2014 is upon us and FATCA kicks into high gear in just six short months. Postponed twice, the law is now scheduled to go into effect later this summer. Banks, privacy advocates, expats and many foreign governments hate it. President Obama, who pushed the law in 2010, and the IRS remain fully committed to the law, however.
What is FATCA and what are people saying?
FATCA is short for the Foreign Account Tax Compliance Act. Enacted in 2010 as part of Obama’s stimulus package, the bill is designed to stem offshore tax evasion and generate billions in new tax revenues. Under the new law, foreign banks and financial institutions (that means foreign brokerage firms, precious metal vendors and insurance companies) will soon become the eyes and ears of the IRS. Specified “foreign financial institutions” will be required to review their account records and report those accounts with ties to the United States.
For some, that may mean an expat living in Switzerland but who holds a U.S. passport or a woman living in the U.S. who merely has signature authority on her ailing mother’s account in Israel.
“FATCA is pound-for-pound the single worst tax law on the books,” says Andrew Quinlan of the Center for Freedom and Prosperity.
The Japan Times wrote that as a result of FATCA, “Americans have become toxic” for foreign banks.
Periodicos Chile wrote, “FATCA is one of the most arrogant pieces of legislation ever conceived.”
Closer to home, Forbes said, “FATCA is an especially egregious example of this misguided approach.”
So why is the law still on the books? In a simple word, “money.”
Politicians are desperate to find new revenue sources without raising taxes. Although many members of the public think that offshore accounts are the sole domain of fat cat American businessmen and jet setting foreign hedge fund investors, the opposite is true.
In our experience, many foreign account holders were born outside the United States or have family in foreign countries. Others are American small business owners that have locations or workers outside the United States and need a foreign bank to pay foreign suppliers. Still others are Americans living overseas. At last estimate, the United States boasted 7.5 million Americans living abroad.
The reasons for having an offshore account don’t matter. They are entirely legal if properly reported each year.
While we concede the need to combat tax evasion, FATCA may not be the most efficient method of doing so and certainly will cost foreign banks hundreds of millions of dollars to implement. The costs and regulatory burden is so high that many foreign banks are simply closing accounts belonging to Americans.
This may not be devastating to a Hindu doctor living in Topeka that wires money to an Indian savings account each month but it has hurt Americans living in Europe. Many expats claim they are unable to find nearby banks willing to open an account for them.
The new foreign reporting laws are also incredibly complex. The IRS’ National Taxpayer Advocate says there 7,332 pages of instructions, 16 IRS publications, and 667 pages of tax forms applicable to Americans living abroad or with foreign accounts.
Although the FATCA penalties are not all that high, fail to report your foreign account and you will find yourself facing huge civil penalties. For example, if the IRS says your failure to report was “willful,” you may find yourself facing a penalty that is the greater of $100,000 or 50% of the highest historical balance in the account. For some folks, prison is a possibility too.
While some politicians are talking about fixing FATCA, we advocate its repeal. Unfortunately, the United States is one of only two countries in the world that taxes its citizens wherever they may reside in the world. (The other is Eritrea – a tin pot dictatorship just a slight cut above North Korea.)
So what is the solution? One partial solution is to consider residency backed taxation like the rest of the world. That alone would help the estimated 7.5 million Americans living abroad.
Sen. Rand Paul of Kentucky has introduced legislation to repeal FATCA but thus far there is little traction. At best, we see another short implementation delay.
What does this mean for U.S. taxpayers, expats and Americans with foreign business interests? It means more hassles when trying to find a bank. Notwithstanding the horror stories, there are many foreign banks that still welcome Americans, however.
For those with unreported foreign financial assets, it means time is quickly running out. Penalties for having an unreported account can be huge. We have found that most taxpayers with unreported accounts are not people looking to evade taxes. They are foreign born Americans, green card holders and dual nationals.
The IRS has several amnesty and voluntary disclosure options for those still not in compliance. Many of those programs are off the table, however, if the IRS gets your name first from a foreign bank. With FATCA implementation less than 6 months away, time is truly running out.
We welcome questions about FATCA, FBAR and foreign reporting issues and will gladly explain your responsibilities and explore your options. Our FATCA attorneys have helped many taxpayers with a wide variety of offshore reporting problems.
For more information, contact attorney Bethany Canfield at or by telephone at (414) 223-0464. The author may also be contacted at or by telephone at (414) 704-6731 (direct). All inquiries are protected by the attorney – client privilege and kept in strict confidence. Our IRS tax services are available worldwide.
Need more information? Our Due Diligence blog has hundreds of text searchable articles on FATCA and FBARs.
Post by Brian Mahany, Esq.
tag as: FBAR lawyers – FATCA attorneys – Offshore Voluntary Disclosure Program – IRS tax attorneys