11 aliceaFATCA GRN

How Will The IRS Use FATCA In The Future?


Click here to read it in Spanish.

Click here to read it in Portuguese.

Click here to read it in Turkish.


The international treaty on foreign assets may be employed more by the U.S. tax agency. Will be used too often with a presumption of guilt?


The U.S. Foreign Account Tax Compliance Act (FATCA) was passed 14 years ago as part of the Hiring Incentives to Restore Employment (HIRE) Act, designed to promote transparency in the global financial services sector. The HIRE Act also contained legislation requiring U.S. persons to report, depending on the value, their foreign financial accounts and foreign assets. (Some persons who are not U.S. citizens are also subject to FATCA requirements.)


FATCA, says the U.S. Internal Revenue Service (IRS), “requires that foreign financial institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments.” American taxpayers with offshore financial assets who have an aggregate value exceeding a certain reporting threshold (varying by the filing status used for a U.S. annual income tax return) must report those assets to the IRS on Form 8938, “Statement of Specified Foreign Financial Assets.”


(The 8938 requirement is in addition to the long-standing requirement to report foreign financial accounts on Form 114, “Report of Foreign Bank and Financial Accounts,” aka the FBAR, of the Financial Crimes Enforcement Network of the U.S. Department of the Treasury. U.S. citizens and residents must file if they have a financial interest in a foreign-held bank account with an aggregate value of more than $10,000 at any time during a calendar year.)


Penalties associated with the two above requirements are stiff. The double-edged FATCA has a goal, as one might expect, of attacking tax evasion by facilitating the flow of taxpayer information between the U.S. and other countries.


It has worked well in some cases – but can it also become a tool for the U.S. IRS to wage undeserved enforcement on all wealthy taxpayers with overseas holdings?



Important definitions

The FATCA filing requirement applies to such specified individuals as U.S. citizens, green card holders, resident aliens of the U.S. for any part of the tax year, non-resident aliens who make an election to be treated as a resident alien for the purposes of filing a joint income tax return and non-resident aliens who are bona fide residents of Puerto Rico, Guam, American Samoa, the Northern Mariana Islands and the U.S. Virgin Islands. The reporting threshold is different for those residing in the U.S. and those residing in a foreign country.


Currently, 113 countries follow FATCA through FATCA model agreements. Ninety-five nations, including several tax havens, have no FATCA agreements with the U.S.


Understanding FATCA’s scope depends on understanding a few key terms:


A foreign financial institution (FFI): Any financial institution that is a foreign entity and accepts deposits in the ordinary course of banking or a similar business, holds financial assets for others as a substantial portion of its business, or is primarily engaged in the business of investing, reinvesting or trading securities, partnership interests, commodities or any interest (including futures and forward contracts) on the aforementioned assets. (The IRS has a free FATCA FFI List Search and Download Tool.)


Specified foreign financial assets: Foreign financial accounts and foreign non-account assets held for investment. These can include depository or custodial financial accounts maintained at foreign financial institutions; stocks or securities issued by foreign corporations; any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person; and any interest in a foreign entity. Certain overseas assets are also exempt from FATCA filing.


A withholding agent: Any U.S. or foreign person that has control, receipt, custody, disposal or payment of any item of income of a foreign person that is subject to withholding. May be an individual, corporation, partnership, trust, association or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies. 


An FFI must get a client’s consent to submit the reports and documentation needed under 26 Code of Federal Regulations (CFR) §1.1471-5 – but a client who does not consent is termed a “recalcitrant account holder” who is subject to a 30% withholding on all U.S. withholdable payments by the FFI.


Popular targets

Two are contributing to FATCA becoming a more frequently used tool of tax enforcement:


More U.S. money. The IRS received an influx of funding two years from American lawmakers and has pledged that high-income, high-wealth tax cheats will be a major target of the agency now and in the near future. Further, the agency consistently lists international tax scams as among some of the most prevalent.


“(FATCA) plays a key part in combating tax evasion by U.S. persons holding accounts and other financial assets offshore,” the agency has said, adding that “unscrupulous promoters continue to lure U.S. persons into placing their assets in offshore accounts and structures, saying they are out of reach of the IRS. These assertions are not true. The IRS can identify and track anonymous transactions of foreign financial accounts.”


High-profile cases. Recent litigation spotlights how the IRS obtains information on foreign holdings (usually employing some aspect of FATCA) and how successful the agency has been in pursuing cases. The American Tax Court, for example, held in the headline Farhy v. Commissioner that the IRS lacked authority to assess and collect after an owner of Belize-incorporated  companies failed to file or pay appropriate U.S. penalties.


The U.S. Supreme Court ruled early last year in Bittner v. United States against a $2.72 million fine on a businessman, Alexandru Bittner, who didn’t file reports for five years when he was living in Romania. Bittner maintained that he owed $50,000, or the $10,000 penalty for each of the years; the IRS claimed he owed for each account, or 272 violations at $10,000 each. (Shortly after the Bittner ruling, the IRS said it intended to eliminate routine mitigation for non-willful FBAR violations, leaving mitigation up to the IRS examiner case by case.)


More high-profile cases are sure to crop up involving taxpayers’ international holdings and the use of FATCA to find information. The Taxpayer Advocate Service (TAS), an independent organization within the IRS that bills itself as the taxpayers’ “voice” at the agency, has said, “Although the concerns giving rise to FATCA are understandable, the IRS’s approach to FATCA implementation has created significant compliance burdens and risk exposures to a variety of impacted parties including non-resident aliens, U.S. citizens living abroad, and [FFIs].


“The IRS has adopted an enforcement-oriented regime with respect to international taxpayers. Its operative assumption appears to be that all such taxpayers should be suspected of fraudulent activity, unless proven otherwise … The IRS has taken this approach despite a lack of comprehensive statistical data establishing the existence of widespread noncompliance or fraud …”


Are some tax cheats stashing money overseas? Undoubtedly. Are the international agreements of FATCA effective ways for the U.S. government to unearth information about those cheats? Evidently.


The real question: Will the IRS embrace a guilty-until-proven-innocent attitude for “widespread noncompliance” against innocent holders of overseas assets?


Your tax specialist needs to stay on top of this and many other issues of wealth, foreign income and tax enforcement. If we can help, please let us know.


About the Author 

Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high-net-worth families and their advisors.


Alicea has more than 20 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm.

Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.


Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S.


Alicea is fluent in Spanish and has a working knowledge of Portuguese.


Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA), the International Fiscal Association (IFA), a member of Clarkson Hyde Global, a world-wide association of accountants, auditors, tax specialists and business advisors and the Global Referral Network (GRN).


Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.


In 2021 and 2022, Alicea was the Gold and Silver Winner, respectively, of Citywealth’s Powerwomen Awards in the category USA – Woman of the Year – Business Growth (Boutique). In 2023, she continued her winning streak by receiving the Gold award for Company of the Year Female Leadership (Boutique) and the Silver award for Accountancy Firm of the Year at the Magic Circle Awards. Furthermore, Alicea has consistently secured her position in the Global Elite Directory for four consecutive years, being recognized as a Private Client Global Elite Advisor and is currently listed for 2024 as a Non-Legal Adviser. This exclusive directory annually highlights the world’s elite lawyers and outstanding wealth advisors serving ultra-high net-worth clients.

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.