Monday, December 9, 2013

VOLUNTARY DISCLOSURES and FATCA: WILL YOU GET CAUGHT IF YOU DO NOTHING?

My apologies to the readers of the IRS Report Card for not writing for so long. The reality of FATCA’s upcoming start dates has finally started to sink in with Americans abroad and recent immigrants to the US.

There are so many issues on the table now both for individuals, the IRS, the Department of Treasury, and financial institutions, as well as tax practitioners, professors, and students.

For both Americans abroad and recent immigrants: Millions of people are agonizing over the question, "Should I just blow it off or do I really need to take some action?" The answer is easy: Whether you take action or not is all based on your personal tolerance level for risk and uncertainty. It is your decision to make. Many people are totally comfortable with the idea that they will never get caught violating the tax laws by not reporting foreign income and accounts or for some reason don’t care if they do get caught. This is because it is one thing for the IRS to compute a tax due and owing from a delinquent taxpayer, but the IRS is years away from routine collection in the ordinary course of delinquent taxes from Americans overseas, provided there are no periodic or regular payments like Social Security payments or pension payments leaving the US for accounts abroad.

Justifiably, some people are viewing the government in general, and Congress and the Executive Branch in particular, as essentially dysfunctional. For these folks, sleeping at night is no problem at all. "My foreign accounts are none of Uncle Sam’s business and they must have bigger fish to fry compared to my situation."

There is no "legal advice" here and I make no moral judgments, nor do I address whether the overall FATCA concept is right or wrong. Nevertheless, here is what we know for sure:

1. The purpose of FATCA is to create a virtual international banking and financial database. Whether or not you do anything at all right now will not change the fact that over the next couple of years, detailed information about your foreign account is going to the IRS either directly from a foreign bank or through an Intergovernmental Agreement ("IGA") from foreign governments to the U.S. Treasury. It will be years before the IRS fully integrates the data it will receive under the IGAs, which are in the news every day now.

The reason FATCA is gaining so much momentum with governments abroad is twofold: international financial businesses and institutions do not want to miss out on future profits arising out of business with Americans; and they certainly do not want to screw up their ability to make transfers from and between other foreign financial institutions. The serious and very real privacy issues notwithstanding, the profit motive, is what is at work here plain and simple. The IGAs allow foreign financial institutions to self-certify their compliance with KYC and AML ("Know Your Customer" and "Anti-Money Laundering") rules of which the financial industry has long been well-aware. If all they have to do is turn over the names of their American account holders to stay in the game, "No problem," even if the US government reneges on the so-called reciprocity issue.

2. As inept as the government seems, they are getting better and better at accumulating and integrating databases. Of course, it is one thing to "be in" a database; quite another for a law enforcement worker to seek your name.

3. For almost all of the taxpayers who are worried about whether they are going to jail for not disclosing foreign assets or accounts, forget about it. If you get caught, chances are overwhelmingly in favor of a civil penalty and/or criminal dollar fine only, and no jail or arrest. They may finish you off financially, but in most cases the government cannot afford to assign Assistant United States Attorneys to parade you before a jury.

4. You can be sure you can find practitioners who will tell you just to forget about the fact that you have unreported foreign assets or accounts. If you get caught, and somehow it becomes a criminal case, the government will have to prove that you acted willfully and your "reliance" defense had no credibility. If your case remains civil only, "reasonable cause" reliance on the advice of a professional is something you will have to prove.

There are still return preparers who have never heard about FBARs and form 8938 (statement of foreign assets). But at this late date, it would be foolhardy to trust any return preparer who doesn’t even ask you if you have any "foreign" accounts; even if that so-called "foreign account" is with the Banco di Roma just down the street from your apartment in Rome through which you pay your rent and deposit your paychecks.

5. You can also be sure you can find practitioners who will tell you your only choice is "to go through the Program," i.e., make a voluntary disclosure under the OVDI. Everyone’s facts are different. One size does not fit all and you may have legal basis for not signing up. I am downgrading my C- to a D+ on my IRS report card for their handling of the OVDI program. While at the agents’ working level, our experience has been overwhelmingly positive with the people who are assigned to handle our clients’ cases, the failure of upper IRS management to anticipate the case loads and Congress’ mean-spirited underfunding of the IRS is absolutely inexcusable. We have been waiting for close to two years for the assignment of an agent to review our OVDI submissions.

6. There are many people at this moment who are making egregious mistakes in an attempt to cover their tracks by going "underground," starting to do in cash what was previously done in paper; attempting to "undo" gifts or other transfers; and sadly, putting pressure on family members or friends to participate in arrangements which would never occur but for the fear of getting caught up in FATCA.

For government prosecutors, the tipping point is a question of degree: The degree to which there is a pattern of, or multiple affirmative acts of, concealment or deception. No single act is controlling. It is a facts and circumstance analysis. How long has it been going on? What does the paper trail look like? Are their unwritten "agreements" or conspiracies with others? How much money is involved? How much effort was involved and how often were affirmative acts made to keep it a secret?

Coming up for practitioners: How will the government and courts litigate refund suits for unagreed FBAR-only cases? Ever hear of the Tucker Act?

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