The Paperwork Machine Is Hungry
To comply with the Foreign Account Tax Compliance Act (“FATCA”), non-US banks must send reports to the IRS with information about their US accountholders. These reports generally contain the following information about US accountholders:
- social security number,
- home address,
- account number,
- highest account balance, and
- income earned on the account.
Then, US persons must also send reports to the IRS that contain much of this same information. These reports are called a Foreign Bank Account Report (“FBAR”). Failing to file an FBAR on time carries heavy penalties that start at $10,000 per year.
Duplicate reporting-that’s the recipe for a happy paperwork machine. Let’s take a look under the hood and see what the IRS does with all this paperwork it receives from both sides.
The Paperwork Machine in Action
When you receive income from US sources, the payor of the income sends both you and the IRS a tax reporting form. For example, you’ll receive an IRS Form 1099 if you work for a US company as an independent contractor, earn interest at a US bank, or sell stock through a US broker.
Every one of these reporting forms and every filed tax return is fed into a computer. When the IRS receives one of these forms from a payor of income, the IRS’s computer looks to see if that income is reported on a tax return filed by the payee of the income. So, the computer looks for a reporting match between payor and payee.
The Dreaded CP2000 Notice
If the computer doesn’t find a match, it spits out a letter to the payee called a CP2000 Notice. The CP2000 Notice doesn’t mean that the payee is under audit—it just opens the dialogue between the IRS and the payee. Now, if the payee doesn’t respond to the CP2000 Notice, things of course get a little more interesting, with an audit coming at some point.
The PaperWork Machine, International Edition
So, based on the IRS’s current practice ofmatching payor and payee and sending a CP2000 Notice if there’s a mismatch, the IRS’s response to FATCA reports will likely look something like this:
- The IRS receives a FATCA report from a non-US bank;
- The IRS’s computer looks for a matching FBAR filed by the accountholder; and
- If no matching FBAR is found, the computer spits out a letter to the accountholder. Remember, the FATCA report contains the account holder’s address and other identifying information, so the IRS will know where to find you.
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People with Hammers . . .
This is when the real fun begins. Remember, the IRS is absolutely paranoid that taxpayers are hiding assets outside the US If a non-US bank says you have a bank account, but your don’t submit the required paperwork on your end, then the IRS thinks they’ve hit the jackpot. To the IRS’s computer, you look an awful lot like the type of scofflaw they’re trying to round up.
The foreign account reporting procedures don’t make a distinction between “New York City investment banker stuffing unreported cash offshore” and “ordinary expat with a non-US account just to pay the bills.” From the IRS’s perspective, they’re both just a US citizen with an offshore account. If those accounts aren’t reported, the IRS will make both of their lives difficult.
Also, the IRS doesn’t have the personnel available to actually look at the facts in each individual case. The whole procedure is done by computer from start to finish, with a human becoming involved only when it is likely too late for you to fix anything.
How to Stop the Problem before it Starts
The way to circumvent this entire procedure is simply to make the paperwork machine work in your favor. Send the paperwork machine all the paperwork it wants, and there won’t ever be a CP2000 Notice in your mailbox.
Thankfully, even though the IRS requires invasive asset disclosure and imposes hefty penalties for failing to disclose, it at least offers generous amnesty programs for those who need to get caught up. Exactly which disclosure requirements apply to you and which amnesty program is right for your situation depends on your specific facts.
The one hitch with these amnesty programs is that you must jump first. If the IRS contacts you before you contact them, your ability to use an amnesty program would be in jeopardy.
If you have an unreported account, get in touch so I can let you know the best way forward. I can help you get everything cleaned up and avoid the hefty penalties.
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