Introduction: If you were to REPEAL FATCA

A previous post discussing the what exactly is meant by FATCA and the Mark Meadows “Repeal FATCA” bill, described:

FATCA is the collective effect of a number of specific amendments to the Internal Revenue Code which are designed to target both (1) Foreign Financial Institutions and (2) those “U.S. Persons” who are their customers.

1. The “Three Faces Of FATCA” which include:

– Face 1: Legislation targeting Foreign Financial Institutions (Internal Revenue Code Chapter 4)

– Face 2: The FATCA IGAs (which for practical purposes have replaced Chapter 4)

– Face 3: Legislation targeting individuals (primarily Americans abroad who commit “Personal Finance Abroad – While Living Abroad” – Internal Revenue Code 6038D which mandates Form 8938)

2. The amendments to the Internal Revenue Code that would be necessary to reverse the sections of the Internal Revenue that created FATCA.

Legislative FATCA vs. Regulatory FATCA

The sections of the Internal Revenue Code that comprise “FATCA” are surprisingly few.

FATCA Face 1: Internal Revenue Code S. 1474(f) gives Treasury broad authority to make “FATCA regulations”.

(f) Regulations:
The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of, and prevent the avoidance of, this chapter.

FATCA Face 3: Internal Revenue Code 6038D(h) gives Treasury broad authority to make regulations governing disclosure of foreign financial assets pursuant to 6038D.

(h) Regulations
The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance which provide appropriate exceptions from the application of this section in the case of—
(1) classes of assets identified by the Secretary, including any assets with respect to which the Secretary determines that disclosure under this section would be duplicative of other disclosures,
(2) nonresident aliens, and
(3) bona fide residents of any possession of the United States.

(The establishment of the higher Form 8938 $200,000 reporting threshold for Americans Abroad is allowed because of this broad regulatory authority.)

Most effects of FATCA are felt from Treasury Regulations and NOT from the FATCA legislation.

The effects of FATCA can be changed by:

(1) amending the law

(2) enacting a regulation:

Americans are governed by laws and regulations made pursuant to those laws. Therefore, Americans who wish to change the way that they are governed can attempt to change laws or attempt to change (or create) regulations. The attempts to change the “unintended” consequences of FATCA, have taken place through BOTH (1) attempting to effect change through regulation and (2) attempting to effect change by amending the laws. Whether the proposed changes are “by law” or “by regulation”, the proposed changes have been described as “FATCA Same Country Exemption”.

In general terms “FATCA Same Country Exemption” is to create conditions where:

– Foreign Financial Institutions would NOT be required to report on certain accounts of Americans abroad provided that the American is a resident of the “same country” where the Foreign Financial Institution is located;

– Americans Abroad would NOT be required to report to the IRS, on Form 8938 certain accounts (located in their “same country” of residence)

Establishing Same Country Exemption Through Regulation – The ACA Approach

The FATCA “Same Country Exemption” proposed by American Citizens Abroad was a plea to Treasury to provide relief to Americans abroad through regulation.

At the risk of oversimplification, the ACA FATCA Same Country Exemption proposal:

– did NOT ask for the repeal of FATCA

– benefited ONLY those Americans abroad who were U.S. tax compliant

– relieved Foreign Financial Institutions in their country of residence from having to treat the accounts as a “U.S. account”

– allowed Americans abroad to NOT treat their local bank accounts as “foreign assets” for Form 8938 reporting

– Is a U.S. citizen really an American abroad for the purposes of the Same Country Exemption? The individual’s “residency” would be determined under Internal Revenue Code 911 (the section that provides the conditions for the Foreign Earned Income Exclusion). Specifically the person would be “qualified” for FATCA Same Country Exemption if:

(d) Definitions and special rules For purposes of this section—
(1) Qualified individualThe term “qualified individual” means an individual whose tax home is in a foreign country and who is—
(A) a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or
(B) a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.

How would it work administratively? The proposal from American Citizens Abroad

In order to claim the “same country” exemption, the individual taxpayer would be required to attach a copy of the election to his or her timely-filed Form 1040 or 1040NR. In this respect, the requirement is similar to that which applies to a taxpayer wishing to claim the foreign earned income or foreign housing exclusion.11

An individual would complete the election on a 1-page, front and back, IRS form providing the
individual’s name, address, Taxpayer Identification Number, and country of residence, and listing the “same country” accounts (name and address of bank and name, number and type of account, i.e., depository, custodian, etc.). The individual would certify that this information is correct. Also, the individual would state that he or she is a resident of X foreign country and the bank(s) are licensed and regulated under the laws of X country of residence (the same country where the individual is a resident). One copy of the election would be given to the bank; a second would be attached to the individual’s federal income tax return; a third would be retained by the taxpayer. Instructions would be included on the form. Taxpayers would be warned that filing the election does not excuse them from having to report any income on the account on their tax return or from having to file an FBAR, provided in both instances they meet the applicable thresholds.

The “same country” exemption would not affect in any way the requirement to file a Form 1040 or 1040NR.

Nor would the “same country” exemption affect in any way the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

Notice that this proposal does NOT require any consultation with the banks, suggesting the following question:

How does this provide any incentive for a bank to accept an American as a customer? After all they are nothing but trouble.

But, I digress…

Notice also that eligibility for FATCA “Same Country Exemption” is conditional on the “American Abroad” meeting the requirements in Internal Revenue Code 911 (describing the conditions for the Foreign Earned Income Exclusion).

The full text of the ACA FATCA “Same Country Exemption” regulatory proposal is here.

In December of 2016, the Obama Treasury refused to exercise its regulatory authority to provide FATCA “Same Country Exemption” for Americans abroad.