During the week of Nov. 2-6 Martin Dahinden, the ambassador of Switzerland to the United States, will be in Atlanta to join the annual regional conference of Swiss representations in North America.
Representatives from Swiss offices in Canada including Montreal, Ottawa and Vancouver and its U.S. offices in Boston, Washington, New York, San Francisco and Atlanta will review new laws affecting Swiss citizens living abroad.
In 2013, the Swiss government and the U.S. Department of Justice signed an agreement to pursue a program that is to encourage Swiss banks to cooperate in the department’s ongoing investigations of the use of foreign bank accounts to commit tax evasion.
In an effort to bring some perspective on how the program affects U.S. citizens who have lived abroad, and the U.S. tax laws affecting them, Global Atlanta interviewed Christopher Benner, a partner in the Personal Financial Services practice of Atlanta-based Bennett Thrasher LLP.
Mr. Benner leads the accounting firm’s growing international individual segment of the practice which includes taxation of expatriates, nonresident aliens, and U.S. persons with various cross-border taxation issues.
These issues could include reporting previously undisclosed foreign financial assets under the Offshore Voluntary Disclosure Program (OVDP), domestic and foreign streamlined offshore procedures, the Foreign Account Tax Compliance Act (FBAR) compliance, foreign asset reporting, international estate planning, and expatriation analysis.
In the following interview he discusses the impact of the crackdown on secret bank accounts as well as other policies affecting U.S. citizens who are living or have lived abroad.
Global Atlanta: The Obama administration cracked down on secret bank accounts and made transparency of financial transactions a priority. What successes has it had and what failures in this regard?
Mr. Benner: The various offshore initiatives have generated billions of dollars of revenue from prior year noncompliance so that has been a positive. The fact that several more will come into compliance from prior years and going forward should also help generate billions more in additional revenue, also a positive.
The implementation of FATCA (the Foreign Account Tax Compliance Act) has also helped clamp down on tax evasion in overseas accounts where we now have agreements with practically all first world countries to exchange information about their U.S. account holders which has definitely increased transparency.
But FATCA has also created a massive new compliance regime that is burdensome to regulate and implement, and has had the effect of many overseas institutions refusing to do business with U.S. account holders and arguably has created a negative sentiment towards the U.S. for its perceived overreach.
Additionally, the increased compliance efforts have managed to get many smaller account holders or those account holders who were not being mischievous in their activities and forced them to pay what many see as outrageously high penalties to come into compliance.
Overall though, I would still say it has been a net positive as too many U.S. persons have been hiding money and evading tax for too long and the recent increase in compliance enforcement has helped reduce this long standing problem. It has also sufficiently instilled fear in the hearts of many so that similar efforts will not be carried on in the future.
Global Atlanta: In 2009 UBS, Switzerland’s largest bank, admitted that it helped 52,000 Americans evade taxes. What was the nature of these accounts, and what eventually happened to them?
Mr. Benner: Many of them have since entered into the offshore voluntary disclosure program. Some are still not in compliance, while others are being criminally prosecuted.
Global Atlanta: The U.S. Treasury Department requires every “United States person” who has one or more foreign bank accounts which at any point during the year reaches an aggregate balance of over $10,000 to file a FBAR (Foreign Bank and Financial Accounts) form. What is the definition of a “United States person,” and how successful is the department in enforcing this regulation?
Mr. Benner: The definition of a United States person is actually quite broad and often misunderstood as a result. A U.S. person with a financial interest in or signature authority over foreign financial accounts must file an FBAR. U.S. persons include an individual, partnership, corporation, trust, trust beneficiaries, and shareholders in corporations or partners in partnerships or other similar entities.
Whether a U.S. person has a “financial interest” in the account can be either direct or indirectly through an entity and the U.S. person does not need to be the legal owner to have a financial interest. If through an entity, generally the U.S. person must indirectly own more than 50 percent of the foreign entity that is the legal owner of the account.
For example, a U.S. partnership owning 70 percent of a foreign corporation with foreign bank accounts would have an FBAR filing requirement as its ownership exceeds 50 percent and the partnership is a U.S. person.
But what’s often overlooked is that a partner owning more than 71.5 percent (70%*71.6% = >50% indirect ownership) of the U.S. partnership would also have an FBAR filing requirement. Similar indirect ownership rules apply for other informational returns beyond the FBAR for disclosing foreign financial assets that taxpayers need to be aware of.
The IRS has scarcely been handing out fines for failure to file an FBAR even if it is late as long as the taxpayer has paid tax on all of the income from the account(s) with a timely filed return and files it without being contacted first by the IRS/Fin Cen.
