Liberty and justice for all United States persons abroad

The Isaac Brock Society

1,012 thoughts on “FATCA Discussion Thread (Ask your questions) Part One”

  1. Egypt is waking up to FATCA:

    ‘The U.S. Internal Revenue Service projects FATCA to net them an extra $8 billion annually in tax revenue. But financial and business experts warn that the new law could cause immense problems for investors, financial institutions and Americans living overseas that could ripple through the business world.’

    http://www.amcham.org.eg/resources_publications/publications/business_monthly/issue.asp?sec=4&subsec=FATCA&im=9&iy=2012

  2. @bubblebustin

    Even the Chamber of Commerce got that one wrong!  NOT $8 billion a year, but $8 billion over 10 years, so they are off by only a factor of 10.  Should we tell them? 🙂

  4. Today Online has an interesting article about FATCA. It basically says that it is a misconception that this is going to affect only financial institutions, but multinational companies could be also negatively impacted:

    “For example, if a MNC uses a third-party FFI (e.g., a bank) to receive payments on their behalf, all payments received may be subject to FATCA withholding if the third-party FFI is non-compliant.

    This becomes problematic if the third-party FFI has no intention of reimbursing the MNC for the amount withheld, even if the MNC is FATCA-compliant or not subject to FATCA withholding.“

    It would help to get big US multinationals to lobby against FATCA.

  5. News Analysis: A Second Option for FATCA Compliance
    This is written by Ernst and Young, part of the FATCA Compliance Complex, so you know what to expect, but you should read it.  They think IGAs are the way to go, and of course, that is exactly what the OECD (and Treasury) wants.  I think that is what they hoped for, when they got the Senators to add FATCA into the Hire Act.  This was the end state they wanted.  Mission Accomplished.  Now the FCC does the work for them, telling all why they should do this.

    The BIG hole in #FATCA, for all it’s “good” intentions, (& BAD unintended consequences) will be the “deemed compliant” & “exempt category.   That is where lawyers and clients intent on continued evasion will focus their efforts, and FATCA will be as successful at stopping tax evasion as the War on Drugs was at stopping Drug consumption!  The Cost, well, let’s not worry about that, right?  No one really knows the cost of the War on Drugs either. 

  6. @Christophe

    That is a good find.  I passed that on to the President and Chief Council of the MNC I used to work for.  Something they certainly need to ponder.

  7. Well, a few more forms, to add to “Form Nation”

    http://www.accountingtoday.com/news/irs-unveils-draft-forms-fatca-compliance-63944-1.html 

    Also, this interesting analysis about the Russia FATCA options…    This one implies or states…

     “Either way, the banks will incur material costs involved in implementing the changes. They have no choice, though, since they will otherwise become outcasts: compliance with FATCA has been virtually accepted by the global community.” 

  9. Overseas tax dragnet refocuses on country partnerships

    (Reuters) – A crackdown on overseas tax evasion is fast changing shape as officials move to implement it via country-to-country agreements, rather than by enforcing a single law for all financial institutions.

    The transformation over the past nine months of the Foreign Account Tax Compliance Act, or FATCA, is largely seen by both advocates and detractors as the most pragmatic way to implement the law, which takes effect in 2014.

  11. Can someone please help with the facts? Does FATCA tie passport renewal to filing of taxes?

    The reason I ask is that I was at a meeting of an American Club yesterday and a presentation was given on taxes and the above statement was made.  There was an audible gasp from everyone in the room when this was stated.

    I have never heard this before. I would like to stop helping the IRS fear mongering so I will get in touch with this organization if it is not true.

    While the presentation was of overall good quality, a statement was also made that the IRS is now also accepting ignorance of the law as reasonable cause. This is not true and I made that clear. However I was uncertain about the FATCA statement.

