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What is a FATCA Violation

What is a FATCA Violation

A FATCA violation is when you fail to report foreign financial assets to the IRS using Form 8938. That sounds simple enough. But here’s what nobody tells you: FATCA isn’t just about what YOU file – it’s a two-way trap where foreign banks are simultaneously reporting your accounts directly to the IRS. So even if you don’t file, they already know. The penalty for this “ignorance” starts at $10,000 per year and can spiral to $60,000 or more before you even realize you had a filing requirement.

Welcome to Spodek Law Group. Our goal with this article is to give you the real information about FATCA violations – not the sanitized version you find elsewhere. Most people who get hit with FATCA penalties aren’t tax cheats hiding money in Swiss accounts. They’re ordinary Americans living abroad who had no idea this form even existed. The system was designed to catch millionaires evading taxes, but it catches schoolteachers in Germany and retirees in Canada. That’s the uncomfortable reality we need to talk about.

Todd Spodek has handled cases where clients faced six-figure penalties for accounts they’d been paying taxes on for years. The problem wasn’t the tax – they’d already paid it. The problem was failing to file a form ABOUT the account. You can owe zero additional tax and still face $60,000 in penalties. This distinction destroys people who don’t understand how FATCA actually works.

The Two-Way Trap Nobody Explains

Heres the thing about FATCA that makes it so dangerous. It dosent just require YOU to file Form 8938. It also requires foreign financial institutions – banks, brokerages, insurance companies, pension funds – to report American account holders directly to the IRS. Over 110 countries have signed agreements to share this data automatically. Your foreign bank is telling the IRS about your accounts wheather you file or not.

So when you dont file Form 8938, your not hiding anything. The IRS probly already knows. What your doing is creating a penalty situation. The IRS sees the foreign bank report, compares it to your tax return, notices theres no Form 8938 attached, and now you’ve got a problem. Its not evasion – its a paperwork failure that triggers the same penalty machinery.

This two-way reporting is what makes FATCA violations so common. People think “I’m paying my taxes, I’m not hiding anything, why would I need another form?” They dont realize the form EXISTS. They dont realize failure to file it carries a $10,000 penalty per year. And they definately dont realize that “I didnt know” dosent make the penalty go away – it just changes the penalty from “willful” to “non-willful.” Non-willful still costs $10,000 per year. Thats a $60,000 price tag for financial ignorance across the six-year statute of limitations.

How One Swiss Bank Changed Everything

FATCA exists becuase of one bank. In 2009, UBS – the giant Swiss bank – got caught helping American clients hide billions of dollars in secret accounts. The scandal was massive. UBS paid $780 million in fines and turned over the names of 4,450 American account holders. Congress was furious. They wanted to make sure this could never happen again.

So they passed FATCA as part of the HIRE Act in 2010. The idea was simple: force foreign banks to report American account holders, and force Americans to disclose there foreign accounts. Close the loopholes. Catch the cheaters. Sounds reasonable, right?

Heres the irony nobody talks about. FATCA was designed to bring money back to America. Instead, its driving Americans away from America. In 2009, before FATCA was fully implemented, 743 Americans renounced there citizenship. By 2020, that number hit 6,705 – a record high. In 2024, nearly 5,000 people renounced, a 48% increase from the previous year. A law meant to catch tax cheats is instead creating a mass exodus of ordinary Americans who cant deal with the compliance burden.

The demand to renounce got so high that the State Department raised the renunciation fee by 400% – from around $450 to $2,350. Thats how you know something has gone seriously wrong. When your charging people $2,350 just to LEAVE, and there still lining up to pay it, the system has created perverse incentives.

The Penalty Math That Destroys People

OK so lets talk about the actual numbers becuase this is were people get blindsided. FATCA penalties come in two flavors: non-willful and willful. The distinction matters enormously.

Non-willful means you didnt know about the requirement, or you made an honest mistake. The penalty is $10,000 for each year you failed to file. Since the statute of limitations is six years, thats a potential $60,000 in penalties. For not filing a form. About accounts you were already paying taxes on.

But wait – it gets worse. If you dont file and the IRS sends you a notice, and you STILL dont file, theres an additional penalty. $10,000 for every 30-day period you continue to not file after recieving the notice. This additional penalty caps at $50,000. So your looking at $60,000 base penalty plus $50,000 continuation penalty – $110,000 total for non-willful violations.

Willful violations are a completly different universe. If the IRS determines you knew about the requirement and deliberately ignored it, the penalty jumps to 50% of the account value OR $100,000 – whichever is GREATER. Per year. If you have $500,000 in a foreign account and willfully fail to report it for three years, your looking at $750,000 in penalties. More then the account itself. They can take more then you have.

