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 . . .
Original Post By: Michael DeBlis
As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.
Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.
1 comment on “The New American Expat: More Collateral FATCA Damage”
Where’s the harm done by CBT and FATCA to those who do have a connection to their US citizenship and forced to renounce, making the decision all the more painful?
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