A new law that requires foreign banks to report information on their U.S. account holders may create some difficulties for expat employees. Smaller banks not wishing to accept the administrative burden may refuse to allow Americans to have bank accounts. It may also impact company payroll processes.
"It may be difficult for Americans to have a personal bank account [outside of the United States]," says Cathy Schultz, vice president for tax policy at the National Foreign Trade Council in Washington.
The problem is that smaller foreign banks, which do not have any U.S. holdings, may not wish to comply with the reporting requirements of the Foreign Account Tax Compliance Act, so "they may just decide they are not going to have accounts with any Americans," Schultz says.
Foreign financial institutions that do not report on the holdings of American citizens to the U.S. Internal Revenue Service would face a withholding charge of up to 30 percent on any income and capital payments the company gets from the United States, beginning in 2014. The intent of the law is to find U.S. citizens who try to evade taxes by keeping funds overseas.
"The Treasury Department has been working on this and they are aware that this is a problem. ... I would think this is something the expat community would have some interest in," Schultz says.
Ruth Manfredi, an American who lives in La Spezia, Italy (originally from South Salem, N.Y.) questions whether smaller banks in provincial areas will even know about the law -- and whether they will know that their depositors are American.
"Does my bank know that I am American in their bookkeeping?" she asks. "If I apply for a new bank account ... I'm not sure I have a legal obligation to tell them I am an American citizen. ... It does raise the question of how much is this actually affecting expats."
The American Citizens Abroad advocacy group, based in Arlington, Va., and Geneva, believes it will have a significant impact -- and is lobbying for repeal of FATCA, which was passed in March 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act.
"FATCA is particularly prejudicial to Americans residing overseas as it is shutting off access to international banks and investment opportunities and creates the new reporting requirement of Form 8938," according to ACA.
According to Creveling & Creveling, a Bangkok, Thailand-based financial advisory firm that specializes in working with expats living in Southeast Asia, the IRS recently increased the threshold limits for income that must be reported.
Instead of $50,000, as originally set, the IRS now requires U.S. citizens -- who are considered foreign residents for the entire 2011 tax year or who are expats -- to file the new IRS Form 8938 if they have aggregate foreign assets of $200,000 on the last day for the year, or $300,000 at any time during the year. Those numbers increase to $400,000 and $600,000, respectively, for married filing jointly.
The new law could also pose some payroll challenges for multinational companies that have expats in isolated areas, says Ed Hannibal, Chicago-based head of the Global Mobility Practice in North America for Mercer. "One of the challenges in some of the smaller and more remote locations is there may only be a small bank that will be a resource for the expat," he says.
Depending on what happens, corporations may even be forced to pay some expats via ATMs or by wiring funds, he says.
"It's going to be really interesting to see what the Treasury Department puts out [as to] how they plan to actually police this [law]," Hannibal says. "There have been no policies or regs around how they are going to do this."
Some corporations may begin addressing the issue with expats as part of the onboarding process, he says, by asking them to disclose information about their foreign bank accounts. "Long term," he says, "it will probably force expats to work with banks that have a foreign network ... some of the big banks [that already are reporting information to the IRS]."
The first set of comprehensive regulations for FATCA should be issued this month, and probably finalized by the end of summer, according to an official with the Treasury Department, speaking on background. The regs are intended to spell out the due diligence necessary for identifying and reporting on American accounts.
A significant part of the regulations, the official says, will be to define what constitutes a financial institution that must comply with the law, and what categories are not subject to the rules.
The official, who says Treasury has received a lot of feedback from the financial community on the administrative requirements, says the law will be phased in, and notes that the withholding tax for noncompliance won't begin until Jan. 1, 2014.
Hannibal says corporations should "let employees know [about the law and its potential impact] once there is some level of guidance coming out of Treasury."
The penalty for expats who do not file with the IRS, according to an article on the subject by Creveling & Creveling, is $10,000 (which could increase to $50,000 if failure to file continues after the IRS notifies the individual). In addition, a 40-percent penalty on understated taxes may also be imposed.
"The increased reporting and enforcement followed in the wake of the UBS scandal, where UBS private bankers were flying to the U.S. to help U.S. citizens hide assets overseas," according to the firm, noting that expats "now face additional costs related to increased disclosure, stiffer penalties for non-compliance, and a doubling of the audit statute of limitations."
"With the enactment of FATCA," the firm states, "it appears that the era of benign neglect when it comes to enforcing tax compliance among U.S. taxpayers with foreign assets has come to an end."