http://www.treasury.gov/connect/blog/Pages/Myth-vs-FATCA.aspx
Myth vs. FATCA: The Truth About Treasury’s Effort To Combat Offshore Tax Evasion
The Foreign Account Tax Compliance Act (FATCA) is rapidly becoming the global standard in the effort to curtail offshore tax evasion. This month’s G-20 communique marked another important milestone; highlighting the importance of global tax transparency and a renewed commitment to work towards an international standard for the exchange of tax information.
For years, there has been concern about the so-called “tax gap” – the difference between the tax dollars that are owed under the law, and those that are actually collected. Offshore tax evasion is a significant contributor to the tax gap. FATCA establishes a process for foreign financial institutions (FFIs) to report information about U.S. account holders to the IRS.
Treasury developed intergovernmental agreements (IGAs) to implement FATCA effectively. These IGAs will require all of the relevant FFIs in a jurisdiction to report information about offshore U.S. accounts – a reporting obligation that will help the IRS catch tax evaders. Yet despite the clear, positive benefits of FATCA, many continue to make misleading claims about its implementation and impact. Here are the facts on FATCA:
Myth No. 1: Some claim it’s overly costly and burdensome due to complex regulations and difficult to meet reporting requirements.
FACT: Treasury and the IRS have designed our regulations in a way that minimizes administrative burdens and related costs. Specifically, the regulations were intentionally designed to appropriately balance the scope of entities and accounts subject to FATCA with due diligence requirements, while also phasing in the related obligations over several years. For example, the final regulations exempt all preexisting accounts held by individuals with $50,000 or less from review. For similar accounts with less than $1,000,000, an FFI is only required to search the account information that is electronically available. In many cases, FFIs are permitted to rely on information that they already must collect for local anti-money laundering and know-your-customer rules.
Many of these cost-saving simplifications were the result of comments received from affected financial institutions and foreign governments, which helped us to tailor the rules to achieve the policy objectives of the statute without imposing undue burdens or costs.
Myth No. 2: Some claim that U.S. citizens living overseas will become outcasts in the international financial world.
FACT: FATCA withholding applies to the U.S. investments of FFIs whether or not they have U.S. account holders, so turning away known U.S. account holders will not enable an FFI to avoid FATCA. We expect that many, if not most, of the governments implementing FATCA through IGAs will require their financial institutions to identify and report on all non-resident account holders, not just U.S. account holders.
Those governments agree with FATCA’s policy objectives, and want to facilitate the collection of information about the offshore accounts of their own residents. For example, 19 countries have already announced a pilot project to exchange account information about each other’s residents that will be collected by the governments in line with FATCA’s due diligence and reporting procedures. FATCA is quickly becoming the global standard for automatic information exchange and we expect the number of jurisdictions that choose to implement the same reporting procedures for all offshore accounts to continue to grow.
Myth No. 3: Some claim that Americans living abroad will give up their U.S. citizenship because of liabilities and burdens created by FATCA.
FACT: FATCA provisions impose no new obligations on U.S. citizens living abroad. Instead, FATCA’s withholding obligations fall on institutions making payments to FFIs, and the due diligence and reporting requirements fall on the FFIs themselves.
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.
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.
FACT: Treasury’s decision to implement FATCA through IGAs that are respectful of the individual laws and customs of partner jurisdictions has contributed to the significant international interest in participating in FATCA compliance efforts. The two FATCA model IGAs incorporate a two-pronged approach: under the first model, FFIs report to their respective governments who then relay that information to the IRS; or, under the second model, they report directly to the IRS to the extent the account holder consents or such reporting is otherwise legally permitted, supplemented by government-to-government cooperation to facilitate reporting on non-consenting accounts. These model IGAs offer alternative frameworks for information sharing that abides by local laws.
The success of this approach is evidenced by the international response to this legislation. To date, Treasury has signed 9 IGAs and has reached 15 agreements in substance, including with Malta, Bermuda, and the Cayman Islands. We are also engaged with over 70 additional countries and expect to conclude negotiations with several others soon.
In September 2013, G-20 leaders committed to the automatic exchange of information as the new global standard, and endorsed the development of a single model for this exchange, which is expected to be based on the FATCA IGAs.
Myth No. 5: Some claim that FATCA will generate a backlash from foreign governments who view this as an overreach of U.S. law.
FACT: FATCA has received considerable international support because most foreign governments recognize how effective FATCA, and in particular our intergovernmental approach, will be in detecting and combatting tax evaders. G-8 leaders recently acknowledged the central role of tax information exchange, stating in their June 2013 communiqué: “A critical tool in the fight against tax evasion is the exchange of information between jurisdictions,” and urging that “[t]ax authorities across the world should automatically share information to fight the scourge of tax evasion.”
Myth No. 6: Some claim that FATCA will unfairly expose FFIs to heavy penalties before they have the necessary mechanisms in place to comply.
