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Hungarian Bank Accounts | US International Tax Lawyer & Attorney

US taxpayers who own Hungarian bank accounts may have to comply with a large number of US tax reporting requirements. In particular, they need to be concerned about reporting income generated by their Hungarian bank accounts as well as disclosing the ownership of these accounts on FBAR and Form 8938. Other requirements may apply, but these are the three main ones. Let’s explore them in more detail in this essay.

Hungarian Bank Accounts: Definition of “Filer”

It is important to understand that each of the aforementioned three requirements has its own definition of “filer” – a person who is subject to these obligations to report his foreign assets and foreign income. These differences in the definition of filer, however, are fairly small. Rather, every definition is essentially based on the concept of “US tax residency”. In fact, the worldwide income reporting requirement applies only to US tax residents.

Who are “US tax residents”? This definition encompasses the following persons: US citizens, US permanent residents, persons who satisfy the Substantial Presence Test and persons who declare themselves as US tax residents. Keep in mind that this is a general definition of US tax residents which is subject to a number of important exceptions.

So, if US tax residency definition forms the basis for all three requirements, what are the differences? Generally, the differences arise with respect to situations which are less common and mostly limited to the persons who try to declare themselves as US tax residents or non-resident aliens. The most common issues arise with respect to the application of the Substantial Presence Test, first-year definition of US tax resident and last-year definition of a US tax resident. A common example can be found with respect to treaty “tie-breaker” provisions, which foreign persons use to escape the effects of the Substantial Presence Test for US tax residency purposes.

The determination of your US tax reporting requirements is the primary task of your international tax attorney. It is simply too dangerous for a common taxpayer or even an accountant to attempt to dabble in this area of US international tax law.

Hungarian Bank Accounts: Worldwide Income Reporting Requirement

Now that we understand the concept of US tax residency, we are ready to explore the aforementioned three US reporting requirements with respect to Hungarian bank accounts. Let’s begin with the obligation to report income generated by Hungarian bank accounts.

All US tax residents, as defined above, must disclose their worldwide income on their US tax returns. This means that they must report to the IRS their US-source and foreign-source income. The worldwide income reporting requirement applies to all types of foreign-source income: bank interest income, dividends, royalties, capital gains and any other income.

The worldwide income reporting requirement applies even if the foreign income is subject to Hungarian tax withholding or reported on a Hungarian tax return. It also does not matter whether the income was ever transferred to the United States or stayed in Hungary – the worldwide income reporting requirement will still apply in either case.

Hungarian Bank Accounts: FBAR (FinCEN Form 114)

In addition to reporting the income generated by Hungarian bank accounts, a taxpayer may also need to disclose the ownership of these accounts on his Report of Foreign Bank and Financial Accounts (abbreviated as “FBAR”). The official name of FBAR is FinCEN Form 114.

FBAR is arguably the most important reporting requirement with respect to foreign accounts. The irony is that it is not a tax form – i.e. it is not part of the Internal Revenue Code which is Title 26 of the United States Code. Rather, FBAR was created by the Bank Secrecy Act of 1970 under Title 31 of the United States Code.

Basically, the US Department of the Treasury requires all “US Persons” to disclose their ownership interest in or signatory authority or any other authority over Hungarian (and any other foreign country) bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. If these requirements are met, the disclosure requirement is satisfied by filing an FBAR.

It is important to understand that all parts of this FBAR requirement are terms and conditions that require further exploration and understanding. I encourage you to search our firm’s website, sherayzenlaw.com, for the definition of “US Persons” and the explanation of other parts of the FBAR requirement.

There is one part of the FBAR requirement, however, that I wish to explore here in more detail – the definition of “account”. The reason for this special treatment is the fact that this definition is a very important source of confusion among US taxpayers with respect to what needs to be disclosed on FBAR.

The FBAR definition of an account is substantially broader than what this word generally means in our society. “Account” for FBAR purposes includes: checking accounts, savings accounts, fixed-deposit accounts, investments accounts, mutual funds, options/commodity futures accounts, life insurance policies with a cash surrender value, precious metals accounts, earth mineral accounts, et cetera. In fact, whenever there is a custodial relationship between a foreign financial institution and a US person’s foreign asset, there is a very high probability that the IRS will find that an account exists for FBAR purposes.

