By Brian Mahany
No one likes FATCA, the Foreign Account Tax Compliance Act. Passed by Congress in 2010, the law requires both U.S. taxpayers and foreign banks to report Americans with foreign accounts. U.S. taxpayers are already subject to FBAR filing rules. (An “FBAR” is a Report of Foreign Bank and Financial Accounts.) Having a second report with different rules adds more confusion and a greater liklihood of fines if a mistake is made. Foreign banks hate the law because it forces them to become informants for the IRS and adds a tremendous amount of extra work.
Although foreign banks have long complained about the law, the volume and frequency of those complaints is increasing. A sample of headlines this week reads as follows:
- “FATCA’s ‘Vulnerabilities Evident’, Washington Expert Claims, Calls For Repeal” – MarketWatch
- “…Banking Execs Say Majority of Banks to Miss FATCA Deadlines” – MarketWatch
- “Why FATCA Should be Repealed” – UPI
- “Banks Expect To Miss FATCA Deadlines” – Accounting Today
- “Most banks will miss FATCA deadlines” – International Adviser
- “Industry Concerned About Extraterritorial Tax Clampdown Plan” Financial Times
- “KPMG – FATCA Deadline Will Be Missed”
The administration needs money meaning that efforts to repeal FATCA will face a difficult road. Budget analysts say that the new law will raise $800 million. Industry folks estimate the cost of compliance may be significantly greater, however. Unfortunately, increased accounting and bank fees are ultimately born by the taxpayer anyway.
While banks are complaining, some governments are jumping on the bandwagon and have entered into reciprocal agreements with the IRS. Just as the administration wants to combat tax evasion, so do other developed countries like the United Kingdom and Germany.
The voices in opposition continue to grow louder, however, we believe that FATCA will survive largely intact. Only a change in administration could likely lead to the law’s repeal at this point.
Whether or not FATCA is repealed, Americans with unreported foreign accounts are still at tremendous risk. The level of international cooperation is at an unprecedented level and more and more countries are entering into tax exchange agreements allowing the IRS to obtain records from foreign banks.
Remember, that even if FATCA is repealed, U.S. taxpayers are still required to report most foreign accounts and file annual FBARs. The penalty for not filing an FBAR may involve 5 years of prison, a civil penalty of $100,000 or 50% of the highest account balance for each year the account is unreported.
Whatever Congress may do with FATCA has little impact on taxpayers with unreported offshore bank accounts. Bank secrecy is largely dead. If you have an unreported foreign account, now is the time to come forward. The IRS is currently offering an amnesty program (the offshore voluntary disclosure program or “OVDI”) for those taxpayers who have failed to file the required annual FBAR forms identifying their offshore holdings. The penalties are steep (27.5%) for most taxpayers but the program avoids audits, onerous monetary penalties and keeps participants from worrying about criminal prosecution.
We believe the decision to disclose is clear. How one should disclose, however, requires a knowledgable tax lawyer or CPA well versed in foreign reporting issues. Amnesty may not be the best deal for everyone.
For more information, contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at brian@mahanyertl.com. All calls are protected by the attorney client privilege and are kept in strict confidence. Our tax lawyers have helped many taxpayers with a wide variety of foreign reporting issues including FBARs, the new FATCA requirements, tax amnesty, OVDI, voluntary disclosures, foreign gift reporting and Swiss accounts.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. IRS services available worldwide.
#1 by Jeff D Tom on May 13, 2012 - 8:38 am
People in every country of the world need to know what FATCA and other US extraterritorial legislation mean for personal privacy and local-country sovereignty.
The reality is, US policies especially crush middle class USPs (US Persons = Green Card or US Citizenship) Abroad whether they are tax compliant to the US or not. The reporting requirements of FATCA and FBAR (FATCA having apparently been passed as a rider to the HIRE act without much real open Congressional debate on the issue) are causing US Persons abroad, many of whom are dual nationals of their country of residence or a third country, to lose their jobs, be refused even basic bank accounts, and be shunned by prospective non-USP business partners who don’t want to deal with dual-reporting and taxation requirements to the IRS.
Most working and middle-class “minnows” abroad pay local, regional, and national taxes in the countries where they live, as well as VAT, excise and other taxes and fees. Whether these taxes are lower or higher that what they would pay as “homelanders” (USPs resident in the US) is immaterial. They all pay their fair share where they live according to the local system negotiated through whatever political means extant. They have to deal with the advantages and the drawbacks of their local countries’ system and do not need and often cannot survive with the additional variables imposed by the IRS.
US extraterritorial taxation policy does not take into account the disparities caused by the shift in exchange rates (thanks perhaps largely to US “quantitative easing”) that pushes people into higher US tax brackets despite no increased local purchasing power, the cost of living in each foreign country, as well as the tax structure in the foreign countries (for example, some countries have a much higher VAT than the US sales tax, but VAT paid outside the US is not eligible for a Foreign Tax Credit in the US).
US Double Taxation also takes money rightfully earned in a foreign country out of the local economy, where USPs should be free to spend or invest their money. Non-USP family members of USPs are also adversely affected, despite having no allegiance to the US.
Working and middle-class USPs have recently reached retirement age to discover that they have outstanding US tax liability, or while having no US tax liability due to the (limited) Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC), might owe confiscatory penalties on foreign tax-deferred or tax-exempt retirement plans that were not reported to the US (see FBAR). Many USPs abroad renounce nationality because their pensions would not count as “Earned Income” and they could not survive if they paid US double taxes. Nonetheless, the renouncement process is time consuming and costly.
There are a number of websites now dedicated in whole or in part to discussions of tax problems that US Persons abroad face (this list is not exhaustive, on many of the sites you will find links to many others):
http://www.isaacbrocksociety.com
http://www.aca.ch
http://www.aaro.org
http://mopsicktaxlaw.blogspot.com/2012_04_01_archive.html
http://federaltaxcrimes.blogspot.com/
http://www.hodgen.com
Disclaimer: In the case of the sites run by lawyers, this present post is not an advertisement for their services, only an indication to the reader who might want to read their blogs and participate by posting comments.
I feel it is primordial that people in the US get the complete story about what is going on with US extraterritorial and taxation requirements. It appears that many people in the US are not aware of the issues, or think that the issues have only to do with very rich people who move money out of the US into offshore banks in order to avoid taxes. The story is much more complicated than that, and I hope that American voters will become more informed.
#2 by admin on May 14, 2012 - 9:23 pm
Thanks for the comments Jeff.
#3 by David on May 18, 2012 - 9:56 am
Thank you Jeff. Have retired to Mexico two years ago and loving the life style, beauty and sense of FREEDOM i have here, until my recent awareness of the FACTA requirement. Have spent many hours trying to understand, expat friends as well are confused, some banks are considering not accepting future US Citizen accounts. I also just learned that if i want to
give up my US citizenship, i can’t (2008 new law) without paying an exit tax! This feels like slavery not freedom! What is going on with our country?