by Brian Mahany
Although we help many individuals with offshore reporting and compliance, we also work with banks, hedge funds and financial professionals. This post takes a brief look at some of the issues facing foreign financial institutions under the new FATCA rules. FATCA is the acronym for the Foreign Account Tax Compliance Act passed by Congress in 2010.
In a few months, foreign financial institutions will be required to provide the IRS with information about their U.S. customers. The new law effects not only banks but also hedge funds, brokerage firms, some insurance companies and even some companies offering precious metals. Although the IRS can’t regulate foreign companies, they can assess tax and many countries have begun signing compliance agreements with the U.S. The price of noncompliance is high.
There is much misconception and false rumors floating around the financial world about FATCA. Some folks think that they need only report information on taxpayers that have declared themselves to be U.S. citizens. Others belief that FATCA is ushering in a compliance nightmare that will require hours of due diligence for each account holder. As with many rumors, there is some truth to both.
The U.S. government is interested in anyone with substantial ties to the United States, whether or not the person is a citizen. If you are a citizen, pay taxes here or hold a green card, the IRS wants to know about your foreign financial accounts. The rules require the banks to perform some due diligence, particularly where there is indicia of U.S. nexus. This could means an account address in the U.S, a foreign business that has U.S. owners or an even an account holder that lists a U.S. based accountant. The government also wants to know about accounts held by Americans in a nominee name.
While no bank or institution can guarantee the citizenship or residency status of every customer, these businesses will need to step up their Know Your Customer (KYC) efforts. Because some financial institutions believe this will be incredibly difficult, some are simply closing accounts and telling their customers to take their funds and find a new bank or brokerage firm.
There are software platforms that automate the process and assure consistency. The usage of one such platform (offered by a company called Finomial*) has been approved by the IRS. Although the Internal Revenue Service doesn’t endorse specific software or business solutions, they will accept the results if a bank or hedge fund uses software that follows the rules.
Assuming you do not simply close the accounts of those customers who are suspected to be Americans or have ties to America, time is running out. Whether you choose to handle KYC and on-boarding functions internally, use an outside company or use a software solution, make sure you understand the rules. The cost of noncompliance is high. In particularly egregious cases, the IRS could even criminally prosecute foreign financial institutions and select employees if they can prove that someone assisted a customer in concealing their account.
The FATCA lawyers at Mahany & Ertl are welcome the opportunity to help foreign hedge funds, brokerage firms and banks better understand their reporting obligations. We can also assist if you are audited or investigated by the IRS. Unlike a non-lawyer consultant, conversations between clients and their U.S. lawyers are protected from disclosure by the attorney – client privilege.
Let our tax lawyers make your compliance efforts easier. Our firm is the only law firm selected by the CPAmerica organization of accounting firms to assist their members with offshore compliance including FATCA, FBAR reporting, W8 forms and FIRPTA reporting. We are the place where the professionals come for answers.
For more information, contact attorney Wassim Malas by email at or by telephone at (414) 223-0464. You can also contact the author, attorney Brian Mahany at or by telephone at (414) 704-6731 (direct).
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and coming soon, San Francisco, California. Services available anywhere in the United States and worldwide.
* [Ed. Note: We are partnered with Finomial as part of their advisory group. We are not compensated, however, for this endorsement.]