2013 has been a year of FATCA talk. FATCA has two components.
A. A public component for banks and governments.
B. A private component for Americans Abroad
The public face of FATCA – Banks and governments
2013 has a been a year of focus on on the public side of FATCA. This has included endless discussion about the compliance costs imposed on banks, the uncertainty of which countries will sign IGAs. (So far very few and even fewer countries of significance have signed IGAs. None of the BRIC countries (Brazil, Russia, India and China) have signed. Interestingly Canada (which is widely considered to be the most significant country has not signed. It’s obvious that 2013 has been a disappointing year (for the U.S. Treasury) on the IGA front. Furthermore, the U.S. has managed to anger each of the four BRIC countries in other ways. For example:
Brazil – Very upset about the NSA spying – Brazilian president cancels visit to the U.S.
Russia – Putin scolds Obama in the Washington Times for claiming the U.S. is exceptional.
China – Where would I begin. Okay, I’ll start with cyber irritants.
Lawyer Robert Wood writes that the world is giving the IRS a nice Xmas gift in the form of six new IGAs. In other words, the gift is that non-U.S. banks are turning Americans abroad over to the IRS for processing. This brings the total of IGAs to only 18. Really, that’s not many. Robert Wood should have referred to the new IGAs as “stocking stuffers”. They are hardly “full blown” gifts.
So, the public face of FATCA continues. But really Treasury needs a big breakthrough. It must get one of the BRIC countries and/or Canada to surrender their sovereignty to the IRS in the form of a FATCA IGA. We will see.
But enough on the public face of FATCA.
The Private Face of FATCA – Those damn Americans Abroad
FATCA has imposed a very large number of costly, intrusive, penalty laden and frightening requirements on American abroad. Of course, most Americans abroad don’t file their U.S. taxes anyway. But, I do agree with Robert Wood that it is getting harder for Americans abroad to hide. As Mr. Wood writes:
If you thought you were living off the grid, it can be chilling to hear your secret banker is about to hand you over. FATCA—the Foreign Account Tax Compliance Act—takes effect in 2014 and the IRS will start penalizing foreign banks if they don’t hand over Americans.
The clear implication is that those Americans abroad who are not in tax compliance need to acknowledge this issue. The situation Mr. Wood describes is actually happening in Switzerland. I would hate to be an American living in Switzerland. I have two posts on the Swiss situation – Americans abroad and Swiss banks – here and here.
U.S. tax compliance and Americans Abroad – What does it look like?
Actually, if you owe no U.S. tax it looks like this:
If you are thinking, that must be expensive, you are right. It is very expensive. Actually it’s cost prohibitive for all but the wealthy. If somebody doesn’t owe any taxes, what could be in this picture. The answer is: forms, forms and more forms. An American abroad who does NOT file his/her forms is guilty of “Form Crime”. “Form Crime” is far far more serious than tax crime. It is far more frightening and carries far higher penalties. Furthermore, not even the tax lawyers are sure how far the IRS can go in assessing penalties for “Form Crime”. Even Robert Wood, speculates that there may be uncertainty on the what triggers the statute of limitations for “Form Crime”. For example, can a U.S. citizen abroad every be sure that he cannot be assessed a “Form Crime” penalty? See Robert Wood’s interesting post and comments about the statute of limitations for failing to file Mr. FBAR. Mr. Wood asks:
Still, just how long do you have to worry? The IRS says 6 years, judged from when the FBAR was due. That’s June 30 following the calendar year being reported. For instance, the 2012 FBAR was due June 30, 2013, and the statute runs on June 30, 2019.
But could the feds use another date? Maybe. According to 31 U.S.C. 5321(b), the statute of limitations is 6 years from the “transaction.” There is no authoritative interpretation when a transaction occurs, but the Internal Revenue Manual (IRM) says it’s the FBAR due date.
