By Usman Mohammad
The CPA Journal
August 2020 Edition
Because U.S. taxpayers are required to report and pay taxes on their worldwide income, the U.S. government has fought to compel taxpayers to report their interests in overseas bank accounts. In the 1970s, the FBAR (Report of Foreign Bank and Financial Accounts) was created as part of the Bank Secrecy Act. The form requires the reporting of a taxpayer’s foreign accounts, and its purpose is to discourage tax evasion committed through the use of unreported foreign accounts. Yet in 2007, UBS banker Bradley Birkenfeld disclosed to the U.S. government that UBS was assisting large numbers of U.S. taxpayers in evading their U.S. tax obligations through the use of undisclosed Swiss bank accounts. The IRS thereafter began scrutinizing UBS and other Swiss banks over secret Swiss accounts held by U.S. taxpayers, scrutiny that quickly spread to foreign banks located in other jurisdictions such as Israel, India, and the Caribbean. Beginning in 2009, the United States began using a carrot-and-stick approach with U.S. taxpayers regarding the issue of undisclosed foreign bank accounts. The government combined criminal prosecutions by the Department of Justice (the stick), with a formal IRS voluntary disclosure program that precluded criminal prosecution if a taxpayer voluntarily came forward, disclosed his foreign accounts, and paid back taxes and a penalty based on the value of the foreign accounts (the carrot).
In 2010, in response to the discovery of the widespread use of undisclosed foreign bank accounts by U.S. taxpayers, Congress enacted the Foreign Account Tax Compliance Act (FATCA). Among other things, FATCA requires foreign financial institutions (i.e., foreign banks) and certain other nonfinancial foreign entities to report on the foreign assets held by their U.S. account holders or be subject to withholding on certain types of payments.
FATCA also created a new information reporting requirement for U.S. taxpayers with respect to their foreign assets, a requirement set forth in IRC section 6038D. FATCA’s information reporting requirement was implemented via new Form 8938, a form that was first required to be filed in 2012 (with returns for the 2011 tax year).