US expats and “accidental Americans”: are you at risk of bank account closure?

A US tax deadline of 31 December 2019 is causing anxiety among Americans banking in the Europe and the UK. We answer their questions.

13 Nov 2019

Martin Heale

Martin Heale

Portfolio Director

Schroders

An approaching US tax deadline has sparked fears among US citizens living overseas – including “accidental Americans” – that their everyday bank accounts may be frozen or closed.

According to a number of media reports, UK and European banks are currently writing to their American clients demanding tax-related information which the banks are required to hand on to tax authorities. If customers fail to provide the information it is suggested that accounts will be closed and services withdrawn.

A video by the Dutch Banking Association, for example, warns Americans living in Holland that if they don’t comply with the request for specific information by 31 December, “Dutch banks will no longer be allowed to accept [their] business.”

What is this US tax deadline – and why is it suddenly an issue?

Since 2014, banks and other “foreign financial institutions” around the world have been required to report to the US authorities on the assets they hold on behalf of any US citizens. That’s when the Foreign Account Tax Compliance Act (FATCA) came into force.

Under FATCA, banks are obliged to begin providing the US authorities with the “Tax Information Numbers” – or social security numbers – of their American account-holders as of 1 January 2020.

The banks have known that this deadline was coming and they have taken various action to ensure they will comply. Some have gone further and threatened that customers who are American citizens or “US persons” could see their accounts closed if the number is not provided by the deadline.

Why is it so difficult for US citizens to invest while living in the UK?

What is an “accidental American” – and how will they be affected by this?

The term “accidental American” is generally used to mean someone who may not think of themselves as American. They may not know that in the eyes of the US authorities – and in particular the US tax authorities – they are technically classed as a “US person” and therefore required to meet a range of tax and other reporting obligations.

An “accidental American” is often someone who was born in the US to non-American or mixed-nationality parents, and who left the country with these parents almost immediately afterwards or where they were born outside of the US remained overseas, but were given American citizenship by virtue of one of their parents being an American.

A surprisingly high percentage of accidental Americans were completely unaware, at least until recently, that the fact they were born in the States or one of their parents were American, meant that they remain full dual US citizens – with the life-long tax reporting (and potential tax-paying) obligations that go along with US citizenship.

If FATCA has been around since 2014, why is the social security number issue arising only now?

Setting up a regime for reporting the bank account information of Americans around the world was never going to be easy, and it’s probably not surprising that it took years.

Rather than hold up the implementation of FATCA while Americans around the world with non-US bank accounts were pressured to get their Social Security numbers, the authorities decided to leave this requirement to be met at a later date – and that’s now approaching.

Getting a social security number isn’t that difficult if you’re an American citizen. So what’s the real problem?

The main problem arises when accidental Americans have never formally acknowledged their American citizenship status.

It’s not hard to imagine that someone who didn’t even know they were considered to be American until recently – when their bank told them they needed to either get a social security number, or find another bank – is likely to view the idea of having to formally enter the US tax reporting net a step too far.

To the frustration of the world’s banks, the US authorities have yet to formally address the issue of the looming deadline – in spite of requests by officials such as the head of the Brussels-based European Banking Federation, which represents some 3,500 banks across Europe.

Nor have the banks in the UK, Europe or elsewhere been particularly clear as to whether they really intend to close the accounts of any American citizens whose social security numbers they don’t receive by the end of this year.

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For Europe’s banks the matter is difficult to ignore. This is because although the penalties Europe’s banks face for failing to comply with FATCA are too significant to absorb as a cost of doing business, there is also a European Union law that requires EU banks to provide a bank account to any EU citizen who wishes to have one.

Calls are growing for clarity from the US authorities. Dutch tax minister Menno Snel, who has been one of Europe’s most proactive and outspoken critics of US policy in these matters, called attention to this issue in September, telling fellow Dutch lawmakers that he had been assured by US officials that any repercussions for failing to comply with the regulations in question could be delayed by as long as several years.

That said, there is no question that many banks, politicians and accidental Americans around the world are awaiting some kind of official statement from Washington.

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Author

Martin Heale

Martin Heale

Portfolio Director

Schroders

Martin heads the Schroders Wealth Management US Team specialising in international wealth and investment management for both US residents and internationally based US clients. Martin has over 25 years’ experience in advising and growing clients’ wealth utilising stock market investments and working in partnership with clients’ other professional advisors.  Prior to joining Schroders, Martin was the Head of Americas at the Royal Bank of Canada Wealth Management International in London and before that was Head of Private Wealth Management for Kleinwort Benson. Martin is a Registered Investment Advisor with the Securities Exchange Commission (SEC) in the USA and holds the Uniform Investment Advisor Law qualification with the Financial Industry Regulation Authority (FINRA).

 

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