How Does the IRS Find Foreign Bank Accounts?

Once upon a time offshore banking was almost synonymous with a surefire way to get away with tax evasion.  However, these past few years have shown an extra vigilant effort by the IRS to locate these assets which are nestled away in foreign countries.  Although there are numerous legal uses for monies in offshore banking, what remains is that there are a great number of them that are illegally used for the purpose of not reporting income.

Tax authorities have gone through great measures to locate these “under the radar” accounts and have imposed harsh penalties as well as imprisonment in some cases on their owners.  Furthermore, with the help of the financial institutes that used to proclaim allegiance to secrecy laws and with consorted efforts of the foreign governments themselves, these accounts are now easier to uncover and gather intricate details pertaining to them.

Enactment of the FATCA

In 2010, the Foreign Account Tax Compliance Act (FATCA) was enacted as a way to increase tax compliance by way of requiring the foreign financial institutes to report directly to the IRS the assets of U.S. individuals.   The federal law has three distinct purposes:

  1. Banks holding these accounts are now required to disclose identification of account holders as well as finer details pertaining to the assets and transactions
  2. Using the IRS form 8938, owners of these accounts will need to submit a formal filing every year for these foreign assets along with their tax return
  3. Foreign banks are required to withhold and pay the IRS 30% of the accounts source income and/or gross proceeds from the sale of securities which occur in
    • Non participating financial institutes
    • Accounts that are owned by individuals who have not disclosed whether or not they are U.S. citizens
    • Foreign entity accounts where the identity of the owners is unknown


Since the FATCA has come to be, some 80+ countries have joined the agreement to become more transparent and open their books up for investigation.  Hence, these financial institutes now must report their U.S. client’s assets or otherwise be subject to penalties.

Why is it that so many countries have jumped on board with the FATCA?  The rewards for tax compliance go both ways.  Many of these foreign countries will also benefit because they can now have access to banking information of their own nationals who have stashed away money in the U.S. or elsewhere.

Form W-9 for Foreign Bank Accounts

The United States government has placed added pressure on foreign financial institutions to report which US citizens have foreign accounts abroad.  In turn, many banks, including HSBC most recently, are requiring their U.S. citizen customers to submit a completed Form W-9 form.  The banks are forcing these customers to submit the information by threatening to shut down the account if the form is not sent in.  The W-9 Form is essentially an admission by you that you are in fact a U.S. citizen and thus an admission that FBAR forms are required to be reported.  You should consult if you have received such request from your bank.

Time May Be Running Out

There are various thresholds pertaining to whether or not you need to disclose assets which are held in a foreign country that can better be explained to you through an experienced tax attorney.  However, a good rule of thumb is that if it is income, whether it is small or not, you should be reporting it.  Furthermore, in a lot of cases, foreign banks will not send you any kind of reminders, nor will they follow up with you when it comes time to report the income with your tax return.  The responsibility lies with you alone.

Doing nothing is often the poorest choice you could make when it comes to offshore accounts.  Fortunately, the IRS offers you solutions to get current by way of the 2014 OVDP (OVDI) or Streamlined Programs.  Addressing foreign assets sooner rather than later is your safest bet, and it is always better to seek compliance before the IRS comes knocking at your door.

Dallo Law Group can advise you on all the risks and options available to you.   We have represented numerous cases in the areas of offshore banking and can provide you with easy to understand recommendations for your particular circumstance.

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