Foreign Account Tax Compliance Act

The Long Reach of the FATCA Letter Notice

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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 a 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 (now closed), 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 voluntary disclosure.

This is why, if you received a FATCA Letter, 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.

FATCA Attorneys Update: IRS Launches International Data Exchange Service

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On January 12, 2015, the IRS announced the opening of the International Data Exchange Service (IDES) for enrollment. The appearance of IDES is not a surprise to FATCA Attorneys, because most FATCA attorneys knew IDES was the next logical step since its purpose is going to be for foreign financial institutions (FFIs) and host country tax authorities (HCTAs) to securely send their FATCA reports about US account holders under regular FATCA compliance or pursuant to the terms of an intergovernmental agreement (IGA), as applicable.

So far, more than 145,000 financial institutions have registered through the IRS FATCA Registration System. Moreover, the IRS made tremendous progress with IGAs – there are now more than 110 IGAs, either signed or agreed in substance.

FATCA Attorneys Update: How Will IDES Function?

Using IDES, a web application, the sender encrypts the data and IDES encrypts the transmission pathway to protect data transfers. Encryption at both the file and transmission level safeguards sensitive tax information. This means that FFIs and HCTAs can have a high level of confidence in the data about US account holders that they will be transmitted to the IRS.

“The opening of the International Data Exchange Service is a milestone in the implementation of FATCA,” said IRS Commissioner John Koskinen. “With it, comes the start of a secure system of automated, standardized information exchanges among government tax authorities. This will enhance our ability to detect hidden accounts and help ensure fairness in the tax system.”

Where a jurisdiction has a reciprocal IGA and the jurisdiction has the necessary safeguards and infrastructure in place, the IRS will also use IDES to provide similar information to the host country tax authority on accounts in U.S. financial institutions held by the jurisdiction’s residents.

IDES runs on all major browsers, including Chrome, Internet Explorer, Safari, and Firefox and will support application-to-application exchanges through the SFTP transmission protocol enabling a wide variety of users to interact with IDES without building additional infrastructure to support transmission.

FATCA Attorneys Update: IDES and Model 2 IGA Jurisdictions

The IRS encourages HCTAs in Model 2 IGA jurisdictions and FFIs to begin the enrollment process well in advance of their reporting deadline. To begin transmitting information in IDES,an FFI or HCTA will need to first obtain a digital certificate. Digital certificates bind digital information to physical identities and provide data integrity. IDES stores each user’s public key and related digital certificate. All IDES enrollees (including host country tax authorities) must obtain a proper digital certificate in order to enroll (there is a list of approved Certificate Authorities available on irs.gov).

FATCA Attorneys Update: IDES and Model 1 IGA Jurisdictions

For HCTAs in Model 1 IGA jurisdictions, the IRS will directly notify them to let them know when it is time to enroll. FFIs will initiate enrollment online on their own; in order to enroll, the financial institution will need to have registered as a participating financial institution through the IRS FATCA Registration System and have a global intermediary identification number (GIIN) that appears on the IRS FATCA FFI list. The online address for IDES enrollment can be found here.

FATCA Attorneys Update: IDES and Offshore Voluntary Disclosure

The opening of IDES is considered by FATCA attorneys as an important development in FATCA implementation which is likely to affect a very large number of US persons with undisclosed foreign accounts. It should be remembers that if the IRS receives the information about an undisclosed foreign account through IDES, it may prevent the US owner of such an undisclosed foreign account from being able to enter into the IRS Offshore Voluntary Disclosure Program.

FATCA attorneys also should warn their US clients who closed their foreign accounts prior to 2014 that the closure of such accounts prior to the implementation of FATCA does not mean that these accounts will not be reported later. On the contrary, FATCA attorneys should stress to their clients that the IDES is likely to be used by FFIs and HCTAs to report prior non-compliance with respect to closed accounts to the IRS as early as March 31, 2016 if not earlier.

