What Are the Penalties for FATCA Non-Compliance?

Nicholas J Price

The Foreign Account Tax Compliance Act (FATCA) is a key provision of U.S. international tax law. Signed into law in 2010, the purpose of FATCA is to combat tax evasion in the wake of the financial crisis of 2008, as part of the HIRE Act. It requires foreign financial institutions (FFIs) to report the assets and accounts held by U.S. citizens and certain U.S. residents, in addition to requiring the individuals themselves to report these assets in their tax return in an additional form, Form 8938, if the assets exceed a certain threshold. For details on what these thresholds are, please read our previous blogs on the subject. For now, we will focus on the financial and legal ramifications of FATCA for those entities and people who are required to report.

One of the easiest ways to hide money from the government used to be offshore accounts, but under FATCA, the U.S. has signed intergovernmental agreements with over 100 foreign countries to ensure reporting by FFIs of the specified foreign financial assets designated under FATCA. This makes it very difficult for FFIs to hide the assets of their foreign payees, and requires them to withhold 30% of specific payments to payees that are noncompliant with FATCA. FFIs that do not comply with FATCA will face a 30% withholding of their own from U.S.-source income. This is a steep penalty to pay for many FFIs that do regular business with U.S.-based individuals and entities.

Types of FATCA Noncompliance

The true targets of FATCA provisions, however, are the individuals subject to FATCA. If you realize you are in violation of FATCA, you have several options, each of which will carry its own risks. The first option is to stand pat, and hope that the Internal Revenue Service (IRS) misses it. This counts as a willful failure to disclose, and bears the harshest penalties if the IRS finds you guilty. For every year you fail to disclose the specified foreign financial assets, the monetary penalty then becomes 50% of the value of the assets or $100,000  whichever is greater. This means that certain accounts over $20,000 that are not reported can incur $100,000 a year in penalties for the duration of the statute of limitations, which is six years: a potential $600,000 in penalties on an account worth as little as 3.3% of the penalty. It is safe to say that this may not be your best option, especially when you consider that accounts with greater value can bear even steeper penalties, although these would not be quite so disproportionate. An account would have to contain over $200,000 to exceed the $100,000 fine, so essentially these penalties range from 30 times the value of the assets to one-half the value of the assets. The other significant form of noncompliance is non-willful noncompliance, meaning that there was no intent on the part of the individual filing to hide the specified foreign financial assets in question from the IRS. And while these penalties are not as harsh, they can pile up very quickly. The penalty for non-willful nondisclosure of specified foreign financial assets under FATCA is $10,000 per year for every year of nondisclosure up to the six-year limit. That is, a $60,000 price tag for financial ignorance. However, there are additional penalties for a failure to file Form 8938  this is a separate penalty from filing the form while participating in non-willful nondisclosure. This is not where the penalties for non-willful nondisclosure end, though. The IRS will apply this to each account not reported. Four accounts, non-willfully non-reported for four years? This penalty would be a maximum of $160,000. The maximum penalty in non-willful nondisclosure is $50,000 per tax return.

IRS Can Levy Additional Penalties

If you are unlucky enough, however, the monetary penalties may be just the beginning of your woes. If the IRS determines that there has been fraud, in addition to any nondisclosure of specified foreign financial assets, the statute of limitations and penalty caps are then removed. On the other hand, there are mitigation guidelines to these penalties, meaning that if the IRS is convinced that your case merits special consideration on the basis of the degree of non-reporting, the penalty may be reduced. These guidelines only apply to accounts worth under a quarter of a million dollars, and while they can seriously reduce the amount of fines, the individual guilty of nondisclosure will still usually incur a fine commensurate with the amount of money not disclosed. And, keep in mind, these penalties are in addition to any back taxes that must be paid, along with interest on said back taxes.

The best option, as always, is to hire an experienced, reputable tax professional to guide you through the reporting and taxation of your offshore assets. While this may seem like a pricey option, it is no doubt better than incurring tens or hundreds of thousands of dollars in penalties. As discussed, this also applies to Foreign Financial Institutions  a 30% withholding of U.S.-source income in this context could easily mean millions of dollars. Thus, it becomes of the utmost importance to keep in line with this specific regulatory filing. FFIs that have any U.S. clientele tend to have a lot of U.S. clientele, as dedicating the resources necessary to have proper reporting is costly. You will then want to ensure that the form for your institution is filed accurately.

Use Technology to Ease FATCA Compliance

The best way to handle the flow of your business entity documents is with robust entity management software. Investing in the right program can save millions in penalties. This program will have a customized approach, tailored specifically to your business needs. Consider entity management software from a company that has over 40 years of entity management experience, and a roster of over 2,000 individual clients that spans the globe. Diligent Entities offers a dedicated team of support professionals to aid in integrating and supporting your investment in the legal security of your corporation. If you are interested, please get in contact with us today, by phone or email.
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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.