THE NEW AMERICAN EXPAT

THE NEW AMERICAN EXPAT: MORE COLLATERAL FATCA DAMAGE

0 Flares Twitter 0 Facebook 0 Google+ 0 LinkedIn 0 Email -- 0 Flares ×

Listen

As I reported in a previous article, the Department of Justice (DOJ) and the IRS instantly began to drool in anticipation when The Foreign Account Tax Compliance Act was passed in March of 2010.  This gives them enforcement tools to make foreign countries and banking institutions play by our rules whether they like it or not.  The Department of Justice has gone even further thinking it has been given the power to make foreign treaties without the constitutionally required Senate ratification.  The Senate so far doesn’t seem to mind, but some other countries and taxpayers are taking offense.

FATCA Basics

FATCA gets its teeth from two provisions:

  1. Non-compliant foreign financial institutions face a mandatory 30% withholding on payments from U.S. based financial institutions.
  2. The FATCA also beefed-up the ability of the Department of Justice to prosecute financial institutions criminally who were assisting U.S. taxpayers with tax evasion.

The First Cut is the Deepest

Landlocked Switzerland doesn’t get to experience the effects of hurricanes often.  Switzerland’s financial industry was landfall for “Hurricane FATCA” which was a category 5+ storm.  With Non-Prosecution Agreements still being debated, it will be a while before we know the total extent of the damage to Switzerland’s once proud financial industry.   The path of this storm appears to be centered on the Caribbean next with perhaps a pass through Israel.

The end result is that foreign financial institutions will have to report information on all “U.S. taxpayers.”  As with most laws, this has some unintended consequences.

A Common FATCA Misconception

When Congress was debating and subsequently enacting what would become FATCA, what the average American who was paying any attention understood is that it was a law aimed at tax cheats who were hiding billions of dollars in offshore bank accounts for the expressed purpose of defrauding the U.S. government of tax revenue.  This in turn was putting a greater tax burden on the average American citizen who did not have a Swiss bank account.  To the average American this made FATCA good, or at least irrelevant.

Somebody really paying attention may have also realized it was aimed at U.S. citizens intentionally residing elsewhere for the expressed purpose of not having to pay U.S. income tax.  To the average American this made FATCA good, or again at least irrelevant.

Meet the Average Americans Residing Abroad

Like most hurricanes, laws, and wars there is bound to be collateral damage.  In this case it is the average American citizen living abroad.  Note I did not say overseas or offshores.  Many of these fine folks live in Canada.  In 2011, the U.S. State Department estimated that there were 6.32 million Americans living abroad who were not associated with the military or U.S. government jobs.  These 6.32 million Americans lived in 160+ countries.  If all of these individuals moved home and started a new state, it would be the 17th most populated state in the U.S.

The Association of American Residents Overseas (http://www.aaro.org/) has estimated this figure broken out by region.

  • Africa: 171,000
  • East Asia and Pacific: 864,000
  • Europe: 1,612,000
  • Near East: 870,000
  • South Central Asia: 212,000
  • Western Hemisphere: 2,591,000

The Reality

The majority of the 6.32 million Americans who live abroad have far better reasons for doing so than to upset the IRS.

Many of these individuals hold American citizenship due only to the fact they were born on U.S. soil.  In some cases, their parents were here working or studying when they were born.  Their American citizenship is only a coincidence of timing.  Many of these dual-citizens elect to live in the other country where they hold citizenship for a variety of reasons.

Other U.S. citizens have left our fine shores because they were in love either with a person or a career which took them to other lands.  Some people have simply left because they disagree with the politics of our nation and want nothing to do with it.

Many citizens residing abroad don’t consider themselves United States’ citizens.  They have no real ties here.  They don’t have a favourite football or baseball team.  Their grandmother doesn’t live in the Midwest, and they don’t celebrate the Fourth of July.  The fact that they hold United States citizenship is just an interesting tidbit for small talk, or a great way to stump others during corporate ice-breakers.

So, imagine finding out about a law that requires you to pay income tax on your foreign based assets to the United States.  Note, I did not say assets abroad or offshore because in this case the asset is actually where the person lives.  For me, it would be like finding out that in addition to paying New Jersey State income tax, I also have to pay tax in New York because I lived there briefly while I was in college.  I don’t live in New York now.  I don’t work in New York.  Occasionally, I may go into the city to see a show, but I have already paid the price for a Broadway ticket.  Shouldn’t that be enough?

