Beware of FATCA Letters

FATCA letters (sometime called Self Certification letters) are going out from banks around the world to millions of US expats in readiness for reporting their financial information to the Internal Revenue Service (IRS).

If you are one of the 8 million US expats subject to the Foreign Account Tax Compliance Act (FATCA), what do you do if you receive one of these letters?

It’s important not to ignore the letter, which usually arrives with a Form W-9 or W-8.  To grossly simplify the impact of FATCA, FATCA has pushed the burden of collection and  validation of tax identification self-declarations for U.S. purposes unto all financial institutions and financial firms of the 244 countries recognized by the United States.  Pursuant to FATCA and its accompanying regulations, nearly all financial institutions, both U.S. and foreign ones, must obtain a signed tax self-declaration from the owner or owners of an account.  Foreign individual must fill in and sign a Form W-8BEN and foreign entities a Form W-8BEN-E.  U.S. taxpayers must complete and sign a Form W-9.

The bank wants the forms back to confirm whether any customer is a US taxpayer and subject to FATCA. Accountholders should very carefully review the forms.  Ignoring the letter may lead to the immediate closure or freezing of any bank account.

Filing FBAR and Form 8938

If accountholder receiving the FATCA letter has not already cleaned up their accounts and properly reported any foreign accounts to the IRS should ask the bank to extend the time limit, requesting you need between 30 and 60 days to sort the matter out. Most banks will consider this reasonable.

You should immediately consult a US tax attorney about filing a foreign bank account report or FBAR (Fincen 114) and Form 8938. The IRS requires these from any US taxpayer with a foreign bank account with a balance of more than $10,000 at any time during a calendar year. They may also want a Form 8938, which is filed alongside the FBAR by US taxpayers with extensive foreign assets. Both should already have been filed for previous financial years.

You should also discuss the Streamlined Filing Procedure with your tax professional. The program means preparing three years of tax returns and six years of FBAR forms. The benefit is the IRS discount penalties.  This process generally takes 1-2 months, which is within the bank’s FATCA timeline.

Offshore account holders who do not clean up their accounts before the IRS finds out tax may be due from their banks risk far higher penalties.

FATCA interacts with these filings by demanding foreign banks and other financial institutions identify accounts held by US taxpayers. Under FATCA rules, foreign banks must report a US customer’s personal details and information about their bank accounts to the IRS. The IRS compares this data with the FBAR, Form 8938 and other filings. If discrepancies are spotted, a tax investigation is likely to follow.

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