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Specified Foreign Financial Assets | Form 8938 International Tax Lawyers

Specified Foreign Financial Assets is one of the most important terms in contemporary US international tax law. In this article, I will explore what these Specified Foreign Financial Assets are and why they play such an important role in modern US international tax compliance.

Specified Foreign Financial Assets and FATCA

In order to understand the significance of the Specified Foreign Financial Assets, we must turn to one of the most important US tax laws called Foreign Account Tax Compliance Act or FATCA.

FATCA was signed into law in 2010 and it immediately became the most important development in international taxation since at least 1970s, if not all the way to the end of the Second World War. There are three parts of FATCA that made it such a revolutionary development in international tax law. The first part of FATCA requires all foreign financial institutions (FFIs) to report to the IRS, directly or indirectly, Specified Foreign Financial Assets (be careful, this concept can be modified by a FATCA implementation treaty to include and exclude various foreign assets) owned by US persons. In essence, it meant that the world financial community would now serve as an IRS informer, providing the third-party reporting of financial assets owned by US persons.

In order to enforce this “obligation”, the second part of FATCA imposed a 30% penalty on the gross amount of a transaction whenever the transaction is related to an institution that is not compliant with FATCA. Such a huge penalty was meant to force all FFIs to become FATCA-compliant and, to a large extent, this goal has been attained.

With the third-party reporting secured by the first two parts of FATCA, the third part of FATCA imposed a new reporting requirement, Form 8938, on certain categories of US taxpayers who would fall within the categories of Specified Individuals and (starting 2016) Specified Domestic Entities. FATCA Form 8938 forced these Specified Persons to directly report their Specified Foreign Financial Assets with their US tax returns.

Specified Foreign Financial Assets: General Definition

In general, Specified Foreign Financial Assets include: foreign financial accounts and assets that are held for investment and not held in an account maintained by a financial institution. The concept of “assets held for investment and not held in an account” covers stocks or securities issued by anyone who is not a US person, any interest in a foreign entity, any financial instrument or contract that has an issuer or counterparty that is other than a US person, stock issued by a foreign corporation, an interest in a foreign trust or foreign estate and a capital or profits interest in a foreign partnership.

In other words, definition of the Specified Foreign Financial Assets is so broad that it applies to virtually any financial instrument or security one can imagine as long as one of the counterparties and/or issuers is a foreign person. It also includes pretty much any ownership interest in a foreign business entity as well as a beneficiary interest in a foreign trust. Therefore, it is always prudent to contact an international tax attorney to confirm whether your particular investment is covered by the definition of the Specified Foreign Financial Assets.

Specified Foreign Financial Assets: Additional Non-Exclusive Lists of Assets

Additionally, the instructions to Form 8938 specifically state that Specified Foreign Financial Assets encompass an interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty. Specified Foreign Financial Assets also include a note, bond, debenture, or other form of indebtedness issued by a foreign person. Finally, options and other derivative instructions with a foreign counterparty or issuer are also included in the definition of Specified Foreign Financial Assets.

Specified Foreign Financial Assets: Influence of FATCA Implementation Treaties

Despite the broad general definition of Specified Foreign Financial Assets and despite the “laundry” list of assets specifically identified above, one should always look at a specific FATCA implementation treaty in order to verify whether an asset is considered to fall within the definition of Specified Foreign Financial Assets. In particular, one must have extra care with foreign retirement accounts. During the negotiation of FATCA Implementation Treaties, countries often insisted that particular types of retirement accounts should be excluded from FATCA reporting (the United Kingdom was particularly successful in this respect).

A word of caution: even if an asset is excluded from FATCA reporting, it does not automatically mean that it would also be excluded from FBAR reporting. It is possible to have a financial asset reportable exclusively on FBAR, but not Form 8938.

Contact Sherayzen Law Office for Professional Help with Reporting of Specified Foreign Financial Assets on Form 8938

If you have any of the Specified Foreign Financial Assets listed above, contact Sherayzen Law Office for professional help. In addition to annual tax compliance, our firm can help you with the offshore voluntary disclosure with respect to any delinquent Forms 8938 which you have not timely filed in any of the prior years.

