventing the rules. Those are crimes with potential criminal ramifications.

So, we have a myriad of issues on the horizon. The only thing we have to go by so far in terms of practice is our experience with the voluntary disclosure programs and how banks have been treated when they resisted compliance. As we know, the banks have not been treated too well. With our knowledge as to how the taxpayers and FFIs have been treated in 2009 and the current program –we can forecast what is likely to be on the horizon. Some people have suggested that we will see a 2012 voluntary compliance program with a 30 percent penalty as one last step before FATCA is brought into full force.

As practitioners, everyone is going to be asked tons of questions by our clients. The fundamental ones are from the taxpayer: What are my obligations? What happens if I move my account from the FFI? In that regard, it’s important to know that an FFI has to report accounts that are closed and the balance amount the day before the account was closed. Therefore, it may make sense for clients to close an account before the June 30 date.  In summary, we anticipate a tidal wave of issues in late 2012 and 2013. The impact of FATCA is just beginning.

Q. What are some of the FATCA issues you are seeing today and what advice do you give your clients?


Foodman: When people come to us with a FATCA or voluntary disclosure problem, the first thing we recommend is that they hire an attorney. Anything we do that is not covered by attorney-client privilege leaves the client at risk. Therefore, we don’t actually provide service until we are covered by privilege. All these matters border on potential criminal prosecution, and we think it’s in the client’s best interest to have counsel. For example, a bank issued a suspicious activity report (SAR) for a client with a legitimate bank account who was buying real estate in Costa Rica. However, the transaction was outside the normal profile of that person’s business. That individual underwent an IRS audit and faced very hefty penalties until he found proper counsel.

Situations like this will be a common problem in the future. The banks are already acting as gatekeepers for the government in terms of transactions, and if they issue a SAR, there’s a good chance there will be a response. So we are quick to tell clients engaging in international transactions, to be sure to update their profiles. Notify the bank, tell them the amounts in advance and how often these transactions will occur. Then the bank can decide if it wants to issue a SAR or ask the customer to leave the bank.

We represent several well-to-do Haitian-American clients who were among several hundred accountholders asked to leave two banks because they hadn’t updated their profiles. Basically, the banks didn’t want any accountholders who had business in Haiti and the U.S.  We were able to find them new institutions.

This type of situation could happen to any accountant. But don’t do it yourself - hire an attorney.  Work through the attorney to be sure the client is protected because you are not. We also tell clients it’s not advisable to use prior return preparers for this work. If there are issues relating to prior filings, they could end up being witnesses against them in some situations. It’s a delicate new world we’re living in. David and I believe that once the government has all the information from the banks, they will be able to use the civil fraud  route, with which is less costly for them to pursue.

Kainen: I ask clients which they value more: their freedom or their money. So far, no client has said, “I value my money more.”  The ramifications of being prosecuted are severe, and people who violate the U.S. tax laws go to prison. Statistically, most people don’t get found out, but that’s small comfort if you’re caught. I also explain that after the criminal case is over, the IRS will go after them civilly. So, they can’t do a few years in prison and keep the money.  The IRS will take it. So I explain those penalties and civil ramifications – along with the opportunity for voluntary disclosure. Since the 1950s, there has always been a process by which a person can come forward voluntarily and not be prosecuted if they comply with certain criteria.

The 2011 disclosure program said that if you come forward and comply with certain criteria, you had to give the IRS 25 percent of the account at its highest value on any day going back to 2003. If you had $1 million in the account in 2006 and now have only $200,000, that would be 25 percent of the million. That’s a problem for clients who have lost money on investments and may have no money remaining. That’s a difficult decision for a client. We make sure to put a memo in the file that we’ve told the client, so if they come back later on and say, “Why didn’t you tell me?” we have proof in the file that we notified them.

Garvin: Following up on what Dennis was discussing,  I’d like to talk about what happens when you don’t choose to comply with a voluntary disclosure program. First of all, there are people who want to do what’s called a “quiet filing,” where you fill out the forms and send them in, but don’t place anyone on notice that you are doing so in accordance with the voluntary disclosure program. The problem with this strategy is that there is no guarantee you will avoid criminal prosecution. There are a vast number of income tax returns and a quiet filing may go through. But an IRS team at a different location is scrutinizing the FBARs more closely. Under that scenario, a client might be assessed the full penalty, which is 50 percent of the FBAR rather than 25 percent.

