Tax dodgers beware: new foreign account tax compliance legislation.

• Author: Smith, Abrahm W.
• Position: Tax Law

Over the past year, the bank secrecy world has changed dramatically. Major international financial institutions have been under the gun of the U.S. Department of Justice to provide account information for their U.S. account holders. The Internal Revenue Service has also joined the effort and on March 23, 2009, established a temporary penalty framework to apply to voluntary disclosures by U.S. persons of their non-U.S. bank accounts to encourage them to become tax compliant. This special program ended on October 15, 2009, but individuals continue to enter the IRS' voluntary disclosure program and disclose their non-U.S. bank accounts even though the penalty framework is uncertain. The IRS announced that the special voluntary disclosure program was very successful and that nearly 15,000 taxpayers came forth during the program. (1)

The current environment (the U.S. Department of Justice's aggressive pursuit of taxpayers' financial information at non-U.S. banks and the United States' need for increased tax revenue) has created the perfect storm to pass legislation to address U.S. persons' use of non-U.S. bank accounts. On October 27, 2009, Senate Finance Committee Chair Max Baucus (D-Mont), House Ways and Means Committee Chair Charles Rangel (D-NY), senior Senate Finance Committee member John Kerry (D-MA), and Ways and Means Select Revenue Subcommittee Chair Richard Neal (D-MA) introduced legislation "to clamp down on tax evasion and improve taxpayer compliance." The legislation was known as the Foreign Account Tax Compliance Act (FATCA). (2) FATCA follows previous efforts to combat foreign accounts, including President Obama's release of the General Explanations of the Administration's Fiscal Year 2010 Revenue Proposals (usually known as the Greenbook) on May 12, 2009, Senator Max Baucus' proposals of March 12, 2009, and Senator Carl Levin's Stop Tax Haven Abuse Act introduced on March 2, 2009.

On March 18, 2010, President Obama signed into law H.R. 2847, the Hiring Incentives to Restore Employment Act (the act or the HIRE Act). The act provides incentives for job creation, but in order to pay for the incentives, the act also contains significant changes that will affect foreign financial institutions that choose to do business with U.S. persons. Of the 12 pages in the U.S. Congressional Record that contain the act, six pages are dedicated to foreign account tax compliance. (3) Thus, although the act is commonly referred to as the HIRE Act for its focus on job creation, one of its main purposes is to target tax dodgers' use of foreign accounts. The act incorporates substantially all of FATCA, with one important exception: FATCA would have imposed reporting requirements on material advisors, including attorneys, accountants, and other professionals, who advise on acquisitions or formations of foreign entities. (4) Although this provision did not make it into the act, practitioners should take note that the U.S. Congress and the U.S. Treasury tried to bring attorneys, accountants, and other professionals into their information gathering police force.

The focus of the foreign account compliance provisions of the act is to increase transparency in the international banking world. As indicated by Senator Levin, "[T]ax dodgers conceal billions of dollars in assets within secrecy-shrouded foreign banks, dodging taxes and penalizing those of us who pay the taxes we owe. The Permanent Subcommittee on Investigations, which I chair, has estimated that these tax-dodging schemes cost the federal treasury $100 billion a year." (5) Under the act, the number of pages of the Internal Revenue Code of 1986, as amended, increases with new requirements for foreign banks to disclose their U.S. account holders, thereby making it more difficult for tax dodgers to hide their assets. However, the U.S. Congress is not done in this area. As Senator Levin said, "[T]his legislation is not a...