The Renunciation Round-up

All of this leaves foreign based U.S. citizens with a very hard decision.  Spend the time, money and effort to become FATCA compliant, or do what their parents warned them never to do – renounce their American citizenship.  Being a citizen of a world leader has its benefits even if you don’t live here and hate our political system.  Before FATCA it was just an ace to hold in your back pocket.  If things got terrible where you lived, you could always come “home.”

For many the price of that luxury has become too high.  Keeping track of who has decided to quit has been an issue.  Under a 1996 law, the IRS publishes the names of those who relinquish their citizenship in the Federal Register.  This was mainly done to shame people, and really not for any pure statistical or record-keeping purposes.  The data is riddled with errors.  The one thing we do now know is more and more U.S. citizens residing abroad are electing to renounce.

The year 2006 was an average year regarding citizenship renunciation.  In that year, 276 former U.S. citizens went through the formal process.  In 2013, this number soared to 2,999 driven by FATCA compliance issues.  If the trend continues this year, 3,154 people will have given up their U.S. Citizenship by the end of 2014.

But at what cost?  Stay tuned   . . .

Get This Ebook

Know all the hidden secrets to deal with IRS

We believe in sharing the information! Plus, you'll receive our exclusive email newsletter, where we promise to deliver actionable advice - straight to your inbox. Just enter your email address below!


5 Comments

  1. Neill
    2014-11-25 23:01:03

    Your well written article hits the nail on the head. I would add some further information to show the depths of the problem. Not only do expats and US immigrants have to deal with filling tax returns in the US but the US tax system is exceptionally hostile to anything foreign. What's completely normal in another country. Say a mutual fund. Is the tax equivalent of the neutron bomb come tax time. Passed to punish the holders sec 1291 labels all foreign mutual funds as PFICs and put in place the most complex taxation imaginable. For 8621 used to report the taxes boasts times (done by the CBO) of days to understand and fill it in (and these are very rosy numbers). Immigrants with working lives abroad before they came to the US face a similar problem to expats.

  2. Shovel
    2014-11-25 23:28:41

    Michael, Sounds like you have started to get the injustice instead of the strict (but immoral) legality of FATCA. Why not come right out and say it... U.S citizenship-based taxation (enforced extra-territorially by FATCA) is mostly an attempt at bald-faced theft by the U.S. bully of financial resources that rightly belong to other countries. Again, the root of this U.S. evil is citizenship-based taxation. The U.S. needs to move to residence-based taxation as a step towards regaining credibility as a civilized country. There is a constitutional lawsuit in Canada against the U.S. dictated law (passed by the Canadian government) that implements FATCA in Canada. Information at: http://www.adcs-adsc.ca/

  3. JC
    2014-11-26 10:09:26

    Any US persons caught up in this should visit the message boards of The Isaac Brock Society: www.isaacbrocksociety.ca. The article does not mention the two very significant legal actions against FATCA. Not only was FATCA not reviewed/approved by the Senate as is required by the Constitution, it violates excessive fines and unreasonable search and seizure provisions so says www.fatcalegalaction.com Also the Canadian based Alliance for the Defence of Canadian Sovereignty: http://www.adcs-adsc.ca/

  4. $75,427 more needed to make the February 1 2015 payment for Canadian FATCA IGA lawsuit/ Il nous reste 75 427 $ à ramasser pour notre poursuite judiciaire | Maple Sandbox
    2014-11-26 12:16:57

    […] this article we can easily imagine these DOJ and IRS people drooling buckets.  [It is written by Deblis & […]

  5. The Isaac Brock Society | $75,427 more needed to make the February 1 2015 payment for Canadian FATCA IGA lawsuit/ Il nous reste 75 427 $ à ramasser pour notre poursuite judiciaire
    2014-11-26 12:18:33

    […] this article we can easily imagine these DOJ and IRS people drooling buckets.  [It is written by Deblis & […]

Leave a Comment

Your email address will not be published. Required fields are marked *

0 Flares Twitter 0 Facebook 0 Google+ 0 LinkedIn 0 Email -- 0 Flares ×