Foreign banks are closing accounts of U.S. expats to avoid IRS reporting requirements; U.S. says reporting is necessary to stop tax evasion

May 6, 2015 | 4 comments

Editor’s note: To read about Ecuador banking requirements for foreigners, click here.

By Laura Saunders

The traditional challenges of expatriate life—adapting to a new culture and language, separation from family and friends—are being complicated by the tougher U.S. laws and more aggressive scrutiny of overseas bank accounts held by U.S. citizens.

William Hart, who moved to Berlin from North Carolina four years ago, found this out the hard way. Last year, the 24-year-old e-commerce analyst said he was rejected for an online brokerage account by Deutsche Bank, although he has a checking account there and worked as an intern at the company. In addition, a smaller local bank turned him down for an online checking account, and he says Wells Fargo & Co., his U.S. bank, closed his brokerage account when it learned he lives in Germany.

Deutsche Bank headquarters in Frankfort.

Deutsche Bank headquarters in Frankfort.

The German banks gave U.S. regulatory changes as the reason, he said. A spokeswoman for Deutsche Bank and a spokesman for Wells Fargo declined to comment.

“I seem to exist in a no-man’s-land,” said Mr. Hart. “Can it really be that expats are facing such massive obstacles in basic financial matters?”

Today, the answer is often “yes,” say advocates for the estimated 7.6 million U.S. citizens living outside the country. “The reality on the ground is that overseas Americans are facing restrictions and lockouts from both U.S. and foreign financial firms,” said Marylouise Serrato, the director of American Citizens Abroad, the leading group representing U.S. expatriates.

Experts say a broad range of U.S. expats are affected, and that the wealthy and employees of multinational firms aren’t immune. “The financial institutions weigh how lucrative the relationship is against the possible compliance risks and burdens,” said Jonathan Lachowitz, an adviser at White Lighthouse Investment Management, a firm based in Massachusetts and Switzerland.

Several factors are contributing to the squeeze. One is the Foreign Account Tax Compliance Act, called Fatca. Congress enacted it in 2010 after learning that foreign banks, especially in Switzerland, had profited by encouraging U.S. taxpayers to hide money with them abroad. The main provisions of Fatca took effect in July, 2014.

As a result, foreign financial firms must report to the Internal Revenue Service investment income and balances above certain thresholds for accounts held by U.S. customers. Nearly 100,000 banks and other companies have registered with the IRS. If they hadn’t, all their customers would have 30% withheld from income received from U.S. sources, such as interest and dividends.

Fatca requires that not only U.S. tax payers report foreign bank accounts to the IRS, but that banks do as well. Accounts with more than $50,000 at the end of year, or $75,000 at any time during the year, are required to be reported. For married couples, the threshold is $100,000 and $150,000.

Still, many registered firms are closing accounts for Americans abroad or declining to open new ones, in order to avoid increased compliance costs and the consequences for potential errors.

Martin Karges, a senior director at BDO USA LLP in New York, said many companies are wary, because a bank official must sign a statement guaranteeing compliance with Fatca.

“Banks look at this from a liability perspective,” he said. “The less the bank has to report to the IRS, the less risk there is.”

Another factor is heightened enforcement of rules against so-called illicit finance, such as money laundering or financial transactions that breach U.S. sanctions. Enforcement is again intensifying after a pause during the financial crisis, making it more expensive or difficult to move money from one country to another.

In Latin America, Mexico has been the most aggressive in closing expat accounts, due mostly to its ties to the U.S. through the Nafta. In most other countries in the region, expats are finding it more difficult to open new accounts and those with existing accounts are often asked for additional information.

Credit: The Wall Street Journal, www.wsj.com

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