FACT: We recently announced a six-month extension to our withholding and account due diligence requirements because we recognize that FFIs need sufficient time to register for, understand, and implement their due diligence and reporting processes. Those requirements will now start on July 1, 2014. This extension exemplifies our commitment to ensuring that foreign jurisdictions and FFIs have sufficient time to properly prepare so that the law can be implemented effectively.
Myth No. 7: Some claim that FATCA aims to use foreign banks as an extension of the IRS.
FACT: Individuals making this claim have confused reporting responsibilities with actual enforcement. The objective of FATCA is the reporting of foreign financial accounts held by U.S. persons or certain entities with U.S. owners. This law only requires FFIs to share information about financial accounts held by U.S. taxpayers, similar to what is already required of U.S. financial institutions; it does not include an enforcement component for those FFIs.
@WhiteKat,
re the comments made to you by the troll that expat return preparer services were affordably priced.
“$500 per 1040 return or tax year.” is an acceptable annual cost just because one has a US parent or a US birthplace, but otherwise no economic or other US connection?
And, if one is below the threshold to file the 1040 from abroad but has to do the FBAR, and the 3520/3520-A for one of our Canadian registered savings (ex. TFSA), or just enough to have to file the 1040 itself, and the FBAR, why is it reasonable to pay that much to demonstrate that we owe the US nothing?
Is it reasonable to expect us to pay even 350. per year with a taxable income of under 10,000.? Or even under 35,000? What could 50 years or more of filing, x 350. could buy for a Canadian family (17,500. plus inflationary costs)? And the fees are only going to rise as complexity, jeopardy and pressure to file increases. The zero US returns rival those of our resident country tax jurisdictions in length, complexity, incomprehensibility and cost.
The annual preparation fees are a substantial tax on US citizenship even if we will continue to owe zero US tax. The forms are often far too complex to do ourselves without error, and the penalties are too large to risk.
And for those who have to file the 3520, 3520-A, FATCA form 8938 and others – remember that even those who worked on IRS forms – like Office of Associate Chief Counsel (International), Internal Revenue Service (31 years of service) – Chief Counsel Attorney Willard Yates, and his IRS attorney colleagues pitied the expats they were designing IRS forms for; http://blogs.angloinfo.com/us-tax/2013/07/22/residence-based-taxation-interview-with-bill-yates-former-attorney-office-of-associate-chief-counsel-international-irs-2/
Yates: …”it wasn’t at all unusual to hear someone remark, “just imagine what people living overseas are going through. What a mess. It must cost people a fortune to have their taxes done.” I don’t think anyone ever assumed that a U.S. taxpayer living overseas could possibly figure out how to do his/her own return….”
Yates: ….”…But, I’ll tell you one thing. I’ll never forget what someone said after one of our many, endless Form 8938 drafting sessions.
Let’s talk about US tax: What was that?
Yates: “Boy, I sure wouldn’t want to have to fill out this form.”…”
@badger, the reason why he could make that claim is because the US Treasury is hiding the Information from the public and the public doesn’t want to know the truth, making it easy for the US Treasury to brainwash the the population. Thus, Stack made the claim because he can and because Americans won’t question. Americans must believe what the US Treasury tells them to believe. They have no other choice.
@bubblebustin
I think it’s clear to (almost?) everyone that renouncing doesn’t free one from any tax obligations. I’d been fully compliant for almost 3 decades (approx. half of which I was outside the USA) before renouncing, so it certainly wasn’t an issue for me. FATCA, however, was an issue. A big one.
Just wanted to add that I’m not saying that everyone is or should be aware of prior tax obligations; the USA has failed miserably in communicating this information. However, I do think that those who are seriously contemplating renouncement or who have already done so will have educated themselves on this. For those who were not previously compliant, how they choose to handle those obligations (if at all) is entirely another matter.
Everyone’s chance to comment on Robert Stack’s US Treasury Notes article posted at FSI Tax Notes:
http://www.fsitaxposts.com/2013/09/25/myth-vs-fatca-truth-treasurys-effort-combat-offshore-tax-evasion/#comments
@notamused
No one can dispute that FATCA will work to make many US persons aware of their tax filing obligations for the first time. What I believe Stack is saying is because US persons already have an obligation to file US taxes, FATCA doesn’t impose any obligations on us that we don’t already have (whether we knew about them or not). I don’t know how he would explain F8938 as not being an additional burden, however.
@bubblebustin
Understood. It wouldn’t surprise me if he / they start touting FATCA as a “service” to USPs abroad to inform them of their obligations. 😉
@bubblebustin, I asked if this is a 5 year goal or a claim that nobody will challenge. So far, it hasn’t been approved yet.
I don’t have a US tax OBLIGATION. I owe USA nothing. I do however, have a Canadian tax OBLIGATION.