Contact Sherayzen Law Office for Help With Undisclosed Foreign Accounts

Almost all FATCA attorneys stress that time is running out for US persons with undisclosed foreign accounts to start their voluntary disclosure process. With the introduction of IDES, a significant practical hurdle to FATCA implementation has been removed. This means that your undisclosed foreign account may be reported at any point now to the IRS.

If you have undisclosed foreign accounts, you should contact Sherayzen Law Office as soon as possible to explore your voluntary disclosure options. Our experienced FATCA law firm will thoroughly analyze your case, determine your existing exposure to U.S. tax penalties, identify the available voluntary disclosure options, prepare all legal and tax documents for your voluntary disclosure, and vigorously advocate your position against the IRS.

Contact Us Now to Schedule Your Confidential Consultation!

BCGE FATCA Letter

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In a previous article, I started the discussion of various FATCA letters issued by banks around the world by concentrating on the HSBC FATCA letter. In this article, I would like to shift focus to a different part of the world and discuss the Swiss format with BCGE FATCA Letter.

BCGE FATCA Letter: General Format

BCGE (Banque Cantonale de Geneve) is determined to comply with FATCA. For this purpose, it developed its own format of a FATCA letter which closely follows the format adopted by most Swiss banks.

BCGE FATCA Letter follows what I call “comprehensive format” (as opposed to the “reference format” followed by HSBC). This means that BCGE FATCA Letter contains all of the main questions within the body of the letter and references only supplementary US forms (like W8BEN and W9). Thus, BCGE FATCA Letter allows BCGE to collect all of the information necessary for its own FATCA compliance in one place and without the need to create any other specialized forms.

It should be noted that the description of the format so far concentrated on the most common BCGE FATCA Letter for individuals, but there are variations in the form for trusts and corporations. Furthermore, there is a variation for the form for certain other circumstances. Since most US account holders who receive a BCGE FATCA are individuals, I will concentrate on the most common format only.

Let’s review each part of the common BCGE FATCA Letter.

BCGE FATCA Letter: Personal Information

The BCGE FATCA Letter commences with the confirmation of the identity and personal information (including place of residence) of the account holder. This section also commences the examination of the account holder’s US tax status by requiring the account holder to list all of his nationalities and the country of birth.

BCGE FATCA Letter: “Per Se” US Status

This is the most critical part of BCGE FATCA Letter because it focuses on the main designations of US person. In particular, this part of BCGE FATCA Letter asks whether the account holder has US national, is a US tax resident (which is asked in two different ways which mean the same thing – lawful permanent resident and the “green card” test), and whether the substantial presence test is satisfied. Definition for the later is provided in a footnote.

If there is at least one affirmative answer to these first four questions, BCGE will automatically classify the account holder as a US person subject to FATCA reporting. Once this determination is made, BCGE FATCA Letter requires the account holder to submit Form W-9 and a special BCGE Form 6387 “Consent to the disclosure of data according to FATCA”. Failure to complete Form 6387 may result in the BCGE designation of the account under FATCA as belonging to a “recalcitrant account holder”.

Please, note that once a status of US person is established, BCGE is very likely to close any securities accounts of a US account holder.

BCGE FATCA Letter Questions 1.5-1.8 on Potential US Status

If the account holder negatively answered the first four questions, the next part of the BCGE FATCA Letter asks a series of questions to see if the account holder if a US person in some other way. Most of these questions also require a submission of Form W-8BEN (with a non-US passport) or W-9.

BCGE FATCA Letter usually contains the following questions. First, whether the account holder was born in the USA or in a US territory (a definition is provided for this term). If the answer is “yes”, but the account holder believes that he is still not a US person, then he must submit Form W-8BEN, a non-US passport or a similar document, and a copy of the certificate of loss of US nationality. If the certificate cannot be produced, BCGE FATCA Letter automatically classifies the account holder as a US person and requires him to submit Form W-9 and a Consent to the disclosure of data under FATCA.

