Home > IRS Form 1042-S > FATCA and Foreign Bank Accounts: The Issue of Withholding and Reporting for Expatriates

FATCA and Foreign Bank Accounts: The Issue of Withholding and Reporting for Expatriates

The Foreign Account Tax Compliance Act (FATCA) is a broad based law that adds to the already complex banking problem faced by many expatriates who live or work in foreign countries.  Many of these expats have bank accounts in foreign financial institutions, which may fall under the reporting requirements established under FATCA.  Essentially, FFIs must share the name and account data of US taxpayers who hold accounts and this reporting requirement is controlled through either an intergovernmental agreement or the FATCA law itself.

The reporting requirement is onerous enough on its own, but failure to comply will result in any US sourced payments to that FFI to be subject to a 30% withholding rate.  This was done in large part to affect those who were sending money offshore in order to evade taxes.  One result was that many FFIs simply stopped accepting US account holders, even if they were residents of the foreign country.  This affected many expats who found themselves unable to open an account at certain banks.

Many expats are retired abroad and receive their money from a US bank through wire transfer or ACH transfers, so the new FATCA law cast such a broad net that it affected almost any US citizen with a foreign bank account.  So, if an expat has an account at an FFI who does not comply with FATCA, then any type of payment could have a 30% withholding until the expat could show that they were complying with tax laws.  Theoretically, this could include pension or Social Security payments, or even wire transfers from one’s own account to an FFI.

The other issue for expats is that of declaring interest earned in an FFI account.  While this is not covered by FATCA, there is a requirement to report this type of worldwide income on Form 8938, and including it on the tax return.  If the amount of interest or dividends exceeds $1500 per year then there is a separate and additional reporting requirement with Form FinCEN -114.  At the moment, the taxpayer has the reporting burden for this type of income, and FFIs are not necessarily required to handle it.

However, given the degree of scrutiny by the IRS over foreign accounts, it is not hard to imagine an expansion of FATCA that would require FFIs to send an annual accounting to either the IRS or their assigned governmental agency in the foreign country.  This would be an easy step to take since the reporting of account holder names and data is already being supplied.  A simple interest and dividend statement would not be a difficult thing for FFIs to supply if requested under FATCA.  This would effectively place FFIs in the position of being ‘tax agents’ on behalf of the IRS if they have US taxpayers as 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.

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Categories: IRS Form 1042-S Tags: ,
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