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US Bank Accounts Disclosed to Israel | FATCA Tax Lawyers Florida

Many persons have assumed that FATCA is a one-way street where only the United States is able to obtain tax information with respect to foreign accounts controlled by its citizens while the information about US bank accounts is never exchanged with other FATCA signatories. While, to some (or even to a large) degree this may be true due to the fact that US financial institutions do not generally collect certain information about nonresident aliens with financial accounts in the United States, there are exceptions.

Disclosure of US Bank Accounts held by US Tax Residents Under FATCA

One of such exceptions are US taxpayers who are also citizens or tax residents of another country. Generally, the information about US bank accounts owned by US tax residents is collected by US financial institutions and shared with the IRS. Then, the IRS may share this information with other countries, including Israel.

This is a fairly important exception, because it affects millions of US citizens who reside overseas, including those who reside in Israel.

2017 Disclosures of Owners of US Bank Accounts to Israel

The most recent example of such a disclosure occurred on February 28, 2017, when the Israeli Tax Authority (“ITA”) announced that it received a second batch of information from the IRS with respect to about 30,000 US bank accounts held by Israeli citizens in the year 2014. All of this information was provided pursuant to US-Israel FATCA Agreement.

Earlier this year, in January, the US transferred the first batch of financial information under FATCA to Israel. At that time, the IRS provided information about 35,000 Israelis who had bank accounts in the United States in 2015.

Disclosure of US Bank Accounts and Other Information Will Lead to Audits of Israeli Tax Returns

The ITA also stated that the IRS will continue to supply the ITA with FATCA information regarding US Bank Accounts in the future. Israel also expects to commence the exchange of information under CRS (OECD’s Common Reporting Standard) by September of 2018.

All of the information that the ITA collects under FATCA and CRS will be used to compare with the information reported by Israelis on their Israeli tax returns. In fact, the ITA created a special tax force dedicated to screening and comparing the data. Hence, one should expect an increase in tax audits and imposition of tax penalties in Israel.

US Bank Accounts

Swiss Bank Program Data Will Be Shared with Israel, Not Just US Bank Accounts

There is one important point that should be emphasized with respect to the future IRS disclosures to Israel. Not only will the IRS share with the ITA the information regarding US bank accounts held by Israelis, but it will also supply the data about Israeli-held Swiss bank accounts that the IRS obtained through the Swiss Bank Program. The ITA already declared that it expects to receive data regarding thousands of the Swiss bank accounts held by Israelis.

This development is something that Sherayzen Law Office has frequently warned about in the past. We have repeatedly stated our concerns that the information that a foreign country obtains regarding US-held accounts through FATCA or CRS will eventually be shared with the IRS through one of the tax information exchange agreements.

The recent ITA declaration is just another confirmation of the correctness of our prediction – only it works here to benefit the ITA, not the IRS. We should expect more confirmations in the future that benefit the IRS directly with respect to detection of noncompliant US taxpayers who might have escaped the direct detection through FATCA.

Hiding Assets and Income in Offshore Accounts Again Made the IRS “Dirty Dozen” List

On February 5, 2016, the IRS again stated that avoiding U.S. taxes by hiding money or assets in unreported offshore accounts remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

The problem with offshore accounts is two-fold. On the one hand, there are numerous con-artists who use offshore accounts to lure taxpayers into scams and schemes. The second and a much larger problem for the IRS is the fact that many U.S. taxpayers used offshore account to hide assets and income from the IRS.

Fighting the strategy of using offshore accounts to hide assets and income has been one of the top priorities of the IRS since the early 2000s. The problem has been complicated by the fact that there are many legitimate reasons for having an offshore account – a fact that, unfortunately, has been largely ignored by journalists and the public opinion in the United States. Therefore, it is necessary for the IRS to approach the problem of offshore accounts carefully in order to avoid hurting innocent people.

Over the years, the IRS (with the help of Congress) has chosen five different and interrelated strategies to fight tax evasion through offshore accounts.

1. IRS Civil and Criminal Enforcement

IRS examinations, audits, subpoenas, and criminal enforcement play a central role in the IRS war against using offshore accounts to hide assets and income. The ability of the IRS to enforce U.S. tax laws is amazingly broad and the IRS will use it whenever it wishes.

