Was this what the IRS was thinking when they pushed FATCA forward? Doubt it.


I have been all over FATCA since March 18th, 2010 when President Obama passed the Hires Act through Congress, aimed at getting Americans working and taxing the wealthy (isn’t that what all socialist and democratic governments do?) Out of this Act comes FATCA, the Foreign Account Tax Compliance Act which is set to become law January 1st, 2013 and unlike most new taxes, FATCA changes the way taxation is administered globally.I’m going to outline why FATCA was brought in, what the US government is trying to do, and why there have been a couple of events in the past 2 weeks which have come to light which leads me to believe that this was not what the US government was thinking when they pushed the Hires Act through Congress.

So FATCA, in case you are unaware, is on its way to becoming the world’s first global tax on Americans, administered by financials institutions and non-financial entities around the world… OR else. Can the IRS do this, you ask? Apparently yes they can. Why do they need to do this you are wondering? Because US investors have been evading taxes by hiding their identities from the IRS or they have created offshore companies to hold their investments out of sight and out of reach of the IRS. The net result here is that the IRS needed to find a way to track down all these US persons who should be filing US tax returns disclosing all their worldwide income but are either not filing, nor including these items.

The estimated lost tax revenues from these US taxpayers using offshore schemes to evade US income taxes is in excess of $100 billion dollars per year. Think the US could use these funds? Yeah, I thought so too. Say hello to FATCA.

So how can the US crack down on these US persons who are hiding their funds? Well first they tried asking some foreign banks for a list of Americans who they had on their registry. That did not go over well at all. The banks said, you have a specific person you want information on, we will give you details, however the IRS didn’t know, they wanted everyone and the foreign banks we not going to give us their revenue sources. So the US government sued beginning with Switzerland. Not the best way to win friends, globally, by suing them, so the US government and the IRS them began pushing FATCA on everyone.

In a nutshell, it requires all foreign banks and foreign institutions to provide information to the IRS as soon as they find a US person on their system / in their bank. The IRS intends on using this information to locate, audit and potentially prosecute US persons who are evading the paying of their fair share of taxes. The scope of FATCA is global. The complexity of FATCA is massive.

The IRS figures through FATCA that every organization globally will opt in to FATCA and will become agents of the IRS and within 5 years will have flushed out every US person to the IRS – both those who are complying and those and those who are not (those who are not have a catchy new name: recalcitrant).

The IRS even offers a way out of FATCA if you are an US person… Just give the IRS 1/3rd of your worldwide income and renounce your US citizenship and you’re out. For good.

Recently, however, I came across two fantastic articles through my FATCA research which clearly shows me that the IRS and the US government may not have thought through the full implications of FATCA.

So here is problem number 1, in a great article from Bloomberg;

http://www.bloomberg.com/news/2012-05-08/u-s-millionaires-told-go-away-as-tax-evasion-rule-looms.html. This article outlines the international response to FATCA as the deadline to sign up with the IRS gets closer and closer. Instead of gearing up systems to flush out these US investors who have been hiding millions and millions of dollars (the FATCATs), these foreign financial institutions (FFI’s) and non-financial foreign entities (NFFE’s) are going through their foreign policies to find ways to instead remove Americans from their business. The costs associated with complying with FATCA outweighs the benefit of US monies. Oh oh.

Does the IRS and US government really want to prohibit US persons from investing outside of the US?

Problem number 2 came recently when Brazilian-born Eduardo Saverin, the billionaire Facebook co-founder, renounced his US citizenship he gained as a teenager in advance of the company’s impending IPO and moved to Singapore to avoid paying capital gains taxes on his approximately $3 billion stake in Facebook.

This is FATCA response #2. Renounce your citizenship and you’re out. So instead of staying in the US and paying taxes, the very rich do not appreciate carrying the taxation burden for a tax and spend government and they take their wealth to another country where it will be appreciated.

Caught red-faced the US government needed to respond so they looked to do to Saverin what they did to the foreign banks who had US persons on their registry. They threatened to sue. Then they changed the law. The US senate introduced a bill under which any expatriate with either a net worth of $2 million, or an average income tax liability of at least $148,000, will be automatically presumed to be leaving the country for tax purposes — enabling the IRS to impose a tax on any investment gains that person makes in the future. Crazy. Greedy.

