What to Do when Your Non-US Bank Asks About Your US Tax Compliance Status
Ines Zemelman, EAJan-05-2016
If you are an American with an overseas bank account, it is likely that your bank has already asked or is going to ask about your US tax compliance status.
If you are among the 8 million Americans residing outside the United States, you are probably using a foreign (ie local to your country of residence) bank for the bulk of your financial needs. By now many of you have received, or are about to, correspondence from your bank requesting information about your US tax filing status - what’s known as the’FATCA Letter’.
The following article will explain why the bank sent you this letter and what you should do about it.
Most importantly - if you have a non-US bank account that you’ve so far failed to report to the IRS and have not yet received this letter - the fact that you are reading this is the best news you can hope for.
It means that you are currently in position to prepare for it and avoid the stress of having to sort out your US tax compliance under a tight deadline.
What is the FATCA Letter and what information is it asking for?
A ‘FATCA letter’ is a letter from your foreign bank requesting certain information about your US tax status (and requesting you complete either Form W-9 or W-8). The letter usually also offers a cursory explanation of the FATCA (Foreign Accounts Tax Compliance Act) legislation that requires the bank to share your name, address, and other personal details with the American tax authorities - the Internal Revenue Service.
If you received such a letter from your foreign bank, you have very likely already been identified as a potential “US Person”. If you are not presently compliant with US tax laws (including disclosure of your non-US bank accounts) - the time for hiding is over – your goal should now be to make the appropriate IRS voluntary disclosure to come clean and resolve your undisclosed foreign accounts.
Why is the bank sending me this letter?
Banks that fail to disclose account data of US Persons are penalized under FATCA. This is a recent US law that made the world’s financial system the reporting and enforcement agent of the IRS. It accomplishes that goal by requiring tens of thousands of foreign banks (in dozens of cooperating countries) to annually review their client records.
If your records contain indications of a US connection - for example you have a Power of attorney (PoA) or third party authority in favour of a person with a US address or your birthplace is in the United States (which automatically makes you a US citizen) - the bank will write to inquire about your US tax and residence status. They will normally also include Form W-9 or Form W-8, one of which the bank requests be completed and signed under penalty of perjury.
A number of Swiss banks have already been hit with huge penalties for failure to disclose US account holders to the American authorities - which served as an object lesson to the global banking community: it is not worth it to cross the IRS.
FBAR and FATCA reporting guidelines apply to all US Persons no matter where in the world they reside.
The reporting of FBAR and high valued assets is mandatory for any person who owns one or more accounts in which the total combined total at any point during the year is equal to or greater than $10,000. If you have more than $50K worth of financial assets, you may also want to check and see if you are required to file Form 8938.
Failure to file these forms or filing with false information carry stiff penalties. Penalties will be assessed for each year a taxpayer failed to file these reports. If it is determined that there was a willful disregard of the law, criminal charges might be filed.
If you have failed to report your foreign accounts on the Foreign Bank Account Report (FBAR), or failed to file the Form 8938, or failed to report your income from these foreign accounts on your US tax return, then you have likely violated US law.
When you receive such correspondence from your bank, you essentially have two options:
- If you are already fully compliant, you should simply reply to the bank and provide them with the requested information. This is certainly the easiest route - but you would have had the foresight to address this issue long ago. There is a famous Chinese proverb - “The best time to plant a tree was 20 years ago. The second best time is now.”
- You could ignore the request from your bank(s). This approach will, however, yield fairly negative results rather quickly.
- The first is that your bank account will be closed (in some instances with funds frozen as well).
- The second is that your details may still be forwarded to the IRS and they would red-flag you - when your bank reports that you have been uncooperative in their efforts to ensure your tax compliance.
Therefore we don’t recommend this approach.
- If you are not currently compliant with US tax filings, the approach we recommend is the following.
a. Respond to the bank immediately and tell them you are in the process of filing. Ask to set up a timeline within which you will provide proof of compliance. Banks will normally give you a month - 45 day extension. They don’t want to lose a client but they will want to see that you are not simply ignoring them.
b. Contact a professional US expat tax preparation company to take care of this for you (many people think that we are pretty good at it). If you were not working against the clock you might try to do it on your own - but this is not something we’d advise if your bank is already on your case. You want to have this done accurately and you want this done fast.
- If you were to come to us, we would most likely recommend that you take advantage of the Streamlined Filing Procedure. Through this program, you will be able to become fully compliant with the IRS without risk of penalties. Joining it requires completing 3 years of tax returns and 6 years of FBAR. The total cost is $1,200 (or $1,400 if your income is over $100,000 per year). Normal processing time is about a month - which would give you enough time
If you have received a FATCA compliance letter from your foreign bank, there is still time to act – though not much – but enough to put together a plan that protects your assets from the IRS. The IRS voluntary disclosure programs reward those who are proactive. Don’t wait for the enforcement division to find you – come forward and regularize your US tax situation first.