FATCA Letter

FATCA Letter

FATCA Letter

FATCA Letter: When a U.S. Taxpayer receives a KYC (Know Your Customer) or CRS (Common Reporting Standard) notice from their foreign bank, there is limited-time to develop a response strategy. A FATCA Letter refers to the Foreign Account Tax Compliance Act. It requires the account holder to certify their U.S. person status under penalty of perjury, and complete either a W-8BEN or W-9. In accordance with IRS requirements, Foreign Financial Institutions (FFIs) report U.S. account holders to the U.S. Government. If a customer does not respond, the foreign bank will generally presume U.S. status.

In recent years, the IRS has been aggressively increasing enforcement of FATCA.  More than 110 countries and 300,000 Foreign Financial Institutions (FFIs) actively report to the IRS. On the U.S. taxpayer side, FATCA requires  U.S.

How the IRS Enforces FATCA

Taxpayers to report specified foreign financial assets to the IRS on a Form 8938.

The Form 8938 is filed alongside an annual tax return.

When an FFI believes a U.S. account holder is a U.S. Person, they will send a FATCA letter to confirm the status– before reporting the account holder to the U.S. Government.

If a person is audited, and the 8938 Form is not included in their tax return, it may result in significant fines and penalties.

*It is important to note that a U.S. person does not mean a US citizen, or even someone who lives in the United States – the definition is much broader.

Which Customers do Foreign Banks Target with a FATCA Letter

Generally, the FFIs focus on customers they believe are U.S. person. The FATCA Letter or email will ask you to submit either a W-9 which is for U.S. Persons, or a W-8 BEN which is for non-U.S. persons.

The FATCA letter will usually ask you to:

  • Confirm your U.S. status 
  • Sign a certification of U.S. Citizenship or Green Card status
  • Send back a completed W-9 or W-8 BEN

Take a Few Preliminary Steps Before Responding to a FATCA Letter

Here are a few practice pointers:

Make Sure the Account is Yours

Before getting yourself entangled in a FATCA situation, be sure the account is yours — and that the bank did not make a mistake.

See if you have Statements at home?

This is will help you determine how much is in the account, and what the maximum balances were.

See if the Bank Sent You Previous Correspondence re: status?

Was this the first letter the bank sent, or just one in a long line of many letters you already disregarded (don’t worry, this is very common).

Were you a U.S. Person when you Opened the Account?

This will also help determine if you identified as a Non-U.S. Person because you were a non-U.S. person. If you were a U.S. person at the time you opened the account, try to assess if the bank already knows you are a U.S. person or not.

See who else is on the Account, and are they a U.S. Person?

Do you own the account by yourself, with a co-owned, or are you just a signatory on the account.

Determine what Portion, if any, of the Money in the Account is yours?

Do you own all the money in the account, part of the money, or none of the money —

How Does FATCA Impact Americans?

FATCA is the Foreign Account Compliance Act.  It is an international act designed to facilitate compliance for U.S. Taxpayers, Foreign Financial Institutions, and other intermediaries with proper reporting of Specified Foreign Financial Assets.

In recent years, the IRS has increased enforcement of offshore and foreign reporting – with the goal of combatting, reducing, and eliminating offshore/foreign tax fraud and evasion.

What is the Purpose of FATCA?

The main purpose of FATCA is to reduce offshore and foreign tax fraud, facilitate tax compliance and ensure the IRS and U.S. government can keep tabs on your foreign assets.

Who Has to Comply with FATCA?

Any U.S. Person Taxpayer (foreign or U.S. resident) who has to file a tax return may become subject to FATCA reporting.  For individuals and other entities filing U.S. tax returns, the main reporting requirement is filing form 8938.

Unlike other international reporting forms such as an FBAR, 5471 or 8865 – Form 8938 is only required if you have to file a US tax return.  The other forms we just mentioned have to be filed irrespective of whether a person meets threshold having to file a US tax return or not.

Stated another way, a person does not have to file a tax return just to include a form 8938 for FATCA Reporting. If they did not otherwise have to file a tax Return, then the Form 8938 is not required.

What are the Consequences for Not Being in FATCA Compliance?

There are two factors to consider: what is the foreign bank going to do and what is the IRS going to do.

Foreign Bank Actions

If you do not respond to the FATCA letter, chances are the foreign bank will freeze your account and prevent you access to the funds. In more recent months, foreign banks have been going so far as actually closing your account, suspending your funds, and refusing to allow you access to your account until you have proven compliance with FATCA. If you received a FATCA notice from your bank, then you are already on their radar. 

IRS/U.S. Government Actions

If the IRS catches you, the penalties can be staggeringly high. Depending on whether you were out of compliance for FATCA, FBAR (Report of Foreign Bank and Financial Accounts), and/or several other forms that may have been required (which depends on the type of accounts and investments you have overseas), the penalties can reach as high as 100%. In addition, the IRS is authorized to: lien/levy your assets or accounts, revoke/deny your passport, issue a customs hold, or impact your ability to renew a Green Card or Visa. 

How can the IRS find out about your noncompliance? The foreign bank is supposed to comply with FATCA and report your personal information to the IRS.

Thus, when you receive a FATCA letter, you’re already in the system. Another way some people get “caught” is when their CPA or bookkeeper gets audited or in other trouble with the IRS. 

Also, sometimes a simple transfer of money between a foreign country and the United States can get you on their radar – for example, the sale of a foreign property or receipt of an inheritance, etc.  

Golding & Golding: About our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and FATCA letters.

Contact our firm today for assistance with getting compliant.