February 27, 2014 - Mirit Reif, Adv.

Let's start with the basics- what is FATCA? By now most of you who are reading this article have most likely stumbled on this abbreviation.

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important development in U.S. efforts to combat tax evasion by U.S. persons holding investments in offshore accounts.

Under FATCA, certain U.S. taxpayers holding financial assets outside the United States must report those assets to the IRS. In addition, FATCA will require foreign financial institutions to report to the IRS certain information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

On July 12, 2013, the Internal Revenue Service (IRS) issued Notice 2013-43, which extended the implementation of certain provisions of the Foreign Account Tax Compliance Act (FATCA) by six months and eliminated reporting on U.S. accounts for 2013. The prior Regulations provided for a phased implementation of FATCA withholding, beginning on January 1, 2014. The new deadlines extend the start of withholding, which is now scheduled to begin on July 1, 2014. The reporting requirement is of all U .S. accounts maintained during 2014, and the reporting deadline is March 31, 2015.

In September 2013, The Swiss parliament approved an agreement with the U.S.A. under which Swiss banks, including about 100 second-tier banks, had to turn over information about American account holders to the U.S. government. The new agreement provided for escalating penalties after that time for banks that seek to avoid prosecution, and requested that they sent information regarding American citizens that had unreported accounts in Switzerland even before July 1, 2014, and since 2008 .

In Israel no agreement has yet been signed but it is most likely that one will be signed in the next few months. When this happens, participating Foreign Financial Institutions will have to report to the U.S. IRS a list of all their clients who are U.S. citizens during 2014, (it is not yet sure if they will have to report earlier years as well like in Switzerland). In order to be prepared to do this the bank requests from all their U.S clients to sign on a form called W-9. This is a form that requests US citizens to provide their identification number and other personal information for IRS tax purposes. This information is then provided to the American tax authorities. Refusing to sign on such a form can result in the bank freezing your accounts.

Why does this matter? Because according to U.S. law, all U.S. citizens have an obligation to pay taxes on all their worldwide income including any foreign income. In addition, in cases where the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year they also have to e-file (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR), (otherwise known as the "FBAR"). This requirement applies to any financial interest including even signature authority over any foreign financial account, such as a bank account, brokerage account, mutual fund, trust, pension plan, etc.

The FBAR form is disconnected from the tax return and, since July 2013, must be e-filed only to the Department of Treasury in Detroit, on or before June 30th of the year following the calendar year being reported. No extensions are accepted.

So, if you are a U.S. citizen, and you never filed U.S. tax returns, not to mention the FBAR form, AND the bank requests that you sign on form W9, you are in trouble, since not complying with your tax or FBAR duty could be considered a criminal felony in addition to being a civil one.

The civil penalties are high. For instance, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50% of the total balance of the foreign account per violation. Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

Beginning with the 2011 tax year, a new form called Form 8938 needs to be filled out and attached to the annual income tax return. This form needs to be filed by U.S. taxpayers who have an interest in foreign financial assets including financial accounts, certain foreign securities and interests in foreign entities with an aggregate value exceeding $50,000. The penalty for failing to file form 8938 is s $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

Penalties are imposed for failing to file an income tax return and for failing to pay the amount of tax shown on the tax return. In addition there is an accuracy-related penalty on underpayments.

The criminal penalties can be harsh, for instance a person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under U.S. tax law.

Now that I explained the risks for not filing US tax returns and/or FBAR forms, let's review what the legal options are in order to amend this:

1. Offshore Voluntary Disclosure Program (OVDP)- This program is a uniformed penalty structure for U.S. citizens who come forward voluntarily and report all their previously undisclosed foreign accounts and assets. This initiative enables the IRS to centralize the civil processing of offshore voluntary disclosures and to resolve a very large number of cases without examination. For calendar year taxpayers the voluntary disclosure period is the most recent eight tax years for which the due date has already passed. At the moment the program includes years 2005 through 2012 and there is no set deadline to apply. However, the terms of this program could change at any time going forward. This procedure has a few stages, and can take a year or two until you reach a final agreement with the IRS after which it closes your file. If you are accepted into the program, you will be cleared from any criminal prosecution. Once that occurs, you will need to prepare and submit income tax returns and FBAR forms for years 2005 through 2012, together with some other documents that need to be submitted as well.

Payment- Through this program, you have to pay all income tax due including any interest and accuracy penalty involved, and an FBAR penalty, of either 5%, 12.5%, or 27.5%, (depending on the case), of the highest aggregate balance during the period covered by the voluntary disclosure.

2. On June 26, 2012, the IRS announced a new Streamlined Filing Compliance Procedures for non-resident U.S. taxpayers to go into effect on September 1, 2012. These procedures are being implemented in recognition that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or FBARS but have recently become aware of their filing obligations and now seek to come into compliance with the law. This procedure is ONLY available for non-resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009 and who have not filed a U.S. tax return during the same period.

Anyone utilizing this procedure will be required to file delinquent tax returns, only for the past three years and to file delinquent FBARs for the past six years. This streamlined procedure is designed for taxpayers that present a low compliance risk. If the IRS agent accepts the case brought before him, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. This means that there is a chance the FBAR penalty will be waived. This procedure is much shorter and less "painful" to your wallet but be aware that the IRS has full discrepancy to decide to accept the case into this streamline procedure or not. Submissions which are not eligible for the streamlined processing procedure will be subject to a thorough review and possibly a full examination, which in some cases means that the IRS might request information going back more than only three years. In addition this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer's particular circumstances warrant such prosecution.

What to do

U.S. citizens with undisclosed foreign accounts, assets, and income should consider seeking legal advice and assess their options. This compliance issue is now even more pressing as the foreign banks are under extreme pressure to identify their U.S. clients to the U.S. Authorities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Our tax department regularly advises taxpayers in connection with voluntary disclosure of foreign accounts, assets, and income.

Mirit Reif is an attorney in the Jerusalem branch of Hacohen Wolf Law Offices. She can be reached at 02-9999235. Hacohen Wolf is a law firm specializing in Real Estate, Taxation and Commercial Law with offices in Jerusalem, Tel-Aviv, New York, London, Amsterdam and China.