  12. @Lisa, here’s how it is linked, in my understanding, it is more complicated than a direct cause and effect. Rather, it is all part of a web that is being woven from different strands tightening around us. The individual FATCA reporting form and it’s provisions, similar to the FBAR and other ‘foreign account’ or foreign asset information reports like the 3520/A, etc. can cause US citizens abroad to be assessed for huge confiscatory penalties, for failing to report, or failing to report accurately, regardless of having zero actual US tax owed on their returns. Because the penalty structures can be layered, one on top of the others, and each one can result in massive penalties, the price for inadvertant errors can far exceed the already post-taxed assets that the reports are based on. And some of the reporting is duplicative, so the potential for repeated errors is heightened. With the FBARs, the highest balance can actually be a balance resulting from a debt like a loan sum, or mortgage, that passed through the account only temporarily on the way to be paid out for a purchase. Or, it can be aggregate balances that are actually sums moving from one account to another – and that inflates the balances to be reported, as well as the basis on which the penalties can be calculated. All the forms are complex, and time consuming to prepare, and often the bank does not provide information in the format that is required. Errors are therefore very likely. The GAO and IRS are aware of this, and choose to continue in the same vein, though the FATCA forms and requirements for individuals to file this June, were flagged as problematic in a GAO report that came out in early 2012 see http://www.gao.gov/assets/590/589717.txt .  RRSPs in Canada needed the 8891? filed every year, or otherwise wouldn’t be recognized as tax exempt or tax deferred by the IRS, and then count towards income for that year -increasing the odds that some US tax would be assessed – regardless that the US/Canada tax treaty recognizes the special status of RRSPs. No election with the proper form, no penalty, but no exemption either. Similarly, with the sale of a principal residence, there is a large sum – the house price – which goes into an account briefly, and then goes back out if another house is being purchased, or is being invested for a senior’s longterm care, etc.. The sale of a principal residence is taxable by the US, though it isn’t in Canada for example – so expats who move, or liquidate their house in order to go to retirement homes, or downsize, etc. are likely to end up owing US taxes for an event that is very common, and likely to occur at least once or more in many a household’s lifetime. That inflates bank accounts, and generates forms that the IRS will demand, and possibly find something to penalize you on.

    So, you’ve got draconian inflated and confiscatory penalties imposed on imaginary valuations of aggregate totals, to be imposed for inadvertant errors, or for not submitting properly any one of the myriad of complex and incomprehensible forms that those abroad must file on their ordinary local accounts and assets – even in the absence of any actual US tax assessed or owed. Forms and requirements so complex and confusing that errors are very likely to result. And imposed on entirely ordinary and common life events – unavoidable at least once in a lifetime – again, increasing the size of the annual jeopardy and potential pitfalls posed by the annual filing from abroad. All that combined makes it far more likely for those abroad to be assessed with huge outstanding fines to be paid – in penalties, rather than actual ‘income tax’. And those outstanding fines imposed – might take some time to resolve, and in the meantime though, show as money owed to the IRS.

    Now, add in an extension of the time the IRS can poke about to try and invent some revenue through finding something to penalize – even where no actual tax is owed. FATCA also changes the statute of limitations that apply to returns – in a complicated way that I don’t quite understand all the details of and can’t describe accurately. The effect is to make the SOLs extended – thus giving the IRS as much possible time to go back and try to find something, anything, to generate some penalties – in lieu of the zero US income tax often owed on the return. Here’s a sample try at an explanation http://gswlaw.com/irsblog/2010/06/16/fatca-six-year-statute-of-limitations/

    All that makes those abroad much more vulnerable to being assessed with, or owing the US large penalties. And, those abroad without a second citizenship need a passport to travel, for work, etc. Those with another citizenship are forced to use the US passport exclusively to enter (and leave?) the US – to visit family, etc. The passport is being connected to tax compliance through questioning and tracking at the border, and IRS attempts to have the SSN on the passport application and renewal forms – with a 500. fine for not providing it.

    So it is all entwined. And, if they want to, the IRS can make it much more of a direct relationship, as in this GAO report:

    Federal Tax Collection
    ‘Potential for Using Passport Issuance to Increase Collection of Unpaid Taxes’
    GAO-11-272, Mar 10, 2011′

    http://www.gao.gov/products/GAO-11-272 

    “Matter for Congressional Consideration”

    “Matter: If Congress is interested in pursuing
    the policy strategy of linking federal tax debt collection to passport
    issuance as an approach to help reduce the federal deficit and to
    increase taxpayer compliance with tax laws, it may wish to consider
    taking steps to enable and require the Secretary of State to screen and
    prevent individuals who owe federal taxes from receiving passports, to
    include establishing criteria for specific categories of passport
    holders and waivers as appropriate. To do this, Congress may wish to ask
    the Secretary of State and Commissioner of Internal Revenue to jointly
    study policy and practical issues and develop options for further
    consideration, including developing appropriate criteria and safeguards.

    Status: In Process

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.“

    See also as described in this article
    http://www.theatlantic.com/business/archive/2012/04/no-taxes-no-travel-why-the-irs-wants-the-right-to-seize-your-passport/255940/ 

    @All, if you see inaccuracies in my explanation, can you chime in for Lisa?


