OPINION EUROPE

How to Lose Friends, Citizens and Influence

The U.S. Foreign Account Tax Compliance Act seeks to co-opt foreign banks as long-arm enforcement agencies of the IRS.

This thoughtful article (found here) from an academic that previously appeared in the Wall Street Journal,  is worth re-thinking in light of the OECD and G20 Action Plan – Base Erosion Plan.

It is worth reading “Myth vs. FATCA” by Robert Stack, Deputy Assistant Secretary (International Tax Affairs) at Treasury; to obtain a better understanding of the U.S. Treasury’s views of how it will impact Americans living outside the U.S.   “Myth No. 3” is particularly relevant here:   Myth No. 3:  Some claim that Americans living abroad will give up their U.S. citizenship because of liabilities and burdens created by FATCA.

The argument made by Mr. Stack is that it is a myth that FATCA imposes no new obligations on U.S. citizens living abroad.  This is indeed correct in a technical sense of how the tax law works; Title 26 applies to U.S. citizens who have spent most all of their lives in a country other than the U.S.  This has been the law since the time of the U.S. Civil War in the 1800s.  However, what is not mentioned, is that there are a host of international tax penalties that will apply to these individuals, even if no income taxes are owing.  These information reporting requirements in the law are typically not understood among most U.S. tax professionals (U.S. tax lawyers, CPAs and enrolled agents) let alone the layperson taxpayer.

For instance, the “FBAR law” from the Bank Secrecy Act has been around since 1970, yet virtually no one in the private sector or the government had much of any understanding of that law until the last few years.   Plus, Congress adopted various information reporting requirements in the 1980s, the 1990s and now during the last decade that are still not well understood.

The civil penalties for each failure by the U.S. citizen living abroad for these information reporting requirements is consistently US$10,000 per violation.  If an individual inadvertently failed to file 3 information returns over a period of 5 years (e.g., regarding their accounts or companies in their home country of residence, e.g., they could be facing US$150,000 of civil penalties – 3x5xUS$10,000!).   For a more detailed discussion of these penalties see pages 8 and 9 – http://www.procopio.com/userfiles/file/assets/files1/docs-1738595-v2-accidental-americans-and-the-push-to-renounce-us-citizenship-2448.pdf

Mr. Stack goes on to say “U.S. taxpayers, including U.S. citizens living abroad, are required to comply with U.S. tax laws?.  Individuals that have used offshore accounts to evade tax obligations may rightly fear that FATCA will identify their illicit activities.  Yet a decision to renounce U.S. citizenship would not relieve these individuals of prior U.S. tax obligations, and might well create additional U.S. tax obligations for certain citizens and long-term residents who give up citizenship or residency.”

This statement assumes that U.S. citizens residing overseas have somehow been using their normal individual, business or other investment accounts in their home country of residence to “evade tax obligations”!  This is where there is a big disconnect in the understanding (or lack of understanding) of the U.S. Treasury Department and IRS of those millions of U.S. citizens who reside overseas.  Undoubtedly, there are some U.S. citizens residing overseas who are taking steps to evade tax and not comply with the law.  However, this author’s experience is that far far far more of the U.S. citizens residing overseas, simply do not have a complete understanding of a very complex U.S. tax law and bank secrecy reporting.

The “Myths” identified by the Treasury Department are set out below and can be read in their entirety at (Are they really “Myths”?)-

Myth vs. FATCA: The Truth About Treasury’s Effort To Combat Offshore Tax Evasion,

http://www.treasury.gov/connect/blog/pages/myth-vs-fatca.aspx

Myth No. 1: Some claim it’s overly costly and burdensome due to complex
regulations and difficult to meet reporting requirements.

Myth No. 2:  Some claim that U.S. citizens living overseas will become
outcasts in the international financial world.

Myth No. 3:  Some claim that Americans living abroad will give up their U.S.
citizenship because of liabilities and burdens created by FATCA.

Myth No. 4: Some claim that countries are opposed to FATCA, in part because
the legislation could force foreign banks to violate laws in their own
countries.

Myth No. 5: Some claim that FATCA will generate a backlash from foreign
governments who view this as an overreach of U.S. law.

Myth No. 6: Some claim that FATCA will unfairly expose FFIs to heavy
penalties before they have the necessary mechanisms in place to comply.

Myth No. 7: Some claim that FATCA aims to use foreign banks as an extension
of the IRS.

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See –

IV. NON-RESIDENT U.S. CITIZENS  

1. Provide an election to citizens who are long-term nonresident citizens to be taxed as nonresident aliens if they meet certain conditions (Schneider, “The End of Taxation Without End: A New Tax Regime for U.S. Expatriates,” 2013; similar to the law in Canada)

a. Require a minimum period of residence abroad

b. Impose an exit tax on electing taxpayers where deemed to sell all assets at the time of election

This concept was proposed  by By Patrick W. Martin and Professor Reuven Avi-Yonah . “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,” September 2013.

For complete summary see – http://www.finance.senate.gov/issue/?id=0587e4b4-9f98-4a70-85b0-0033c4f14883

This document is the fifth in a series of papers compiling tax reform options that Finance Committee members may wish to consider as they work towards reforming our nation’s tax system.  This compilation is a joint product of the majority and minority staffs of the Finance Committee with input from Committee members’ staffs. 

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