Despite the fact that FBAR compliance is neither easy nor straightforward, FBAR has a very severe penalty system. On the criminal side, FBAR noncompliance may lead to as many as ten years in jail (of course, these penalties come into effect in extreme situations). On the civil side, the most dreaded penalties are FBAR willful civil penalties which can easily exceed a person’s net worth. Even FBAR non-willful penalties can wreak a havoc in a person’s financial life.

Civil FBAR penalties have their own complex web of penalty mitigation layers, which depend on the facts and circumstances of one’s case. In 2015, the IRS added another layer of limitations on the FBAR penalty imposition. One must remember, however, that these are voluntary IRS actions which the IRS may disregard whenever circumstances warrant such an action.

Hungarian Bank Accounts: FATCA Form 8938

Finally, the third requirement that I wish to discuss today is a relative newcomer, FATCA Form 8938. This form requires “Specified Persons” to disclose all of their Specified Foreign Financial Assets (“SFFA”) as long as these Specified Persons meet the applicable filing threshold. The filing threshold depends on the Specified Person’s tax return filing status and his physical residency.

The IRS defines SFFA very broadly to include an enormous variety of financial instruments, including foreign bank accounts, foreign business ownership, foreign trust beneficiary interests, bond certificates, various types of swaps, et cetera. In some ways, FBAR and Form 8938 require the reporting of the same assets, but these two forms are completely independent from each other. This means that a taxpayer may have to report same foreign assets on FBAR and Form 8938.

Specified Persons consist of two categories of filers: Specified Individuals and Specified Domestic Entities. You can find a detailed explanation of both categories by searching our website sherayzenlaw.com.

Finally, Form 8938 has its own penalty system which has far-reaching income tax consequences (including disallowance of foreign tax credit and imposition of 40% accuracy-related income tax penalties). There is also a $10,000 failure-to-file penalty.

One must also remember that, unlike FBAR, Form 8938 is filed with the filer’s federal tax return and forms part of the tax return. This means that a failure to file Form 8938 may render the entire tax return incomplete and potentially subject to an IRS audit.

Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Your Hungarian Bank Accounts

If you have Hungarian bank accounts, you should contact Sherayzen Law Office for professional help with your US international tax compliance. We have helped hundreds of US taxpayers with their US international tax issues (including disclosure of Hungarian bank accounts), and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

FFI FATCA Requirements: Introduction | FATCA Tax Lawyer & Attorney

Since July 1, 2014, the Foreign Account Tax Compliance Act (“FATCA”) has imposed a heavy compliance burden on Foreign Financial Institutions (“FFIs”). Many of these FFIs have struggled with developing a good understanding of their new FATCA requirements even to this day. In this brief essay, I want to provide a general overview of these FFI FATCA requirements so that readers can begin to develop an understanding of FATCA.

FFI FATCA Requirements: Background Information

FATCA was enacted into law in 2010. The most important idea behind the new law was to combat US tax noncompliance of US taxpayers with foreign financial assets.

There are several important parts of FATCA, but the most important one of them was forcing FFIs to identify US owners of foreign financial assets, collect certain information about them and share it with the IRS. Failure to do so meant facing a FATCA penalty in the form of a 30% withholding tax on the gross amount of all transactions with a noncompliant FFI. In essence, FATCA turned FFIs around the world into free IRS informants.

FFI FATCA Requirements: Three Categories

What precisely does FATCA require FFIs to do in order to be FATCA-compliant? If we look broadly at the FFI FATCA requirements, we can group all of these requirements into three broad categories. Each of these categories consists of a myriad of smaller but still fairly complex FATCA compliance requirements and requires a deep understanding of new FATCA terms.

The first and most important category of FATCA requirements is to collect the required due diligence information concerning all account holders, investors and payees. “Collecting” here means obtaining the required due diligence information and documentation. In other words, FATCA has to be part of an FFI’s “Know Your Client” (“KYC”) procedures.

Additionally, these new due diligence requirements apply not only to new customers, but also to pre-existing account holders. Pre-existing account holders are the account holders who already had accounts with an FFI as of the time FATCA was implemented (i.e. July 1, 2014) or sometimes a different date.