  13. @Lisa, also FATCA would require banks to identify US citizen account holders. No-one knows yet what identification (ex. passport?) they might request as proof of non-US status.

  15. @Lisa

    Badger has given you an indirect answer which I can not fault. It is pretty darn comprehensive.  I would, however, add this…

    There is NOTHING specially that I know of in the FATCA law and the pursuant regulations that directly ties passport renewal to filing of taxes. It is the more oblique route that Badger points out.  

    Let me just add to those points. 

    As we have recently seen, with the Surface Transportation Bill and the Veterans Job Bill, there are those in Congress who are determined to tie Passport Renewal to tax status, as recommended by the GAO report Badger sites.  It has been defeated twice, but it will be back. 

    The law language starts out somewhat benignly (some say reasonably).  It seems to have large thresholds with checks and balances, so it is not arbitrarily applied. However, as you know, once a law is in place, like the Bank Secrecy Act of 1970 with FBAR requirements, thresholds and enforcement can change with little or no public knowledge.  Therein is the danger for all U.S Passport holders living abroad.

    The risk is, that given time, tax status and passport status, tied together, will be the new reality for All Americans Abroad. 

    Your members of the American Club have to understand that the meaning of U.S Citizenship has changed significantly in the past 3 years. That U.S. Passport, is not just a convenient little travel document any more.  It represents membership in a very unique “Tax, Form and Penalty” club which has some onerous dues that accompany the so called benefits. These dues are ones your American Club members have probably never heretofore considered when they acquired their U.S. passport. 

    Basically, Congress and the IRS are saying, “if you don’t want your membership revoked, or penalties applied, you have to pay your dues.”  FATCA brings us one BIG step closer to that reality.  

    As a direct result of FATCA’s “Total Financial Situational Awareness” (TFSA), passport renewal tied to tax status will be the natural progression of these new IRS powers.  If you don’t pay your U.S. taxes while living abroad, you many not have to struggle with the decision to renounce your citizenship. The IRS may be given the power to make the decision for you.  If you don’t have another passport as a fall back, you may become Stateless if your passport renewal (as a result of delinquent dues) is not approved while you are out of the country.  

    If you are inside America when this happens, you have just had new prison borders defined. Pay up, before you are allowed to exit.  You may not see outbound immigration clearance as you check in for a flight, but it may be coming in this new form. 

    That is the way I would explain it to your American Club members. 

  16. @Just Me, thanks for the clarification.

    @Lisa; the whole picture is getting so complex that I hardly know how to describe it, or keep up with all the initiatives and tweaking. The punitive measures like the Transportation Act passport provisions are like zombies – they keep going even when you think they’re dead. Perhaps you can underscore that for the club members. Even the threats to the FEIE keep recycling, along with renewed calls for more restrictive exit/renunciation provisions.

    Due to the efforts of participants here, like Roger Conklin, Just Me, and others , we get a historical overview of the tax and other restrictions on those living ‘abroad’, and see that not only is it bi-partisan in nature, but they are continually res-erected.

    It is only my distance from, and ignorance of this aspect of life in the US that caused me to get this far without knowing about these threats until very recently – and they are so shocking in import, that sometimes I still can’t believe that my country of birth could offer such malignant and harmful threats to my well-being and to my non-US family .

    Basically we can count on many of the most punitive US initiatives that impact us to continue to lurk in the background, because the underlying beliefs and impulses of those in the US remain untouched by the realities of being born and living outside the US.

    Ironically, even those, like US Treasury Secretary *Geithner, who have some experience living abroad don’t integrate that into their beliefs about those of us who were born, or choose to live somewhere other than Homeland USA  (*”Geithner spent most of his childhood in other countries, including present-day Zimbabwe, Zambia, India, and Thailand where he completed high school at the International School Bangkok.[7] ” source: http://en.wikipedia.org/wiki/Timothy_Geithner ).

