Currently, an estimated nine million Americans are living abroad. The majority have accounts at foreign banks, and many of them are now receiving letters from their banks asking for their US tax identification numbers. Some are also asking their American clients to certify that they are current with their US tax filings.
FATCA, the Foreign Account Tax Compliance Act, penalizes foreign banks that don’t hand over account info about their American clients, and if their customers don't respond to their letters and provide the information requested, they may abruptly close their accounts.
American citizens and green card holders are required to report their worldwide income to the IRS. Those with over $50,000 worth of assets or investments abroad also have to file Form 8938 with their Form 1040, while those with over $10,000 in one or more foreign bank accounts at any time during the year also have to file an FBAR (Foreign Bank Account Report), or FinCEN Form 114.
Not filing and false reporting can incur large fines, even if the offence is non-wilful. Each year considered a separate violation. Criminal penalties can also apply if the offence is considered wilful.
So what choices do US expats have when they receive a letter requesting US tax info or certification of compliance from their foreign bank?
1. Ignore it
The difficulty with this approach is that the problem is more likely to worsen than go away. The bank may close your account if you don't respond and it may hand your contact details over to the IRS too with a note saying that you didn't respond to requests for information regarding your compliance. As such, the head in the sand approach could actually end up attracting unwanted attention rather than avoiding it.
2. Bend the Truth
Saying you are compliant when you really aren't is never a good option, as both the bank and the IRS will inevitably find out at some point, leaving you open to the steep penalties reserved especially for those who willfully avoid compliance.
3. Quickly file then tell the bank that you're compliant
This certainly isn't the worst strategy, though the sudden filing rush of historic returns and FBARs may appear conspicuous to the IRS, and you may find yourself liable for penalties for past non-compliance, or an audit.
4. Streamlined Procedure
The Streamlined Procedure lets US taxpayers who aren't up to date with their filing file the last 3 years' returns and the last 6 years' FBARs without facing penalties, so long as they are willing to self-certify that they haven't been willfully avoiding paying taxes. This is a great option for expats who haven't properly understood their filing requirements before being contacted by their foreign bank. The self-certification should be taken seriously though, as if an audit later reveals willful avoidance, penalties can still occur.