What FATCA Means for Your Foreign Bank Accounts
By Nick Hodges
Anyone with a foreign bank account needs to take a close look at FACTA © Igor Vorobyov/iStock
U.S. tax laws are changing. In fact, they’re changing even as they’re being implemented—and if you’re confused, you aren’t alone. There’s a lot of false information making the rounds about the HIRE Act and FATCA—the Foreign Account Tax Compliance Act.
I’ve been keeping a close eye on developments and as FATCA’s practical application unfolds worldwide, I’ll be updating you in these pages. It’s important to point out though, that you don’t need to worry about FATCA reporting if your income falls below the U.S. minimum for filing an income-tax return.
The minimum income the IRS requires for filing a tax return depends on age and marital status, and the amount changes each year (see here). So, what is happening with FATCA? In October, the U.K. became the first country to sign a treaty with the U.S. regarding exemptions and compliances for foreign financial institutions (FFIs). It’s now clear that the IRS is going to push for more inter-governmental agreements to share information.
FATCA is bringing governments to the table to negotiate with the IRS on behalf of their national banks. Once an inter-governmental agreement is in place, a bank must then comply with its own government’s reporting requirements—not those of the IRS. The IRS is expecting to negotiate the first 40 intergovernmental agreements by the end of 2013.
On the heels of the U.K. agreement, a banker in Brazil called me to say that his bank wants to keep the accounts that U.S. citizens now hold with it. For that reason, the bank would like to comply with the IRS’s FATCA regulations. To do so, he explained, the bank needs to do three things:
1. Request voluntary compliance from account holders
The bank will first contact all obvious U.S. account holders to request that each one voluntarily provide his Social Security number. The bank will then file a form like the IRS Form 1099, in the same way U.S. banks file, thus reporting interest income to the IRS.
2. Prove compliance to the IRS
“Our dilemma,” the banker told me, “Is that there may be some U.S. citizens who do not respond to our request for information. To maintain our compliance status, we have to prove to the IRS that we have identified and reported on all U.S. citizens.” To do this, the bank has started running algorithms on all existing accounts data to determine any U.S. activity in any account.
This includes searching for U.S.-based telephone numbers, addresses on deposited checks, and any other bank-transfer information available. It is also cross-referencing this information with third-party databases for more complete information. Even foreign financial institutions that do not work with U.S. citizens have to prove it: Big Brother is here.
3. Withhold income paid to non-disclosed accounts
The bank must withhold—and pay to the IRS—30% of the income earned by any account its algorithm identifies as being a U.S. account, but which has not been disclosed by the account holder. (“Income” here means the interest that your capital has earned—the capital itself does not fall into the withholding net.)
That means that the income credited to an undisclosed account will only be 70% of what was earned. Without a Social Security number, the withholding will be forwarded to the IRS in the name of the account.
To put it plainly: If you raise your hand, say you’re a U.S. citizen, and give your foreign bank your Social Security number, then any interest income your account earns there will be reported to the IRS, just as if that account were Stateside.
If you have an account in a foreign bank and you don’t tell that bank you’re a U.S. citizen…the bank will probably figure it out anyway, withhold 30% of the interest you’ve earned, and send those funds to the IRS directly.
Banks like the Brazilian one that called me hold substantial assets from U.S. citizens. But beyond that, the banks themselves may also hold substantial investments in the U.S. The banks want to continue to receive 100% of their income on these U.S.-based investments. But to do so, they have to comply with FATCA. If they don’t, the IRS will withhold 30% of the bank’s income from its U.S-based investments.
Many U.S. expats believe that the IRS will never find their foreign financial accounts. But with FATCA, the IRS has motivated FFIs and their governments to find your accounts for them. For some countries, it may take a couple more years. But based on my conversations with FFIs—and what they are seeking to do for compliance—I have to tell you: The IRS will likely find your foreign bank accounts sooner rather than later.
U.S. citizens who try to hide assets abroad by not disclosing foreign financial assets (on IRS Form 8938) or by not volunteering a U.S. Social Security number to their FFI should be worried.
In addition to IRS penalties starting at $10,000 per year, per account, U.S. citizens who are non-compliant will have 30% of their foreign-based income withheld by compliant FFIs. There are no secrets in the world anymore.
And a bonus article on capital controls ala Argentina (short):
http://www.zerohedge.com/news/2013-02-12/guest-post-what-textbook-capital-controls-look
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