    Your club members would profit from reading some of the history that led to our present situation; starting with this at the ACA http://americansabroad.org/issues/taxation/history-of-us-taxes-abroad/ and the AARO http://www.aaro.org/position-papers-2011 . There is also this http://renunciationguide.com/Background-and-History-of-Tax-On-Expatriation.html

    There have also been allusions to the expected trends in the media, although they are often not quite accurate about the complexity of the details. For  ex. see http://blogs.wsj.com/washwire/2012/05/18/tax-history-why-u-s-pursues-citizens-overseas/

    I have appreciated this by Phil Hogden http://hodgen.com/why-people-expatriate/ who has also said that those abroad should consider “Get out while the getting is semi-good. Don’t wait for more time. More time means more laws.”, and while not advice that works for all of us (timing, resources and ability to renounce remain a significant barrier for many), it seems well documented that the US will not change enough to allow us to remain unscathed, whether now, or later, no matter how compliant we are. There are just too many hazards and pitfalls, whether by intentional design on the part of the US, and IRS, or unintended. It really doesn’t matter what the intent is/was, because the result is life-altering, and as Phil says, “The IRS will do what it always does–write rules and regulations–which are invariably bad for carbon-based life forms. For every regulation written to “answer a question” the IRS creates four more questions, each an order of magnitude more difficult than the one that was “solved.” , and every effort by the IRS just makes it worse. See: http://renounceuscitizenship.wordpress.com/2012/06/07/phil-hodgen-why-people-expatriate-a-comment-on-his-post-what-about-those-who-cannot-certify-5-years-of-tax-compliance/

  17. I so very much appreciate the vigilance of you Brock participants who bring these things to light when they happen!

  18. Yes, two ATTEMPTS at legislation to deny passports as mentioned above.  The latest was listed as THE revenue producer for the Veterans act and the former as the revenue producer for the transportation act. 
         Don’t forget that small errors in the form 2555 (income exclusion) are now programmed in to cause the exclusion to be completely denied and returned to the taxpayer with a bill for the full amount of the income (reference “Petros”‘ ongoing saga).  If this should trigger 2 years, the bill would exceed $50,000 for a person using the full exclusion.  It takes about 8 months for your revised 2555 to be processed and for the bill to be removed—a tax lien could be released at any time chosen by IRS.
         Glad to see that there are more groups involved—I hope the leaders soon network and find each other (ACA, AWC, American club, Democrats abroad, Republicans abroad, etc)

  19. *Lisa FATCA does nothing to tie passport renewal to payment of taxes.  There is nothing in the proposals to link the 2.

    However, it is the case that when you apply for a passport, the IRS is informed. State will ask for an individual’s SIN. The individual is not obliged to provide it. Without an SIN the IRS has trouble matching their records. This seems primarily designed to ferret out passport applicants who are known to owe taxes.It’s far from clear what they currently do, if anything, with the information

  20. @Cornwalliscal; you were mentioning a SIN# in connection with US passports. Did you mean the SSN, Social Security Number?

    I did see this re the SSN:

    http://travel.state.gov/passport/faq/faq_1741.html

    Q:Do I have to provide my Social Security Number?
    a:Failure
    to provide your Social Security Number may result in significant
    processing delays and/or the denial of your application.

    Section 6039E of the Internal Revenue
    Code (26 U.S.C. 6039E) requires you to provide your Social Security
    Number (SSN), if
    you have one, when you apply for a U.S.
    passport or renewal of a U.S. passport    . If you have not been issued a
    SSN, enter zeros
    in box #5 of the passport application
    form you are completing. Contact the Social Security Administration to
    request a Number.
    If you are residing abroad, you must
    also provide the name of the foreign country in which you are residing.
    The U.S. Department
    of State must provide your SSN and
    foreign residence information to the Department of Treasury. If you fail
    to provide the
    information, you are subject to a $500
    penalty enforced by the IRS. All questions on this matter should be
    directed to the
    nearest IRS office.

  22. Badger –   Commendations on your response to Lisa. And thanks for that recent JCT doc. This passage from page 93 on treatment of individuals deserves full quotation:

    If the broad assertion of taxing jurisdiction is to be conceded in favor of expanding territorial taxation to individuals, the scope of any such expansion should be considered. For example, the exclusion could apply only to earned income by increasing or removing caps on the foreign earned income exclusion and making the exclusion available to Federal employees. The treatment of unearned income may require revisions to the rules for determining source of such income, and create a need for new rules to establish status as a nonresident citizen. Such rules in turn would require anti-abuse provisions, possibly modeled on rules governing tax-motivated expatriation.

    US persons who have been extraterritorial for many years may find that their shift from earned income to pension/investments as they grow older will become a very unhappy situation, scarcely redeemable by return to the belly of the beast where no sensible medical care would be available. The future of extraterritorial US persons grows ever darker. Sauve qui peut. The big three barbed hooks of enforcement: FATCA, passport, US border controls. The last is especially significant for Canadian extraterritorials, many of whom may find themselves tasked with taking every precaution to avoid inadvertent diversion to the homeland. Ex may in many cases become exile.

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