However, I expect this to change in the near future. As a result of FATCA, the U.S. now receives information regarding U.S. account holders at many foreign financial institutions where they did not have this information previously.
As the IRS has more information available to them to allow them to more readily identify U.S. account holders at foreign financial institutions, and match that against the database of FBAR filers for each year I think we can expect to start seeing FBAR failure to file penalties become more prevalent.
Global Atlanta: Have many “United States persons” come forth voluntarily and reported their previously undisclosed foreign accounts and assets? And how has the IRS dealt with them that have?
Mr. Benner: Quite a few have come forward and the revenue speaks for itself. Since the 2009 initiative and through June of 2014, more than 45,000 disclosures have been made and $6.5 billion in revenue has been collected by the IRS from those disclosures.
Tens of thousands more have “come in from the cold” under the streamline domestic and foreign offshore procedures but the revenue data is still unavailable. The domestic streamline offshore procedures were just implemented in the latter half of 2014 but I would expect those will bring in a haul of at least $2-3 billion each year. This program assesses a 5 percent penalty rather than a 27.5 percent penalty under OVDP (Offshore Voluntary Disclosure Program) for filers who were ‘non-willful’.
Global Atlanta: Please describe the different sorts of circumstances involving “United States persons with which you and your colleagues at Bennett Thrasher have dealt with?
Mr. Benner: Often times individuals new to the U.S. don’t understand the worldwide taxation regime of the U.S. as their home country might have only taxed income earned in their country of residence. I have seen this many times with individuals thinking – I pay tax on that account in X Country, so I don’t have to pay tax on that in the U.S. which is wrong.
Other times I have seen where a U.S. citizen sets up a foreign entity to acquire real estate in a foreign country not realizing that he just created an additional disclosure requirement regarding that foreign entity and fails to disclose it as a result.
And in other times I have seen a foreign national come to the U.S. and leave a foreign 401(k) equivalent type account behind and think that this is not a “bank account” and “tax deferred” for U.S. purpose when in fact it is a foreign account and is often not tax deferred in the U.S.
Another typical example is U.S. expats working abroad who think that they didn’t have to file U.S. tax returns due to living abroad and think that if they don’t make over the foreign earned income exclusion amount that they don’t have to file – and that is in fact not the case.
Others have included “accidental Americans” who were Americans by birth but were largely raised in a foreign country and only recently became aware of their U.S. filing requirement.
Global Atlanta: In view of the IRS and Justice Department’s increased offshore enforcement efforts, what do you recommend your clients with undisclosed foreign assets do to avoid prosecution and limit their exposure to civil penalties?
Mr. Benner: They should consult a knowledgeable attorney and accountant in this area. Often times we can help them navigate their choices on which program to enter, and also to help them assess the costs of coming into compliance, which usually are not as bad as they might think.
I should also note that if they think they have a compliance issue or learn that they have one and do nothing about it, the penalties for non-compliance can become far more severe. The penalties are not just monetary and can include criminal prosecution and up to 10 years of jail time.
Global Atlanta: In an effort to combat tax evasion and money laundering activities, Switzerland has agreed to a deal with the Organization for Economic Cooperation and Development to exchange data with 560 other countries that should effectively end its banking secrecy. However, the Swiss parliament has refused to discuss a bill that would change it legislation and comply with the U.S. Foreign Compliance Act. Do you think that the U.S.-Swiss deal is going to be effective?
Mr. Benner: Yes. Switzerland did have a big problem with getting its government to kowtow to the IRS and its FATCA demands, but it eventually did so.
The IRS currently receives information under a ‘model 2’ FATCA IGA signed in February of 2013 where the U.S. receives information about U.S. account holders directly from the Swiss banking institutions.
Switzerland has also recently announced its intention to switch to a ‘model 1’ FATCA IGA agreement soon that involves receiving the information directly from the Swiss government as that falls in line with most other countries of similar stature.
Certain elements of the right wing party in Switzerland did attempt to impose a referendum on FATCA in late 2013, but they failed to collect the requisite 50,000 signatures. And thus, FATCA marches on.
Mr. Benner earned his bachelor of arts in business and behavioral science degree from Oglethorpe University and his master of science (Personal Financial Planning) degree from the Robinson College of Business at Georgia State University. He is a Certified Public Accountant (CPA) licensed in Georgia and is a Certified Financial Planner (CFP®) and Personal Financial Specialist (PFS). He is also a member of the Personal Financial Planning Section of the American Institute of Certified Public Accountants (AICPA) and the Georgia Society of CPAs (GSCPA).
