ALERT: Non-U.S. banks are now collecting data from U.S. customers pursuant to FATCA. U.S. persons with undeclared foreign accounts should become U.S. tax compliant as soon as possible.

By Robert A. Ladislaw, Esq.

If you are a U.S. citizen or a U.S. Green Card holder (a “U.S. Person”) with unreported foreign financial assets or income, you should take steps to get into U.S. tax compliance as soon as possible.

Pursuant to the Foreign Account Tax Compliance Act (“FATCA”), the United States has entered into Intergovernmental Agreements (“IGA’s”) with over 100 countries that are signed or agreed upon in substance. The IGA’s are in addition to the tax information exchange agreements that were already in place with many countries. Each IGA requires banks located in the signatory country to obtain certain information from their customers who are U.S. Persons. This information will be provided to the United States Internal Revenue Service (“the IRS”).

In order to comply with FATCA and their home country IGA, banks located outside of the United States are now asking their customers who are U.S. Persons for the following:

  1. to provide Form W-9, containing their social security number;
  2. to provide copies of their foreign bank account reports (“FBARs”) that have been filed for the years 2008 through 2013, or, alternatively, confirmation that the customer has entered the Offshore Voluntary Disclosure Program (“OVDP”, to be discussed below); and
  3. to sign statements saying that they are in compliance with all tax laws, and authorizing the bank to provide information about their accounts to any tax authority.

The banks are threatening to close or freeze the bank accounts of customers that do not comply with these requests.

Tax authorities in countries with a “Model 1” IGA will collect the information from the local banks and report the information to the IRS. Banks located in countries with a “Model 2” IGA will report directly to the IRS.

As foreign banks will now be sharing information with the IRS, U.S. Persons with undeclared financial accounts and income outside of the United States should take advantage of one of the available options to become U.S. tax compliant before the IRS contacts them. If such an individual is examined by the IRS before they enter one of the available programs, the individual may face severe civil penalties, or even criminal prosecution in certain instances. In addition, as indicated above, U.S. customers who are unable to confirm to their foreign banks that they have filed their FBAR’s or have entered the OVDP may find that their accounts will be closed or frozen.

The good news is that there are options available for U.S. persons with undeclared foreign income or assets (from legal sources) who have not yet been contacted for examination by the IRS:

  1. Non-compliant taxpayers that acted willfully to avoid reporting and taxation may enter the offshore voluntary disclosure program (“OVDP”).
  2. Certain U.S. Persons who can show they did not act willfully are eligible to file under the “offshore streamlined procedures.”

A taxpayer entering the OVDP must file eight years of delinquent or amended tax returns and FBARs, along with other documents and disclosures, and pay penalties. Generally, the most significant of the penalties within the OVDP will be the “miscellaneous” offshore penalty of 27.5% (or 50% in some cases) of the highest value of the taxpayer’s offshore assets during the eight year period. The taxpayer must also agree to cooperate with the IRS and Department of Justice, if requested, by providing information about financial institutions and other facilitators who helped the taxpayer establish their offshore arrangements. In return, the taxpayer will receive a formal closing agreement with the IRS and the IRS will not assess any of the several potential civil penalties that might otherwise be imposed. Examples of such penalties include the fraud penalty, penalties for the failure to file international disclosure forms, and the draconian and confiscatory “willful” penalty for failure to file the FBARs. In addition, the IRS will not seek criminal prosecution.

Taxpayers who can show they did not act willfully can often file under the less costly and less time consuming offshore streamlined procedures. Under the streamlined procedures, a U.S. Person who is a nonresident of the United States can file delinquent or amended tax returns for the previous three years, FBARs for the previous six years, and pay no penalties. Residents of the United States can file amended returns for the previous three years, FBAR’s for the previous six years, and pay a penalty of 5% of the highest value of their offshore financial assets during the six year period. Such taxpayers will be subject to no other penalty. Of course, taxpayers filing under the streamlined procedures must show that their failures were not willful.

Taxpayers who have reported all of their income from offshore sources, but who have failed to file FBARs or other required international forms, can file such forms in accordance with delinquent submission procedures, often without penalty.

Our firm has long and extensive experience with international tax disclosures and tax dispute resolution. We have been successfully representing clients within the IRS offshore voluntary disclosure programs since the first one was announced in 2009. We guide clients through the process of choosing the option that is most appropriate for them in their circumstances, and assist them to ensure a successful filing that will not be rejected by the IRS.

Please contact Robert Ladislaw or William Blum with any inquiries.

One response to “ALERT: Non-U.S. banks are now collecting data from U.S. customers pursuant to FATCA. U.S. persons with undeclared foreign accounts should become U.S. tax compliant as soon as possible.”

  1. Charles says:

    Hi Solomon,

    Many thanks for that informative blog especially to us bankers.

    I work at a bank in Nairobi, Kenya and our bank has a large footprint on US citizens who have accounts with us.

    We are facing a major problem with the FATCA compliance because most customers no not want to share their Social Security Numbers with us even if in encrypted format.

    Please clarify if the SSN is a must requirement during FATCA or that can be omitted or we can request it in truncated form.

    Unfortunately the IRS FAQs on FATCA are not helpful on this issue.