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FATCA Hassles: Feds Cracking Down on Overseas Tax Evasion

Sept. 9, 2013
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Last year, the media was abuzz with reports of Americans living abroad renouncing their citizenships in unprecedented numbers. Many of those stories focused on wealthy Americans who were looking to avoid having to pay higher American income tax rates or estate taxes, and who sought out more advantageous tax jurisdictions.

But this year, we’re starting to see that the true picture is quite different: Many of the Americans renouncing their citizenships in places like Switzerland aren’t particularly wealthy, and they’re not trying to avoid U.S. taxes. They are just trying to live their lives. But a recent law passed by the U.S. Congress is making life much more difficult for American citizens living abroad.

The issue: FATCA, or the Foreign Account Tax Compliance Act.

The rules require foreign banks – even banks with no business in the United States and not under U.S. jurisdiction in any way – to report to the IRS the balances and transactions of all Americans’ accounts.

In all cases, this additional compliance hassle costs banks additional time and money. The combination has also caused banks to refuse service to Americans, and made it much more difficult for ordinary Americans living abroad.

Switzerland, which has strict privacy laws protecting customers’ confidential financial information, has effectively declared American citizens personae non gratae as far as their banks are concerned. Banks are shuttering accounts, refusing mortgages and refinances, and refusing to open accounts for Americans living abroad.

Unintended Consequences

The law was originally aimed at wealthy Americans who were using assets abroad to shelter income from U.S. income tax. Under U.S. law, individuals must declare income “from any source derived,” including income earned abroad.

The root of this new enforcement push, and the impetus behind FATCA, goes back a few years, to 2008, with a Senate report that found that tax haven banks were helping Americans evade income taxes to the tune of $100 billion per year, or even more. “Tax havens are engaged in economic warfare against the United States, and the honest, hardworking American taxpayer is losing,” said Senator Carl Levin, a Democrat from Michigan. “The iron ring of secrecy around tax haven banks and their deceptive banking practices enable and encourage tax cheats to hide assets from the United States. Congress needs to enact strong penalties on tax haven banks that help U.S. taxpayers avoid paying taxes to Uncle Sam.”

While the Obama administration inherited the case from the Bush Justice Department, the new Attorney General, Eric Holder, directed his attorneys to step up the enforcement on overseas tax evasion. But not just against individuals. They wanted to send a message to the international banking community, as well. Specifically, they went after UBS, the Swiss banking giant, for helping some 52,000 wealthy Americans conceal income from the IRS. To avoid criminal charges, the firm caved, and agreed to reveal information on 4,450 of their American customers. The firm was also penalized $780 million.

As the case progressed, the Justice Department wanted some more focused enforcement tools, and so got Congress to pass the laws authorizing the unusual requirements of foreign banks – even banks with no business interests within United States jurisdiction. To force these foreign banks to play ball, Congress authorized the IRS to set up automatic withholding of interest and dividend payments to those banks from any American asset they may hold in their own investment portfolios.

The intent, of course, was to target the same kinds of people that UBS had been serving with their private banking services: Wealthy Americans living in the United States, but who were deliberately parking assets abroad where the IRS could not levy bank accounts, and where the IRS would have trouble even finding the assets.

The second-order effects of the law, however, aren’t limited to fat cats hiding massive amounts of assets. Ordinary working class and middle-class Americans living abroad are getting caught up in a net intended to catch much bigger fish: Banks are refusing to take on American teachers, businessmen, engineers, doctors, au pairs and even American salespeople living overseas promoting the sale of American exports, say observers.

In Switzerland, banks are even refusing to do business with immediate family members of Americans who are themselves Swiss nationals.

Many of these people have spouses or children or both in these foreign countries, but they cannot access routine financial services Americans and most people in developed European and Asian countries take for granted in order to provide for their families because of FATCA’s onerous requirements on foreign banks. These banks don’t want the headache of complying with FATCA, and are telling Americans to close their accounts. Americans can’t open new checking accounts, can’t get a mortgage or a business loan, and can’t have a credit card or debit card from a foreign bank

American expats living abroad are getting around the problem by renouncing their citizenships in droves. This is not just an effort by the wealthy to avoid paying American estate and income taxes. They are being forced to renounce American citizenship simply to avoid a nightmare of tax compliance not only for themselves, but their spouses and any financial institution they do business with.

These unintended but predictable consequences to FATCA’s reporting requirements are already well underway. Now a new provision is starting to take effect: FATCA is requiring foreign retirement plans to report information on their U.S. participants. Failure to comply will result in an automatic withholding of 30 percent of any interest sourced in the U.S.

The rules create an incentive for foreign employers to cease investing in America, avoid hiring Americans, or both. And in some cases, Americans have been refused employment or promotions at foreign companies because the job description requires them to be signatories on the company’s account.

The withholding immediately causes another round of compliance headaches among dividend paying corporations and mutual funds in the United States, who must do the deducting from dividend checks and forward the proceeds to the IRS.


The fix does not seem to be on Congress’s radar at this point. Congress will likely be preoccupied with issues stemming from sequestration, and with passing either a budget or continuing resolution by October 1 to avoid a looming government shutdown. Meanwhile, ordinary Americans living abroad aren’t much of a lobby. Taken together, they aren’t particularly wealthy and don’t form any kind of organized voting bloc. While they can vote in their home districts, the 5 to 7 million Americans living abroad have no real Congressional representatives looking out for their own interests. The State Department is supposed to, but they are too busy handling paperwork for citizenship renunciation to take the case against FATCA back home.

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UBS image by Andy Roberts