What to Do if You Received a FATCA Letter from Your Bank About Foreign Account Reporting

IRS Audit 101 Infographic
IRS Audit 101 (Infographic)
September 17, 2018
2017 Statistics on Tax Crime Convictions and Prison Sentencing
2017 Statistics on Tax Crime Convictions and Prison Sentencing
September 20, 2018

What to Do if You Received a FATCA Letter from Your Bank About Foreign Account Reporting

What to Do if You Received a FATCA Letter from Your Bank About Foreign Account Reporting

If you are a U.S. citizen or resident alien with a foreign checking or savings account, at some point you will likely receive a FATCA letter from your bank. FATCA, or the Foreign Account Tax Compliance Act, is a federal anti-tax evasion law enacted in 2010 under the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires foreign financial institutions (FFIs), such as banks and mutual funds, to disclose information about U.S. account holders to the Internal Revenue Service (IRS). Because FFIs that fail to comply with FATCA risk incurring massive fines, there are powerful incentives for foreign banks to report their U.S. clients. Unfortunately for such clients, this creates a high risk of penalization, as federal laws require U.S. taxpayers to report foreign accounts to the IRS (provided certain thresholds are surpassed). Though it is crucial to act quickly if you have received a FATCA letter from an overseas bank, you should consult with an international tax lawyer before proceeding – because the way you respond could impact how swiftly, and how severely, you are penalized.

Why Did I Receive a FATCA Letter About My Offshore Bank Account, and What Should I Do Next?

Before our IRS tax attorneys can discuss the subject of FATCA bank letters in depth, it is necessary to provide some basic background about the underlying tax laws and disclosure requirements.

Alongside the Bank Secrecy Act (BSA), the Foreign Account Tax Compliance Act is one of two federal laws that create special tax filing requirements for U.S. persons, including U.S. citizens, U.S. business entities, U.S. trusts and estates, and resident aliens (who are also referred to as “lawful permanent residents,” “LPRs,” or “green card holders”). While FATCA applies primarily to foreign banks, the BSA applies primarily to U.S. clients of foreign banks, who must comply with a requirement known as the FBAR, or Foreign Bank Account Report. FBAR filing requirements are triggered once an account reaches a minimum value of $10,000, or, if there are multiple accounts, an aggregate minimum value of $10,000.

While FATCA requires FFIs to disclose foreign accounts to the U.S. government, the BSA requires U.S. taxpayers to disclose foreign accounts by filing FBARs with the IRS. However, though oriented toward financial institutions, FATCA also has a component which applies to individual taxpayers, namely the requirement to file Form 8938 (Statement of Specified Foreign Financial Assets) once a threshold of $50,000 is exceeded. Thus, not only must foreign account holders file Form 8938 (under FATCA) and file an FBAR (under the BSA) – they can also count on their banking information being shared with the IRS. After all, noncompliant banks have been fined millions of dollars, leading some FFIs to expose thousands of taxpayers to the IRS.

As to the FATCA letters themselves, what exactly can taxpayers anticipate? The answer varies, depending on which bank the taxpayer uses and where the bank is located, as each nation and FFI utilizes slightly different language and formatting. That being said, taxpayers might expect to see:

  • Requests for confirmation of the taxpayer’s compliance with the U.S. Tax Code
  • Requests to provide a U.S. taxpayer identification number (TIN)
  • Statements that the information will be transmitted with no further need for action
  • Warnings that the account may be closed if the taxpayer does not take appropriate actions

It is impossible to overstate the importance of taking your letter seriously and discussing your next steps with an experienced FBAR tax attorney – the earlier, the better. Be advised that ignoring the letter will not prevent the IRS from investigating your account(s), but, on the contrary, will merely suggest willful noncompliance, making the situation worse. Failure to disclose foreign accounts can lead to severe penalties, particularly in cases of intentional noncompliance.

On a final note, it’s important to point out that Form 8938 and the FBAR, though critical, are not the only forms on which foreign income must be disclosed. In addition, taxpayers must indicate the existence of offshore income using Schedule B (Form 1040A or 1040) (Interest and Ordinary Dividends), which should be attached to the taxpayer’s federal personal income tax return. The relevant section of Schedule B is Part III, Foreign Accounts and Trusts, which asks, “At any time during [year], did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country?”

If the taxpayer checks “Yes,” he or she must (1) file an FBAR, (2) identify the country where the account is located, and (3) indicate whether he or she “receive[d] a distribution from, or [was] the grantor of, or transferor to” a foreign trust. If so, the taxpayer may also be required to file Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts).

International FBAR and FATCA Attorneys Can Mitigate Tax Penalties

It is easy for taxpayers to become lost in the sea of acronyms, tax forms, deadlines, and disclosure programs relating to FATCA and FBAR – yet even minor errors or missteps expose taxpayers to debilitating penalties. In some cases, taxpayers may even be at risk of criminal prosecution and prison time.

If you have undisclosed foreign bank accounts, the best time to consult with an experienced tax attorney is today – before the IRS initiates an FBAR audit or criminal tax investigation. With a swift and proactive approach, it may be possible to dramatically mitigate the FBAR penalties you are currently at risk of facing.  However the most powerful program designed to avoid criminal prosecution, the OVDP is ending and has a 9/28/18 final entry date so if you have foreign compliance problems contact our office IMMEDIATELY!  For a reduced-rate consultation, contact the Tax Law Office of David W. Klasing online or call our tax firm today at (800) 681-1295.

Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San BernardinoSanta BarbaraPanorama CityOxnardSan DiegoBakersfieldSan Jose, San FranciscoOakland  and Sacramento.

Helpful Q and A libraries:

https://klasing-associates.com/topics/ovdi-faq/

https://klasing-associates.com/topics/fbar-compliance-and-disclosure-faq/

https://klasing-associates.com/topics/foreign-audit-faq/

https://klasing-associates.com/topics/international-tax-law-faq/

https://klasing-associates.com/topics/ovdp/