FATCA Form 8938 – Where it came from, how it came about, what it means for U.S. citizens abroad

Where it came from – 2009 – Obama describes his justification for what is to become FATCA

Obama Goes After Overseas Tax Cheats AKA U.S. Citizens Abroad – See the following video which was uploaded in May 2009.  Obama says taxes are an obligation of “citizenship“.  Obama lauds the work of Levin and Rangel (at this point they are the future architects of FATCA). The whole video (where “First Tax Cheat Geithner” introduces Obama) is interesting.  Note in particular the video starting at 7:30 where Obama provides his justification for what is to become FATCA.

How it came about – 2010 – The Hire Act (which included FATCA) was enacted.

It is important to note that FATCA was legislation which was unrelated to the principal purpose of the Hire Act. It was “slipped in” at the last minute. It is likely that few legislators knew what they were signing when FATCA was signed into law. FATCA was “Trojan Horse” legislation at its finest. But, FATCA is many other things including:

FATCA is a creator of jobs

FATCA  has created new and lucrative work for accountants and lawyers. (An NYU tax professor recently referred to FATCA as “The gift that keeps on giving“.) It has been a boon to the education industry – it will be soon be possible to receive a certification in FATCA compliance.

FATCA is a form of Capital Control

President Kennedy said that the U.S. government has never had to erect a wall to keep our people in. That was then. This is now.

FATCA is an attack on the sovereignty of other nations

Why should foreign banks do what the IRS wants?

FATCA – through Form 8938 – is an attack on U.S. citizens living abroad

This is the primary purpose of this post.

FATCA needs to be understood as legislation which is aimed at foreign financial institutions and U.S. persons with foreign assets. Almost all of the FATCA discussion has been about the effect of FATCA on foreign financial institutions. Form 8938 is the part of FATCA aimed at U.S. persons. It has received very little analysis until now. FATCA mandates form 8938 which  allows the U.S. government to impose massive penalties and force people to disclose their assets to the government.

What it means – FATCA Form 9838: – Form Nation’s most deadly and profitable form – An Analysis

FBAR Scholar Hale Sheppard has written a comprehensive article on FATCA Form 8938 and what it means for U.S. citizens living abroad. The reasons why this article are important have been well articulated by Just Me. You will find the article on the ACA site. The following comment about Mr. Sheppard’s analysis is deserving of a post on its own:

Bless you @Just Me for making this available to us.

The Hale Sheppard article is well worth reading. He makes the complexities more comprehensible (though still hard for the layperson to fully grasp)  and explains the size of the jeopardy – even for inadvertent errors – very clearly. If this isn’t killing an international taxpayer gnat with a ton weight, then it is hard to see how it could get worse – short of just summarily executing any US citizen abroad and seizing their entire assets like a despot might. Basically, after you read this, to me, (if you were in any doubt at all still up to now), the hazard of remaining a US citizen and living abroad is unsupportable. The hazards that 8938 imposes so far exceed that of the FBAR, and it looks so much more intricate in its design, that there will no doubt be many many more innocents caught unaware, taxpayer and preparer alike – which the IRS and Congress and the GAO are very well aware of (and Sheppard notes). They have deliberately chosen not to do anything about it, even in the face of professional feedback alerting them to the substantial risks that have been created for those required to file it, and their preparers.

It is so far in the opposite direction of what the Taxpayer Advocate has advised in terms of complexity and making compliance readily achievable for the average person. No talk of the tax code being tackled for reform will probably ever touch this one – as it is designed for maximum penalty revenue generation – and the provisions allow the IRS to take away any safeguards that may even usually exist in terms of SOL, etc. The penalties are layered, draconian and confiscatory. And, again, this is entirely the case without any actual US tax assessed or owed. The assets reported and penalized are – just like the FBARs, entirely post-tax, legal and most often may have zero US source or connection. So the damage will be done to the innocent and the otherwise compliant, and recourse is either not available, or would come with such complexity and cost as to completely obliterate an individual and their household – a thousand times more in scale than what we currently face. Sheppard notes that not only would any attempt at any recourse require considerable money and time to mount a defense, but that it would involve several venues – not just Tax court.

