American expatriates are not the only taxpayers who should be concerned about FATCA, FBARs, tax evasion and expat tax penalties. Foreigners with US bank accounts are now subject to greater scrutiny too. Effective January 1, 2013 US financial institutions are required to report the account information of nonresident aliens to the IRS. Earlier we discussed US tax reporting requirements for nonresident aliens.
How will the IRS use this information? The IRS will eventually report the US bank account information of nonresident aliens to the governments of foreign nationals. These IRS Treasury Regulations are the result of two latest developments: FATCA (Foreign Account Tax Compliance Act) and tax exchange information agreements between the USA and foreign countries.
There are some key issues to clarify for nonresidents aliens.
Are nonresidents aliens required to pay US taxes on interest income from US banks?
Nonresidents aliens are not required to pay US tax on interest income from banks, savings institutions and insurance companies. However, if this interest income is connected to the nonresident alien’s conduct of a US trade or business, then it is taxed in the USA. Moreover, for the last 50 years the US financial institutions were not required to report the US bank information of nonresident aliens to the IRS. Many nonresident aliens actively opened the US bank accounts and made deposits without a fear of being reported to the IRS or their home countries.
Is the US bank information of all nonresident aliens reported to the IRS?
Per the latest IRS Treasury Regulations, the US financial institutions are required to report the information of NRAs only if a foreign country entered in the information exchange agreement with the USA. Per IRS Revenue Procedure, Rev. Proc. 2012-24 there are 78 countries on this list:
- Antigua & Barbuda, Aruba, Australia, Austria, Azerbaijan
- Bangladesh, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria
- Canada, China, Costa Rica, Cyprus, Czech Republic
- Denmark, Dominican Republic
- Egypt, Estonia
- Finland, France
- Germany, Gibraltar, Greece, Grenada, Guernsey, Guyana
- Honduras, Hungary
- Iceland, India, Indonesia, Ireland, Isle of Man, Israel, Italy
- Jamaica, Japan, Jersey
- Kazakhstan, Korea (South)
- Latvia, Liechtenstein, Lithuania, Luxembourg
- Malta, Marshall Islands, Mexico, Monaco, Morocco
- Netherlands, Netherlands island territories: Bonaire, Curacao, Saba, St. Eustatius and St. Maarten (Dutch part), New Zealand, Norway
- Pakistan, Panama, Peru, Philippines, Poland, Portugal
- Romania, Russian Federation
- Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland
- Thailand, Trinidad and Tobago, Tunisia, Turkey
- Ukraine, United Kingdom
Following the implementation of these Treasury Regulations, nonresidents aliens have started to withdraw money promptly from US banks. Foreign investors in USA real estate and US financial institutions must understand all information disclosures that they might face in regards to their USA holdings. An expat tax CPA can assist with proper US tax preparation and planning.