The Internal Revenue Service continues to set unforeseen precedents through FATCA (Foreign Accounts Tax Compliance Act) regulations as more aggressive measures are being designed to track down international US Citizens and Green Card Holders and collect as much tax revenue as possible.
In recent years, the IRS began indicting bank officials of UBS (a major Swiss Financial Institution) for helping American Persons keep unreported income hidden from the IRS. In addition to punitive fines and criminal pursuit by the DOJ (Department of Justice), UBS was also required to report the names and information of American Account Holders. After the fiasco with UBS other Swiss banks began following suit and reporting all American Citizen banking activity to avoid the same fate.
Another measure that has been taken in recent years are the various amnesty programs which have been initiated by the IRS and Department of Treasury that offer reduced fines and no jail time for taxpayers who voluntarily file back taxes or report missing years of FBARs (Foreign Bank Account Reports). These amnesty programs were so successful in obtaining updated information and receiving past due tax bills that the IRS came to the realization that more can be done to enforce the worldwide income reporting mandates of the IRS.
FATCA: One More Form For You To Fill Out
Once they decided that more could be done they took 2 main steps: Add more forms and acquire foreign support. One of the forms added to ‘enhance’ FATCA reporting was Form 8938, Statement of Specified Foreign Financial Assets. Form 8938 is a requirement of US Citizens or Green Card Holders who have extremely high foreign account balances (over $50K) or specific foreign accounts or regular holdings in non-US institutions. Form 8938 is in addition to Form TD F 90-22.1, which is a required form if you have over $10K in one or more foreign financial accounts.
Adding new forms could only offer so much – especially when the forms added don’t even apply to most American Expats. As such, the IRS decided that increasing reporting obligations simply wasn’t enough; so they set yet another precedent by involving foreign financial institutions in their efforts to obtain information about every working US Citizen and Green Card Holder in the world.
Initial phases of these international reporting obligations are going into effect this year and all aspects are expected to be completely implemented by 2016. Through these foreign financial institution reporting obligations, foreign banks will be required to identify US Account Holders by searching for a US Social Security Number, address, birth documentation, or other indications that an American Citizen or Green Card Holder is opening or has opened a foreign financial account.
Once an American Account Holder has been identified, he/she will be required to submit additional information to the foreign bank to share with the IRS and determine withholding eligibility. If the United States Citizen or Green Card Holder refuses to supply the foreign financial institution with requested information, that denial will be reported to the IRS along with other identifiable information so that the IRS can decide which withholding measures to take.
Foreign Banks Refusing Service To American Account Holders
It’s not difficult to imagine that these extra reporting obligations place a huge burden on foreign financial institutions. As such, many foreign banks are refusing service to American Account Holders altogether. For those who intend to become compliant with IRS reporting obligations, the question of “Why?” remains. Why would they agree to go to such lengths to help the IRS gouge it’s Citizens’ worldwide income?
One reason is the perception of upholding a moral responsibility to the world economy by helping to prevent money laundering. Additionally, the IRS has threatened to assess any non-compliant foreign financial institution with a 30% withholding fee on all US-sourced income on which proper reporting procedures were not utilized.
Another reason that foreign governments and financial institutions are willing to share information with the United States is that it’s a 2 way street. While it’s one of only a few, the United States isn’t the only country that taxes its residents’ worldwide income. There are residents from other countries that may be earning taxable income in the United States and hiding it from their home country. In return for information about US Citizens and Green Card Holders living and working abroad, the United States will provide information to other countries about its residents living and working in the US.
Different countries are developing different laws to become compliant with United States reporting obligations. Some countries like Mexico are taking steps to make it easier for foreign financial institutions so they’re more likely to cater to US Persons. These steps are in the form of local privacy laws that require banks to report information to their own government. Their government will then work with the IRS to ensure that all required information is shared.
There is still an issue that remains, however. While many governments are doing what they can to ease the burden placed on foreign financial institutions, others are insulted by US demands and are doing very little to help the cause of the US. In these countries, it’s possible that certain foreign financial institutions will just do away with American Customers completely. If you’re just denied a new account from a foreign bank that doesn’t want to be bothered by US reporting obligations that may not be such a bad situation, but imagine if you already have an active foreign financial account in a foreign bank that decides to do away with all of its US Clients? What would happen to your money? Would it be safe or lost in the shuffle? It is in your best interest to speak with the account manager(s) at your foreign financial institution(s) to understand what their response will be to increased FATCA measures before you face irrevocable financial devastation.
Do you have questions about how these new FATCA obligations will affect you as a US Expat? Do you need to file back taxes or report missing FBARs before it’s too late to receive amnesty? If you need help on any level with understanding or meeting your tax and reporting obligations, get the most qualified assistance by calling Taxes for Expats – the most trusted tax advisor among international Consuls and Embassies.
About the Author: I.J. Zemelman, EA is the founder of Taxes for Expats.