Since 2009, the IRS conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

Hence, brute force still looms large in fighting tax evasion through offshore accounts and creates enormous (and fully justified) fear in the hearts of many U.S. taxpayers. This fear is also central to the IRS ability to use the other four strategies listed below.

2. Extensive Reporting Requirement for Owners of Offshore Accounts

As owners of offshore accounts have already noticed, the number of reporting requirements with respect to offshore accounts has risen dramatically. In addition to FBAR (which has existed since the 1970s), FATCA introduced Form 8938 in 2011. Furthermore, Form 8621 and Schedule B to Form 1040 have been modified to require additional reporting with respect to offshore accounts. Other forms also indirectly require reporting of foreign accounts (through reporting of ownership or a beneficial interest in a foreign entity or a foreign trust).

By forcing U.S .taxpayers to do extensive reporting with respect to their offshore accounts, the IRS has achieved two goals at the same time. First, it has collected an enormous amount of information with respect to U.S. offshore accounts and their owners. This information can be used in a later investigation to track fund and identify patterns of behavior. In a short while, due to the implementation of FATCA in many jurisdictions around the world, this information will also be used to compare the banks’ information with the information provided by the taxpayers on their information returns.

Second, the enormous fines associated with offshore accounts reporting can create huge tax liabilities for noncompliant taxpayers. This provides the IRS with a financial incentive to pursue these taxpayers. These potentially disastrous noncompliance fines also serve to deter many taxpayers from engaging in risky tax evasion schemes.

Of course, one of the biggest problems associated with these reporting requirements is that the majority of persons, including tax accountants, never heard of them until they were already in trouble. When the IRS pressure started to rise, it was already too late for a lot of U.S. taxpayers to do simply current compliance and they had to pay fines to the IRS. It is important to emphasize that the process is by no means over – on the contrary, as the complexity of U.S. tax compliance continues to rise, a lot of taxpayers (and their accountants) still do not know about a lot of these requirements.

3. Voluntary Disclosures

In order to alleviate the reporting noncompliance nightmares for U.S .taxpayers, the IRS created a number of voluntary disclosure programs. The early programs were not very successful; however, after the IRS stunning victory in the 2008 UBS case, the 2009 Offshore Voluntary Disclosure Initiative (OVDI) turned out to be a huge success. The 2011 OVDP, 2012 OVDP and 2014 OVDP with 2014 Streamlined Compliance Procedures followed in quick succession and with even bigger success. Since 2009, more than 54,000 OVDP disclosures took place and the IRS has collected more than $8 billion; this is not taking into account the huge surge in Streamlined disclosures since 2014.

The information that has been collected through OVDP is used to identify noncompliant individuals and entire schemes to evade U.S. taxes through offshore accounts. The IRS then uses this information to pursue taxpayers with undeclared offshore accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas using offshore accounts. The IRS works closely with the Department of Justice (DOJ) to prosecute these tax evasion cases.

4. Swiss Bank Program

In addition to the voluntary disclosure program for individuals, the IRS also created a voluntary disclosure program for Swiss banks. Such voluntary disclosure program is, of course, an unprecedented event – never in history did one country force another country’s entire bank system to do a voluntary disclosure on the territory of that other country.

While the debate over this breach of Swiss sovereignty (although, technically, the Swiss government agreed to the Swiss Bank Program) is interesting, for the purposes of this article, it is important to note that Swiss Bank program was a huge step forward in attacking the usage of offshore accounts to hide assets and income.

By the end of February of 2016, about 80 Swiss banks went through Category 2 voluntary disclosure and paid penalties to the U.S. government. They also turned over enormous amount of information regarding their U.S. accountholders and the various schemes that Swiss bankers developed to hide assets and funds from the IRS. In essence, the Swiss bankers turned over to the IRS substantially all of the blueprints for tax evasion that they had created.

5. FATCA

The final major strategy for fighting the practice of using offshore accounts to hide assets and income from the IRS is the famous Foreign Account Tax Compliance Act or FATCA. Ever since FATCA entered into force, it has changed the global landscape of international tax compliance. One of the most salient features of FATCA is the fact that it forces foreign banks to report to the IRS all of the offshore accounts that they can identify as owned by U.S. persons.

