FATCA Criminal Penalties | International Tax Lawyer & Attorney
While there are a number of articles in professional publications and attorneys’ blogs covering the civil penalties associated with a failure to comply with the Foreign Account Tax Compliance Act (“FATCA”), there is almost a complete silence with respect to FATCA criminal penalties. This essay intends to fill this gap by introducing its readers to potential FATCA criminal penalties that the IRS may pursue in case of FATCA noncompliance.
FATCA Criminal Penalties: FATCA Background and FFI Reporting Requirements
Congress enacted the Foreign Account Tax Compliance Act (“FATCA”) as part of the Hiring Incentives to Restore Employment (“HIRE”) Act of 2010. The law revolutionized international tax compliance, because, for the very first time, it forced all foreign financial institutions (“FFIs”) to report their US account holders to the IRS, including their names, account numbers and highest values of these accounts.
In other words, FATCA has turned all compliant FFIs into IRS agents. FFIs now carry the entire burden of automatically (and, it is important to emphasize the word “automatically”) disclosing all of the FATCA-required information directly to the IRS. The IRS now only needs to properly process and analyze the data in order to identify noncompliant taxpayers and investigate them.
How did the Congress achieve this goal? It imposed a very harsh penalty on FATCA-noncompliant FFIs without paying much attention to the potential legal and political implications such an over-reaching law has for the sovereignty of other nations. FATCA created a new tax withholding regime under which every noncompliant FFI faces a 30% withholding with respect to any incoming transaction. The penalty is imposed on the gross amount of a transaction, which means that using a noncompliant FFI may result in a net loss for the parties engaged in the transaction.
The net impact of the FATCA FFI penalty is that no bank or person would wish to utilize a noncompliant FFI, effectively cutting off the latter from the any USD-nominated transactions and the world markets.
FATCA Criminal Penalties: FATCA Requirements Imposed on US Taxpayers
FATCA created a new tax reporting obligation specifically for US taxpayers called Form 8938. I have discussed Form 8938 in detail elsewhere on my website and here I will provide just a very simplified description of this requirement. A Specified Person (who can be an individual or an entity) must file Form 8938 if the value of his Specified Foreign Financial Assets (SFFAs) exceeds a certain filing threshold which is determined by the tax return filing status of the Specified Person.
SFFAs are defined very broadly to include pretty much any type of a financial asset, an ownership interest in a foreign business, ownership of a beneficiary interest in a foreign trust, ownership interest in a foreign trust under the IRC Sections 671 through 679, et cetera. Additionally, Form 8938 requires the Specified Person to report foreign income attributable to holding or disposing of SFFAs.
Failure to file Form 8938 may lead to an imposition of a $10,000 civil penalty, subject to reasonable cause exception. An additional $10,000 penalty applies if the taxpayer fails to file Form 8938 within 90 days after the IRS mails notice of the failure to file the form. If the taxpayer persists in his failure to file the form, the IRS will impose additional $10,000 for each thirty-day periods the failure continues up to the maximum of $50,000. It is important to note that the statute of limitations does not start to run if Form 8938 has not been filed.
FATCA Criminal Penalties in General
Interestingly, the US Congress did not create any separate FATCA criminal penalties. The IRS and the US Department of Justice (“DOJ”), however, have not had any problems in engaging into criminal prosecutions of FATCA violations.
There are three major provisions that the IRS and the DOJ can rely upon in their criminal prosecution of FATCA violations. First, 18 U.S.C. section 371 (see below for more details). Second, 26 U.S.C. 7201 – a felony charge for intentional filing of a false Form 8938. Finally, 26 U.S.C. 7203 – a misdemeanor charge for a willful failure to file Form 8938.
So far, the IRS and the DOJ have used Section 371 more than Sections 7201 and 7203. However, as time goes on, I expect that Sections 7201 and 7203 will be used more extensively.
Since Section 371 criminal charges are the most common at this point, let’s explore this type of a criminal prosecution charge in more detail.
FATCA Criminal Penalties: 18 U.S.C. Section 371
As long as there is enough evidence, the IRS and the DOJ can use 18 U.S.C. section 371 to prosecute US taxpayers based on a charge of engaging in a FATCA-related conspiracy. This is likely to become the most favorite tool to prosecute persons for aiding US clients to circumvent FATCA requirements, including tax withholding provisions.
The DOJ already used this tool as early as within two months after FATCA tax withholding obligations became effective in July of 2014. On September 9, 2014, Mr. Robert Bandfield, five other individuals and six corporations were charged under 18 U.S.C. section 371 for a conspiracy to aid US clients with evasion of FATCA reporting requirements.
It is important to point out that criminal charges under 18 U.S.C. section 371 are especially dangerous for foreigners who help US taxpayers with tax evasion.
Contact Sherayzen Law Office for Professional Help With a Willful Failure to File Forms 8938
For persons who willfully failed to file their Forms 8938, the best strategy to avoid a criminal prosecution is to engage in a voluntary disclosure of their undisclosed foreign assets before the IRS finds out about your willful FATCA violations. Sherayzen Law Office can help you!
While the IRS flagship Offshore Voluntary Disclosure Program (“OVDP”) was closed on September 28, 2019, the IRS updated its traditional voluntary disclosure program in November of 2018 to help willful taxpayers voluntarily disclose their prior tax noncompliance. I will refer to this option as Modified Traditional Voluntary Disclosure (“MTVD”).
Sherayzen Law Office can help you with MTVD and any other type of a voluntary disclosure. Our highly-experienced team of tax professionals has helped hundreds of US taxpayers to successfully conduct an offshore voluntary disclosure of their undisclosed foreign assets and foreign income. We have prevented the initiation of numerous criminal prosecutions and saved tens of millions of dollars in penalties for our clients. We Can Help You!
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