FATCA Allows IRS to Gather Bank Account Info Without Tax Treaty
In recent guidance to its own program managers, the IRS stated that it has the authority to request information on non-US accounts held by US citizens and residents from non-US banks in accordance with FATCA, even if the US does not have a tax treaty or other agreement to exchange tax information with the foreign country.
This should be unsettling news for Americans abroad who continue to bury their heads in the sand instead of coming into compliance with the IRS.
Origins of FATCA
The Foreign Account Tax Compliance Act (FATCA) was signed into law by the President Obama back in 2010, with the goal of helping the IRS collect tax revenue originating overseas more effectively and efficiently.
At the time, the US government was losing an estimated $100 billion annually as a result of offshore tax non-compliance.
FATCA requires foreign financial institutions (e.g., non-US banks, investment houses, etc.) doing business in the United States to implement systems to identify US customers and report account information to the IRS.
As a matter of practice, in order to expedite the information gathering process, under FATCA, US bank account information is often not sent directly to the IRS, but is instead sent via the government of the local jurisdiction where the foreign financial institution is located. To this end, the US government has signed dozens of so-called intergovernmental agreements with partner countries that have agreed to digital information exchange programs.
How FATCA Affects You and Your Bank Account Information
FATCA combats offshore tax evasion in two distinct ways:
(1) by requiring US citizens, including those living abroad, to report their holdings in foreign financial accounts and their foreign assets on an annual basis to the IRS, and
(2) by requiring foreign financial institutions (“FFIs”) (which include just about every foreign bank, investment house and even some foreign insurance companies) to report to the IRS (or to their government, which then reports to the IRS) the balances in the accounts held by customers who are US citizens.
If US citizens don’t comply with the reporting rules, they can be subject to severe penalties if caught by the IRS. If the FFIs don’t comply, they and their account holders may be subject to an onerous and automatic 30% withholding tax on payments such as interest and dividends from US sources.
For a number of years now, citizens abroad have felt the far-reaching effects of FATCA. Local banks continue to send out letters informing Americans that if they indeed have US citizenship, then they need to complete an IRS Form W-9 or other information form, and sign a waiver of confidentiality, in order to maintain an account at the bank. These forms trigger a gathering of bank account information under FATCA that will ultimately fall in the hands of the IRS.
FATCA, Foreign Bank Accounts, and the Relevance of Tax Treaties
As a result of FATCA, the IRS has signed intergovernmental agreements with dozens of partner countries, including countries with which the US otherwise does not have an income tax treaty or other exchange-of-information agreement.
In its guidance, the IRS clarified that FATCA’s strength goes beyond the reach of tax treaties. In other words, a request of information from a FATCA partner country is not dependent on the US having a tax treaty with the relevant foreign country.
For US citizens around this world, this shows the importance of tax compliance with the IRS due to the global reach of FATCA.
The current tax compliance climate has spurred many delinquent US expats with offshore interests to catch up with the IRS using one of its tax amnesty programs, including the popular penalty-free Streamlined Procedures. If you’re late in your filings with the IRS, feel free to contact us to learn more about safely coming back into compliance the IRS.