FATCA: The creation of further “Form Crime”
It amazes me that this issue is not widely discussed on the blogs. FATCA is a leader in the creation of “form crime”. What follows is an except from a clear and sobering excerpts (I urge you to read their complete report) from Holland and Knight:
Foreign Accounts and Assets
As if taxpayers and tax advisors do not already have enough confusion regarding the filing requirements for the Foreign Bank Account Report (FBAR), FATCA imposes a second filing requirement on U.S. taxpayers with foreign accounts and assets. Section 511 of FATCA creates a new Section 6038D, which requires U.S. taxpayers with foreign accounts and assets to report these investments on an informational return when the aggregate value of the investments exceeds $50,000. …
Generally, a foreign corporation will qualify as a passive foreign investment company (PFIC) if (i) 75 percent or more of its gross income in the tax year is passive income, or (ii) on average during the tax year at least 50 percent of the assets held by the corporation produce passive income or are held for the production of passive income.12 Section 521 of FATCA amends Section 1298 of the Code to require persons owning shares in a PFIC to file an annual information return disclosing their ownership of the PFIC.13 This replaces current law where such disclosure is only required when the taxpayer makes a Qualifying Elective Fund election or disposes of their interest in the PFIC. The PFIC disclosure is effective as of March 18, 2010. Notwithstanding, on April 6, 2010, the IRS issued Notice 2010-34 indicating that guidance would be forthcoming clarifying the new reporting obligation. As a result, the Notice indicates that taxpayers who were not otherwise required to file Form 8621 prior to the creation of Section 1298(f) will not have to do so for tax years prior to March 18, 2010. …
As stated above, U.S. persons who transfer assets to a foreign trust (including Mexican real estate transferred to a Fideicomiso) or who receive a distribution from a foreign trust are required to file Form 3520. This is simply an informational filing, and has no tax significance. The penalty under Section 6677 is 35 percent of the gross reportable amount (generally the amount transferred to the trust or received from the trust). Section 535 of FATCA amends Section 6677 such that a failure to file Form 3520 would have a minimum penalty of $10,000. Thus, the penalty will now be the greater of $10,000 or 35 percent of the gross reportable amount. The penalty increases by $10,000 for each 30-day period following notification from Treasury that the filing is delinquent. There is, however, a 90-day grace period following notification from the Treasury before the additional $10,000 penalties accrue. Additionally, the total penalty assessed for failure to file Form 3520 will not exceed the gross reportable amount. The penalty is effective for Forms 3520 filed after December 31, 2009. Therefore, any taxpayers who fail to file a Form 3520 with their Form 1040, and are otherwise required to do so will be faced with the new penalty structure. …
Yes, the private face of FATCA is making a bad situation for Americans abroad far worse. Look at the increase in reporting and penalties. But, it doesn’t stop there. FATCA also gives the IRS longer to assess those penalties.
FATCA and extending the statute of limitations on Form Crime
FATCA is also a leader in extending the statute of limitations for Form Crime. The penalties are committing “FATCA Form Crime” are very very severe. Take note of the following description by Wolfe law group of how FATCA increases the statute of limitations on Form Crime:
Under the new law, the statute of limitations is extended to six years if
there is an omission of gross income in excess of $5,000 and the omitted
gross income is attributable to a foreign financial asset.
Taxes are generally required to be assessed within three years after a
Taxpayer’s return was filed, whether or not it was timely filed. A special
rule extends the three year limitation period in the case where there is a
substantial omission of income.
If a Taxpayer omits substantial income on a return, any tax with respect to
that return may be assessed and collected within six years of the date on
which the return was filed.
In the case of income taxes, there is a substantial omission of income if
the Taxpayer omits from gross income an amount that was properly includible
in gross income and that is in excess of 25% of the amount stated on the
The state of limitations period will be suspended if the Taxpayer failed to
timely provide information with respect to foreign financial assets
required to be reported. The limitation period will not begin to run until
the information required has been furnished to the IRS.
The new six-year statute of limitations applies not only to returns filed
after March 18, 2010 on which the Taxpayer fails to report income in excess
of $5,000 attributable to foreign financial assets, ..
Some concluding thoughts …
Americans abroad badly want to be in U.S. tax compliance. It’s just that as this post demonstrates, Congress has created laws and the IRS has created forms that make tax compliance for U.S. citizens abroad somewhere between difficult and impossible. Yet Americans abroad have to live with diminishing access to banks accounts, banks who are turning them over to the IRS and threats of life altering penalties.
It’s no wonder renunciations of U.S. citizenship are “sky rocketing”. You see Americans abroad really DO want to comply with U.S. laws. It’s just that nobody can!
- #FATCA is sure to create and exacerbate tensions between Homelanders and #Americansabroad (renounceuscitizenship.wordpress.com)
- #Americansabroad in Switzerland should not enter #OVDP and join #FBAR Fundraiser (renounceuscitizenship.wordpress.com)
- #Americansabroad connect through @IsaacBrockSoc – It’s the #FATCA of the matter (renounceuscitizenship.wordpress.com)
- Required reading for countries considering a #FATCA IGA with the US (renounceuscitizenship.wordpress.com)
- Mountains of IRS Paperwork for US expats (renounceuscitizenship.wordpress.com)
- Good interview about #Americansabroad renouncing U.S. citizenship – Linked to #FATCA (renounceuscitizenship.wordpress.com)
- War Report: Local perspective on #OVDP for Swiss banks and #Americansabroad in Switzerland (renounceuscitizenship.wordpress.com)
- 7 Sins With Bank Accounts? FATCA Makes Them Deadly (forbes.com)