As TaxProf Blog and others noted at the time, a few weeks Trump signed Executive Order 13789, setting a deadline of 20 June for Treasury Secretary Mnuchin and his people to:
… review all significant tax regulations issued by the Department of the Treasury on or after January 1, 2016, and, in consultation with the Administrator of the Office of Information and Regulatory Affairs, Office of Management and Budget, identify in an interim report to the President all such regulations that:
(i) impose an undue financial burden on United States taxpayers;
(ii) add undue complexity to the Federal tax laws; or
(iii) exceed the statutory authority of the Internal Revenue Service.
Unfortunately for beleaguered U.S. Persons abroad, that time frame does not include the original FATCA regulations released in 2014, and the scope does not include past refusals to use clear statutory authority to issue new regulations to excuse us from incomprehensible “offshore” information forms with obscene fines.
For foreigners investing in the U.S. it’s better news: the Trump/Mnuchin review might repeal the Form 5472 filing requirement for single-foreign-member LLCs (proposed on 10 May 2016, 81 FR 28784; finalised on 13 December 2016, 81 FR 89849). That requirement was widely seen as a tiny, halting step towards imposing genuine FATCA reciprocity on inbound investors who were trying to remain anonymous. But even if it doesn’t get repealed, it’s no big deal: the Obama administration left plenty of loopholes to make sure that foreigners can keep hiding their identities from both the U.S. government and their own governments.
What exactly is “FATCA reciprocity”?
When foreign countries say they want FATCA reciprocity, they are not very interested in the garbage data that the IRS can provide right now — 1099-INTs and 1099-DIVs on individually-owned accounts. No one cares about a few dozen basis points of interest on Bank of America deposits left behind by former expats who came back home. Rather, foreign governments want to know about all the super-secret Wyoming and Nevada LLCs used for laundering money into U.S. real estate.
But the IRS can’t provide information on companies — let alone their maximum account balances from the day right before they bought all that real estate — because the IRS has no idea who owns most companies. Even if they did, they have no authority to collect account balance information from domestic banks — the same information which FATCA demands that banks in other countries send.
The extended Form 5472 filing requirement looked like a first crack at circumventing this lack of information. Trump may repeal it. But even if he doesn’t, well-advised foreigners hiding money in the U.S. have little to worry about: the Form 5472 regulations left them a year to shift their assets out of LLCs, and the FinCEN customer due diligence rules finalised on the very next day (11 May 2016, 81 FR 29397) left them a giant class of entities not subject to beneficial-owner lookthrough — trusts — into which they could shift those same assets.
Give everyone enough time to run out the back door
Phil Hodgen is the latest to point out an amusing little caveat in the Form 5472 filing requirements, now found at 26 CFR 301.7701-2(e)(9):
(9) Reporting required under section 6038A. Paragraph (c)(2)(vi) of this section applies to taxable years of entities beginning after December 31, 2016, and ending on or after December 13, 2017.
As Phil notes, that means a single-foreign-member LLC which closes down before 13 December 2017 does not need to file Form 5472. This exception was not some lame-duck thing which Obama inserted under pressure from the incoming Trump administration; it was already in the proposed rule from May 2016.
If the 5472 filing requirement were to come into force for any LLC which started a taxable year after 31 December 2016 regardless of the ending date, that would have left those LLCs just three weeks to escape the new filing requirement, unless they wanted to take a bet that the 45th President would repeal the 44th President’s work. Instead, the “ending on” clause gave them a whole year to decide what to do. Now they can wait to see whether the new Form 5472 filing requirement survives Trump’s regulatory review.
This is very nice treatment for foreigners who import capital to the United States. Contrast that with what Treasury does to U.S. Persons who “export” capital from the U.S. (i.e. use their human capital to earn wages overseas and then put their savings in the bank down the street).
Into a trust instead
Even if Trump doesn’t kill the new Form 5472 filing requirement, the FinCEN customer due diligence rules left a giant hole: they do not require banks to look through trusts.