Apparently Saverin filed to give up his US citizenship in January of 2011, but the news didn’t surface until the federal government released the information in a routine report. Saverin may be barred from re-entering the US if authorities decide he left the country for tax reasons because you don’t want a super-rich guy coming into your country and buying things! That will show him.

Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign- sourced income.” Saverin won’t escape all US taxes because Americans who give up their citizenship owe what is effectively an exit tax on the capital gains from stock holdings.

Saverin maintains that his renunciation of American citizenship, which actually took place last September, wasn’t a ploy to skip out on American taxes, but rather an attempt to free himself from FATCA, which he described as a burdensome restrictions on American investors abroad. US citizens are severely restricted as to what they can invest in and where they can maintain accounts. Many foreign funds and banks won’t accept Americans so it was for financial reasons and not tax related.

It’s true that FATCA is making life more difficult for US persons, including the IRS’ global reach (many countries tax based on residency); foreign bank account reporting rules; and FATCA. As a result of all the regulations, some foreign banks are dumping more U.S. customers.

Saverin is hardly the only one taking this particular route to big tax savings. The number of those renouncing US citizenship stands at around 1,800 last year.

While I cannot see the US government pulling back on FATCA I think they need to look again at what they are trying to accomplish and how they plan on getting there before all their high-income earners not in the US disappear from the radar within 5-10 years of FATCA being in force. So the tax pool will grow, then diminish and the IRS will be looking for newer ways to increase tax revenues.

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5 thoughts on “Was this what the IRS was thinking when they pushed FATCA forward? Doubt it.

  1. The Urban Daddy February 21, 2016 / 9:24 am

    Hi Anonymous,

    I don’t believe the IRS is going to treat you as a criminal because you did not disclose those investments / funds.

    Because you are paying the 20% which I presume is withholding tax for not being certified, it would be in your best interest to bring those funds to the attention of the IRS as soon as possible (in your year end filing likely) and if asked just explain that your were told the withholding was sufficient.

    If I’ve learned anything from my 10+ years working for the CRA and 5 years dealing with IRS issues, it’s that a legitimate explanation goes a long way.

    Good luck and thank you for your comment.

    Warren

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  2. Anonymous February 19, 2016 / 7:14 pm

    I have been in the US for 14 years and just learned about FATCA. I have accounts in the UK that I have already paid 20% gross UK tax and did not believe that I needed to advise the IRS of. I now find out that because I did not disclose to the IRS they will probably treat me like a criminal.
    This is a very, very important topic for many ex-pats as well as US citizens.

    Like

  3. twistedxtian June 13, 2012 / 4:31 pm

    When I woke up this morning I thought to myself, “Self, let’s learn about Foreign Account Tax Compliance Acts and Offshore Voluntary Disclosure Programs.”

    Yeah, no. I didn’t. But I learned about them anyway, and it was actually pretty cool. 🙂 So thanks for the education guys. This is something I hear about on occasion so I like that I have a little more education on the matter.

    Like

    • Urban Daddy June 13, 2012 / 10:16 pm

      See, you totally came to the right place. 🙂 My profession is taxation and I’ve been doing it for (feeling old moment coming) almost 17 years. I just try not to bore everyone here with it. I have a tax management blog which I bore the crap out of boring people. 🙂

      Like

  4. Just Me June 11, 2012 / 12:05 am

    Thanks for this expanded narrative on unintended consequences. You are on the right track, but… there is always more to the story, so let me add some that you may not have considered.

    I too have been following the offshore tax story closely, but since pre FATCA times when the IRS launched its 2009 OVDP (offshore Voluntary Disclosure Program) now morphed into the 2011 OVDI or “I” for Initiative.

    This was started to go after the US homeland offshore tax evasion of Rich Whales seen to be hiding income and funds in secret offshore accounts. (Who knows if that $100 Billion is right. I think it was just a WAG) The nature of the program was that it swept up thousands of Expat and new immigrant minnows into the net who were benignly non compliance of FBAR requirements (who would have known?) and issues related to not reporting their “offshore” income primarily due to unawareness of the unique nature of US Citizenship tax.

    The FBAR penalties were the bludgeoning tool of choice (pulled from the 1970s anti terrorist statutes) to force compliance suddenly for something long ignored even by professional practitioners, let alone minnow Expats and immigrants.

    This is the opposite of what Countries that Canada do with it’s voluntary programs. Their program is more rationale and civil. They want you to pay the taxes and the interest for failures, but you don’t assert harsh penalties for old statutes if a person comes forward voluntarily and reports and pays up. That isn’t how the IRS (International Revenue Service) operates.