The US has gone utterly insane, and there is no recourse but to remove oneself. Imagine an annual government mandated lottery, where every year, you are forced to participate in a ritual imposed by a despot far far away, and you can never know what they will do to make the jeopardy harder and harder to avoid, (often to be applied retroactively), even if you are trying to follow the rules and be compliant.  Any normal life event – operating a business, getting a loan or mortgage, inheriting from family, etc. could tip you over the reporting threshold – especially as with age, if lucky, your wages, and savings increased – even slowly. The peak of the jeopardy will come when you are a senior, and have less ability to cope with your own affairs, and the most savings at stake. So, eventually someone else might also be exposed to the jeopardy – on your behalf. If you’re both deemed US taxable persons – that is two or more people at direct risk, plus both family’s assets. Don’t even understand how this affects even modest estates, but it can’t possibly be good.

After you read this article – and see the many sources Sheppard had to consult to put this together, ask yourself, what sane individuals could possibly think that those of us abroad can fully comprehend these rules, and comply without error? There will no doubt be additional complexity and contradictions added as time goes on, and the reporting thresholds could be lowered at any time if Congress so chooses.

Given too that the situation of the non-US spouse is jeopardized when the US taxable person is jeopardized, that makes joint assets even more at risk. And even if there weren’t joint assets, a life-altering debt for one is a life-altering debt for the whole household. Again, all this is the case without even one cent of US tax actually owed – on already taxed assets – reported in full to the countries where we live.

No US citizen resident faces this scale of reporting and jeopardy.

I encourage you to read Mr. Sheppards’s analysis and then see if you agree with the above comment. I suggest:

1. There will be no possibility of being compliant without engaging expensive “cross border professionals“. U.S. citizenship is now impossibly expensive to retain.

2. There will be fewer and fewer cross border professionals who will even be willing to risk being involved in all this.

3. The IRS is requiring that tax preparers be licensed which will also reduce the number of U.S. tax preparers.

4. Those professionals who will take this work on will become more and more expensive. Many of you will simply not have the money to remain compliant even if you wanted to.

5. My belief is that the “end game” is to compile a registry of the assets of U.S citizens abroad and then confiscate them or their value (or what is left after the penalties have been levied).

6. In my opinion, you should renounce your U.S. citizenship at the earliest opportunity. It’s no wonder that renunciations are soaring under the Obama administration.

As I write this, I wonder how this can even be happening. The U.S. government has launched a vicious, unprovoked and unprincipled attack on U.S.  citizens abroad. Why? I simply can’t understand it.

Some of these sentiments captured as tweets:

In closing …

Stop citizenship-based taxation and repeal FATCA!

All U.S. citizens abroad should use the 2012 election to draw attention to the unfairness of citizenship-based taxation!

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3 thoughts on “FATCA Form 8938 – Where it came from, how it came about, what it means for U.S. citizens abroad

  1. Just Me

    Good find on that video of Obama, and thanks for highlighting this FATCA form issue on your blog. As usual you have very good comments.

    Reply
  2. Thatisme

    Now I understand that President Obama is indeed behind all of this. It is going to be very difficult to be an American Abroad and vote for him. Not that I am against him going after tax cheaters, but for lumping us Americans Abroad with them. You know hell is full of people with good intentions. I believe now that he should realize that Americans Abroad are not tax cheaters and should be treated differently. He chould look at the penalties being levied by Mr. Shulman on Americans whoi live and work abroad who want to comply and did not know about FBARS. My God, even the TAX Adviser feels this way, that is, that we are being trapped.

    Reply
  3. Brian Mahany

    The world is getting smaller and smaller every day. It’s not just the IRS that is overextending its global reach but several other developed countries are attempting to follow in Uncle Sam’s footsteps.

    We appreciate the sentiments in the article and in the several comments that follow. While renouncing one’s citizenship is an attractive option, for many it’s not practical. (Congress anticipated this one too when it passed the exit tax legislation in 2008!) If you want to leave legally and deal with the exit tax or wish to remain here for the short term and come into compliance, give us a call. We are tax lawyers that concentrate in foreign reporting requirements.

    Whether you stay or go, have a plan!

    Reply

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