This is a question we receive often. With the implementation and enforcement of FATCA (Foreign Account Tax Compliance Act), the United States is increasing enforcement priority of noncompliant US account holders.
More than 100 countries and tens of thousands of foreign financial institutions have agreed to report US account holder information to the United States.
But I am not a U.S. Citizen?
This is a common misconception. The requirement for FATCA reporting is for the individual to be a US account holder – not a US citizen. In other words, whether you are a US citizen, Legal Permanent Resident, Visa Holder who meets the substantial presence test, or a former green card holder who was considered a long-term resident – you are generally considered a US person.
As a US person, you are required to report your foreign accounts and global foreign income to the United States (the United States taxes individuals on their worldwide income). With that said, the question generally arises as to whether a person can transfer their money from an offshore account into the United States, without issue?
Transferring Your Money to the United States
The fact of the matter is, the money overseas is your money. The IRS is not seeking to penalize you for the mere fact that you are transferring your foreign money into the United States (presuming the money was received legally). Rather, the United States is penalizing you for failing to report the existence of this money to the US government while it was overseas in a foreign account.
There are many individuals who have a reporting requirement because the value of their foreign accounts/specified assets exceeds $10,000 in annual aggregate total on any given day — but do not have any taxable income. In this situation, there is a reporting requirement, but no taxation (since there was no foreign income earned). Nevertheless, they still must report the accounts properly. If the money was “earned” income and U.S. Taxes weren’t filed and/or paid to report the money, it can complicate the situation — but through voluntary disclosure a person can usually get into compliance relatively simply.
Depending on the facts and circumstances of your case, you may be able to avoid penalties altogether. The following is a summary of the basic requirements of individuals who were considered “US persons” and therefore may have a foreign account reporting and/or foreign income reporting requirement:
FATCA & Reporting Foreign Income – The Basics
Golding & Golding is a flat-fee, full-service firm; we are lawyers who assist international clients in reporting their offshore accounts to the IRS. Most recently, many of our clients learned about Foreign Bank Account reporting requirements when they received a FATCA Letter from their Bank, asking them to certify their U.S. Status by submitting either a W-9 or W-8 BEN.
Who Has to Report?
We have represented numerous clients worldwide with issues similar to yours:
– Expats who relocated overseas and did not know they had to report their foreign accounts.
– U.S. Citizens who live overseas and may or may not earn significant income, but have accounts in a foreign country.
– Legal Permanent Residents of the United States who relocate back to a foreign country but are unaware that they are still required to report the foreign accounts.
– Non-Residents who meet the substantial presence test and therefore are required to report foreign bank and other accounts to the US government.
These are the most basic rules when it comes to foreign accounts and foreign income:
If you are either a US Citizen, Legal Permanent Resident (aka Green Card holder or recently gave up your Green Card) or foreign resident who meets the substantial presence test, then you are required to report your worldwide income to the IRS. This means that even if you do not have any US-based income, you are still required to report your worldwide income (even if it is the type of income which is not taxed in your home country such as interest and dividend income in most Asian countries). And, if you have enough foreign income to meet the minimum threshold for having to file a US tax return, then you are required to do so even if it is based on your foreign income alone.
If you meet the requirement for being a U.S. “Taxpayer” (even if you do not meet the threshold for having to file a US tax return), you are still required to file an annual FBAR (Report of Foreign Bank and Financial Accounts). The threshold is as follows: if at any time during the year, you have more than $10,000 in foreign accounts (whether the money is in one account or spread over numerous accounts), you are required to file an FBAR.
In addition, if you have significant amounts of money overseas, then you may also have to file additional forms such as an 8938 (FATCA Form) or 8621 (Passive Foreign Investment Company, which includes Foreign Mutual Funds along with as many other passive investments). There are many other forms you may have to file, but we determine those on a case-by-case basis.
Fines & Penalties
Unless you are criminal, chances are the IRS or Department of Justice will not be banging down your door to come drag you to jail. With that said, the fines and penalties can be very steep and depending on your particular circumstances, may include penalties upwards of 100% of the value of your foreign account. If the IRS believes you were willful (aka intentional), then they may launch a criminal investigation against you and the penalties and fines can get much worse from here, including Liens, Levies, Seizures…and worse.
Customs Holds and Passport Revocation
With the implementation of FATCA (Foreign Account Tax Compliance Act), the United States is heavily cracking down on offshore tax evasion and unreported foreign accounts in general. The IRS and US government have the power to both revoke your passport as well as possibly hold you at the airport “customs hold” to question you on the spot (usually outside the presence of your attorney).
