The IRS has various ways to find out about international or overseas bank accounts. The Foreign Account Tax Compliance Act (“FATCA”) which was passed by Congress in March 2010 requires foreign financial institutions to register with and report to the IRS certain information about their U.S. account holders.
The foreign financial institutions include, but are not limited to depositary institutions (e.g., banks), custodial institutions (e.g., mutual funds), investment entities (e.g., hedge funds or private equity funds) and certain types of insurance companies that have cash value products or annuities.
The foreign financial institutions are required to report information such as the identities of their U.S. account holders, the social security numbers of the U.S. account holders, the account numbers, account balances and income, such as interest and dividends earned on the foreign account. If the foreign financial institutions do not register and agree to report, they face a 30% withholding tax on certain U.S.-source payments made to them. With July 1, 2014 being the deadline under FATCA for compliance, virtually all foreign financial institutions have now established procedures to identify U.S. account holders and have each U.S. account holder sign a Form W-8 BEN or face closure of their account.
Under these procedures, the foreign bank will send you a letter that you have been identified as a U.S. accountholder to be reported to the IRS. As such, the bank will ask you to submit proof that you have entered into the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) which allows taxpayers to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS. If you have engaged tax counsel and entered into this program, you need not worry.
In addition, under the Bank Secrecy Act of 1970 financial institutions are required to report any deposit, withdrawal and transfer of $10,000 or more to the IRS. These reporting requirements include international transactions and have been used as a basis to investigate taxpayers who have assets overseas. So even if a U.S. taxpayer were to refuse to cooperate with the foreign financial institution and that bank were to close the account, the transfer of the funds out of that institution would be reported to IRS.
If you have never reported your foreign investments on your U.S. Tax Returns, you should seriously consider participating in the IRS’s Offshore Voluntary Disclosure Initiative (OVDI). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.
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