Letter from Your Non-U.S. Bank Regarding Chapter 4 of Subtitle A of the U.S. Internal Revenue Code – aka – “FATCA”

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Financial institutions, outside the U.S. have been taking numerous steps to advise their U.S. born clients and U.S. resident clients about the reporting of their account information to the U.S. Internal Revenue Service.

These letters take various forms, depending upon the institution.  In short, they normally say that as a result of the “Foreign Account Tax Compliance Act” (aka – FATCA, which comes from the newly created Chapter 4 of Subtitle A of the Internal Revenue Code, Title 26) they will be providing various account information to the U.S. Internal Revenue Service.

Some institutions are accelerating the information provided to include the account number, account holders/owners, balances and income from all sources.  FATCA does not require all of this information until it is fully phased in over the next couple of years.

Many U.S. born individuals who have resided virtually all of their lives outside the U.S., often find out for the first time they are U.S. income tax residents by virtue of their birth and the 14th amendment of the U.S. Constitution.  See, Co-author. Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,”  by Patrick W. Martin and Professor Reuven Avi-Yonah, September 2013.

In many cases, I have seen and advised individuals who are first learning of these obligations when they open new accounts and the financial institution outside the U.S. requests an IRS Form W-9 with a U.S. taxpayer identification number, i.e., the social security number for U.S. citizens.  See an older post (23 July 2014) –  Why do I have to get a Social Security Number to file a U.S. income tax return (USCs)?

The financial institution will have them certify under penalty of perjury their status as a U.S. person or not.  If the individual was born in the U.S., they will necessarily be a U.S. person unless (i) they were born to diplomatic parents who were on diplomatic assignment in the U.S., or (ii) they renounced their U.S. citizenship and obtained a Certificate of Loss of Nationality from the U.S. Department of State.  See, The Importance of a Certificate of Loss of Nationality (“CLN”) and FATCA – Foreign Account Tax Compliance Act

These FATCA letters are no longer just for U.S. taxpayers with non-U.S. accounts.  Countries throughout the world are using the exchange of information agreements between the U.S. Treasury and other countries, the Intergovernmental Agreements to notify their taxpayers that soon information about their U.S. accounts will be made available to their tax authorities.  See, recent Mexican articles released including August 26, 2015, in the El Siglo de Torreón, titled Preparan SAT y EU auditorías:  ”

“El Servicio de Administración Tributaria (SAT) realizará el primer intercambio de información con Estados Unidos en septiembre para las primeras auditorías de personas con cuentas bancarias en Estados Unidos a partir del próximo año, aseguró Aristóteles Núñez, jefe del fisco.

“Vamos a poder conocer quiénes tienen cuentas en Estados Unidos y con ello empezar a revisar quién ha pagado sus impuestos y si no lo ha hecho habrá auditorías.”

3 thoughts on “Letter from Your Non-U.S. Bank Regarding Chapter 4 of Subtitle A of the U.S. Internal Revenue Code – aka – “FATCA”

    Trish Moon said:
    August 29, 2015 at 2:03 am

    In Canada there are thousands and thousands of people who relinquished their US citizenship years ago (beginning in the late 1960’s) by becoming Canadian citizens. They were told in no uncertain terms that by becoming Canadian, they would irrevocably lose their US citizenship. The consulates/embassies failed to advise the majority of these people that they should notify the DOS in person and receive a CLN. I have looked at the Nationality Act of 1940 and 1952 and it does NOT say a relinquished/renounced citizen must have a CLN. What it does say is that the consulate should prepare one.

    And the argument that these people have automatically had their citizenship restored is questionable. If one must “intend” to lose it one would expect one must “intend’ to have it back.

    If it were true that a renunciant must have a CLN, it is interesting that the wording in the IGAs acknowledge one can be a renunciant, & provide a reasonable explanation of why no CLN was received. There is no further indication that a CLN must be obtained.

    I do not understand the basis of this emphasis from the compliance community that one MUST have a CLN. If it is not in the statute and not in the (updated) DOS FAM, where are you getting this information?

    “Countries throughout the world are using the exchange of information agreements between the U.S. Treasury and other countries, the Intergovernmental Agreements to notify their taxpayers that soon information about their U.S. accounts will be made available to their tax authorities.”

    By this I assume you mean that the US is going to honor the rather vague mention of reciprocity in the IGAs. Could you kindly provide a reference to something specific that indicates the US has implemented whatever legislation/data systems will be required to fulfill this obligation? I am surprised to hear that FATCA letters will soon be sent to non-“US Persons.” . The focus seems to be on the 30th September deadline for our “foreign” bank accounts to be reported to the IRS.

    Thank you.

      impuestosypatrick responded:
      August 29, 2015 at 1:19 pm

      These are thoughtful comments. Let me respond in two different replies. First, regarding the letters from non-U.S. financial institutions. I have seen many of these letters from financial institutions throughout the world. It is up to each bank and financial institution to communicate with their customers as they see fit. I have NOT seen any such letters from Canadian financial institutions to date.

      As to the IRS’s ability to implement its data systems, that is a question I do not have enough information to answer. However, the directors of the new IRS Foreign Payments Program Office (http://www.irs.gov/Businesses/International-Businesses/U.S.-Withholding-Agent-Program ) will be at the annual University of San Diego School of Law – Procopio International Tax Institute in October 2015.