And heres the cascade that traps people:

• Miss Form 8938
• IRS sends notice
• You panic and still dont respond
• $10,000 per 30 days starts accumulating
• Eventually they determine your non-response is “willful”
• Now your in the 50% penalty territory
• Possible criminal referral

One missed form turns into a life-altering financial catastrophe.

When Your Own Country Makes You Unemployable Abroad

Heres something that will make you angry if your an American living overseas. The FATCA penalties arent even the worst part. The worst part is what foreign banks do to avoid FATCA compliance.

Foreign banks hate FATCA. It costs them money to report American account holders to the IRS. It creates legal liability. It requires them to implement expensive compliance systems. So what do many of them do? They simply refuse to serve Americans at all.

Americans abroad have been denied bank accounts. Denied mortgages. Denied entry into company pension plans. Denied insurance contracts. Not by the IRS – by foreign institutions that dont want the hassle of dealing with American clients.

Todd Spodek has heard stories from clients that sound unbelievable. One client was developing a business with two foreign partners. They went to the bank for financing. The banker told the foreign partners to evict the American from the partnership becuase of IRS reporting requirements. The American got pushed out of a business HE started becuase his citizenship made the deal unbankable.

Think about that. Your an American citizen. You started a business. Your own citizenship makes you a liability to your own company. Your partners have to choose between you and financing. They choose financing. You loose everything.

This isnt hypothetical. This happens constantly. American Citizens Abroad – an advocacy organization – has documented case after case of Americans being financially stranded in countries were theyve lived for decades. Bank accounts closed with no warning. Unable to recieve paychecks. Unable to pay bills. Unable to get a mortgage on a home in the country were they raised there kids. All becuase FATCA made them toxic to foreign financial institutions.

The Accidental American Nightmare

Theres a category of FATCA victim that shows how absurd this system has become: the “accidental American.” These are people who were born in the United States but never really lived here. Maybe there parents were visiting. Maybe they were born on a US military base abroad. Maybe they lived here for a few months as an infant before there family moved back to Europe or Asia.

Under US law, if your born in the United States, your an American citizen. Period. Dosent matter if you never lived here. Dosent matter if you dont speak English. Dosent matter if youve never filed a US tax return in your life. Your American, and FATCA applies to you.

These accidental Americans often dont discover there problem untill there bank asks for a W-9 form. The bank runs a FATCA compliance check, sees a US birthplace, and suddenly this person who has lived in France or Germany or Japan for there entire adult life is being reported to the IRS. And they have decades of unfiled tax returns and FATCA forms.

Boris Johnson – yes, THAT Boris Johnson, the former UK Prime Minister – was an accidental American. He was born in New York City. He renounced his US citizenship while serving as Mayor of London, reportedly becuase of the tax and reporting burden. If a wealthy, powerful politician found FATCA intolerable enough to renounce, imagine what its like for ordinary people.

The cascade for accidental Americans is brutal:

• Born in US
• Grow up abroad knowing nothing about US tax obligations
• Foreign bank discovers US birthplace
• Account frozen or closed
• Cant get mortgage, insurance, pension in your home country
• Discover you owe decades of penalties
• Only escape is paying $2,350 to renounce citizenship you never wanted and never used

Criminal Prosecution Is Real

People think FATCA violations are just civil penalties. Write a check and move on. Thats dangerously wrong. FATCA violations can lead to criminal prosecution, and the Department of Justice has proven there willing to pursue these cases.

Adrian Baron was a banker at Loyal Bank, which operated out of Hungary and Saint Vincent. In 2017, an undercover federal agent approached Baron and said he wanted to open accounts without appearing on any documents – basically, he wanted to hide money from the IRS. Baron helped him do exactly that. He explained how Loyal Bank could circumvent FATCA reporting requirements.

Baron became the first person ever convicted under FATCA. He was extradited from Hungary, pled guilty to conspiring to defraud the United States, and faced up to five years in federal prison. The first FATCA conviction wasnt a tax evader – it was a banker who helped someone evade. This signals that the DOJ is serious about enforcement and willing to go after the infrastructure of non-compliance, not just individual taxpayers.

The Bandfield and Mulholland case is even more striking. These two were sentenced to 6 and 12 years in prison respectivly for schemes that included helping clients circumvent FATCA. Bandfield actually bragged in a recorded meeting about there “slick” structure designed to counter “Obama’s new laws.” That recording played at his sentencing hearing.

Twelve years in federal prison. For helping people avoid FATCA compliance. If your thinking about ignoring your FATCA obligations, or if your thinking about hiring someone to help you hide accounts, understand that the DOJ treats this as serious crime. Not paperwork violations. Crime.

