MSBA April Bar Bulletin

Glen E. Frost, Esq., CPA, Managing Partner
John Pontius

Foreign Bank Account Reporting Extends Beyond Switzerland: FATCA Updates

For the last six years, most of the focus of offshore tax evasion has been on Swiss bank accounts. However, the Internal Revenue Service will soon be broadening their investigations into other foreign countries with the implementation of new provisions of the Foreign Tax Compliance Act “FATCA” on July 1, 2014. This new law will require foreign banks to disclose the account information of U.S. account holders or face a 30% withholding tax. The IRS is specifically looking for U.S. persons not paying their U.S. taxes from their foreign bank accounts and not disclosing the values of their accounts. For purposes of this article, we define U.S. persons as U.S. citizens and resident aliens (i.e. Green Card Holders). To make the article easier to read, the terms “U.S. persons” and “taxpayers” will be used interchangeably. This article provides an overview of current tax law for U.S. persons holding foreign bank accounts and assets. It also summarizes the new FATCA provisions that will take effect this summer, so that taxpayers can plan accordingly to minimize their risk of civil and potentially criminal penalties.


The Foreign Account Tax Compliance Act (“FATCA”) is a source of frustration for taxpayers with foreign bank accounts and assets because of the added compliance requirement of filing Form 8938,Statement of Specified Foreign Assetswith their annual federal income tax return. Additionally, taxpayers may soon find it hard to keep or open foreign bank accounts. This is because some banks will chose not to have U.S. clients, instead of following the new FATCA provisions that will be implemented on July 1, 2014. This law will require that foreign banks implement cumbersome reporting requirements for U.S. persons or face a 30% withholding tax.

FATCA took effect on January 1, 2013 as part of the Hiring Incentives to Restore Employment (“HIRE”) Act signed into law on March 18, 2010. It has made significant changes for information reporting of foreign-held bank accounts and assets. It was designed to serve as the foreign bank reporting mechanism to better enforce the Bank Secrecy Act (“BSA”) of 1970. Before fully explaining FATCA, it is important to understand the background of the tax law in this area.


The BSA requires U.S. persons to file annual reports with the Department of Treasury disclosing their foreign bank accounts and assets, if the value of the account is over $10,000 at any time during the year. In the past, this information was reported on Form TD 90-22.1,Report of Foreign Bank and Financial Accounts(“FBAR”). Since July 1, 2013, this disclosure needed to be filed electronically with the Department of Treasury on Financial Crimes Enforcement Network (“FinCEN”) Form 114,FBAR. The non-willful penalty for failing to file an FBAR may be up to $10,000 per account per year. The willful penalty is the greater of $100,000 or 50 percent of the account value.

Historically, as foreign banks were not legally required to disclose information about their U.S. account holders to the U.S. government, few U.S. persons provided this information to the Department of Treasury. This changed in 2008 during the Department of Justice’s investigation of the United Bank of Switzerland (“UBS”). UBS admitted to helping U.S. taxpayers shield assets to avoid taxes and was subsequently fined $780 million. In conjunction with this record fine, UBS was required to turn over names linked to 4,700 of their accounts. Since then, many Swiss banks have been investigated by the Department of Justice for civil and criminal penalties. As a result, many Swiss banks have disclosed the names of their U.S. account holders and/or closed their accounts. More recently, many Swiss banks have sought to enter into non-prosecution agreements through a program established by the Department of Justice, which will lead to the disclosure of many more accounts.

Since 2011, FATCA mandated that U.S. persons with foreign-held assets over $50,000 report those assets on Form 8938,Statement of Specified Foreign Assets. The amount of assets that trigger this requirement vary based upon filing status and whether the taxpayer resides domestically or abroad. This form is included with the taxpayer’s annual tax return and is in addition to the requirement to file an FBAR with the Department of Treasury.

If a U.S. taxpayer fails to disclose a foreign asset on Form 8938, he or she may be subject to a $10,000 failure to file penalty and additional penalties of up to $60,000 for continued failure to file after the taxpayer has been notified by the IRS. Underpayment of the tax, due as a result of income derived from undisclosed foreign accounts, may subject taxpayers to an additional accuracy related penalty on the tax deficiency. In addition, failure to file Form 8938, failure to disclose assets, and failure to pay related taxes, could result in criminal penalties.

Implementation of new FATCA requirements

New provisions of FATCA take effect on July 1, 2014. The Department of the Treasury is mandating foreign banks to report income derived from U.S. person held accounts, or be subject to a 30 percent withholding tax. The reporting will be on a form similar to a Form 1099, a form that is required to be filed by domestic banks at this time. Currently, over 20 countries have signed intergovernmental agreements (“IGAs”) for financial information exchanges. Thus, taxpayers need to be aware that their foreign bank accounts outside of Switzerland may soon be investigated by the IRS. By filing a Foreign Financial Institution (“FFI”) Agreement with the IRS, the FFI agrees to identify U.S. citizen held accounts, comply with due diligence procedures, and IRS reporting requirements. Once the FFI identifies its U.S. account holders, it must report the name, address, and tax identification number (“TIN”) of each account holder, the account number, and value at year end, as well as any gross dividends, interest, and other income paid or credited to the account. As a result of these burdensome administrative requirements, many Canadian and European banks have been closing and denying new brokerage accounts for U.S. customers.

Taxpayer Options in Light of New FATCA Provisions

In the coming months, many taxpayers holding foreign bank accounts can expect their account information to be reported to the IRS. This gives the U.S. person with previously undisclosed foreign bank accounts a much greater likelihood of detection. Taxpayers have options on how to proceed with disclosing their foreign accounts. These options include, complying with future reporting requirements, making a “soft” or “quiet” disclosure, or participating in the more formal Offshore Voluntary Disclosure Program (“OVDP”). Failing to comply with the reporting requirements for foreign bank accounts is an incredibly risky proposition, and it is important to exactingly follow those requirements. If you are aware of someone who has not kept up with their reporting requirements, refer them to an experienced tax attorney, who can guide them through all of their options.

This article was written by John Pontius and Glen E. Frost, of Frost Law. Frost Law is a tax controversy law firm located in Annapolis, Maryland.

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Tags: Articles, IRS, Tax Evasion