The IRS is interested in accounts that earned income but no one paid the taxes, or accounts there were placed outside the U.S. to avoid paying taxes. There are a  myriad of potential penalties in these cases, including civil fraud, which can be 75 percent of the account – and other penalties could be piled on.

Foodman: Commissioner Shulman recently announced the IRS will go back to the 2009 voluntary disclosure program and look at quiet filings during that period to see if they want to take further action against those taxpayers. They may make a determination to prosecute those people civilly or criminally or punish them.

Traditionally, before you get to the IRS criminal division, there are a series of civil steps that occur after the return is filed. Now, everything goes straight to criminal investigation on the IRS campus on Austin, Texas. In addition to increasing the number of agents, the IRS has been opening attaché offices in embassies around with world –Panama, India, Singapore, Israel and Indonesia. If an account is located in a tax haven location, it will get a stricter review than other accounts warrant.

Q. Since most people are unaware of FATCA, how can South Florida legal and accounting professionals help their clients?

Kainen: Attorneys are trained in law school to spot issues. Now, as practitioners, we need to realize there is a big issue facing clients. Depending on your area of practice – taxes, estate planning, business – you need to ask certain questions. Do they live in the U.S.? Do they have foreign bank accounts? Have they filed tax returns? Once you have determined that a U.S. person who lives abroad or has international accounts hasn’t filed a return, you either handle the issue from there or find someone who can help them.

Also, you have to understand what makes someone a U.S. person for tax reasons. Someone from overseas who loves living here has the obligation to comply with certain filings. So, the attorney needs to alert them that if they stay more than a certain number of days, there could be tax consequences.

Garvin: The most important thing you can do is educate your client base, both individuals and entities. Remember that businesses and other entities also have bank accounts in other locations around the world. They also need to be notified  that FATCA exists and they should take action now. There is so much that needs to be done that if you wait until June 30 2013 there will be too much to do in a timely manner. So notify your clients that FATCA is coming and they should tell you about their issues.

At that point, you have to understand what the client wants to accomplish and decide if you can assist them. That’s all an attorney can do. And remind them that FATCA is not something that’s going to happen – it has already happened.

Foodman: A year ago, there were 15 forms the IRS issued relating to foreign transactions. But in 2012 plans call for an omnibus form to be coming out. That form says certain international financial assets over $50,000 have to be reported and be attached to the U.S. return when you file.  There may also be a minimum penalty of $10,000 through the FATCA process.

So, I would advise professionals representing clients in real estate transactions this will affect FIRPTA [Foreign Investment in Real Property Tax Act.] Immigration attorneys whose clients are looking for a change of status to U.S. residency may be affected as well. So, there are all types of clients who need to be aware of FATCA and their reporting responsibilities.  Today, the government needs the money and the IRS is going after it.

Questions from the Audience

Q. Does anyone on the panel know if the IRS has a policy when a foreign bank account is discovered and under audit?


Garvin: I have a number of cases in which people wanted to participate in voluntary disclosure and didn’t know they had been selected for audit. In those cases, the IRS says that it’s too late to accept them for the program. The IRS is also maintaining its right to conduct its audit and assert all available penalties, and could also refer the case for criminal prosecution.

Q. What about people who did nothing and are now under audit?


Garvin: The IRS says they have lost the lottery and all penalties are available.

Q. Are they imposing the criminal penalties?


Garvin: They are discussing indictments and this type of investigation takes two to three years on average. But the IRS has stated it doesn’t feel bound to make any accommodation just because there’s a voluntary disclosure program since the client did not come forward.

Q. Can you take steps to prevent an indictment?

Kainen: Law is an art, not a science. Statistically, not everyone with a foreign bank account being examined will be indicted. So how should these cases be handled? First, I tell that client never to lie to the agent. If you say, “I have no foreign bank accounts,” and the agent has the record with your signature, you have just given the agent the reason to refer the case for criminal prosecution.

So, you may have to protect clients from themselves. In this situation, you can tell the agent, “My client will not speak to you. If you believe there is a foreign bank account and you want to write up an examination report, we may agree to it.” The theory is that a money penalty is better than a criminal penalty. In a criminal case, the prosecutor needs to prove willfulness – a specific intent to commit a crime. So, the IRS may throw the book civilly at your client, but not refer to the criminal division.

