What Happens if I Do Not Reply to a Bank’s FATCA Request to Certify?
If a person does not respond to their Foreign Financial Institution’s (FFI) FATCA Request, chances are the Foreign Financial Institution will report them to the United States as a U.S. Account Holder.
If the IRS realizes that the U.S. person did not properly complete the necessary annual forms such as a FATCA Form 8938, FBAR — or report the income being generated from the foreign accounts on a U.S. tax return — they may be subject to significantly high fines and penalties.
While not every person who is reported to the IRS by a FFI will be audited, examined, or investigated, the individuals who receive and IRQ inquiry may suffer major headaches and unnecessary stress trying to deal with the IRS (who are considerably understaffed at this time).
These penalties can be absurd, and reach as high as 100% value of the foreign account, in a multi-year audit situation in which the IRS believes a person was willful.
Not all individuals will be penalized so heavily, and individuals may be able to qualify for a penalty waiver or warning letter in lieu of penalty.
The following is a reproduction of our very popular What to Do if you Receive a FATCA Letter:
Golding & Golding represents clients worldwide with FATCA Letter compliance issues (aka “When a person receives a FATCA “Foreign Account Tax Compliance Act” Letter from their Foreign Bank or Foreign Financial Institution requiring them to Certify their U.S. Status”).
We have worked with numerous banks in over 40 countries and have successfully brought hundreds of people, businesses, and estates into IRS Tax Compliance. Click Here for a List of Recent Results.
What is FATCA?
FATCA is the Foreign Account Tax Compliance Act, and it is an international tax law with a global impact on U.S. Taxpayers worldwide – no matter where they live. FATCA is being enforced by the IRS, several foreign countries, and tens of thousands of FFIs (Foreign Financial Institutions). The purpose of FATCA is to ensure that US taxpayers comply with all aspects of IRS tax law by reporting their foreign accounts, along with foreign interest income and other passive investments, even if the amounts are relatively small.
*If you have a large account (over $50K) and minimal income, it will not reduce the chances of disclosure, since disclosure is typically based on the account balances, not the income the account generates.
Over the past years, the IRS has become aware that hundreds of thousands, if not millions of US taxpayers maintain foreign accounts overseas that have gone unreported. Many of these US taxpayers have never reported their foreign accounts because for as far back as anyone can remember, it was impossible for the IRS to track foreign accounts. In fact, it was common practice for CPAs to recommend to their clients to avoid disclosure. After realizing how much money the IRS was losing out on annually in penalties and tax revenue – FATCA was born.
Even before the implementation of FATCA, the IRS has been recovering Billions of dollars of revenue annually through OVDP (Offshore Voluntary Disclosure Program)
What is a FATCA Letter?
A FATCA Letter is a warning. The letter will come from a foreign financial institution such as a bank, brokerage, or investment house when it is unsure of the intended recipient of the letter is a U.S. Taxpayer. In other words, the FFI will evaluate its client base to determine which portion of the clients are either US taxpayers, live in the United States, or maintain a foreign address in the United States. For these unlucky taxpayers, the foreign financial institution will send out a FATCA letter.
The main purpose of the letter is to investigate the customer in order to ascertain whether the bank client has complied with IRS FATCA laws. Namely, has the taxpayer filed the necessary paperwork with both the Internal Revenue Service and Department of Treasury sufficient to show full compliance with FATCA, including FBAR (Report of Foreign Bank and Financial Accounts, 8938 (Statement of Specified Foreign Financial Assets), Schedule B (Interest and Ordinary Dividends) and more.
Who has to Comply with FATCA?
Specifically, US taxpayers are required to comply with FATCA by properly disclosing and reporting their foreign accounts and foreign income in their Tax Return filings and FBAR reporting requirements of foreign and offshore accounts. In order to ensure the taxpayer has complied, the foreign financial institution issues a FATCA Letter, which will usually be accompanied by two forms – a W-9 and a W-8 BEN. Only US taxpayers are required to complete a W-9 and return the completed W-9 form to the foreign financial institution.
Once the US taxpayer returns the W-9 to the foreign financial institution, then the foreign financial institution will identify the individual taxpayer as a US taxpayer. Next, the foreign financial institution will forward the US Taxpayer’s information to the Internal Revenue Service for their records during a FATCA information exchange.
Alternatively, if the individual who maintains the foreign bank account is a foreign person who may be residing in the United States but not actually subject to US tax (tourist or student for example) then they are not required to complete a W-9. Rather, they will complete W-8 BEN which signifies that they are not US taxpayers, and therefore the foreign financial institution will not report that information to the Internal Revenue Service.
