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FATCA: The Effect of Reporting Requirements on FFIs and US Account Holders

FATCA (Foreign Tax Account Compliance Act) will go into effect July 1, 2014 and will affect any foreign bank or institution with a US citizen as an account holder.  Likewise, FATCA places a mandate on US citizens to report their off-shore banking and financial activity, or face the serious penalties imposed by FATCA.

Effect on Foreign Financial Institutions

FFIs were the first to react when FATCA was introduced in 2010.  It had become common practice for US citizens to hold assets in foreign accounts, often anonymously.  Some countries had centuries old reputations for banking secrecy, and US citizens seeking financial privacy sought out banks in those jurisdictions.  In some case, those accounts were held for the purpose of evading US taxation, and thus spurred the enactment of FATCA.  Basically, it provides a mechanism to reveal the identity of US citizens holding foreign accounts, using the FFIs themselves as the reporting agents.


At first, many countries and FFIs balked at the idea of becoming an agent for the United States’ tax enforcement policies, and some resisted.  However, a part of FATCA’s power is the sanction of non-compliant FFIs and exclusion from doing business within the US financial network.  In addition, non-compliant FFIs would face a 30% withholding on any US sourced payments to its accounts.  Few foreign countries had the financial or political power to stand up to the US and deny access, and those that did have changed their stance in the past few years as FATCA gained momentum.

The first reaction of some FFIs was to stop accepting new US account holders, and therefore avoid the problem altogether.  Many existing account holders were also asked to find a new location for their assets.  However, some countries began to facilitate agreements with the US to smooth the reporting requirements, and utilize internal reporting protocols rather than requiring FFIs to deal directly with the IRS.

Effect on US Citizens with Foreign Accounts

A US taxpayer must indicate on their tax return ownership of assets in excess of $50,000 at any single FFI.  The minimum penalty for non-disclosure is $10,000, along with a 40% surcharge on unpaid taxes.  But even the US citizen who complies with this requirement was facing ‘lock-out’ from many foreign banks who no longer accepted US account holders.  Despite FATCA’s purpose of uncovering tax evaders, the reach of the strict reporting requirements was affecting many citizens lawfully working or residing in other countries.

Through no fault of their own, US citizens found themselves unwelcome at FFIs due to the zealous efforts of the IRS to impose its tax policies via foreign banks.  The US government is attempting to mitigate some of this resistance by FFIs through negotiation agreements with the host countries, but in many cases the damage has been done, and US account holders are no longer accepted by many foreign banks.  Regardless of whether one is legal resident or investor in a foreign country, FATCA has changed the view of FFIs toward US account holders.

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Erich J. Ruth

Erich J. Ruth provides technical support for National Software which is the parent company for 1099FIRE. 1099FIRE develops and markets a comprehensive range of products that enables any size of business or institution to effectively manage and comply with year-end filing requirements. 1099FIRE is an employee-owned company located in Phoenix, Arizona.

If you have any questions or comments about our software, feel free to contact us at any time.

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