This groundbreaking piece of legislation has had an enormous impact on the ability of the IRS to identify noncompliance by U.S. persons, because foreign banks now act as its agents and voluntarily disclose U.S. persons and their offshore accounts.

Contact Sherayzen Law Office for Help With Your Offshore Accounts

If you have undisclosed offshore accounts, you should contact Sherayzen Law Office as soon as possible. We have helped hundreds of U.S. taxpayers to bring their U.S. tax affairs in order while saving millions of dollars in potential penalty reductions. We furthermore help to reduce your income tax liability as a result of your voluntary disclosure and post-voluntary disclosure tax planning.

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Main Differences between Model FATCA IGAs

As FATCA is being adopted by more and more countries, it is important to understand that there are two types of model FATCA IGAs (i.e. intergovernmental agreements to implement FATCA) that are signed between various countries and the United States. Both model FATCA IGAs were issued by the US Treasury Department and both model FATCA IGAs are perfectly valid, but some countries prefer one model FATCA IGA over the other. In this article, I would like briefly discuss the main differences between the two model FATCA IGAs.

Model FATCA IGAs Background

FATCA (Foreign Account Tax Compliance Act) was enacted by US Congress in 2010 to target tax non-compliance of U.S. taxpayers with foreign accounts. Since that time, this law has established the global standard for promoting tax transparency and has been adopted by a very large number of countries around the globe.

The adoption of FATCA usually occurs as a two-step process. First, a foreign jurisdiction signs one of the two model FATCA IGAs with the IRS. Second, the foreign jurisdiction’s legislature modifies domestic law to implement the provisions of whatever one of the two model FATCA IGAs that the country signed.

Model FATCA IGAs: Model 1

The first of the two Model FATCA IGAs is called “Model 1IGA”. Its principal feature is that it requires foreign financial institutions (FFIs) to report all information required under FATCA to their domestic government tax agencies. The domestic tax agencies would collect all of the FATCA information and turn it over of the IRS.

Since the FFIs would do all of their reporting domestically to their own agencies, Model 1 IGA is sometimes negotiated as a reciprocal agreement. This means that some Model 1 IGAs require the IRS to provide certain information with respect to the tax residents of the country that signed such a reciprocal Model 1 IGA.

Finally, the FFIs covered by a Model 1 IGA do not need to sign an FFI agreement. However, the FFIs will still need to register on the IRS’s FATCA Registration Portal or file IRS Form 8957.

Model FATCA IGAs: Model 2

The second of the two Model FATCA IGAs is called “Model 2 IGA”. Unlike the other model IGA, Model 2 IGA requires FFIs to report the FATCA-related information directly to the IRS and without any intermediaries.

Since the FFIs report all FATCA-related information directly to he IRS, they need to register with the IRS and sign an FFI agreement (which should reflect the specific changes to the model FATCA IGAs negotiated by the foreign jurisdiction).

Both Model FATCA IGAs Lead to Disclosure of Foreign Accounts Held by US Persons

Irrespective of the type of the agreement, it is important to remember that both model FATCA IGAs are designed to perform the same function – disclosure of foreign accounts held by US persons (directly or indirectly). This means that the spread of both types of model FATCA IGAs presents a direct threat to any undisclosed foreign accounts of US persons with potentially catastrophic consequences for these US persons, including potential criminal prosecution and willful FBAR penalties in excess of the balances of these secret accounts.

Contact Sherayzen Law Office for Help with Undisclosed Foreign Accounts

If you have undisclosed foreign accounts, please contact Sherayzen Law Office as soon as possible. Our international tax lawyers will first carefully review the facts of your case and identify the best voluntary disclosure options available to you.  Our international tax professionals will conduct your voluntary disclosure process from the beginning through the end, including the preparation all of the required legal documents and tax forms.

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The Long Reach of the FATCA Letter Notice

The FATCA Letter Notice is a critical component of a FATCA Letter that is causing significant problems for millions of US owners of foreign financial accounts. Yet, a lot of the FATCA letter recipients are completely unaware of the full impact of the FATCA Letter Notice. In this article, I will provide a general explanation of the FATCA Letter Notice and its importance to US owners of foreign bank and financial accounts.

