U.S. expats around the world are expected to receive-or some may already have- a FATCA letter from their respective foreign banking service providers.
FATCA letters are intended primarily as a confirmation from the banks to verify if the recipient is; (1) a U.S. taxpayer; and (2) subject to FATCA. The financial institutions themselves could face a stringent penalty from the IRS if they fail to report the U.S. taxpayers’ personal and accounts information to the IRS; therefore, the failure to respond to the FATCA mail may result in an immediate closure of the taxpayer’s bank account. The letter will likely arrive with a From W-9 or W-8, and the banks will likely expect materials to be delivered back to them within a time limit.
Buy some time with an extension
Receiving a FATCA letter from the bank means the U.S. taxpayer has been identified to meet the FATCA filing requirements. If the taxpayer hasn’t reported the foreign account on an FBAR or all income sources with the foreign account on a U.S. tax return, one should first ask for an extension from the bank. Without a proper response from an account holder, the bank may proceed with its reporting duty to the IRS. If the bank discloses the delinquent taxpayer’s account information- getting caught with an undeclared foreign account, simply put- the taxpayer may no longer be able to participate in the IRS offshore voluntary disclosure programs. As a result, the taxpayer would be ineligible for criminal amnesty or lesser civil penalties for his/her failure to comply with the U.S. tax law. The taxpayer also may become prone to the IRS audit which will be extremely expensive and time consuming.
For that reason, the recipient of a FATCA letter is advised not simply ignore or improperly process the letter.
Become current with the taxes
After the bank approves the extension- usually lasting for 30-45 days- it would in the taxpayer’s best interest to consult with an expert to sort out undeclared foreign accounts. What is important to realize is that the letter itself serves only as a reminder to properly declare foreign accounts. Failing to respond to the bank’s FATCA mail could only result in closing of an account; however, failing to comply with the IRS could bring just about the worst tax nightmare. The likely options to come current with one’s filing status are (1) the Offshore Voluntary Disclosure Program, (2) Streamlined Filing, and (3) Quite Disclosure. U.S. expat taxpayers are advised to consult with tax experts to understand benefits and risks of each option before choosing a tax compliance program.
DISCLAIMER: ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY JC&CO. TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.