12/01/23

US: Foreign Account Reports a ‘Financial Trap’ for Americans Overseas.

As published on news.bloombergtax.com, Wednesday 11 January, 2023.

Rules regarding the reporting of offshore holdings can pose significant financial danger to so-called accidental Americans, National Taxpayer Advocate Erin Collins said in her annual report to Congress Wednesday.

The IRS watchdog’s annual report found that rules determining reporting requirements in the Foreign Account Tax Compliance Act and the Bank Secrecy Act were “complex” and could result in severe punishment if violated.

The rules were put in place to ensure US citizens were not shielding income, Collins noted. But unfortunately, she said, they could “be a substantial financial trap for the unwary"—particularly for accidental Americans, those who hold American citizenship because they were born in the US or because they were born to American parents overseas, even if they have lived all or most of their lives overseas and have no other significant US ties.

Civil penalties for FATCA violations begin at $10,000 and can reach as high as $50,000. Non-willful Foreign Bank and Financial Account Reporting violations under the Bank Secrecy Act are subject to penalties of up to $10,000; willful violations are punishable with penalties of up to $100,000, or 50% of the account balance—whichever is higher. In some cases, criminal penalties may be considered.

The watchdog’s annual report follows agency guidance released at the end of 2022 that provided relief to foreign banks and accidental Americans that have had difficulties complying with FATCA.

Many accidental Americans do not have US Social Security numbers or tax identification numbers. But under FATCA, if the individual has a bank account overseas, the bank is required to report this information to the United States. If the bank fails to do so, it is subject to harsh penalties.

Some banks have opted simply to close those accounts to avoid the hassle.

The December Treasury guidance said such banks wouldn’t be considered “significantly non-compliant” because they failed to report these identification numbers. The guidance applies to preexisting accounts only, and banks are required to obtain the birthdates of Americans without other identification numbers.

In particular, overseas taxpayers face barriers obtaining taxpayer identification numbers and accessing IRS customer service. They also file electronically at much lower rates than their US-based counterparts. These issues, Collins said, were magnified by the Covid-19 pandemic.

The problems originate in the fact that, among developed nations, only the US requires its citizens to file and pay taxes regardless of whether they are US residents or not. Collins’s report highlighted several other issues US citizens abroad face meeting their tax obligations.

The IRS said funding provided to the agency under the Inflation Reduction Act will help to improve its service to all taxpayers, including those overseas, according to comments included in the report.

Some of those affected by the filing requirements have sought to end the problem by renouncing their US citizenship. On Monday, the Association of Accidental Americans, an advocacy group, told a US district court that the $2,350 fee the State Department charges for renunciation was unconstitutional. The State Department has said that it it plans to return the renunciation fee to its previous level of $450.