@badger: amusingly, I’ve seen no evidence that the finance industry in Mongolia is doing the slightest thing about FATCA. As far as I can find there has been literally one Mongolian-language news report on the topic: a radio station for Mongolian migrant workers in Seoul reported on the implementation of FATCA in South Korea.
http://www.mglradio.com/main/index.php?page=5&mid=koreanews&document_srl=749273
I guess after the shame of having been pressured into being part of that “Coalition of the Willing” that occupied Iraq, Mongolia is less interested in jumping on board with the latest cockamamie iteration of U.S. imperialism. (In other words, they have more sense than the UK & France.)
I really don’t care anymore what the compliance condors say. They don’t live our lives and are not affected in the same way as we are. Comments that list the stages of “grief” or whatever they are, are condescending and I reject them. Does this person have a masters degree in social work? I doubt it.
Anyway, most of us have taken steps to deal with this while at the same time thinking our former uncle has lost his marbles and is abusive. And just to go down the path of analysis..when someone is abusive the best course of action is NOT to appeal to their good sense. It is to leave in the safest way possible.
When FATCA is touted as something good (as Stack is doing) naturally any of the consequences of it will also be considered holy. He must make efforts to dismiss the notion that FATCA is causing US renunciations, ignoring the fact that while a CLN may not save someone from US taxation, it will save their personal financial information from being readily handed over to what many consider to be a foreign government.
He should just say that circumventing the bank from having to turn your financial information over by presenting a CLN will not absolve you of your past tax filing obligations, rather than implying that the renunciations are misguided.
terrific blog comments from Phil Hodgen
Full comment here: http://hodgen.com/tax-law-is-considered-dangerous/
LOL
Looks like FATCA had to censur my comment again. It’s still not showing at fsitaxposts. No surprise there.
For you, KalC
Hey, Kalc, where did the ‘blob’ comment go? It looks like I am laughing out loud for no reason. FATCA hasn’t driven me that crazy, at least not yet.
@AnonAnon –
Odd. For exit tax purposes, the capital gains wouldn’t have mattered, just the value of the USC’s assets (+- $2M). In the case of a house, the value could be halved.
The capital gains on the house would have (potentially) mattered if the ex-USC was a covered expat. Anecdote could use some additional detail in order to get a proper understanding.
@broken man – You’re probably right. My friend didn’t specifically say the tax was due to capital gains. That was my assumption, but I’m not up on the details of the exit tax.
The point remains that it was a large amount of tax on income earned by Canadians (one dual) in Canada. Why on Earth should the US be able to claim an “exit tax” on any of that? The exit from the US occurred long before the wealth was accumulated in Canada. My friend’s expensive mistake was in maintaining dual citizenship so long. That should be a lesson to younger dual expatriates: Unless you have serious intentions of moving back to the US, get rid of US citizenship as soon as possible, before you accumulate wealth outside the US that they will eventually claim tax on.
By the way, does anyone know if the US concluded an Intergovernmental Agreement with Eritrea yet? 🙂
To be more precise, I should have said “assets accumulated in Canada” rather than “income earned in Canada”.
I’ll stick my neck out and guess that AnonAnon’s anecdotal exit tax problem, assuming the details we have are correct, was retirement savings rather than capital gains. The exit tax has a capital gains gains exemption of $651k, and while you could blow well past that with some well chosen stocks or half a house it would take some doing. However the exit tax has no exemption at all for retirement accounts, all of which become instantly taxable at your top marginal rate as if you had withdrawn the lot when you expatriate.
It would be nice to know the real details though. I would have thought than anyone facing a $75k tax bill would think twice before pulling the expatriation trigger. That buys a lot of US tax preparation, even at complex offshore return rates. Or maybe they pulled the trigger before calculating out the cost.
@Watcher, you could be right, too. These friends of mine are very private people but one of them let slip to me the amount they paid, to the chagrin of the other one, who hadn’t wanted it known. (I was appalled at the amount and wondered if they meant $7500 rather than $75,000, but they assured me that it was the latter figure.) That’s why I must be so careful not to provide any more information that might identify them. They must have accumulated more wealth than I realized. I can’t ask them for any more details. They said that they were forced but willing to pay all that money to the IRS to be rid of all future dealings with them. They want peace of mind in their old age. They seem to be comfortable with their decision, but I am outraged at the US over what I consider outright theft of wealth accumulated by Canadians.
House was purchased around 1970. Depending on the location, the house could have appreciated substantially in the meantime.
However, I agree. With some tax preparation it *may* have been possible to avoid the exit penalty. For example, the USC may have been able to gift to non-USC spouse enough assets to get below the $2M threshold, and thus not be a covered expat (assuming being a covered expat was the reason for the penalty in the first place). However, without knowing the details we’re all just shooing the breeze :-).
@bubblebustin, All,
Comments are now being posted at http://www.fsitaxposts.com/2013/09/25/myth-vs-fatca-truth-treasurys-effort-combat-offshore-tax-evasion/#comments
I just submitted this one as I tried to open one link (that previously worked!) in my previous comment that now stands.