What makes these prosecutions so effective is the paper trail. FATCA creates documentation at every step. The foreign bank has records. The IRS has records from the foreign bank. Your tax returns show what you did or didnt report. When prosecutors build a case, they have years of documentation showing exactly what you knew, when you knew it, and what you chose to do about it. Theres no “he said, she said” – its all documented. And in Bandfields case, he was literally recorded bragging about his schemes. The evidence is overwhelming by the time charges come.

The Forms That Never Expire

Heres a system revelation that terrifies tax professionals: certain international forms have no statute of limitations. The IRS can audit you indefinately if you fail to file them.

Normaly, the IRS has three years to audit your tax return. In some cases, that extends to six years. But if you fail to file Form 5471 – the form for Americans who own shares in foreign corporations – your entire tax return stays open forever. Not just the parts related to the foreign corporation. The ENTIRE return. Every deduction. Every income item. Open indefinately.

IRS agents are trained to close audits within 26 months. Thats there internal guideline. But international forms remove all time constraints. An agent can look at your 2015 return in 2030 if you missed an international form.

FATCA violations specifically extend the statute to six years – matching the FBAR statute. But the interaction between different international forms creates a web of overlapping deadlines and indefinate exposure. Miss one form and it effects everything else. The IRS now routinly incorporates the six-year statute into its audit scripts for anyone with foreign accounts, and if you have a foreign corporation involvement, they can go back basicly forever.

What You Actually Need To Do

If your reading this and realizing you might have a FATCA problem, dont panic. But dont ignore it either. The IRS created amnesty programs specificaly becuase so many people violated FATCA unknowingly that they needed a way to bring people into compliance without destroying them.

First, understand what triggers FATCA reporting. You need to file Form 8938 if your specified foreign financial assets exceed certain thresholds:

• US residents single: $50,000 at year-end (or $75,000 at any point)
• US residents married: $100,000 at year-end
• Americans abroad single: $200,000 at year-end ($300,000 at any point)
• Americans abroad married: $400,000 at year-end ($600,000 at any point)

Heres what counts as a specified foreign financial asset: foreign bank accounts, foreign brokerage accounts, foreign mutual funds, foreign life insurance with cash value, foreign pension plans, stock in foreign corporations, partnership interests in foreign partnerships. Your foreign pension – the one your employer abroad has been contributing to for years – is a FATCA-reportable asset.

Importantly, foreign real estate that you own directly is NOT a specified foreign financial asset under FATCA. Your vacation home in Portugal dosent count. But if you own that property through a foreign company, now the COMPANY is reportable, and so are its assets.

Second, understand that FATCA Form 8938 is different from the FBAR (FinCEN Form 114). They have overlapping but different requirements. Different thresholds. Different penalties. Different filing locations. You might need to file both. You might need to file one but not the other. This dual reporting burden is confusing even for professionals.

If your behind on FATCA filings, the IRS Streamlined Filing Compliance Procedures might be your best option. This program lets you come into compliance by filing the last three years of tax returns and six years of FBARs, paying any tax owed plus a reduced penalty. The penalty under Streamlined is 5% of the highest aggregate balance of your foreign accounts during the six-year period – much better then the $10,000 per year standard penalty.

Clients come to Spodek Law Group after making exactly this kind of mistake. They lived abroad for years. They filed there US tax returns. They paid there taxes. They had no idea about Form 8938. Now there facing tens of thousands in potential penalties. The Streamlined program exists for exactly this situation.

But heres what Spodek Law Group wants you to understand: the Streamlined program requires you to certify that your violations were non-willful. If thats not true – if you knew about FATCA and deliberately didnt file – the Streamlined program can make things worse. A false certification adds another layer of legal exposure. Before entering any compliance program, you need professional guidance to assess your specific situation.

The Reality Check

FATCA violations represent one of the most punishing penalty regimes in the tax code. The penalties are disproportionate to the offense. A person can pay every dollar of tax they owe and still face $60,000 or more in penalties just for failing to file a form about accounts the IRS already knew about through foreign bank reporting.

The system was designed to catch wealthy tax evaders hiding money in Swiss accounts. Instead, it catches ordinary Americans abroad who didnt know the rules. It catches “accidental Americans” who never lived in the US. It catches people who were compliant with there actual tax obligations but missed a disclosure form.

If you have foreign accounts, foreign investments, foreign pensions, or any financial life outside the United States, FATCA applies to you. Ignorance dosent protect you. “I didnt know” dosent eliminate the penalty – it just changes it from willful to non-willful, and non-willful still hurts.

Call Spodek Law Group at 212-300-5196 if your facing a FATCA situation. The consultation is free. The mistake of waiting isnt.