FATCA inspiring new regulations

Thanks to the Foreign Account Tax Compliance Act (FATCA), foreign governments and financial institutions are assisting the U.S. Internal Revenue Service in reporting financial activity and holdings of American citizens living abroad. While the intent of the act was to prevent citizens from evading tax laws, there are opponents of the act who say it is a violation of privacy. Others feel the act is necessary and helps track down a significant amount of financial activity that was unseen before. But there is no question, regardless of the side of the fence people choose to take, that FATCA has established a new playing field for international tax compliance. Not only are banks and governments feeling pressure to comply, but individual citizens are as well. Further, expats now have several financial watchdogs looking through their accounts, as opposed to just the IRS, David Grannaway, former IRS special agent, told Accounting Today. “Basically what’s happening now is that these banks, to comply with their country’s requirements and internationally with the United States, are going in and kind of scrubbing their own accounts,” Grannaway said. “If they find someone or multiple account owners that have United States connections, the banks are sending letters to the clients in the U.S., saying we’ve identified that you are a U.S. citizen, and this is putting you on notice that under FATCA we are potentially going to turn your name over to the IRS, or you need to submit documentation showing that you’ve reported the income on your income taxes.” Foreign financial institutions want to be compliant Essentially, if American citizens have a non-U.S. bank account, those institutions want to know citizens are complying with the IRS. In fact, it is in their best interest to do so, as noted by Forbes. Foreign financial institutions face an increased penalty if they have U.S. accounts of citizens who are not compliant. The Offshore Voluntary Disclosure Program (OVDP) is a program to help taxpayers who have been quiet with their foreign accounts to step forward with minimal penalty. However, those banking institutions not stepping forward in a timely manner will be slapped with a 50 percent penalty. This means a fine equal to 50 percent of each account that is kept quiet from the IRS and is discovered. The standard fee for OVDP is 27.5 percent, which is still significant. But this increase goes to demonstrate how serious the IRS is handling global tax compliance issues. However, many foreign financial entities want to come forward and join the IRS’s OVDP. But the reason behind this is not only because of fear of higher fees. In fact, there is a trend of foreign financial institutions and governments wanting to comply with the IRS anyway. Yet the reason is not because of American tax dollars, but rather the notion of international cooperation. “Ever since 9/11, countries are more linked now and cooperating more with each other in law enforcement,” Grannaway said. “Then you add in the economic crash in 2007, 2008 and 2009. Countries are looking for tax revenue as well.” So regardless of how consumers feel about FATCA, the fact is that governments around the world are joining forces with the IRS in an effort to work together and improve international relations. Further, FATCA is not the only program out there of its kind. Other countries are taking a cue from the IRS and establishing compliance measures of their own. For example, the Indian Parliament just passed a bill to deal with undisclosed foreign income and assets, or better known as Black Money. Black Money Similar to OVDP, the Indian government has established a method for its expats to come clean with their disclosures for a penalty totaling 60 percent of their account amount, the Deccan Herald reported. The Parliament has established a compliance window, which lasts until 2017 and encourages citizens to bring their account information forward. The window closes in 2017 because the country is implementing automatic account reporting in that year, making hiding assets a more difficult task. “The world is no longer willing to tolerate tax havens which thrive in secrecy,” said finance minister Arun Jaitley. As the IRS strengthens its arm to enforce global tax compliance, other countries are joining the fight. These programs, though some have been established for some time, are newly being implemented across the board. This is changing the scope of how taxpayers around the world comply with regulations in their own countries, as well as those they are guest to. Consumers need to be aware of these evolving laws and take necessary steps to be compliant with both domestic and international tax laws. For more information on tax compliance, visit our Global Tax Compliance page today.