Do New Zealand Banks Report to the IRS?

Received a letter from your NZ bank asking for your Social Security Number? This is now standard practice for New Zealand based banks, is part of the obligations required of banks under the FATCA legislation.

But, one question we’re frequently asked, is whether New Zealand banks report accounts directly to the IRS?

We’ll attempt to answer this in our brief article below.

For a US citizen or green card holder residing in New Zealand, this is a significant question and one which, for many clients, is the deciding factor on US tax compliance.

How It Actually Works

To answer the question above, NZ banks do report bank accounts of NZ based US citizens to the IRS, but not directly. Rather, they do so through IRD.

In July 2024, New Zealand signed the Foreign Account Tax Compliance Act – FATCA. These laws were generally introduced worldwide, at the request of the US government, in order to ensure information reporting on certain financial accounts held by US citizens overseas.

Here’s the chain:

1. You open or hold an account with a NZ bank

2. The bank requests confirmation of whether you are a US tax resident, and if so

3. The bank reports your account details to the IRD through an Excel file upload

4. The IRD sends that data to the IRS

So, whilst NZ banks are not directly filing this information with the IRS, it does indeed end up with the IRS through the chain above.

What do NZ Banks Report as part of FATCA?

In the interest of transparency, the IRD publish online the forms requested of FATCA filing institutions (such as NZ banks), which show us the information which is reported to the IRS. This includes (where it exists):

-          Name

-          Account number

-          Account Balance

-          Dividends, interest and other income

-          Substantial owner

-          TIN – This stands for Taxpayer Identification Number (ie the social security number) – IRD number also

-          Date of birth

As you can see above, this is sufficient information for the IRS to determine if a US citizen possibly has unreported income or foreign accounts.

What makes a bank ask if you’re a US person?

Banks are required to look for “US indicia”, such as:

• Being born in the US

• Known US citizenship or residency

• US mailing address or phone number

• Regular transfers to or from the US

Whilst the banks don’t necessarily disclose what prompts them to ask a customer if they are a US person, they are required to confirm the US status for all new customers and are gradually requesting this information from existing customers.

This means that for accounts which were open before FATCA existed, NZ banks are required to update their records to confirm the US status of each of their customers.

What does the IRS do with this FATCA information?

This information isn’t made public by the IRS, however we can assume that the IRS are gradually building this information to understand better the income of non-filers or those with undisclosed income/accounts.

The IRS has been gathering this information for just under 12 years (since information sharing began in New Zealand), and it is reasonable to assume that they do intend to use it eventually.

FATCA reporting of course doesn’t necessarily give the IRS the full picture of the tax affairs of a US citizen overseas, but does enable the IRS to:

• Match against your US tax returns

• Identify unreported foreign accounts

• Trigger compliance letters or audits

For those who are already filing returns annually, this information should all line up and not create any compliance risk.

If you're not already filing but believe you should be, obtaining sound US tax advice from a US tax consultant is essential.

How This Links to FBAR and Form 8938

One common misunderstanding is that, if the NZ banks are reporting accounts held by US citizens to the IRS, then this means that the taxpayer doesn’t need to report.

This of course isn’t correct, and the IRS do require foreign accounts held by US citizens to be reported each year as part of their US tax return

• FBAR (FinCEN 114) – required if total foreign accounts exceed $10,000 USD – We have a helpful article on our website discussing this

• Form 8938 – required at higher thresholds

It is important to note that FATCA reporting does not replace these filings, and indeed they are designed to complement each other.

Common Mistakes

It is quite common that clients are of the understanding that small balances are not reported, or that the banks don’t report this information to the IRS. As you can see above, there is an efficient system of reporting in place.

Summary

In our brief article today, we’ve run through the process of FATCA, which is part of the worldwide effort by the US to ensure compliance with US tax law.

As a reminder, this information sharing only applied (for FATCA purposes) to those who are considered tax resident of the US, such as US citizens and green card holders. It does not apply to those with no connection to the US in a tax residency or immigration sense.

If you’d like to discuss further what this might mean for you, reach out to our US tax consultants, who provide friendly, expert US tax advice – info@usatax.nz