Why foreign banks share your information with American government officials

As an American, you have a certain expectation of privacy. We don’t expect government officials to listen in on our personal conversations without cause, we don’t think they should have access to our private healthcare information, and we don’t believe they should monitor our personal finances.

For the most part, these expectations are reality. However, the Foreign Account Tax Compliance Act, more widely known as FATCA, is one exception to the rule. Under FATCA, the U.S. government has access to the amount of financial assets that any American – not just expats – have in foreign bank accounts. 

Unlike many tax rules and procedures, FATCA is fairly new to the party. It was enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, and it focused on tightening cases of offshore tax evasion.

Judging by American movies, tax evasion is a serious problem. Those seeking to hide their assets and lower their tax liability are often portrayed as stashing money away in Swiss bank accounts or traveling to the Cayman Islands to make illegal financial transactions. 

FATCA sought to reduce or even eliminate this practice by requiring all financial assets in foreign banking institutions by United States citizens be reported to the federal government annually. That means banks with U.S. customers must report all balances and income for Americans to the IRS each year. Individual taxpayers also need to report their foreign financial assets and income on a separate form.

FATCA is part of a larger, more complex effort toward a global transparency initiative. 

Why do banks agree to hand over this information?

It all boils down to a financial penalty. Unless they comply, foreign banks and other financial institutions that choose not to register or agree to report U.S. citizens’ qccounts and assets are subjected to a steep 30 percent withholding tax on certain types of U.S.-based payments.

What types of financial institutions are exempt?

While most financial institutions fall under FATCA purview, generally banks are exempt from reporting laws if they are:

  • Governmental entities
  • Non-profit organizations
  • Small, locally owned and operated banks
  • A specific type of retirement agency

How do I know if my bank is subject to FATCA?

Typically, banks will send their U.S. customers written notification before reporting the information. Often this communication asks them to confirm that they are indeed an American citizen and up to date with their U.S. tax filing. 

If a bank is already aware of your U.S. citizenship status, they may skip this step altogether and directly begin FATCA reporting to the IRS.

If you receive this letter, don’t throw it in the trash. You’ll need it to know how to register and comply with FATCA, so seek advice from an expat tax CPA.

What is the IRS looking for?

FATCA financial reporting isn’t limited to saving and checking accounts. In most cases, it also applies to foreign pensions, interests in foreign estates, partnership interests in foreign businesses or securities and stocks issued by foreign corporations.

It also applies to accounts with foreign branches of U.S. banks.