Getting Into Compliance
Getting into compliance should be mandatory on your “to-do” list. Even though our firm, Golding & Golding, is based in Newport Beach, we represent clients worldwide. A majority of our clients live overseas in over 40 countries. We have helped numerous clients get into compliance and are regarded as one of the top Offshore Disclosure Law Firms worldwide.
To that end, there are three main methods of compliance:
(1) Streamlined Compliance
This program is for individuals who were unaware of any requirement to file an FBAR and/or report their income on a US tax return. The penalties under the streamlined program are significantly reduced and may possibly be waived depending on whether a person qualifies under the strict definition of foreign resident for offshore disclosure purposes.
This program is mainly for individuals and businesses who were willful, aka were aware they were supposed to report their foreign accounts but intentionally hid or kept the account/income information secret.
(3) Reasonable Cause Statement
This is not a particular program; instead, it is a method for getting to compliance while attempting to avoid any penalty. There are many pros and cons to this method depending on your specific situation, which must be evaluated carefully with your attorney before making a decision.
We all work hard for our money, whether we are living and working in the UK, or overseas as an expat. But the key ingredient to successful money management is often missing: we fail to make our money work hard enough.
So, if you are one of those people who just let your salary sit in an account paying paltry interest, then you need to start looking at how to make your money do more for you.
Our guide to offshore deposits takes you step by step through choosing the right account and making sure you continue to get the best deal.
Know what you need
The first thing you need to do before deciding what type of account you want is to ask yourself what you need that account to do.
When doing that, you should consider all of the following points:
· Do you need to visit the bank regularly?
· Can you use internet access for an account?
· Are you happy with using a bank you have never heard of?
· Can you afford to have your money tied up for a period of time or do you need instant access?
· Do you need to hold your money in a different currency to the one you are paid in?
· How do you want your interest paid?
· Are you subject to tax in a jurisdiction where you are not resident?
· How safe will your money be in the account?
· For most expats, choosing an offshore account will be the most sensible option when the answers to these questions are taken into account, as you have more control over how the tax on the interest is paid.
If you can allow the interest in the account to roll up without the tax being taken off at source each time, then you will benefit from a higher return. But you need to be careful to ensure you are not breaching any tax regulations.
There are a variety of accounts available to expats, and while this means you have a wide choice, it can make for a bewildering array of options. You should research the type of account that will work best for you. Here are some options:
These accounts allow you to access your money at any time, without giving the bank prior notice. You will often receive a lower rate of interest than you would on an account that ties your money up for a period of time. But this is not always the case, so compare them carefully.
As you can guess from the name, you have to give the bank a period of notice before you can withdraw your money without penalty.
In most cases you can withdraw your money in an emergency without giving the specified notice period; but, at the very least, you will suffer interest penalties.
Generally, you will have to give 30 days, 60 days or 90 days’ notice of withdrawal from these accounts; in return you should get a higher rate of interest.
It is possible to hold your savings in specific currencies, such as pounds sterling, euro or the US dollar. Choosing these accounts can improve the interest you receive, and mean you hold your money in the same currency you are paid in or have to spend.
Multi-currency accounts allow you to switch currencies, which can help reduce exchange fees if you have income and expenditure in different currencies.
Most accounts pay interest annually, but if you would prefer to receive your interest more regularly, perhaps to augment your income, then you can use a monthly interest account.
The advantage of this is that the interest will sit in your account, if you do not withdraw it as income, and will build up each month, rather than coming as a lump sum at the end of the year.
The interest rates on these accounts are usually slightly lower than the equivalent annual interest accounts.
This is calculated to take into account the additional interest you will accumulate on the monthly payments (interest on the interest) to ensure you do not receive more overall than an annual interest customer.
These offer a fixed rate of interest, usually higher than elsewhere, provided you leave your money in the account for a set period of time, which can be anything from one year to five years. You can sometimes make withdrawals within strict rules. If you withdraw money outside these, you face losing all the interest you would have earned. You should never sign up to an account like this if there is even a small chance you could need your money outside the permitted allowances.
Deferred interest accounts
If you would prefer to tell the bank when you want your interest paid, for tax purposes, use a deferred interest account. In most cases, the interest on these accounts would automatically be paid when it is closed, unless you ask the bank to pay your interest at a specific time – perhaps when your other income has fallen and you want to take advantage of paying a lower amount in tax.
Compare Bank Accounts
Once you know what you need, you must find the accounts that offer you those services. This has been made a lot simpler thanks to the comparison services, such as moneyfacts.co.uk, which are now available on the internet.
You can look at everything – what the account's rate is, whether it is fixed for a period of time, how you can access the account, whether any additional bonus is applied to the interest rate for a period of time – and compare the benefits of different accounts.