The second requirement is to report to the IRS three categories of persons: (a) all US account holders; (b) recalcitrant account holders; and © non-participating (i.e. FATCA-noncompliant) FFIs. This means that, under FATCA, FFIs must turn over to the IRS the identifying information concerning accounts held by US persons as well as point out the “bad apples” who refuse to comply with FATCA.

Recalcitrant account holders is a fairly complex FATCA term. In its most basic form, it refers to an account holder who does not supply the required FATCA information and who does not fall under any types of a waiver. In a future article, I will provide a more detailed description of this term, but, at this point, I would like to refer the readers to Treas Reg § 1.1471-5(g)(2).

Finally, the FFIs are charged with the requirement to coordinate FATCA withholding as necessary. In other words, the FFIs are required to impose FATCA noncompliance penalties on any FATCA non-compliant FFI, thereby turning FATCA in a worldwide self-enforcing system from which no FFI can escape.

FFI FATCA Requirements Are Interconnected

Needless to say that all three of these FFI FATCA requirements are deeply related to each other. For example, the due diligence requirement is essential to an FFI’s ability to properly comply with its FATCA reporting and withholding obligations. It is important to keep this connection between different FFI FATCA Requirements in mind while building an effective FATCA compliance system.

Contact Sherayzen Law Office to Find Out More About Your FFI FATCA Requirements

Sherayzen Law Office is a US international tax law firm that specializes in US international tax compliance, including FATCA compliance. We also help FFIs develop an effective FATCA compliance program as well as analyze existing FATCA compliance programs.

Contact Us Today to Schedule Your Confidential Consultation!

Mizrahi-Tefahot Bank Rejects DOJ Settlement Offer | FATCA Tax Lawyer

On August 8, 2018, Mizrahi-Tefahot Bank (“Mizrahi-Tefahot”) informed the Tel Aviv Stock Exchange that its Board of Directors rejected a settlement offer from the US Department of Justice (“DOJ”).

It appears that the DOJ offer was received by the bank on August 7, 2018. The DOJ proposed that Mizrahi-Tefahot pay $342 million to settle the DOJ investigation into whether the bank helped US taxpayers evade US federal taxes.

Mizrahi-Tefahot felt that this was an unreasonably high amount to pay. In its financial statements for the quarter that ended on March 31, 2018, the bank reserved just $46.1 million to settle the DOJ investigation.

The official and primary reason for the rejection of the DOJ offer, however, was the fact that the DOJ’s letter was not accompanied by any details of how DOJ arrived at such a high sum of money. The letter did not contain even any references to any calculation principles. Mizrahi-Tefahot’s lawyer felt that any reasonable calculation of potential settlement amount would lead to a much lower settlement offer.

The most likely reason why Mizrahi-Tefahot felt so confident in rejecting the DOJ offer was its knowledge of the settlements paid by the Swiss banks. NPB Neue Privat AG, for example, only paid $5 million. Basler Kantonalbank believes it can settle for $100 million. In other words, it appears that the negotiation process with the DOJ has matured to the point where Mizrahi-Tefahot can reasonably predict the amount for which the DOJ would agree to settle the case.

Mizrahi-Tefahot is not the only bank in Israel under the IRS investigation. Bank Leumi settled its DOJ investigation for a fine of $270 million and entered into a deferred prosecution agreement. Bank Hapoalim is still in settlement negotiation with the DOJ; in fact, last May, it further increased the funds set aside for a possible DOJ settlement to a total of $365 million.

Contact Sherayzen Law Office for Help With the Voluntary Disclosure of your Mizrahi-Tefahot and Other Israeli Bank Accounts

As part of their settlement agreements, foreign banks agree to supply to the DOJ full information concerning bank accounts owned by US persons. Mizrahi-Tefahot settlement will very likely follow the same path; so will Bank Hapoalim and any other Israeli bank investigated by the DOJ.

This means that if you have undisclosed foreign bank accounts in Israel, you are at a high risk of IRS detection and potentially disastrous FBAR penalties. This is why you need to contact Sherayzen Law Office for professional help with the voluntary disclosure of your Israeli bank accounts. Our law firm specializes in offshore voluntary disclosures of foreign accounts and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!