Did Your Foreign Bank Ask About U.S. Person Status?

Did a foreign Bank ask about U.S. Person Status?

Did a Foreign Bank ask about U.S. Person Status?

FATCA stands for the Foreign Account Tax Compliance Act, and the U.S. has entered into FATCA agreements with over 110 countries, with hundreds of thousands of foreign financial institutions actively reporting U.S. account holder information to the IRS. If the foreign financial institution gets wind that the taxpayer may be a U.S. person, then the FBI may request that the taxpayer certify their U.S. person status. Typically, the foreign bank will require the taxpayer to sign a certification form as well as complete a W-9 — as opposed to a W8-BEN, which is used for non-resident aliens or non-U.S. persons.

So what can a taxpayer do when they’re presented with a self-certification form and a W-9?

First, Don’t Panic

Just because the foreign financial institution sends you a FATCA self-certification form and a W-9 does not mean you are a U.S. person. Taxpayers should check whether they are a U.S. person for tax purposes, as that may change from year to year. For example, if the taxpayer is only a U.S. person because they met the substantial presence test in prior years, but they don’t currently meet the substantial presence test, then they may not be considered a U.S. person for tax purposes.

Don’t Lie to Your Bank

It could be tempting to intentionally misrepresent your status to the foreign bank, thinking that the foreign bank may never report you to the IRS. While the foreign bank may not actually report you to the IRS, if the IRS learns that you intentionally misrepresented your US person status to your foreign financial institution, you could face significant fines and penalties under U.S. tax law.

Determine the Due Date of the Letter

Typically, these letters will provide taxpayers anywhere from 30-to-90 days to respond. Taxpayers should make a note of the due date so they can prepare, develop, and execute a strategy in conjunction with the time they have to respond.

Are you FBAR and FATCA Compliant?

Presumably, once the taxpayer responds to the foreign bank, the bank will report them to the IRS, and the IRS would be aware that the taxpayer has foreign accounts and that they are a U.S. person. If the taxpayer is a U.S. person and they have been in prior years but they didn’t properly report their foreign accounts, assets, and investments on various international reporting forms such as the FBAR and Form 8938/FATCA, the taxpayer should consider their compliance strategy before (time permitting).

Consider Getting Into Compliance Before Responding (or as Soon After that you Can)

Since once these foreign financial institutions know that the taxpayer is a U.S. person for tax purposes, the account holder reports to the US government, the taxpayers should consider getting into compliance as soon as they can, if possible, before they submit the form back to the foreign financial institution. Once the foreign financial institution has that information, then the clock starts ticking

Should You Not Do Anything?

For some taxpayers, they would (understandably) rather bury their heads in the sand and not respond to the letter. Depending on the size of the account, how much money is in the account, whether the account is active or dormant, and whether the taxpayer plans on resuming using that account actively, all factors into how the taxpayer would respond to the foreign financial institution’s inquiry. It should be noted that if the taxpayer has a significant amount of money in the account or actively uses the account, or has other third parties actively using the account, by not responding to the letter where the bank may freeze the account or even possibly forfeit the funds within the account.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. Contact our firm today for assistance.