Going to confession won’t be enough anymore. Now that the Vatican has signed an agreement with US authorities to report information about overseas accounts under the Foreign Account Tax Compliance Act (FATCA), more taxpayers must be on their best behavior.
This is believed to be the first intergovernmental agreement between the United States and the Holy See, and has been characterized by the Vatican as a “very significant step” in combined efforts to thwart tax evasion.
The agreement, which was announced on June 10, culminates negotiations that heated up around Christmastime last year. Be aware that the Holy See is not part of Vatican City, per se. It represents the ecclesiastical jurisdiction of the Catholic Church running the Vatican Bank. The bank itself has been under a dark cloud recently as charges of corruption have come to light. In fact, Pope Francis has made the cleanup of this financial mess one of his top priorities.
FATCA was enacted in 2010 to help uncover assets held in foreign banks and other offshore accounts by US taxpayers. These locations are often touted as “safe havens” from US taxing authorities. The law went into effect on July 1, 2014, and has spawned intergovernmental pacts with more than 100 countries, including notorious fence-sitters, such as Russia and China, as well as traditional tax havens, such as the Caribbean and Switzerland.
To promote compliance with US tax law, FATCA requires foreign financial institutions to report information about accounts held by US taxpayers directly to the IRS, even if the accounts hold only foreign assets. Similarly, they must report information on accounts held by foreign entities in which US taxpayers have a substantial ownership interest. If a bank refuses to disclose the information, it can be assessed a 30 percent withholding tax on certain US source payments, whether or not the recipient is a US taxpayer.
Note that FATCA doesn’t eliminate the requirement to file the dreaded FBAR (Report of Foreign Bank and Financial Account). This filing requirement applies to US taxpayers who have a financial interest in – or signature authority over – any financial account in a foreign country if the aggregate value of those accounts exceeds $10,000.
An FBAR must be filed with the IRS regardless of any other agreements. It just adds another layer of oversight. Clients who admit to being tax cheats may seek protection under the umbrella of the Offshore Voluntary Disclosure Program (OVDP). The IRS recently revised and streamlined the OVDP to make it more appealing to taxpayers. However, the maximum penalty was practically doubled from 27.5 percent to 50 percent, effective Aug. 4, 2014.
The joint announcement by the United States and the Vatican is another reminder that troubles for tax evaders won’t disappear by some sort of miracle. Confession is good for the soul.
About Ken Berry
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a wide variety of newsletters, magazines, and other periodicals.