Beginning on the Applicability Date, covered financial institutions must identify and verify the identity of the beneficial owners of all legal entity customers (other than those that are excluded) at the time a new account is opened (other than accounts that are exempted) …
The definition [of “legal entity customer”] would also not include trusts (other than statutory trusts created by a filing with a Secretary of State or similar office). This is because, unlike the legal entities that are subject to the final rule, a trust is a contractual arrangement between the person who provides the funds or other assets and specifies the terms (i.e., the grantor or settlor) and the person with control over the assets (i.e., the trustee), for the benefit of those named in the trust deed (i.e., the beneficiaries). Formation of a trust does not generally require any action by the state. As FinCEN noted in the NPRM, identifying a “beneficial owner” from among these parties, based on the definition in the proposed or final rule, would not be possible.
Funny, it sure looks like Section 674 of the “Internal” Revenue Code tells you a perfectly good way of doing something that “would not be possible”. You complain that it would be complex and expensive to perform such an analysis? Well, the U.S. government certainly didn’t hesitate to make foreign financial institutions perform that analysis with respect to all of their trust customers (26 CFR 1.1441-1(c)(6)(ii)(C) and all the rest).
But the Financial “Crimes” Enforcement Network didn’t dare make U.S. banks do the same. (Recall that FinCEN are the same bunch of arrogant bastards who say that eight-month old babies are responsible for filing their own FBAR forms and that U.S. persons abroad need to be monitored by U.S. authorities to make sure they’re not laundering money instead of buying groceries.) Just another way in which FATCA “reciprocity” isn’t actually reciprocal, and never will be — unless the world forces the U.S. to accede to CRS instead of lying down and surrendering as FATCA runs them over.
Meanwhile, the compliance-industrial complex immediately stepped up to make use of this FinCEN “oversight” and offer their services to any foreign LLC owners who wanted to flee to the safety of a trust.
Months before anyone seriously thought Trump would be president, the Obama administration poked giant loopholes in their scheme for entity-level FATCA reciprocity. They did not make a serious attempt at finding out who owns any LLC, let alone trust, whose creator doesn’t want to be found. They built a three-foot-tall fence around an open-air bird exhibit. If an elephant tries knocking over the fence you’ll hear loud and indignant braying of donkeys, which will distract otherwise-intelligent observers from the obvious fact that a three-foot tall fence doesn’t trap flying birds. Its construction was just political theatre, designed to fool clueless foreign government officials into thinking that FATCA reciprocity was right around the corner.
FATCA-natics continue the political theatre even today. We all noticed Elise Bean’s insistence that domestic Form 1099 and FATCA Form 8966 were equivalent. On the surface it looks like she was trying to minimise the impact of FATCA in the eyes of the domestic audience. However, it’s likely that she had another motivation: to continue to mislead foreign observers about reciprocity. If Meadows had left her 1099-and-8966 analogy unchallenged, non-Americans listening to her comments might have mistakenly assumed that Treasury was already collecting 8966-equivalent information, and that other countries’ tax authorities would eventually be able to get their hands on such information if they applied enough pressure.
Don’t let FATCA-natics feed you any sanctimonious little myths about how FATCA helps feed starving children in Africa and how you’re a monster for daring to question it. FATCA was designed to kneecap all the U.S.’ competitors and leave Wyoming, Nevada, and Delaware as the last tax havens standing. The IGAs just tricked foreign governments into standing still for the kneecapping.
Eric, you mention the 1099 form which was discussed at the FATCA hearing. I am not familiar with this form.
TurboTax tells us that there are many 1099 forms: 1099-Misc, 1099-INT, 1099-DIV, 1099-R, 1099-C, etc.
Which 1099 form related to a taxable event was E. Bean (and Meadows) referring to? One of these, or all 1099s that would have to be filled out depending on circumstances?
@Stephen Kish: Not quite sure. Bean wasn’t specific as to which 1099 she meant. She had to keep it vague since her analogy wasn’t very good. I guess she and the others would specifically have been thinking of 1099-INT, which is the most familiar 1099 — the others you only get in rather specific situations, but lots of people have savings accounts throwing off at least US$10 of interest per year.
Stephen Analogous to a Canadian T3, T5, T5013, and so on- a record of what is paid to you-so that their computers can match them against your return. One reason why most duals can fudge their returns (TFSAs and RESPs for example) ; their are no information slips sent to the IRS.