Second, BCGE FATCA Letter asks whether the account holder is a US taxpayer for any other reason – this a “catch all” question to make sure that BCGE does not miss a potential FATCA requirement. BCGE FATCA Letter lists a number of possibilities of how one becomes a US person : joint tax status with a US spouse, in the process of renouncing US nationality or green card, effectively connected income and owner of a US property. Again, supporting documentation or Form W-9 with the Disclosure Consent under FATCA are required.

Finally, BCGE FATCA Letter addresses the remaining potential for the account holder to be a US taxpayer such as US mailing address, care-of address, postbox, and fixed or mobile telephone number. If the account holder has any of these items, then BCGE FATCA Letter asks him to provide Form W-8BEN with a non-US passport (or similar documentation).

BCGE FATCA letter: Confirmation of Beneficial Ownership Status

By signing BCGE FATCA Letter, the account holder affirms that he is the beneficial owner of the bank account.

BCGE FATCA Letter: Treaty Relief Considerations

If it is established that the account holder is NOT a US person, BCGE FATCA Letter contains a fairly unique aspect – discussion of the possibility of claiming a favorable tax status with respect to investments into US Securities. Most other banks usually discuss this important issue in a separate letter, but BCGE FATCA Letter actually incorporates this issue within its body. Form W-8BEN is required to proceed.

BCGE FATCA Letter: Notice and Reimbursement Requirements Imposed on Account Holder

Finally, a BCGE FATCA Letter usually contains another interesting topic – the shift of risk to the account holder through imposition of notice requirements. Since this is a tactic which is adopted increasingly by foreign banks, it is useful to explore this requirement with specificity.

BCGE FATCA Letter states that, by signing the Letter, the account holder “undertakes to inform the Bank of any changes in circumstances resulting in a change of tax status, as the one indicated below and transmit the necessary documents or forms within 30 days after the change in circumstances.” BCGE FATCA Letter sets forth three such changes: change of residence, change of nationality and amendment of the account holder’s tax status (such as receipt of green card, substantial presence in the United States, et cetera).

BCGE FATCA Letter goes on to state that if the declarations made by the account holder in the Letter become invalid for some reason (such as belated discovery of U.S. status), the account holder must transmit to BCGE a new declaration of status with a Form W-9 and FATCA waiver.

The key phrase, however, is with respect to what happens if the information submitted by the account holder within the BCGE FATCA Letter turns out to be incorrect or incomplete. In such a case, the account holder “undertakes to indemnify the Bank for all damages it may suffer” as a result of relying on the incorrect declarations made in the BCGE FATCA Letter. It is unclear whether failure to comply with the Notice requirement is equally subject to this reimbursement requirements, but it seems to be the case.

Thus, it appears that BCGE FATCA Letter decisively shifts all risk of an incorrect declaration (even if non-willful due to belated discovery) from BCGE to the account holder. This is why it is important for the account holder’s attorney to carefully review this document and negotiate the necessary changes.

Contact Sherayzen Law Office for Help With FATCA Compliance

If you received a FATCA letter regarding an undisclosed personal or business account, contact Sherayzen Law Office for professional help. Our team of international experts will thoroughly review your case, analyze your current FBAR and FATCA exposure, recommend the proper voluntary disclosure plan and help you implement it (including preparation of all necessary legal documents and tax forms).

Contact Us to Schedule Your Confidential Consultation Now!

Kentucky Resident Charged for Maintaining Secret Swiss Bank Accounts

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U.S. Attorney Preet Bharara for the Southern District of New York and Acting Special Agent in Charge Shantelle P. Kitchen of the Internal Revenue Service-Criminal Investigation (IRS-CI) New York Field Office announced on November 18, 2014, the unsealing of an indictment against Peter Canale, a U.S. citizen and resident of Kentucky, for conspiring to defraud the IRS and evade taxes by establishing and maintaining secret Swiss bank accounts. Canale was arrested on November 18, 2014, at his residence in Jamestown, Kentucky, and is expected to be presented later today in the US District Court for the Eastern District of Kentucky. Canale is scheduled to be arraigned before US District Judge Katherine B. Forrest in Manhattan federal court on December 3, 2014, at 3:00 p.m.