Garvin: I also feel strongly that the client has to understand that lying is never an option. But you can refuse to answer. Clients should not try to talk their way out of the situation. If they start answering questions and filling in the contingencies, they are increasing the chance of indictment and raising the probability of losing at trial if that comes about. Clients believe that if you are nice to the agent, they can make the problem go away, but that strategy never works.

Q. Do you think voluntary disclosure will continue after the 2011 program ends, and what form will that take?


Kainen:  I think a program will continue with the penalties getting higher and higher. We will continue to write the disclosure letters and hope the penalties won’t be that onerous.

Garvin: Right now, what’s being discussed is that taxpayers would continue to fill out the disclosure forms and submit the same information. It is anticipated the IRS would  implement a 30 percent penalty.

Also, there are a lot of instances where you don’t need to get into the voluntary disclosure program. If your client says, “This was an honest mistake. I did not do this to cheat on my taxes,” the client might qualify for a 5 percent penalty or a $10,000 penalty.

Q. Law firms in Central and South America have admitted setting up bearer share companies in Panama for U.S. residents. Is there any international enforcement of the laws against facilitating U.S. taxpayers in tax crimes?


Garvin: I am not aware of any foreign attorneys investigated or indicted with bearer shares in Panama, but several rogue bankers have been indicted.  Also, the government has said it may terminate that option in order to get off the OECD [Organization for Economic Co-operation and Development] list of tax havens.

Kainen: There will always be individuals who violate and skirt the law. I can see an individual taxpayer who gets caught might decide to cooperate with prosecutors. Then, our conspiracy law would include those individuals. At the end of day, someone who assists a U.S. person in violating the law could be part of a conspiracy.

Q.  There have been some isolated cases where the government says a lawyer’s statements can used against the client. Have you been confronted with this issue?

Kainen: In a criminal tax investigation when the client counsel meets with IRS criminal tax counsel anything the attorney says can be used against the client. But if you have the same kind of meeting at the Department of Justice in Washington, what you say can’t be used against the client. So, the lawyer and CPA need to know exactly what the rules say. And you do have to be very careful in what you say because it can be deemed to be an admission by the client. It’s often better to say nothing.

Garvin: I agree – you have to be very careful. It’s a terrible surprise to the attorney and to the client when this situation arises.

Q. Should you try to go to court?

Kainen: Ultimately if the case is litigated and goes to tax court, your client will be destroyed. So, I believe you should try to resolve things at a lower level.

 ABOUT FATCA

In March 2010, President Obama signed into law the Foreign Account Tax Compliance Act (FATCA). Provisions included in the Hiring Incentives to Restore Employment Act (HIRE).

Under FATCA, by 2013, foreign financial institutions (FFIs) will be required, among other things, to provide information about each of their U.S. owned or controlled accounts, disclose information to the IRS and withhold U.S. taxes on these accounts if necessary. If a covered financial institution tries to evade the requirements of the new law, it risks losing its U.S. correspondent banking relationships, among other consequences.
Some provisions of the law must begin before Jan. 1, 2013 in order to ensure effective enforcement. For example, FFIs must enter into a special agreement with the IRS in 2012.  Under the agreement they must:

 “Undertake certain identification and due diligence procedures” related to its account holders; report to the IRS annually, and  “withhold and pay over to the IRS 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person or (c) foreign entity accountholders failing to provide sufficient information about the  identity of its substantial U.S. owners.

The 30-percent withholding tax applies regardless of the amount of gain, or whether there is a gain or loss on the sale (unless the appropriate disclosures are made). Financial institutions that do not comply risk losing their corresponding banking relationships. FFIs include banks, brokerage firms and certain offshore insurance companies.

The final rules will be hammered out in 2011, through the beginning of 2012.

FATCA also:

  • Eliminates the withholding exemption for bearer bonds.
  • Provides for new income tax return reporting requirements for “specified foreign financial assets”.
  • Adds an annual information reporting requirement for passive foreign investment companies.
  • Increases the statute of limitations for civil tax examinations to six years for omission of income from foreign sources; making the civil statute of limitations and the criminal statute of limitations equal.



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