What if I do Not Respond to My Foreign Bank’s FATCA Request?

Sean M. Golding, JD, LLM, EA - International Tax Lawyer for Offshore Voluntary Disclosure

Sean M. Golding, JD, LLM, EA – International Tax Lawyer for Offshore Voluntary Disclosure

If you received a FATCA (Foreign Account Tax Compliance Act) request from your foreign bank/foreign financial institution asking you to “confirm” your U.S. Status, you may be tempted to avoid reporting the information it requests.

If you’ve never heard of FATCA, then after a few hours of researching online, not only will your head be spinning, but you may be convinced that it is not worth submitting the FATCA information that the bank or foreign financial institution requests from you…

Not responding to a FATCA Letter is a bad idea. The following is a reproduction of an article we authored regarding FATCA. While you may disagree with the law, it is the current state of the law and your intentional failure to comply may lead to excessive fines and penalties — not the least being your foreign bank or foreign financial institution closing or forfeiting your account.

FATCA is Unfair

When it comes to FATCA (Foreign Account Tax Compliance Act), people and organizations can be very passionate.

Many individuals and organizations truly believe FATCA is a bad law. They believe that it is especially unfair for non-US residents, accidental Americans (born into citizenship), or other individuals who do not intend on currently residing in the United States to have to pay US tax. For this group of people, having to report their foreign income and foreign account information to the US government can be very onerous and over-burdensome and we do agree that some areas of this law should be revised.

Yet, whether a US person believes FATCA is a bad law or not, it is still important to remember that it IS the current law and should be followed. You do not want to be caught off guard and possibly hit with extensive fines and penalties. [In fact, in order to help some of these accidental Americans, the US has created the Streamlined Foreign Offshore Program and you may be able to get away with paying no penalty and no taxes. You should contact an experienced tax attorney to see if you qualify.]

Unfortunately, in addition to all of the legitimate tax professionals who want to help, you have to be wary of some tax professionals who have no intention of actually helping individuals – but are simply seeking to scare clients (“you are going to jail”) and take advantage of their fear by charging hourly fees and pushing clients into the wrong programs (OVDP vs. Streamlined) in order to charge more.

Confusion over FBAR & FATCA

Oftentimes, when a client contacts us at Golding & Golding, it is after they have conducted their own initial research online. They have usually spoken with some aggressive salesman-type of Attorney or CPA who misrepresented the current law and scared them into believing they are going straight to jail.

There are also some clients who have traversed the different expat and other forums and wrongfully believe that FATCA Compliance and FBAR Reporting are inapplicable laws and should not have to comply at all under any circumstances.

What is the Foreign Account Reporting Law?

Under current US tax laws, rules, and regulations, there are significant reporting requirements for individuals, estates, and businesses that have foreign accounts. These are individuals who generally fall into the category of being either a US citizen (accidental or not), Legal Permanent Resident (aka Green Card Holder), or Foreign National subject to US tax under the Substantial Presence Test.

If a person falls into one of these common categories (there are others), then under this current US tax law, they are required to report their foreign accounts and other foreign money to the US government if they meet certain threshold reporting requirements. There are two main reporting requirements as follows:

FBAR (FinCEN 114): If it any point during the year a US person has more than $10,000 in annual aggregate total in foreign accounts (aka accounts outside of the United States) on any day the year, they are reported to report that information annually on an FBAR. It does not matter if the person owns the money, is a joint account holder with a non-US person, or merely has signature authority over the account – they are required to report. This form is not filed directly with your tax return but is a separate form that is filed electronically directly to the Department of Treasury.

FATCA Form 8938: in addition, starting in 2011 under the new FATCA (Foreign Account Tax Compliance Act) law, individuals may also have a reporting requirement directly on their tax return with Form 8938. Unlike the FBAR, the FATCA form has different threshold requirements, which will vary depending on whether a person is married filing jointly, married filing separate, or single. It will also vary depending on whether a person is a US resident for foreign resident. In fact, the threshold requirements for reporting are much higher (you must have more money to report) when you reside abroad (outside of the United States).

You May Disagree With FATCA

We understand that many individuals disagree with FATCA. They think the law is unfair and does not provide enough exceptions or exclusions for individuals who reside outside of the United States. In all honesty, that is probably true – why does somebody who resides abroad with no ties to the U.S. have to continue reporting their foreign money to the United States? (Please see below regarding the benefits of a US passport.)

It is not as if there is a “tax” on reporting; in other words, while a person must pay tax on their worldwide income and the failure to do so could lead to fines and penalties; the fact that the penalties are so high for failing to simply report the account information is something that should be revised at the government level.

In addition, if somebody happens to be an Accidental American aka they have no intent of being an American and meet certain qualifications such as not traveling to the United States or earning US source income – then the current tax law definitely seems unfair and they should be relieved of the penalty. (Please note – the government did enact the Streamlined Foreign Offshore program for these individuals.)

We agree that the government should change some of these unfair laws. Of course, if you disagree with the law, you should take action to try and change it, but it is important to keep in mind that if you knowingly violate the law in the meantime, you may be putting yourself and your family at risk.

FATCA – Breaking the Law

Every day, each person has the opportunity to decide whether they will abide by the law or break the law. In that same vein, each person has the opportunity to decide whether they want to comply with FATCA or disregard it. With that said, if you are going to break the law and knowingly not comply with FBAR or FATCA reporting, it is important to understand the potential repercussions, such as:

  • Frozen Accounts
  • Potential Fines And Penalties
  • Jeopardize Your Ability To Travel
  • Lose Your Passport
  • Customs Hold At The Airport
  • Lose The Right To Enter The United States

What are Some Benefits to You of FBAR & FATCA Reporting?

