Tough luck of the American taxpayer | In Principle

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Tough luck of the American taxpayer

The amendment to Poland’s Penal Code which entered into force on 15 April 2016 modified the rules concerning liability for perjury. The increased sanctions affect persons making false statements pursuant to requirements arising out of implementation of FATCA rules in Poland.

The Foreign Accounts Tax Compliance Act, or FATCA as it is known, is an American law which is a weapon in the fight against tax avoidance and concealment of assets by American citizens or other persons who for whatever reason are subject to the US income tax regime.

The Agreement between the Government of the United States of America and the Government of the Republic of Poland to Improve International Tax Compliance and to Implement FATCA, popularly known as the FATCA Agreement, was signed on 7 October 2014. The agreement imposes obligations on the Polish state and local financial institutions to identify, gather and exchange information on US taxpayers.

Within a year after signing of the FATCA Agreement, pursuant to the Polish Act Implementing the FATCA Agreement, FATCA shifted from the international level down to the level of customers of financial services provided by financial institutions. Many holders of bank accounts received a letter from their bank requiring them to submit a statement on whether or not they have the status of a US taxpayer, or requesting them to submit a W-8 or W-9 identification form. They could also be warned that filing a false statement could expose the person to liability for perjury.

I solemnly swear to tell the truth…

When called upon to declare his status, the holder of an account is required to provide the statements indicated in the request by the financial institution. These statements are made under pain of criminal responsibility for false testimony, and Art. 233 of Poland’s Penal Code is applicable. A condition for criminal responsibility under that provision is that the person making the statement or signing the form was duly instructed of the threat of criminal responsibility for making a false statement. Under the Act Implementing the FATCA Agreement, the proper wording of the instruction is “I am aware of the criminal responsibility for making a false statement.” If the statement is made on form W-8 or W-9, the information included in the forms is deemed sufficient to satisfy the requirement for instructing the user of the account.

…the whole truth…

Most Polish taxpayers without ties to the United States can declare without hesitation that they are not American taxpayers. But there is a certain group of actual targets of FATCA who for various reasons may have severed ties with the United States but because they hold US citizenship are still deemed by the Internal Revenue Service to be American taxpayers. Such persons have often failed to file US tax returns or report to the IRS for many years, and consequently are exposed to serious civil and criminal sanctions under FATCA and other American laws. These sanctions can be so severe that they have sparked a debate on whether they constitute “excessive fines” barred by the 8th Amendment to the US Constitution. Suffice it to say that they can be enough to wipe out all of a taxpayer’s assets.

US taxpayers must decide how to proceed. The obvious choice is the fully legal and transparent approach, for example participation in the programme for voluntary disclosure of foreign assets. Riskier options could raise issues under the criminal law.

…and nothing but the truth

Art. 233 §6 of the Penal Code provides that the regulations on perjury apply as relevant to a person who submits a false statement, if the law provides for the possibility of taking such a statement from the person under threat of criminal responsibility. This means that the perjury regulation applies as well to persons submitting statements pursuant to the Act Implementing the FATCA Agreement.

It should be recognised that the user of a bank account who knowingly submits a false statement is exposed to criminal responsibility, and the offence is subject to punishment of 6 months to 8 years in prison. The high potential punishment, comparable to that imposed on a person guilty of assault causing gross bodily harm, results from a recent amendment of the Penal Code. As recently as the first quarter of 2016 the same offence was punishable by up to 3 years’ imprisonment.

A person who makes a false statement out of fear of other criminal responsibility for himself or a family member may receive lighter treatment. If a person chose not to disclose his or her status as an American taxpayer because of the potential criminal sanctions the person could face for failure to comply with obligations to the IRS, it could be argued in that situation that their action should be classified as falling within a certain privilege. Even in that case, however, the statutory threat is fairly high, at 3 months to 5 years in prison.

The stiffening of the sanction for making false statements appears to be a side effect of the amendment designed to extend the application of Penal Code Art. 233 to other types of prohibited acts. Apart from the limited practical value of this comparison, it should be pointed out that the interests of the US IRS in this sense enjoy more extensive protection than the interests of Poland’s own State Treasury. The Fiscal Penal Code provides for a standard of punishment of up to 5 years’ imprisonment in such a case, rather than the maximum of 8 years in the case of an offence affecting the US tax authorities. It should be expected that this discrepancy will be caught and corrected by the Polish justice system.

American taxpayers who have neglected their obligations to the IRS face a choice where whichever path they take carries some legal risk. It is a risk that can be managed, however, in order to avoid the most severe consequences of FATCA.

Wojciech Marszałkowski, Tax Practice, Wardyński & Partners