    With disclosure they administer severe punishment too. It is the American Way.

    The IRS dealt with Minnows harshly in a “one size fits all” regime and extracted draconian penalties that were all out of proportion for the “so called” failures. The IRS trumpeted the success (journalist scribes repeated in news stories without question) and Congress moved on to double down with FATCA under the justification that this would create $8.5 billion in new revenue over 10 years? What? That little for all this fuss?

    Now you may have missed this Reuters story, but there were a few of those living abroad that seethed about this overreach and IRS application of penalties for failures. Here is a shortened link for your reference. http://reut.rs/uwDMt9

    I got caught out by this. Tried to do the right thing, and went through a 851 day process you wouldn’t wish on Kim Jong-il. I published my entire story of what it is like to be on the OVDP fish fertilizer processing belt. Not fun at all. A very expensive process in both $$$ and LCUs (life credit units) http://bit.ly/KLx6NL

    I also published some advice for those minnows who think they had to join the OVDI. It is called “OVDI Drudgery for Minnows”: http://bit.ly/NdQXGZ

    These OVDP/OVDI practices plus increased publicity about FATCA (indeed a global system in the creation – GATCA) caused a group of Canadians to create a blog dedicated to discussing the issues and countering what limited and wrong narrative there was in mainstream press in Canada about requirements.

    This was to counter the fear factor being marketed by Tax professionals in Canada to the million or so US. Citizens that need to “come clean” or “fess up”, implying that all living in Canada were active tax cheats that needed their expensive help. They must confess their sins and be compliant with these newly enforced Citizenship taxation and reporting requirements, regardless of their circumstances. Pay us, and pay the IRS was the message.

    In December of 2011 they created a blog called the Isaac Brock Society. It first started as a .com address in and has just repatriated to .ca address. Here is the link to what it is all about, if you haven’t already discovered it. http://bit.ly/KVrjX3

    The web master, Petros, has gotten some recent press, as he is one of the non rich that are renouncing their citizenship as another of the unintended consequences of FATCA and IRS jihad. Here is a link to the Reuters story titled: “Tax time pushes some Americans to take a hike” http://yhoo.it/J7mJyR

    There are a lot more of them in Canada actively pursuing this route. Look at the 858 comments on this thread if you want to see interest in this subject. http://bit.ly/LQZTOK
    This is another unintended consequence of IRS actions, middle class average US citizens are now cutting the ties that bind.

    If you are living over seas, and just an average middle class person, the cost of passport ownership just went very negative. So this is a story about more than the Rich like Saverin. The narrative is evolving from the Rich expatriating, to the average US Expat handing in their passport. BTW, here is Peter Dunn with his story as was interviewed on Pete the Planner program in middle America. http://bit.ly/MZq0I7

    Coming back to FATCA,there is one other unintended consequence that you haven’t mentioned

    Did you know that there is also the domestic equivalent of FATCA, which I refer to as DATCA. The IRS with its regulatory powers is now forcing US banks to turn over data on its non residents who have accounts in the US to the IRS? This is so it can use this DATCA information as a leveraging tool to force FATCA down the throats of the world. It helps by getting recalcitrant Foreign Countries on board, as they think they are getting some receprorcity, false though it is.

    There has been push back by the very members of Congress that voted for FATCA in the first place. Lovely irony. Here is a link to a recent Op-ed on the Miami Herald by the Florida Bankers Association and my comments / email to them. In their Op-ed complaints, they failed to connect the dots between FATCA and DATCA. http://bit.ly/LvLvP7 If they don’t like DATCA they need to repeal FATCA. It is that simple.

    Finally, to your point about a global system, you are very right in your analysis. Others have seen this coming too, and yet, surprising there is NOTHING being reported in the US media.

    A Global #FATCA is in our future: http://bit.ly/JPZQ3C

    Finally, I note this story on the Financial Post in Canada. http://natpo.st/LMYlVR
    Would encourage you to Read the comments, as you learn more there than in the article.

    Thanks for your efforts at spreading the word on all that is wrong with this misguided effort. And to be fair, the question should be, What was Congress thinking when they passed these FATCA provisions. Answer, they weren’t thinking at all, as we know they don’t read the bills, so most of them had no idea what was buried in the Hire Act.

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