Part 1- Unintended Consequences of FATCA – for USCs and LPRs Living Outside the U.S.
As the Foreign Account Tax Compliance Act (“FATCA”) has gone into effect (1 January 2014), there are an increasing number of
consequences to United States citizens (USCs) and lawful permanent residents (LPRs) residing overseas.
There are many intended consequences of the FATCA law, such as the following:
- Identifying non-U.S. financial, investment and company assets of USCs and LPRs;
- Identifying the foreign financial institution (“FFI”) where such assets are located;
- Identifying non-financial foreign entities (“NFFE”) owned by the USC or LPR;
- Generally bringing transparency to the assets, accounts and information of worldwide assets of USCs and LPRs.
Ironically, I see a number of unintended consequences of FATCA; meaning consequences that were never contemplated by the U.S. 
Congress or the President when the laws were passed. Nor were they intended consequences of the U.S. Treasury Department as the FATCA Intergovernmental Agreements (“IGA) were negotiated throughout the world with various countries. See, Complete List of IGA Countries to Date (Very Few Notable Absences)
This and other follow on posts will discuss these unintended consequences.
One of the most significant unintended consequence, is that the U.S. federal government (the IRS, the Treasury Department, or 
Congress) never initially even contemplated USCs and LPRs living overseas. In other words, the group targeted were U.S. resident individuals who were evading taxes through foreign financial institutions. I say this, based upon extensive conversations I have had with ex-government officials and some government officials who were involved in the original policy discussions.
The focus then was on U.S. resident taxpayers; even though the U.S. imposes U.S. income taxes on the worldwide income of USCs living anywhere in the world. See, “Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,” by Patrick W. Martin and Professor Reuven Avi-Yonah, 2013.
In practice, the U.S. federal government has known for many years that it can be nearly impossible to collect a tax liability against USCs who live and have their assets outside of the U.S. Specifically, the Treasury Department noted back in 1998 that . . .
- Other factors also operate to limit both compliance measurement and improvement. Because the United States asserts taxing jurisdiction over those with little or no connection to the United States other than citizenship or status as a lawful permanent resident, in many cases overseas U.S. taxpayers are difficult to trace or contact. Moreover, even when valid tax assessments can be made against overseas taxpayers, IRS has limited enforcement recourse if the taxpayer’s assets are physically located outside of the United States.
See pages 13-15 of the Treasury report which can be found at the post, Sometimes Old is as Good as New – 1998 Treasury Department Report on Citizens and LPRs
Also, the original offshore voluntary disclosure initiative in 2009 never even contemplated any particular treatment for USCs or LPRs residing overseas. I submit, the USC and LPR living overseas was not even on the “radar” of the IRS at the time the first program was created. It was not until 2011, that a new category was created that imposed a 5% penalty for persons residing overseas, but who also had only US$10,000 of U.S. sourse income.
As time has gone on, the IRS has realized that numerous USCs and LPRs indeed live somewhere other than the U.S. (millions of them) and yet again modified the 2014 OVDP to provide for a “0%” penalty in certain circumstances for these individuals.
When FATCA was originally passed in 2010, USCs and LPRs living overseas was not the focus (and barely a thought). The heavy 
compliance focus as of late was an unintended consequence.
Now even the Senate has started to focus on USCs living overseas. The Senate Permanent Subcommittee on Investigations focused extensively on Swiss accounts opened by USCs living overseas. The full report can be read REPORT: Offshore Tax Evasion:The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts (February 26, 2014) –
In those reports, the Senate Permanent Subcommittee on Investigations focused extensively on USC owned Swiss accounts opened by USCs living outside the U.S. See, Key Take Aways from Senate Investigations re: Foreign Banks and “Offshore Tax Evasion”: U.S. Citizens Residing Overseas have Become a Focus of the Government.;