Whether you are planning your move abroad or are already living the life of international adventure, you should know that expats face local FATCA banking challenges from a new U.S. Treasury Department program that could affect your ability to open or maintain a local bank account.
The Foreign Account Tax Compliance Act or FATCA was passed in 2010 and is being implemented in 2013. Primarily designed to require more disclosure to the U.S. Internal Revenue Service (IRS) by non-U.S. banks about accounts owned by Americans, FACTA’s main goal is to track down Americans who try to dodge U.S. taxes by setting up secret offshore accounts. FATCA requires non-U.S. banks, investment funds and other financial institutions to report to the IRS on accounts held by Americans with more than $50,000. Foreign financial institutions that do not comply with FATCA reporting rules could have a 30 percent tax imposed on all their U.S.-based transactions and also those of their U.S. clients.
To understand the practical impact of FATCA and how expats face local FATCA banking challenges, we spoke with Marylouise Serrato, the executive director of American Citizens Abroad (ACA), a non-profit volunteer association headquartered in Geneva, Switzerland that represents the interests of Americans living overseas.“What we are seeing right now is great hesitation by banks to keep American clients,” Ms. Serrato explained. “We see a lot in Switzerland because our global headquarters is in Geneva, but it is a worldwide problem for Americans living abroad. It is becoming increasingly difficult for many American expats to maintain overseas banking services. It is even affecting mortgages, although they do not have to be reported. The banks are nervous because of the steep non-compliance penalties and the cost of implementing FATCA.”
Adding to the problem, the IRS also has stepped up its enforcement of FBAR or The Report of Foreign Bank and Financial Accounts, which has been on the books since the 1970s, but only recently vigorously enforced. Under FBAR, smaller account holders must complete an FBAR form each year if they own or have signature authority on a foreign account that exceeds a cumulative total of $10,000 at any time during the calendar year. “If you have five accounts holding $2,000 each, you have hit the IRS threshold and must complete an FBAR form,” said Ms. Serrato. “FBAR also takes into consideration not just bank accounts, but some foreign pension funds. The majority of Americans living abroad who have foreign pension funds should be reporting those on an FBAR form.” Penalties for undeclared accounts are $10,000 per account. In some cases, according to Ms. Serrato, the IRS can take 27.5 percent of the value of your account for failure to disclose.
Most expats will be affected by FBAR reporting requirements. FATCA reporting requirements, however, are much higher and should affect fewer American expats. “People will have to look at what investments they have to determine if it is reportable under FATCA,” said Ms. Serrato. “It is not just bank accounts, but also certain insurance polices that need to be declared on FATCA form 8938. We have a guidance tool on our FATCA website that shows a comparative chart to help determine filing requirements for the FBAR form or an 8938 FATCA form.”