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Bank Account Closures An Added Worry for Travelers Stuck in U.S.

May 5, 2020, 8:16 PM

Foreign individuals stuck in the U.S. due to coronavirus-related travel restrictions are at risk of having their overseas bank accounts closed, a major consequence on top of the inconvenience.

The reason: a requirement that foreign banks report U.S. account holders to the IRS, and a statute that says an individual becomes a U.S. resident if in the country for 183 consecutive days. Banks may decide to shut the account rather than dealing with the grueling reporting requirements, leaving individuals in a major bind.

To shield themselves from risks, individuals should contact their bank quickly if they are in the U.S. longer than expected and at risk of crossing the residency threshold. That’s something individuals so far may not know to do, said Tara Ferris, principal for financial services at EY in New York. She was formerly senior counsel with the IRS Office of Associate Chief Counsel (International), where she led the drafting of FATCA regulations.

The IRS has offered a 60-day extension to try and protect travelers from becoming U.S. residents, and delayed the reporting deadline for the Foreign Account Tax Compliance Act to December. Still, travel complications could extend beyond that new deadline.

“By the time FATCA reporting is due, more people could have tripped into being U.S. residents,” said Ellen M. Gilley, an associate at Ropes & Gray LLP in Boston.

FATCA requires foreign banks to hand over to the IRS very detailed information on U.S. account holders, like account balances, related transactions, and any interest and dividends, or face severe penalties. That could involve retooling their internal compliance protocol, which can get expensive and is time-consuming.

“Banks have to do due-diligence on their account holders, and in some cases they’re saying its just not worth it,” said David Balaban, international tax director at Grant Thornton LLP.

Change of Address

Notifying an individual bank may just require an individual adding a U.S. phone number or address to their account. That would mark the account as one that requires additional information, in case the foreign institution needs to report information to the IRS.

“The foreign financial institution has an affirmative obligation to monitor for changes—and if the information they get back doesn’t take that account outside the scope of FATCA, they have to treat that individual as a U.S. person,” Ferris said.

Failing to comply with FATCA rules could result in steep penalties for financial institutions, major damage to their reputation, or create additional compliance hurdles for investors and account holders. Account holders who violate FATCA could get hit with up to a 40% penalty on their under reported overseas assets.

Check out Bloomberg Tax’s country-by-country roadmaps covering direct and indirect tax developments.

To contact the reporter on this story: Siri Bulusu in Washington at sbulusu@bloombergtax.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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