Penalties For Non-compliance With FATCA
One of the hallmarks of FATCA (Foreign Account Tax Compliance Act) is the way it contains enforcement mechanisms and penalties for non-compliance. Administered by the Internal Revenue Service, there are obvious tax penalties for violations by US citizens, but the enforcement of FATCA’s mandates across international borders targeting foreign financial institutions (FFI) is almost unprecedented.
Penalties and Sanctions for FFIs
Originally many FFIs had no intention of complying with what was seen as providing assistance to the IRS with domestic tax compliance. If a US citizen were an account holder at an FFI, the customer believed that they were protected from cross border scrutiny and secure within the bounds of any foreign privacy policies to keep their accounts anonymous. Countries such as Switzerland had build a reputation on banking secrecy, but FATCA was designed to pierce the veil of banking privacy and reveal US account holders and their assets, regardless of location.
Naturally, the US government anticipated some resistance to FATCA, and had prepared an enforcement scheme that was hard to ignore. First, any FFI that had US account holders was required to share the names and account details with the IRS, otherwise any US-sourced payments to the bank would face a 30% withholding rate. Any FFI that refused to reveal those names, would be summarily isolated from an international banking system that relies heavily on transactions that pass through the US financial system.
Few FFIs have the capacity to operate in the modern financial world without using the US system at some point, and so the IRS had a big stick behind its back as it sought enforcement of FATCA. When one player controls the game, it is simple to decide who is allowed to play. As a result, most countries are negotiating compliance agreements with the US that the FFIs will have to abide by, or face isolation in the global financial network.
Penalties for US Taxpayers
Any US taxpayer that has a foreign account valued at $50,000 must report the fact to the IRS, or face a $10,000 minimum penalty. That amount can climb to a maximum of $50,000 in some cases. In addition, if the account was used to circumvent payment of US income taxes then there would be a 40% surcharge on top of the owed taxes and penalties. These are some serious fines for even what may be lawful use of a foreign account for either business or personal reasons. Although one may have paid all taxes owed, simply failing to report the existence of the account brings the $10,000 fine.
These penalties show how serious the IRS is in collecting what it estimates as large sums of unpaid taxes from offshore accounts, and given the spending and debt levels in the United States it is not surprising that they are looking for any source of money available. What took most people by surprise was the willingness of the US government to leverage its international financial power to bring FFIs and their host countries into line, regardless of whether they liked it or not. Whether FATCA is a symbol of the US government’s ongoing international overreach, or simple fiscal desperation will only be seen with time.
by 
Erich J. Ruth
Erich J. Ruth provides technical support for National Software which is the parent company for 1099FIRE. 1099FIRE develops and markets a comprehensive range of products that enables any size of business or institution to effectively manage and comply with year-end filing requirements. 1099FIRE is an employee-owned company located in Phoenix, Arizona.
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