      I will ask them at that time about its current status.

      Also, the IRS Commissioner had the following prepared remarks about the topic last year in June 2014, which may be helpful in answering your question (Note his comment: “Third, the automatic exchange of bulk information contemplated by FATCA will require a modern mode of data transmission, one that, frankly, is not available at the moment.”):

      http://www.irs.gov/PUP/irs/Commissioner%20Koskinen's%20Remarks%20at%20US%20CIB%20and%20OECD%20Int%20Tax%20Conf%20June%202014.pdf

      IRS Commissioner’s Koskinen’s remarks:

      I’ll also note that the U.S. government’s preparations for FATCA have not exactly been easy. Since enactment, the IRS and Treasury have been working extremely hard to solidify the legal framework, global relationships, and infrastructure necessary to convert FATCA from a concept into a practical reality, and this has been no small task. For four years now, FATCA implementation has demanded a tremendous amount of hard work and dedication on the part of a relatively small group of public servants, without whom offshore tax evasion might still be considered a viable practice.

      These folks have diligently worked on issuing guidance that is clear and eases the FATCA compliance burden as much as possible, and they have made a herculean effort to take into account the extensive stakeholder comments we’ve received in order to get there. I know there are still a few more things to do, but I should take the time, midstream, to thank the IRS and Treasury FATCA team for the work they have completed so far, because that work has been monumental.

      And beyond the legal and regulatory framework that’s been created, you’ll find a number of other very novel elements of the FATCA implementation effort that are important in their own right.

      First, so that we can identify and interact with our stakeholders in the global financial community, we had to create a new Global Intermediary Identification Number, or GIIN, and develop a unique registration system. This system allows financial intermediaries around the world to establish their FATCA-compliant status and obtain a GIIN to prevent FATCA withholding when receiving payments from U.S. sources.

      The FATCA registration system opened several months ahead of schedule and has performed flawlessly to date. So far, tens of thousands of financial institutions have established FATCA accounts and received their GIINs. And just yesterday in fact, we successfully made available to all potential withholding agents the so-called “IRS FFI List” of Foreign Financial Institutions, so those agents can download the database of IRS-issued GIINs to their own systems and use that data to determine which of their account holders are FATCA-compliant and thus free from FATCA withholding.

      Second, we had to be very mindful that FATCA data will be coming to us from a wide variety of sources and in a variety of ways. So we had to reach intergovernmental consensus, with extensive input from the financial sector, on a common data format, or schema, that will allow us to process and interpret all FATCA data, no matter its source, once we receive it.

      This hard work was guided by the OECD, and for that effort that I would like to extend my special thanks to the OECD representatives here in the room today, as well as to the individual members of the OECD Secretariat staff and the private sector financial community not with us who diligently worked through a tremendous amount of detail to ensure that FATCA information reports can be used efficiently and effectively, not only by the IRS but by our reciprocal FATCA partners as well.

      Third, the automatic exchange of bulk information contemplated by FATCA will require a modern mode of data transmission, one that, frankly, is not available at the moment. This too has presented a challenge for IRS like no other faced in the past. So, working again with our partners in tax administration around the world, we have had to design a new system for electronic data exchange that will allow FATCA data to be transmitted quickly and securely. So far, we are pleased with the resulting design of this new “International Data Exchange System,” which we refer to as IDES. We believe it will accomplish our goals, and anticipate it will be available to users by January of the coming year so that FATCA data can flow on time.

      In this regard, I also want to emphasize that we take very seriously the need to ensure that the financial data transmitted through IDES will be transmitted securely, kept confidential, and used only for tax purposes. Protecting this information and assuring its intended use must be our number-one goal. Toward that end, we designed IDES to include state-of-the-art encryption protocols, and we developed a set of safeguard standards addressing the security and use of data once it is received by a government.

      Lastly and importantly, during the past several months, we have been conducting bilateral meetings with each one of our reciprocal FATCA partners to ensure that our safeguard needs are understood and that we and our partners achieve a high level of comfort that FATCA data will be kept confidential and used only for tax purposes, as our treaty and information exchange agreements contemplate.

      Before I leave the subject of FATCA implementation, I want to mention our resource limitations at the IRS. The agency continues to be in a very difficult budget environment. Since Fiscal Year 2010, IRS funding has been reduced by more than $850 million, or about 7 percent, and we have 10,000 fewer employees, even as our responsibilities have continued to expand. . . .

    Trish Moon said:
    August 30, 2015 at 12:12 am

    Thank you for your answer. I can see that I misunderstood your statement. “These FATCA letters are no longer just for U.S. taxpayers with non-U.S. accounts.” You meant resident Americans. I did not catch the distinction. So my remarks were not geared to the IRS being able to receive information but to transmit it. Perhaps there is no difference but what surprised me was the idea that the US was ready for reciprocity.

    I think everyone is highly (and rightly) concerned about the protection of data. There have been so many issues already. It is not encouraging to imagine this exchange beginning when IRS has had such cuts in funding and manpower. This article speaks to some specific concerns about IDES: http://bit.ly/1KUeQfU

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