Expatriate Tax Sense or Broad-Brush Overreach: The U.S. Foreign Account Tax Compliance Act (FATCA)
An effort to control tax havens for those hiding their assets overseas has resulted in broad brush impacts on hard-working expatriate Americans living and working out of country. The previously delayed Foreign Account Tax Compliance Act (FATCA) is now in full swing effective July 1, 2014. In an attempt to close a gap that foreign investors could use for tax avoidance in the proverbial Swiss bank, we now have a worldwide system of taxation enforcement trailing to the IRS. FATCA was approved as a rider to the 2010 Hiring Incentives to Restore Employment Act (HIRE Act).
“The United States is the only industrialized country in the world to tax the income of its citizens based on nationality rather than residency.” — Barbara Stcherbatcheff
A growing list of American expatriates, actually 3,000 in 2013, (triple the amount from 2012) made the difficult and painful choice to jump ship on their citizenship to avoid compliance with this onerous new law, citing over complicated tax requirements, banking problems, and job security.
As companies grow internationally, the amount of American expatriates grow significantly. According to the U.S. State Department, there are 6.32 to 7 million Americans residing outside of the country, considered expatriates. This sweeping approach to catch tax evasion will harm honorable and well-intentioned Americans working off-shore. There will significant impact on their ability to go about their daily financial lives.
It has already become difficult, if not impossible for many to get a bank account in a foreign land. Many foreign financial institutions have raised their account minimums for Americans to $1 million due to increased administrative reporting costs. For the middle-class working expatriate who was transferred offshore, this is not likely criterion that can be met. Many banks are refusing to serve American clients due to the reporting requirements.
Foreign financial institutions are now required to provide annual reports to the IRS on American citizen’s accounts ranging from retirement accounts to investment accounts valued at $50,000 or more. The FATCA requires foreign institutions to report their accounts held by US citizens via intergovernmental agreements facilitated by the IRS. They will be required to report names, addresses, and detailed transaction histories. Failure to comply will result in a 30 percent withholding penalty.
Seventy-seven thousand banks are working to comply. It has been estimated that this reporting requirement will result in considerable expense upwards of $100,000 for larger financial firms. Are foreign financial institutions now an enforcement arm of the IRS? Their alternative; don’t do business with expatriates or divest from American interests.
Will foreign financial institutions divest from U.S. interest due to this onerous requirement?
The Japanese Bankers Association stated:
In the event that the implementation of FATCA is not practically feasible for the Japanese financial services industry, it would result in substantial confusion in the industry and could ultimately lead Japanese financial institutions to withdraw their investment from U.S. financial assets.
It is a stretch to see the financial benefit to the IRS. Their projected revenue from FATCA is $1 billion per year. With administrative costs already more than $8.6 billion to get ready for FATCA reporting, there is little logical benefit. According to the U.S. Treasury Inspector General for Tax Administration, they are not yet ready for FATCA maintenance and further postponement is recommended.
Not ready equals more taxpayer costs.
“The Fatca legislation treats all Americans with overseas bank accounts as criminals, even though most of them are honest, hard-working individuals who happen to be living and working or retired abroad,” said Jacqueline Bugnion, a director of American Citizens Abroad.
U.S. citizens residing/working in other countries must also complete a new IRS Form 8938 (Statement of Specified Foreign Financial Assets) if there are accounts or assets worth $50,000 in U.S. currency. There is a 40 percent penalty for not reporting or underreporting accounts. The tax preparation costs are estimated at $2,000 to $4,000 per year. The penalties for errors or non-reporting, could be confiscation of assets up to 100 percent even with no tax obligations. People question why there is such duplication between FATCA and Foreign Bank and Financial Accounts reporting (FBAR).
American expatriate, John, a business owner based near Lausanne, Switzerland, … asked that his last name be withheld for fear of alienating his family in the U.S. “Giving up my U.S. citizenship is a genuine option,” says the Ohio native, who recently received his Swiss passport and is considering relinquishing his American one. “I am at a breaking point — being American costs me time [and] money, but mostly aggravation.”
A new controversial bill was introduced by New York Senator Chuck Schumer (D). The “Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy or the Ex-PATRIOT Act” would bar expatriates that relinquished their citizenship from coming back to the United States.
The overreaching FATCA has awakened the American Citizens Abroad (ACA). Calling for repeal, they foresee damage to Americans offshore and negative effects to the American economy. Provide unnecessary expense and frustration to expatriates going about their everyday lives is not the answer to solve off shore tax evasion.
Everyone painted with the same broad brush will yield little intended results. Casting this wide net by targeting working expatriates is not the answer.
