Expats in the US with offshore assets are between a rock and a hard place about declaring their financial affairs to the tax man as the Foreign Account Tax Compliance Act (FATCA) counts down.
The options are straightforward – give up your tax secrets now or have them revealed by foreign financial institutions under FATCA from July 2014.
The Internal Revenue Service (IRS) has had a program for disclosing foreign accounts running since 2009. Thousands of taxpayers have signed up for the amnesty which offers capped penalties.
Thousands more suspected tax avoiders have held back in the hope FATCA would be repealed and that they would not have to pay back taxes and penalties that, in some cases, date back for several years.
The IRS Offshore Voluntary Disclosure Program guarantees no prosecution for undeclared offshore earnings.
The average penalty is 27.5% of tax due – plus the tax as well.
No FATCA amnesty
FATCA has no built-in amnesty and the IRS promises to deal harshly with any taxpayer who is found to have flouted strict US tax laws that demand all worldwide earnings are disclosed to the authorities.
Many taxpayers are thought to be playing the odds.
If a $50,000 tax penalty is due, disclosure is probably not that worthwhile, but for taxpayers facing much larger fines, a simple cost-benefit analysis makes disclosure hard to resist – especially as FATCA is looming in the not-too-distant future.
Even without FATCA giving the IRS intelligence on tax avoiders, US tax laws still require anyone with offshore earnings to make a declaration and pay tax with their annual returns to the IRS.
Expats in the US with offshore bank accounts, investments and other financial holdings must declare them to the IRS if they are tax resident in America.
Automatic tax exchange
Tax residency not only covers American citizens, but for instance, expats on green cards.
Many do not realise the intricacies of the US tax laws, especially disclosure of offshore income and assets.
Even US expats outside the States have to make foreign asset declarations to the IRS, as the nation is one of only two to tax citizens abroad. The other is Eritrea.
As the clock ticks down to FATCA, time is running out for taxpayers to put their financial affairs in order, especially if they stretch back several years.
Automatic tax information exchange is becoming the norm and is expected to be in place worldwide within two years, so expats with tax headaches should seek professional advice and look at their cheapest penalty options before the IRS catches up with them.
