You Received a FATCA Notice from Your Foreign Bank. What To Do Now?

02/05/2016

If you have a bank account anywhere outside the US, starting in 2015, chances are you will receive a letter saying that your bank must hand over the details of any American accounts, including yours. The letters vary with the country and with individual institutions. But the overall message is that the IRS is about to get your information.

As unnerving as this message is, FATCA is here, and ignoring your offshore accounts isn’t wise. You might well think that your accounts are not big enough to be noticed. But that is a dangerous game of chance and isn’t worth the risk. And indeed, for most people, the cure isn’t likely to be terribly painful.

Many American citizens living abroad are receiving letters (and in some cases even phone calls) from their banks about their American status. Some ask for your US tax ID and ask you to verify that you are fully tax compliant with the IRS. Some don’t require a response and just say your information will be sent. Some say the bank will close your account if you don’t respond favorably. But what if you aren’t up to snuff with the IRS? 

FATCA—the Foreign Account Tax Compliance Act—is America’s global disclosure law. It penalizes foreign banks if they don’t hand over Americans’ information. Most foreign countries and their banks are getting in line to comply, so don’t count on bank secrecy anywhere. The smart money suggests resolving your issues. You can have money and investments anywhere in the world as long as you disclose them. You must report worldwide income on your US tax return. Yet tax return filing alone isn’t enough.

US persons with foreign bank accounts exceeding $10,000 in aggregate at any time during the year must file an FBAR—now rebranded as a Fin CEN Form 114—by each June 30. Tax return and FBAR violations are dealt with harshly.

With the range of penalties, including massive fines (and in rare cases even jail time), it is sensible to consider reacting to a FATCA letter carefully. For example, you might at first be tempted to tell the bank you’re compliant even if you’re not. This seems dangerous. The bank or the IRS will find out, maybe not right away, but eventually.

You also might consider failing to respond or just closing your account. Again, this is dangerous. Banks routinely turn over the names of closed accounts, so that hardly solves the problem. Plainly, joining one of the IRS amnesty programs and telling your bank you’ve done it is the safest choice. The most favorable program is the IRS’s Streamlined Procedure.

Under changes announced by the IRS in June of 2014, the Streamlined Procedure is a good deal. It can apply not only to overseas Americans but also to those living in the US. The Streamlined program works just fine for most people.

Some people want to fly beneath the radar. Yet filing amended tax returns and FBARs outside one of the IRS programs is considered a “quiet” disclosure. Such a correction of past tax returns and FBARs without drawing attention to what you are doing can be dangerous, and the IRS warns against it. Just filing properly on a prospective basis is also not the best choice. After all, there is a risk your past non-compliance will be noticed.

Don’t take any action without considering your profile, facts, numbers, actions and risk tolerance. These are serious matters. Indeed, although the chance of a terrible result might be small, terrible in this case really can mean terrible. Get some advice and try to get your situation resolved in a way that makes sense for your facts, risk profile, and pocketbook.