The dog and pony show continues:
Has anyone here read this article that appeared online earlier this week? It should not go unanswered, as it is so misleading and glosses over everything that is wrong with FATCA by reducing what was presented in the recent FATCA hearing “as an opportunity to cherry-pick extreme examples of FATCA’s (admittedly bumpy) implementation and rail against FATCA’s necessary disclosure of financial information to invalidate the entire law.” Who is this guy working for? Whose agenda is he promoting? He makes no mention of the cost of implementation of FATCA, relative to what it brings in. That alone is enough reason to repeal it! Being a lawyer well versed in this nightmarish law, John Richardson might want to reply to Richard Phillips, Senior Policy Analyst at ITEP. This sort of propaganda has to be attacked immediately when it appears and the authors need to know that there is a very determined, smart and experienced organisation that will call them out on all of their inaccuracies. This is not about having an opinion on something, but rather misrepresenting the essence of why the recent Senate hearing took place, to address the consequences of FATCA. This needs some investigating and making Mr. Phillips aware that his writings are being scrutinized and that he will be called out publicly on the inaccuracies and lack of facts and detail in what he has written.
Here is the link to the article mentioned above:
He works for ITEP, which is the ‘Institute on Taxation and Economic Policy’. They are based in Washington and are supposed to be totally non-partisan, yet the article is clearly partisan. Apparently their opinion has a lot of importance among lawmakers and legislators, so reading what he wrote won’t encourage a FATCA repeal, that is for sure.
Form 1099 is actually pretty similar to the Canada CRA T5 and T4 forms in terms of the information reported.
Thanks for another great post, Eric.
When rebutting Elise Bean’s assertion that FATCA reporting is equivalent to 1099 reporting, most of the focus has been on the scope of reporting required, especially reporting of account number and balance. One aspect that has not been taken up is the difference in what the account holder sees. With 1099s a copy is always sent to the taxpayer. With FATCA reporting, however, this depends on the jurisdiction. While some Europeans have said that their bank informs them of what has been sent to the IRS, this is not the case in Australia (or Canada from what I hear). In Australia the ATO appears to be relying on the mutual assistance article in the treaty to support the IGA requirement of sending data to the IRS. There’s nothing in any of this that requires notification of the account holder. In fact, the ATO seems to think that they require IRS permission to disclose that information to the account holder! (see http://fixthetaxtreaty.org/2017/02/24/foi-take-2/) And… apparently seeking that permission requires the ATO to disclose to the IRS the identity of the account holder asking to see his/her own information!
Interesting article from Bloomberg BNA today: “EU Politicians Step Up Pressure for U.S. FATCA Reciprocity”
So, will the EU have the guts to put the US on all the blacklists where it belongs, or are they just going to beat up on poor bastards like Iraq & Afghanistan & Syria whose governments got blown up by the US and have never been able to re-establish control of their purported territory.
“When foreign countries say they want FATCA reciprocity, they are not very interested in the garbage data that the IRS can provide right now — 1099-INTs and 1099-DIVs on individually-owned accounts.”
Don’t forget 1099-Bs. Those report withholdings from gross proceeds of sales, which can be hundreds or thousands of times larger than withholdings from interest and dividends. This difference is so important that when TIGTA reported that IRS data entry clerk Monica Hernandez embezzled withholdings from 1099-Bs, TIGTA described withholdings as coming from interest and dividends without saying that those are other divisions of 1099 and without saying how much the embezzlement really is. The ring leaders still need protection from getting caught, so I’m the only one who explains these differences.
Now, can the IRS really provide 1099-INTs and 1099-DIVs, let alone 1099-Bs? Maybe in some cases. But not when the forms come from financial institutions, because those are the ones that get embezzled from, and the IRS doesn’t have records of the real account holders. If an actual account holder files a US tax return then the IRS might create accurate records of those 1099s, maybe — except when the IRS needs to trump up an extra penalty for a frivolously honest report.
Also don’t forget 1042-S forms. When a payer knows that an account holder isn’t a US person, they’re supposed to report withholding on Form 1042-S instead of 1099. Some payers get it right, some don’t, but IRS employees alter records of all of them.