Your Peace of Mind

If you are a law-abiding citizen and do not ever knowingly break the law, then you are probably the type of person who wants to get into compliance the minute you find out that you are currently unintentionally breaking the law.

If you live outside of the United States but are subject to US Taxes, you may even qualify for the Streamlined Foreign Offshore Program (which means there are NO penalties) and you may even qualify for the Foreign Tax Credit (which offsets taxes you already paid to a foreign country and you may end up with NO tax liability as well).

Whether you are suffering: extreme fear or anxiety, loss of sleep, inability to concentrate, irrational fear of the IRS showing up at your doorstep – all of this can be alleviated by just getting into compliance.

You Get to Keep (or Apply For) Your Citizenship or Green Card

While reporting your FBAR/8938 comes with its share of headaches and fear, you can take solace in the fact that it comes with benefits as well. 

By submitting a properly prepared FBAR/8938, you will be in tax compliance and therefore, it will not impact your application for US naturalization, Green Card, or work visa – whereas the failure to file these forms may negatively impact your application.

If you don’t want to abide by the US tax laws for offshore asset reporting, you can always give up your US status (as outlined further below). Yet, many people want to keep their US citizenship and/or Green Card, even if they are accidental Americans. There are many benefits to keeping their US status, such as:

  • Overall protection of being a US Person (access to embassies, etc.)
  • Use of US Passport (aka “blue book”) which provides easy access for travel worldwide.
  • Ability to travel to the US either to visit family or for business without having to go through travel visa or equivalent each time (example: imagine a case where you have a suddenly sick/dying family member and you need to immediately jump on a plane to the US – that passport will come in handy).
  • Ability to purchase US property without issue.
  • Not be subject to the same strict tax laws for inheritance ($5.45 million exemption vs. $60,000 exemption) that a non-US person would be. 

Even after reading the above benefits, if you still really do not want to be subject to US tax laws, then you can always renounce your citizenship or relinquish your Green Card.

Renounce Citizenship – Relinquish Green Card

We do not live in a lawless society and there are rules people have to follow – or else chaos would ensue. As attorneys, we believe in the U.S. Legal System and all of the direct and indirect benefits a person may receive for simply being a U.S. Person.

If you truly disagree with the law and feel you should not have to report, there are two main options you can legally pursue:

  • Renounce your Citizenship
  • Relinquish Your Green Card

**If a person has significant assets, there may be the 877A “Exit Tax” associated with the renouncement/relinquishment.

FATCA – Unfair, But Worth Potentially Getting in Trouble?

Overall, the way that the law is written is unfair to many individuals, especially those who live overseas or are accidental Americans. Still, is it worth it to avoid the law, knowingly violate it, and risk significantly higher fines and penalties and even a possible criminal investigation? While the chances of getting caught may be much lower than many egregious tax professionals advertise online, people still do get caught.

Ultimately, it is a personal choice and your own risk-level.

FATCA – Closing Your Account

One final issue to keep in mind is that many foreign banks are proactively reporting US account holders to the United States. As a law firm that represents numerous individuals annually with FATCA-related issues, we can tell you that these letters are very real and becoming more and more common.

These letters often state that unless a person certifies under penalty of perjury (or the foreign equivalent) of their US status, the foreign financial institution or bank is going to close the account, freeze the account, and/or not provide you any access to the money. We see many clients who have their accounts frozen and have no access to their money unless they comply with US tax laws.

Some foreign banks choose to close out your account rather than deal with your potential FATCA mess. Thereafter, the foreign financial institution may send you a check for the money that you had in the account. Moreover, because the check may be substantial, there are other FinCEN Forms or international banking forms that may be filed when you are issued that check. A large check coming from a foreign bank will be an immediate red flag and your risk of audit will increase.

How are you going to explain to the US government (if you are audited), that you received a $700,000 check from a foreign bank that you never reported the money or declared it – even after receiving a FATCA Letter?

Be Careful

In the end, the decision to comply or not comply should be up to each individual who may be subject to foreign reporting. It depends on each person’s risk management level and what they’re willing to shoulder or not. That person should weigh the risks versus the rewards, the pros versus the cons.

For some people, they could care less and have no concerns that the US government is going to come to a foreign country to get them. Alternatively, there are many individuals who reside abroad and enjoy traveling back and forth to the United States on a US passport and may not want to risk the loss of the passport and other fines and penalties associated with it.

If you are considering coming into compliance, then you should speak with an experienced offshore voluntary disclosure attorney to get a better idea of your specific situation and what your best route for compliance may be.

If you are subject to US taxes but live overseas, you may potentially qualify for the Streamlined Offshore Disclosure Program (which means you do not have to pay any penalties) and you may even qualify for the Foreign Tax Credit (which means any taxes you may owe the IRS will be offset by any taxes you paid to a foreign country – in some cases, you may end up with zero tax liability). Thus, you may be one of the lucky individuals who do not have to pay any penalties nor any taxes.

**Quiet Disclosure Caution: if you are considering a Quiet Disclosure, we highly recommend against it as that is proactively committing a crime. This will automatically disqualify you from the Streamlined programs or Reasonable Cause submission. If you want to learn more about the dangers of quiet disclosure please see this article.

For additional information, please read here.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our International Tax Lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70 different countries. Managing Partner, Sean M. Golding, JD, LL.M., EA and his team have represented thousands of clients in all aspects of IRS offshore disclosure and compliance during his 20-year career as an Attorney. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo and various Law Journals nationwide.

Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
International Tax Lawyers - Golding & Golding, A PLC