Before you try to “pull one over on the IRS”, if you submit a W-8 BEN when you are actually W-9 then that is tax fraud and/or tax evasion and the Internal Revenue Service and Department of Justice have made it known that they will seek full enforcement and criminal prosecution of individuals seeking to avoid penalties and other voluntary disclosure programs by lying about their US tax status.
Is it True Some Foreign Financial Institutions are Reporting “Everybody”
Yes. In order to comply with FATCA, many countries are finding it easier to “over-report” rather than to “under-report.” In other words, if you are a foreign national but either have a US address or other proof on file that you currently or previously resided in the United States, then some of these foreign financial institutions are reporting you as well – and you are now caught in the FATCA Matrix. Why? For many foreign financial institutions, it is simply easier and more cost-effective than trying to sift through each client’s record to determine if they are actually a US Taxpayer or just someone who resides or previously resided in the United States.
Why are Foreign Countries Complying with FATCA?
One important thing to keep in mind is that several of the countries and/or foreign financial institutions who have agreed to enter into agreements with the United States are doing so because they want to stay in the good graces of the United States. Moreover, the countries sign a “reciprocity agreement” so that the United States will also exchange information of Foreign Taxpayers who have accounts in the United States. Moreover, implementing FATCA for many of these countries and institutions has been a very costly endeavor; thus, they are doing whatever they can to make their lives easier complying with the Internal Revenue Service and Department of Treasury.
As a result, even if you are just a Foreign National who resides in the U.S., if you have a U.S. address, chances are the FFI will send you a FATCA Letter and report you to the IRS.
What are the Procedures to Comply with FATCA?
There are many facets to FATCA, depending on whether you are an individual taxpayer, foreign institution, withholding agent, various other designations. Boiled down to its barest, in order for most individuals in order to stay in compliance with general IRS Tax Reporting Requirements as well as FATCA ,they must make sure that they properly reported the foreign and offshore accounts.
Depending on how much money you have and what types of assets you have overseas will determine what is required in terms of achieving FATCA compliance. For the most part, if your overseas accounts are limited to bank/investment accounts, and you do not have any interest in a foreign business or foreign trust then there are three (3) main forms you have to file:
– Schedule B – Even if you do not earn any interest or dividends, section 7 of the form requires you to identify if you have any interest in any overseas account despite whether you earned any income from the accounts.
– 8938 – This form is filed by individuals who have $50,000 in aggregate total in the overseas accounts for any given year on the last day of the year or more than $75,000 and any foreign account at any point during the year. If the person is married, then those numbers are doubled. The numbers are higher for those who are required to file the 8938 but reside overseas.
– FBAR/FinCEN114 – These forms are used to report foreign accounts, but unlike the 8938 an individual is required to complete this form if at the end of the year the individual has an annual aggregate total of all their foreign accounts exceed $10,000. This form is not filed with your tax return but rather filed electronically directly with the Department of Treasury. In addition, unlike the US tax return, you have until June 30th of any given year to electronically file this form. (Updated Procedures for Tax Year 2015 – filed in 2016)
What Happens if I am Not in Compliance with FATCA?
Luckily, you are not alone. If you are one of the hundreds of thousands – if not millions – of individuals have failed to comply with these laws and earned overseas income (even if it is minimal foreign interest income in a country that does not even tax passive income) then there are two different IRS programs you can enter to try to get compliant – the Offshore Voluntary Disclosure Program (OVDP) and the IRS Modified Streamlined Program (Domestic and Foreign – based on where the applicant(s) reside).
Each program has separate requirements and you should speak with an experienced international tax attorney before entering into either program, since if you enter one of these programs and it is the wrong program you cannot enter the other program. Thereafter, once you can prove compliance with FACTA your foreign bank and foreign financial institutions will generally leave you alone.
What will the Foreign Banks and FFIs do if I do not comply?
If you do not comply, your foreign bank and foreign financial institution may freeze or even forfeit your account. FATCA has a very strong hold over hundreds of foreign institutions and many of them would do whatever they have to do to prove to the US they are complying with the law.
Conversely, if one of these foreign financial institutions reports you to the IRS then you may have serious issues at hand, including additional taxes penalties, interest, and worse – if the IRS believed you acted criminally and/or if you are applying for naturalization and/or seeking to renew of your green card.
If you are under IRS examination for any reason before applying for admission into one of these programs, you are disqualified from entering. As difficult as it is for individuals to come to grips with the fact that compliance with FATCA will usually require a person to enter one of the offshore disclosure programs and pay a penalty, is also important to be aware that there are legitimate purposes behind FATCA.
Moreover, if a person is caught (IRS Investigation or IRS Audit) before they had the opportunity to enter one of the offshore disclosure programs, the penalties and sanctions will be much worse.