Facts of the Case With Respect to Secret Swiss Bank Accounts According to Indictment

According to the allegations in the indictment unsealed on November 18, 2014, in Manhattan federal court, Canale conspired with others – including Michael Canale, his brother, Beda Singenberger, a Swiss citizen who ran a financial advisory firm, and Hans Thomann, a Swiss citizen who served as a client adviser at UBS and certain Swiss asset management firms – to establish and maintain secret Swiss bank accounts and to hide those accounts from the IRS. Canale used a sham entity to conceal from the IRS his ownership of the secret Swiss Bank Accounts and deliberately failed to report the accounts and the income generated in the accounts to the IRS.

One of the most surprising facts in this case is the source of money – it was foreign inheritance. In approximately 2000, a relative of Canale’s who held an undeclared bank account in Switzerland died and left a substantial portion of the assets in the undeclared account to Canale and Michael Canale. Canale and his brother met with Thomann and Singenberger and determined they would continue to maintain the assets in the secret Swiss Bank accounts for the benefit of Canale and his brother.

Thereafter, in approximately 2005, Canale, with Singenberger’s assistance, opened secret Swiss Bank Accounts at Wegelin bank (no longer in existence). The account was opened in the name of a sham foundation formed under the laws of Lichtenstein to conceal Canale’s ownership.

Equally surprising is that a criminal case was brought against an account that was under $1,000,000. As of December 31, 2009, the account held assets valued at approximately $789,000.

For each of the calendar years from 2007 through 2010, Canale willfully failed to report on his tax returns his interest in the secret Swiss Bank Accounts and the income generated in those secret Swiss Bank accounts. For each of these years, Canale also failed to file a Report of Foreign Bank and Financial Accounts (FBAR) with the IRS, as the law required him to do.

Canale, 61, is charged with one count of conspiracy to defraud the United States, evade taxes, and file a false and fraudulent income tax return, which carries a statutory maximum sentence of five years in prison. The maximum potential sentence is prescribed by Congress and is provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge.

Secret Swiss Bank Accounts Charges Related to a Client List Obtained from Indicted Swiss Banker

The Canale case is another example of an indictment stemming directly from a misplaced letter mailed by a Swiss financial adviser Singenberger (the same advisor who helped Canale open his secret Swiss Bank Accounts) that ended up in the hands of the US tax authorities. The IRS has been picking off the clients on the list one by one since 2013 (including Jacques Wajsfelner and Michael Reiss).

Lessons to be Learned from Canale Case

As I mentioned in a recent article regarding the Cohen case, there has been a growing trend where the IRS is pursuing criminal prosecutions in cases that involve smaller balances on secret Swiss Bank Accounts as long as the IRS is comfortable with its ability to establish willfulness with respect to FBAR non-reporting.

Canale case is just one more example of this trend. The balances were not large at all – the highest balance was far under $1 million. However, the Canale case also included an aggravating factor of allegedly using a sham foundation to conceal his identity; these cases usually carry a higher than usual probability of an IRS criminal prosecution.

What was unusual about the Canale case is how little weight was given to the source of the funds on the secret Swiss Bank Accounts – inheritance. It appears that, in all likelihood, other circumstances were so negative as to simply overwhelm the positive nature of this factor.

Contact Sherayzen Law Office for Professional Help Regarding Your Undisclosed Foreign Accounts

If you had undisclosed foreign accounts at any point since the year 2006, you should consider your voluntary disclosure options as soon as possible. While the DOJ Program for Swiss Banks makes the maintenance of secret Swiss Bank Accounts extremely dangerous at this point, the implementation of FATCA since July 1, 2014, carries a far more potent chance that you undisclosed foreign accounts will be discovered even if they are outside of Switzerland.

