FATCA: Expat Americans face account freeze as IRS grace period approaches end

From the end of 2019, expatriate US persons must provide their US tax identification number (TIN) to their local banks, or risk having their bank accounts closed or frozen.

Under the Foreign Account Tax Compliance Act (FATCA), which came into effect in July 2014, all foreign financial institutions (FFIs) must identify their US clients and report them to the US Internal Revenue Service (IRS). FATCA is intended to prevent US taxpayers from evading US income tax on offshore investments and assets, in part by penalising foreign institutions that do not report identifying information about their US shareholders, clients or investors to the IRS.

Originally, the intention was to enforce this by applying a 30 per cent withholding tax on payments to any FFI that did not comply, but in practice all major countries enacted legislation forcing their financial institutions to comply with FATCA.

The original FATCA regulations required FFIs to collect their US clients’ TINs and dates of birth, and report them to the IRS, but this proved to be an administrative burden too far. So, in 2017, the IRS granted FFIs a three-year grace period under which they would only have to submit a US client’s date of birth, and only provide their TIN if the bank already had a record of it. FFIs were also required to ask each US client for their TIN every year, and to make electronic searches for any missing US TINs.

This grace period comes to an end on 31 December 2019, and foreign banks with US clients are now intensifying their procedures for obtaining the missing TINs, even where the client has never had one.

Clients who don’t provide their US TIN, including hundreds of thousands of ‘accidental Americans’ who have lived abroad all their adult lives, risk having their bank accounts frozen unless they have a ‘reasonable explanation’ of why they have not obtained a US TIN.

The reason for the banks’ urgent need for clients’ US TINs is that FFIs that continue to service US clients without TINs risk having the 30 per cent FATCA withholding tax applied to all returns from their US investments.

The rules apply to any ‘partner jurisdiction’ that has made a so-called Model 1 FATCA agreement with the US, which includes most European jurisdictions. The European Banking Federation estimates that there are nearly 300,000 ‘accidental Americans’ in the EU.

The UK’s Guardian newspaper cites the case of a 74-year-old woman who has been sent increasingly urgent letters from Barclays demanding her US TIN, even though she left the US in 1947, aged 18 months, and had assumed that her US citizenship had lapsed. The woman claims she paid an accountant GBP11,300 to help her obtain a social security number, file five years of back taxes and declare all her assets, and renounce her US citizenship. Another had his GBP100,000 online individual savings account (ISA) frozen for nearly four months after he failed to provide the administrator with a US TIN.