Many US citizens with non-US bank accounts have already received a “Dear American” letter from their bank. These letters are individually worded by each bank, but they boil down to the same thing: the bank believes you may be a US citizen or resident, and they want more information to either confirm or deny your status as such.
Why are Banks Sending These Letters?
The Foreign Account Tax Compliance Act (“FATCA”) went into effect on July 1, 2014. In a nutshell, FATCA requires each non-US bank to:
- determine whether or not each account holder is a US person and
- provide information to the IRS about each US account holder.
Non-US banks provide this information to the IRS by filing a “FATCA report,” which is IRS Form 8966 (although really banks use an electronic system to do the actual reporting).
Non-US banks that don’t cooperate with FATCA are hit with a 30% withholding tax on certain payments they receive from US persons. So, FATCA is essentially a big stick that the IRS uses to beat information about US account holders out of non-US banks.
Why did I Receive a Letter?
You received a letter because your bank believes you may be a US person based on information in its files. The FATCA term for this information is “US indicia.” US indicia can range from something obvious like a US passport or a US birthplace to something more subtle like the bank’s receipt of a phone call from a US telephone number.
If you aren’t really a US person despite the US indicia in your account, then you can “cure” the US indicia by providing additional information. The FATCA regulations have detailed rules about the types of information the bank must collect to cure each different type of US indicia. For example, if the bank knows that you were born in the US, then that US indicia can only be cured by proof of citizenship in another country and proof that you lost your status as a US citizen.
What will the Bank do now?
If the bank doesn’t receive the proper information to cure each instance of US indicia, the bank will report your account ownership to the IRS. This is the case even if you were to close your account immediately upon receipt of the “Dear American” letter. Banks are required to report their US owners of accounts at any time during the year.
So, now that FATCA is in full force, it’s too late to simply close your account and avoid being reported to the IRS.
I Haven’t Received a Letter—am I in the Clear?
Because FATCA is so new, non-US banks have a couple of years to sift through their accounts looking for US indicia. Also, not every non-US bank will be able to send a “Dear American” letter to each US account holder before it’s time to send a report to the IRS.
So, just because you have not received a letter does not mean that you won’t
- receive a letter in the future and/or
- be included in a FATCA report that your non-US bank sends to the IRS.
What Should I do now?
Now is the time to get caught up on any delinquent tax reporting with respect to your non-US account.
You’re generally required to report any interest or other income from your non-US account on your US tax return each year. Just because the income is earned in a non-US account doesn’t change the general rule that you must include it in your US tax return.
Also, your ownership of a non-US bank account likely triggers a requirement to file the Foreign Bank Account Report (the “FBAR”). The penalties for not filing the FBAR can be massive—either $10,000 per year if the failure to file the FBAR is not “willful,” or the greater of $100,000 and 50% of the account balance each year if the failure is “willful.” (Yes, that’s half the account each year, so a failure to file FBARs for four years means the penalty could be as high as twice the highest balance in the account.)
Finally, you’ll need to file other specialized disclosure forms in certain situations. For example:
- if you own your non-US account through a foreign trust, you need to file IRS Form 3520 (and the trust needs to file IRS form 3520-A), and
- if you own your non-US account through a foreign company, you likely need to file IRS Form 5471.
So, if you haven’t properly included interest in your income and/or reported your non-US bank account on an FBAR or other disclosure form, you’ll want to get the matter cleared up before your bank informs the IRS about your account.
Fortunately, the IRS has several amnesty programs that you can use to clear up the delinquent reports while paying no penalty or only a small penalty. These programs can be used by Americans living in or out of the US
The first step is to determine which amnesty program is right for you. The only way to do that is to speak with a US tax attorney who has experience helping Americans clean up reporting issues related to non-US accounts.
Get in touch and we discuss the best path forward so you don’t have anything to worry about.
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