If you need help, contact Mr. Sherayzen, a voluntary disclosure professional and international tax attorney at Sherayzen Law Office. Our team will thoroughly analyze your case, evaluate your current voluntary disclosure options, and proceed to implement your voluntary disclosure plan (including preparation of all legal documents and tax forms).

Contact Us to Schedule Your Confidential Consultation Now.

HSBC FATCA Letter

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In a previous article, I explained why FATCA Letters mark a critical event for the voluntary disclosure process of a US taxpayer with undisclosed foreign accounts. While I mentioned that the content of a FATCA letter is usually more or less the same, I emphasized that the actual format of a FATCA letter may differ dramatically from bank to bank. With this article, I am starting a series of article devoted to various FATCA letter formats adopted by various banks around the world. Today, I wish to concentrate on the HSBC FATCA Letter.

HSBC FATCA Letter: General Format

HSBC FATCA Letter follows what I call a “reference format”. Unlike the “comprehensive format” usually followed by FATCA letters issued by Swiss banks, the reference format of the HSBC FATCA Letter means that the HSBC FATCA Letter is fairly concise but it references (hence the name) various forms that need to be completed by the HSBC customers.

Basically, this means that the HSBC FATCA Letter itself does not ask any questions, but it acts as kind of a checklist for various supplementary forms that need to be completed by the account holder in order to provide the bank with the information necessary for its own FATCA compliance. Failure to provide such information would result in the bank classifying the US taxpayer as a “recalcitrant account holder”.

An interesting aspect about the format that the HSBC FATCA Letter follows is that some (but not all) of the supplementary forms were developed and modified by the bank for the sole purpose of FATCA compliance. Thus, there are two types of supplementary forms that are referenced by HSBC FATCA letter: US standard forms (W-8, W-9, et cetera) and proprietary forms developed by the HSBC itself (SW, S1, S3, et cetera).

HSBC FATCA Letter: US Supplementary Forms

Similar to every FATCA letter issued by other banks around the world, HSBC FATCA letter references the main relevant forms developed by the US government – Form W8 (usually, W8BEN) and Form W9. Form W9 is of course the critical form that must be provided to a foreign bank in order to verify the US taxpayer’s social security number. Form W8, on the other hand, provides the critical information for the foreign bank for the purpose of tax withholding under relevant tax treaties. It also allows the bank to indirectly confirm the account holder’s non-US tax status.

HSBC FATCA Letter: Proprietary Forms Developed by HSBC

HSBC FATCA letter references a variety of forms developed or modified by HSBC according to FATCA requirements. The most common documents are S1, S2 and S3. Form S1 is basically asks for a government-issued ID establishing non-US status. Form S2 is a copy of Individual Certification of Loss of Nationality (again for establishing the Non-US Citizenship status) which is very relevant in the limited 9(though, rapidly growing) situation where a US taxpayer gives up his US citizenship.

Form S3 is one of the most important forms referenced by the HSBC FATCA letter. Officially titled as “Explanation of a US address and/or US Phone Number”, Form S-1 requires a fairly intrusive explanation of whether the account holder has US phone number and US telephone address, and why. What is very interesting about Form S3 issued by HSBC is that it requires the taxpayer to make a detailed determination whether the substantial presence test has been met. It even contains a fairly detailed explanation of the test itself.

Contact Sherayzen Law Office for Help with HSBC FATCA Letter

If you have undisclosed bank accounts with HSBC (whether Hong Kong, India, or any other country except the United States itself), you should immediately begin the exploration of your voluntary disclosure options before HSBC discloses your account to the IRS.

This is why you will need the professional help of Mr. Eugene Sherayzen, an experienced international tax lawyer who already has helped hundreds of US taxpayers around the world with respect to their US tax compliance. We can also help you!

Contact US to Schedule Your Confidential Consultation Now!