What is a FATCA Letter?

When FATCA was implemented in July of 2014, foreign banks and financial institutions (“FFIs”) started to mail letters to their clients aimed to verify information required for the FFI reporting under FATCA. These letters are called “FATCA Letters”.

The FATCA Letters serve two important functions for the FFIs. First, the questions contained in or referred to by a FATCA Letter are designed to help FFIs verify whether the account holder is a US person. Second, the FATCA Letter is designed to give notice to the US account holders that their accounts will be disclosed to the IRS.

In this article, I will concentrate only on the FATCA Letter Notice and its most significant impact on US taxpayers.

The FATCA Letter Notice

Very few people understand that the there is not just one FATCA Letter Notice, but two different FATCA Letter Notices that serve different functions – the express FATCA Letter Notice and the implicit FATCA Letter Notice. The express FATCA Letter Notice is the official notice with respect to the FFI’s own FATCA compliance. The implicit FATCA Letter Notice is the notice forced upon the US account holders with respect to their US tax compliance.

The Express FATCA Letter Notice

The express FATCA Letter Notice is very simple – the FFI puts the US account holder on notice that his or her account will disclosed to the IRS. This means that the FFI has complied with its due diligence requirements for the US tax purposes as well as the local bank privacy purposes.

The express FATCA Letter Notice is the one that most US taxpayers understand and the one that they are most concerned about. This is understandable because the express FATCA Letter Notice tells US account holders that their accounts will be disclosed to the IRS irrespective of whether the account holders want this disclosure and whether the timing of this disclosure is convenient to them.

The Implicit FATCA Letter Notice

The implicit FATCA Letter Notice consists of the forcing upon the US account holder the knowledge of their past non-compliance with US tax laws. This “forcing” element is accomplished by the FATCA Letter’s statements that all foreign accounts owned by US persons must be disclosed to the IRS by these very persons. As soon as he receives a FATCA Letter, the US person is on notice that his foreign accounts are subject to complex US tax compliance rules and, if it turns out that these accounts were never properly disclosed, he is non-compliant with respect to past filings. In essence, this is a “shock therapy” method of inducing US tax compliance.

This implicit FATCA Letter Notice of past US tax non-compliance is very dangerous for three interrelated reasons. First, it forces the US recipient of a FATCA Letter to conduct current year’s tax compliance to avoid willful non-compliance designation. The current year’s compliance is done irrespective of the recipient’s circumstances and his ability to do so. At the same time, it provides the IRS with the information that this US person owns foreign financial accounts that were never reported previously.

Second, the receipt of the FATCA letter means that the US account holder should promptly take the necessary steps to conduct some form of an offshore voluntary disclosure. Failure to take these steps or a significant delay in conducting a voluntary disclosure may result in the IRS investigation and the account holder’s inability to conduct voluntary disclosure. Moreover, the delayed reaction to the FATCA Letter Notice may strengthen the IRS case for arguing willful non-compliance with respect to any delinquent FBARs and any other information returns.

Finally, since the US taxpayer is forced to react swiftly to the implicit FATCA Letter Notice (due to the other two factors described above), his ability to choose the right path of his voluntary disclosure may be constrained by the lack of the necessary documentation or knowledge of other important facts. With the changes that the IRS implemented with respect to the 2014 OVDP, SDOP and SFOP, it is important to remember that engaging in one form of a voluntary disclosure may result in the subsequent inability to switch to another voluntary disclosure path.

Contact Sherayzen Law Office for Help With Your FATCA Letter

As you can see, receiving a FATCA Letter Notice is an event of potentially important implications. An inadequate response to a FATCA Letter Notice may have a highly deleterious effect on the US account holder’s ability to conduct voluntary disclosure (which means facing the draconian FBAR civil and criminal penalties) or choose the right type of a voluntary disclosure.

This is why, if you received a FATCA Letter, you should contact Sherayzen Law Office for help immediately. Our experienced international tax law firm has helped hundreds of US taxpayers like you to bring their US tax affairs into full compliance with US tax laws, and we can help you as well.

So, Contact Us Now to Schedule Your Initial Consultation! Remember, contacting Sherayzen Law Office is Confidential.