IRS Invades Privacy - Foreign Banks

The IRS is in the business of collecting money. Foreign banks have often been used by taxpayers to avoid the IRS, but no longer since the IRS invades privacy restriction very easily these days.

IRS Invades Privacy – Foreign Banks

As a citizen of the United States, you are what is known as a global taxpayer. In laymen’s’ terms, this means you are required to pay tax on your income regardless of where it is earned. If you stay out of the country for the entire taxable year, your first $80,000 in earnings is not taxed. If you are in the country, you need to pay up.

According to existing regulations, US citizens investing in US (equities and bonds in US) in foreign banks are open for scrutiny by the IRS. The foreign banks are supposed to report the names and details of the beneficiaries of such deposits. Unless the banks have obtained the status of “qualified intermediary (QI)”, they are expected to comply with this rule. Fines may be imposed on a bank that does not follow the guidelines.

To qualify as a QI a foreign bank has to sign a QI agreement with the IRS. By signing the agreement, the foreign bank would be expected to follow a series of regulations. This agreement would require that US citizens who wish to deposit their holdings of stocks and bonds in the bank must agree to disclose their identity to the IRS. The IRS, however, does not expect to know the identities of non-US depositors. US citizens who hold such deposits in foreign banks are supposed to authorize the forwarding of Form W-9 to the IRS. Otherwise, the bank is supposed to withhold tax on any gains.

As you might imagine, more than a few banks have made no attempt to gain QI status. Instead, they offer themselves up as private businesses where your privacy can be protected. If you fail to report or pay taxes on the money held, the bank views that as your problem. The IRS, of course, is not particularly happy with this situation.

The IRS invades your privacy at foreign banks all the time now. Most people do not realize this, but it is true. Three developments have led to this result. The global war on terror has resulted in governments co-operating on money transfer issues to an extent not previously seen. Globalization has also led to many foreign banks opening US branches, which makes them susceptible to IRS action. Finally, the first world countries have cracked down hard on money laundering by agreeing to mutual assistance treaties which give wide access to banking systems.

If you hold money in foreign banks, you are legally required to report it to the IRS. The IRS invades privacy efforts of foreign banks all the time, so you risk disaster if you do not.