Foreign Bank Letter

Responding to a Letter from a Foreign Bank Asking for Your US Taxpayer ID

An increasing number of US taxpayers are receiving letters from foreign banks asking account holders for their US tax identification numbers. Banks are sending out these letters as part of efforts to enforce foreign bank account reporting rules under the 2010 US law known as FATCA (Foreign Account Tax Compliance Act). This law requires US taxpayers to make a yearly report of their foreign accounts on their tax returns.

Concurrent to the individual reporting requirements, the US has negotiated a number of intergovernmental agreements with foreign countries which require foreign banks to report accounts held by US taxpayers. These agreements limit the ability of US taxpayers to hide assets in offshore accounts by requiring foreign banks to report the accounts of American depositors. FATCA is not a new law but it has taken a number of years for foreign banks to begin the process of reporting on their US account holders so many are only beginning to receive such letters requesting information.


Why are You Receiving a Foreign Bank Letter?

US taxpayers are required to report their offshore accounts through two mechanisms: the yearly FBAR and on form 8938 with their annual tax return.

The FBAR (foreign bank account report) form must be filed for any taxpayer with foreign accounts valued (in aggregate) of $10,000 or more. A FBAR report must be filed online with the Treasury Department’s Financial Crimes Enforcement Network or FinCEN. Failure to make a yearly report or to include all accounts on that report can result in draconian fines: $10,000 per omitted account account per year (if you are deemed to be non-willful) or up to 50% of the value of the accounts if your failure to report was willful.

In addition to the yearly FBAR, FATCA regulations also require taxpayers to report their foreign accounts on form 8938 (to the IRS) but the thresholds for reporting are somewhat higher. Failure to report foreign accounts on form 8938 can result in additional penalties of $10,000 to $60,000.

A letter from the bank may be the first time a US taxpayer has ever heard about their duty to report foreign accounts. The most important point to make is this: account holders should respond! FATCA provides the IRS with a number of new and powerful tools to help root out offshore accounts. Most countries now participate in FATCA reporting so it is very difficult for US taxpayers to hide foreign financial accounts.

Resist the temptation to do nothing! We understand that no one really wants to step out and declare their assets to the IRS but the consequences of ignoring or trying to avoid the matter can be dire. If an account holder doesn’t respond to the bank’s request for information the bank will probably close their account. Proactively moving the funds to another bank suggests a person is actively avoiding disclosure and, if caught, the highest levels of penalties can be imposed. In addition to civil penalties, account holders who are caught hiding funds can be criminally prosecuted for tax evasion and subject to a prison sentence.


Actions that Can be Taken After Receiving a Letter from Your Foreign Bank

So what are your options when you receive a letter asking for US tax information? If the account holders are not US taxpayers (citizens, green card holders, or US residents for tax purposes) then they should inform the bank they are not US taxpayers. If they are taxpayers but failed to disclose these accounts on previous FBARs and on their tax returns there are three mechanisms to report those accounts and become compliant with FATCA: the “quiet” disclosure, OVDP program, or Streamlined program; each have costs and benefits.

The first option is a “quiet” disclosure; the taxpayer files amended FBAR and 1040 returns for the last three years to include forms 8938 (where needed) and pay any tax due on income produced by offshore assets. A related version is the not-so-quiet disclosure wherein you file three years of amended returns and include a letter requesting abatement of penalties. If the IRS accepts your explanation as “reasonable cause” for failing to file, then it is possible the return will be accepted without any penalties. The risk with the quiet disclosure is the uncertainty; taxpayers don’t know if the IRS will agree with their explanation or choose to impose penalties, begin a full audit, or possibly begin a criminal investigation for tax evasion.

The second option is to enter the IRS’ offshore voluntary disclosure program or OVDP. The OVDP program applies a flat penalty of 27.5% of the highest account balance (over an 8 year period) on undisclosed offshore assets. The taxpayer must make a full disclosure of all assets, file amended returns and disclosure reports, and pay any back taxes due. No additional penalties will be imposed and the IRS will not recommend criminal prosecution for tax evasion. This route can be costly but a 27.5% penalty is preferable to the uncertainty of an audit or criminal prosecution.

The final option for disclosing offshore accounts is the Streamlined program. In order to qualify, the taxpayer must successfully argue their failure to report offshore assets was non-willful. The taxpayer files 6 years of amended returns and FBARs, pays all taxes owed, and provides a statement of non-willfulness. A flat 5% penalty is assessed on the highest aggregate balance. One significant drawback to this program is that it does not eliminate the risk of criminal prosecution like OVDP.

In order to participate in the OVDP or Streamlined program the taxpayer must voluntarily come forward to disclose their offshore accounts – not in response to a notice from the IRS. They are designed to encourage taxpayers to proactively disclose accounts but you can only participate if the IRS has not already discovered the accounts independently.

These voluntary disclosure programs can be an excellent way for taxpayers to clear up any back tax issues without having to pay the extreme penalties for failing to disclose or endure the uncertainty of waiting to find out whether the IRS will eventually find out about these offshore accounts. Which path/program to take will depend on the individual facts and circumstances of each case.  


Need Help with a Foreign bank Letter or reporting?

The attorney’s, CPA’s and former IRS agents at Freeman Tax Law specialize in helping individuals comply with all United States tax laws and regulations.  We have years of experience dealing directly with the IRS, and can negotiate on your behalf if need be.  Please contact us if you would like to discuss your personal tax situation.  The initial consultation is always free, and course completely confidential.