Bank accounts in countries outside the US can cause headaches when owned by US taxpayers. The problem has been heightened by FATCA rules that have being implemented in a number of countries outside the US.
FATCA applies to US citizens, green card holders and other US tax resident individuals who have accounts with non-US banks or financial institutions.
An acronym for the Foreign Account Transactions Compliance Act, FATCA requires banks and financial institutions in countries outside the US to provide the IRS with details of accounts that are owned by US taxpayers. Although the mechanism varies by country, in most countries where FATCA has been implemented banks and financial institutions are required to report these details to the Revenue Authority of that country, and the Revenue Authority is required to pass this information along to the IRS.
Foreign banks are generally required to report accounts known to be owned by US citizens and green card holders, as well as accounts owned by anyone who is potentially US tax resident, as indicated by an associated US address, US telephone number, or US person with signing power or other authority over the account.
US taxpayers who have duly reported their non-US bank and financial accounts on their US tax returns and on their Foreign Bank Account Reports (“FBAR’s”), need not be concerned about FATCA. US taxpayers who have not reported their non-US accounts are exposed to an IRS audit, triggered by FATCA reporting.
The IRS takes non-compliance seriously, as is evident from the penalties that are imposed for failing to report foreign bank accounts. Individuals who are required to report their non-US bank accounts, but have not done so, typically face heavy penalties and in some cases criminal prosecution when the IRS discovers their foreign accounts through FATCA reporting.
Green card holders are often unaware that if they spend even a short period in the US they become US taxpayers; and being unaware of their US taxpayer status, they generally don’t file US tax returns or FBAR’s – with the result they also fail to report their non-US accounts. FATCA reporting sometimes causes their bank to render their account details to the IRS before they get to make the necessary disclosures.
In most cases the problem of unreported foreign accounts can be relieved through Voluntary Disclosure to the IRS. There are different categories of Voluntary Disclosure. In certain cases, the risk of criminal prosecution may favor a solution that focuses on reducing the chances of criminal indictment; while in others, the risk of criminal prosecution is sufficiently low allowing focus on a solution that reduces or eliminates civil penalties.
While the remedy always depends on the specific facts, doing nothing about foreign unreported accounts is never a good solution.
See FATCA Tax Reporting.