The Foreign Account Tax Compliance Act (FATCA) has been in effect for more than two years. The law, which has revolutionized tax compliance for American citizens with overseas accounts, was passed in 2010. During that time, the IRS has been extraordinarily successful in wringing compliance with its disclosure requirements from foreign banking and investment institutions. With the help of the Justice Department, the IRS has settled cases with these banks and those banks have paid settlements of nearly a billion dollars.
The law contains numerous reporting requirements and noncompliance brings with it draconian penalties and the potential for criminal prosecution. To encourage compliance, the IRS has offered various programs, including the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined program.
If you have not complied with the reporting requirements of the law, you have two options, but given publicityFATCA has received, you should discuss with your tax attorney with great care which option you should choose because it is becoming more difficult to successfully argue lack of knowledge of the requirements of FATCA. Choosing incorrectly could have severe consequences.
The OVDP is the more demanding option, with 8 years of tax returns and FBARs and a potential of 27.5 percent to 50 percent penalty, but it offers closing agreement with the IRS that prevents criminal prosecution.
The Streamlined program seems less severe, requiring only three years of returns and FBARs and much lower penalties. But it does not take criminal prosecution off the table, and you could be subject to a stringent audit. Most important, you noncompliance must be demonstrably non-willful.
Willfulness is a broad category for the IRS in this context, and if there is any evidence within your financial records and transactional behavior that suggests that you actively avoided learning which disclosure requirements applied to your activities, the IRS could argue that you were acting with “willful blindness.”
You should discuss with your tax attorney the factors the IRS will use to examine your behavior and determine if you could be in danger of triggering a finding of willfulness. The IRS will expect a detailed explanation of all of your behavior, and a failure to provide plausible answers for all of your behavior could result in severe penalties.