The reason why is that new laws require Chinese financial institutions to exercise "due diligence" to investigate to see if their Chinese account holders are also US persons. Even if a Chinese account was opened with a Chinese passport, the banks are required to see if there are any indications that the account holder might have some sort of relationship with the US. All account holders are investigated.
Things the banks look for:
- Wires in or out to the US
- US phone numbers or addresses
- US email addresses
- A US person as a co-signer
If a bank finds detects these activities on an account, they will send a letter to these suspected Americans and tell them that they are going to share their information with the US. Or, the account holder can tell the IRS themselves with a W-8 form.
The bank will issue what is known as a FATCA letter. Learn what to do about this FATCA letter here.
Huge risks exist for Chinese-American persons
Chinese-Americans who have prepared a US tax return with a professional tax preparer could have significant problems. The chances of US taxes being done correctly become less likely as a person’s affairs become more complicated.
Recently, our International Tax Supervisor, Liza Zhai, alerted us to absolutely terrible tax advice that has been shared on WeChat. There is a tax firm claiming to specialize in international taxation that claims that Chinese people with inactive foreign corporations do NOT need to file a Form 5471. This advice is wrong and dangerous. We wrote about the requirements of dormant international corporations here.
For more of the common mistakes and assumptions both Chinese taxpayers and the tax preparers make, read this article.
As of this writing, the US taxes its persons on a worldwide basis. But the problem is that the tax code as it has developed has been designed to keep large corporations from shielding money offshore. Thus, what we wound up with is incredibly complicated reporting requirements with significant penalties that affect anyone with income or assets overseas. Accurate tax foreign tax reporting is simply above the abilities of an average tax firm.
Corporations, partnerships, life insurance, pensions, mutual funds all held overseas all likely require additional reporting, along with foreign gifts. There is even an excise tax on life insurance. Violations can be assessed for many years. Small technical violations can have disastrous consequences. It is imperative that returns are prepared to the highest standard. There is little room for error.
Additionally, there is an entirely separate bank secrecy law that is different from the US tax code that requires US persons to declare foreign bank accounts. Yet this law has a different standard of enforcement, that too can have disastrous consequences if not handled correctly.
Tax surprises for Visa and Green Card holders
Many Visa and Green card holders aren’t aware that they are still US persons for tax purposes. Especially the who have been living overseas. Read this article to find out if you are considered a US person for tax purposes.
Even if FATCA is repealed, it might be too late.
There exists a chance that FATCA will be repealed as part of the tax reform package. However, the China banks have already started the information sharing process. FATCA may only be repealed after the IRS learns of your foreign account information and you being audited.
Consequences for being detected by the IRS before you disclose
If you are detected and your affairs are no in order, it is possible to see a bank reporting penalty of 50% of the account value. There could be additional penalties in the hundreds of thousands of dollars, and it is possible to be completely humiliated by mediocre tax representation.
The IRS has fewer auditors than it has 10 years ago, yet it is still under intense pressure to keep additional assessments high. Chinese-Americans provide a ripe target because of higher than average income and wealth and the fact that there is a large possibility that there is something wrong or missing in their tax returns that will give the IRS a big penalty it can impose.
On February 16, 2017 Da Ying originally of Beijing plead guilty in Federal Court to a violation of the bank secrecy law and is currently facing up to 10 years in prison and around a million dollars in fines, penalties, and unpaid taxes.
Additionally, the IRS has become very aggressive in assessing international tax and FBAR penalties for simple technical violations. Learn more about that here.
About Parent & Parent LLP
We are a tax law firm and must have higher standards of regulations than an accounting firm. We are trained advocates with experience in winning for our clients. We do not want anything bad to happen, but if something does, our clients are well-protected.
Our Chinese clients come from Beijing, Hong Kong, New York, Texas, California, and anywhere in the world. If you want the highest level of protection, contact us for a consultation.