Ex-Pats Face Problems With Foreign Banks Due to FATCAOffshore Account Update
Posted in on October 30, 2014
In 2010, the US Congress passed a law attempting to address the problem of US residents being encouraged to move money offshore to avoid tax obligations. Foreign investment companies and foreign banks were profiting from this activity. The solution is called the Foreign Account Tax Compliance Act (FATCA), and it went into effect in July of 2014. Under FATCA, foreign banks must report investment accounts and certain bank accounts to the US government if the account is held by a US citizen. If the foreign bank fails to make required reports, all customers could have 30 percent of income from US sources such as interest and dividends withheld.
The issue is the provisions in FATCA do not effectively distinguish between US citizens who live in the US and who have moved their money abroad to avoid taxes and US citizens who live abroad and who have money in a local bank where they live. This has created myriad of complications for ex-patriots. That said, it is important for ex-patriots in such situations to consult with a New Jersey international tax attorney as soon as possible.
The Problems Due to FATCA
Around 100,000 foreign banks and financial institutions have registered with the Internal Revenue Service (IRS) and are complying with FATCA. Many other banks worldwide, however, have decided the regulatory burden is too much to bear. As a result, these banks are closing accounts that belong to US citizens and/or are not permitting US citizens to open accounts.
Unfortunately, many of the accounts being closed are just regular bank accounts used by ex-patriots living abroad. For example, around 2/3rds of the bank accounts that were closed had a value of $10,000 or less and around 60 percent of the investment accounts affected had a value of $50,000 or less.
When ex-patriots have their accounts closed or are not able to maintain investment accounts where they live, this can interfere with relationships with foreign spouses; can affect business dealings such as the ability to form a partnership; and can make banking impossible. The problem has become so bad that 1/5th of people responding to a recent survey said they had been forced to either separate or consider separating jointly-held financial accounts with foreign spouses. In at least one case, this left the ex-patriot in a vulnerable position because she did not want to have separate accounts as she was a stay at home mother with no individual income.
In addition to challenges posed by FATCA, ex-patriots with money abroad may also face penalties if they fail to file an annual Foreign Bank and Financial Accounts (FBAR) form. This is true even if they don’t live in the US and aren’t aware of the requirements.
With an increased focus on preventing tax evasion on a global level, US citizens living abroad need to consult with a New Jersey international tax attorney for help ensuring they have fulfilled all required IRS obligations.