The bonus rate is particularly important, as banks will often add a bonus to a standard interest rate to get the account to the top of the best-buy tables, but when the bonus expires the rate may be pedestrian at best.
There is no reason to avoid the accounts that have a bonus rate added – you may as well get the extra while it is on offer. But always make a diary note of when the bonus expires, and then check the rates on offer again to see if you can move your money to a better paying account.
As an expat, you should consider using an offshore account based in a jurisdiction that has a high level of consumer protection. The key areas are the Channel Islands and the Isle of Man, and often their banks are subsidiaries of onshore banks that are household names.
It is vital you understand what protection you would get from each regime if your bank fails – something few of us worried about before the banking crisis.
Guernsey, Jersey and the Isle of Man all have depositor protection schemes that will pay out the first £50,000 of any savings deposited with a bank within their jurisdiction. Gibraltar will pay out 100 per cent of the amount deposited up to €50,000.
In the European Economic Area, the minimum deposit protection is €50,000, although Cyprus, the Netherlands and, from January 1, 2011, Ireland have increased protection to €100,000.
However, you should always check the depositor protection scheme for the bank you are interested in, as these limits can change at any time.
Find Out How to Apply
Once you have decided on an account, you need to apply for it. If you have a branch of the bank nearby, it may be easiest to call in to complete the relevant forms. That way, you can present the information the bank needs to establish who you are and where you live – usually a passport or driving license with a photo, and utility bills sent to your address within the past three months.
Of course, for many expats this is not possible, so you will have to open the account by post or online. You will still need to provide proof of identity, and usually the banks will not accept photocopies, as these are easy to doctor.
Call the bank using the relevant numbers online, and ask for the details and any paperwork you would need to open the account you want. Always check with the bank what its policy is before you send your documents through the post – and make sure you send them by registered or recorded delivery, so if they go missing you will have an idea of where they have gone astray.
Many banks will allow you to go through the account-opening process online now – Alliance & Leicester International have one of the most sophisticated online facilities – but, even so, you will have to prove who you are, so the bank complies with money laundering rules.
Read the Terms and Conditions
It is always tempting to throw the bumf you get from banks into a drawer, never to be looked at again, but if you do not know what terms are applied to your account, you could end up losing out. Yes, reading these documents can be very dull, but ignoring them can leave you open to unexpected problems.
Banking literature is never easy to get through, but remember: if it is hard to understand, that is most likely to be the area where you are going to get caught out. Make sure you read the small print and don't get stung by the banks because of your ignorance.
It works the other way too. Knowledge is power, and if you know what the bank should be offering, you can make sure it keeps its end of the bargain.
Transfer your Money
If you are transferring money from another account into the one you have just opened – and most people will be – then you have to make arrangements to do this with your existing bank.
If you want to close the account where the money is currently held, you will need to instruct the bank and fill in any necessary paperwork.
This can be easier in some countries than in others, and if you are planning on leaving a country and you want to close the account and have the money transferred before you go, give yourself plenty of time. The UK banking system is, believe it or not, relatively efficient at such requests. If you are dealing with banks in other countries, they may not act so quickly.
In any case, if you are leaving a country and closing accounts, make sure the accounts are closed before you leave to avoid any problems, such as having to go back to sign a document to release funds.
If you returning to the UK from Australia, for example, this could be an expensive mistake.
Tax for expats can be phenomenally complicated, and there is no "one-size-fits-all" solution, so the best thing is to get advice that is specific to the country you are living in and to your circumstances.
The one thing you cannot do with tax is ignore it.
The UK HM Revenue & Customs is cracking down hard on tax evasion by expats, where people have held money offshore and not declared it to the UK tax office.
The powers HMRC now has to force banks to provide details of customers are extensive and, with the announcement in the Comprehensive Spending Review that a further £900 million will be used to tackle tax and benefit fraud, things are only going to get tougher.
It is only fair that you pay the right tax. If you have a bank account offshore and you are subject to tax in the UK, then you must declare it.
The European Savings Directive came into effect in 2005, and gives you the option of having a withholding tax automatically applied to your savings by the EU member state in which you reside, or the institution holding your money will pass on information on the interest you have been paid to the UK tax authorities. Switzerland, Jersey Guernsey and the Isle of Man, although not part of the EU, have put equivalent voluntary measures in place.
Depending on where you hold your account, you may not have this choice – some areas have a default option of the withholding tax.
You need to check with the bank holding your account to be sure what measures apply.
Monitor the Rate at which you’re being paid
Banks are famous for getting your money through the door with a tempting rate, then cutting it while you are not looking. So play them at their own game – check the rate regularly and vote with your feet if you are not getting what you want.