Even if other countries can get reports from the IRS, they’re not going to be accurate reports.
1099-B’s are NOT issued to non resident alien’s.
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“1099-B’s are NOT issued to non resident alien’s.”
Do you know for sure? I don’t know for sure because I was a US citizen when I got one, but here are some reasons to be unsure:
1099-INTs aren’t supposed to be issued to non resident aliens, but a US finanical institution which is supposed to issue me 1042-Ss insists on issuing 1099-INTs.
1042-Ss aren’t supposed to be issued to be issued to US citizens, but a US financial institution sometimes issued them to me when I was a US citizen. Sometimes they issued a consolidated 1099 and a separate 1042-S for the same account in the same year, and the total amount of withholding was correct, and as far as I can tell, all of the withholdings were embezzled.
Some US financial institutions issue substitute form 1099s but I don’t know what kind of 1099 they were substitutes for, and this was both before and after I renounced.
One US financial institution issues no forms at all and when I asked for one they said they don’t issue any tax forms to non resident aliens.
As wealthy as Trump is, it seems a no-brainer that he has also created a few trusts for himself. I honestly doubt and always did that he will want to reveal his own secrets, and so in the end, he will not allow America to become transparent. There will never be any reciprocity. One can only hope for repeal of FATCA, because it seems that there are a handful of senators who understand the detriment of the law better than the others.
The author of the article you posted regularly gets an earful (or two) from his “anti-FATCA fans” on Twitter. These of course, are Brockers plus other connected expats who are very dedicated to challenging/exposing anti-expat policies, etc.
A prominent tax scholar posted a scathing article questioning various aspects of the Richard Phillips piece you mention (some confusion regarding attribution to correct the organization’s Phillips is associated with):
Tax Justice Network finds the necessary 70 billion
This is clearly unrelated but I know there are some who are following Rocco Galati efforts in representing COMER’s fight to restore the Bank of Canada to its intended purpose and serve Canadian interests rather than a European Central Bank. No surprise here in the verdict, same agenda different day.
COMER v BANK OF CANADA , Supreme Court UPDATE May 05/2017
Committee for Monetary and Economic Reform (“COMER”), et al. v. Her Majesty the Queen, et al. – The request for an oral hearing is dismissed with costs.
(Federal Court) (Civil) (By Leave)
Date Proceeding Filed By
2017-05-05 Copy of formal judgment sent to Registrar of the Court of Appeal and all parties
2017-05-05 Judgment on leave sent to the parties
2017-05-04 Decision on the application for leave to appeal, Abe Ka Br,
The request for an oral hearing is dismissed. The application for leave to appeal from the judgment of the Federal Court of Appeal, Number A-76-16, 2016 FCA 312, dated December 7, 2016, is dismissed with costs.
Dismissed, with costs
Supreme Court of Canada – SCC Case Information – Docket – 37431
That’s a very disappointing, actually deplorable, ruling. The Supreme Court of Canada has heard so many trivial cases and yet when it comes to something as important as the COMER case it tosses it aside, refuses to give it a hearing. It appears the worldwide banking cartel is alpha dog to our Supreme Court poodles too.
An article about a murder in today’s FT illustrates how real estate transactions between LLCs can be used to conceal the identity of the buyers:
“Transfers of a single property among LLCs allows outside investors to buy in and cash out without any requirement to disclose their identities, says Paul Gillis, an accounting expert at Peking University’s Guanghua School of Management. “It’s a typical Chinese investment pattern. This is how groups of Chinese often invest in US real estate.” ”
Message to USA: clean up your act or are you addicted to the illicit money.
FT article: “Murder case highlights property money trail from China to US” (paywalled, might try to open with Google)
Late update: Treasury did not regard “Treatment of Certain Domestic Entities Disregarded as Separate From Their Owners as Corporations for Purposes of Section 6038A” as “potentially significant” for purposes of EO 13879
No mention of it in publicly-available comments by lobbyists either
So they did not review it. The IRS issued a list of regulations they intend to examine further in Notice 2017-38, from among the subset identified as “potentially significant”.
In short, nothing affecting FATCA reciprocity and nothing of interest to US persons abroad