Are you an American abroad living in perpetual fear of the IRS? Do you wake up every morning wondering if today you’ll receive a formidable notice that the taxman cometh? You are not alone. Expats around the world are facing (and fearing) the painful reality that the IRS’s global tax enforcement effort is underway. While you may want to stick your head in the sand, a brief review of where we are and how we got here may encourage you to confront your IRS situation.
It started in 2010 with the passage of the Foreign Account Tax Compliance Act. FATCA was billed as an effective way to tackle offshore tax evasion. The legislation requires foreign financial institutions (FFIs) to report on U.S. taxpayers’ accounts or face hefty withholding penalties on transactions passing through the U.S. Affected institutions include not only banks, but any entities substantially engaged in holding or investing financial assets for others. These institutions are required to comply with the law regardless of conflict with the laws of their home country. That means FFIs have been put in the position of potentially violating local data privacy or bank secrecy laws or getting hit with significant penalties on funds passing through the States.
While the PR for the legislation presented it as an important means to tackle rich and greedy tax cheats, the reality is that FATCA impacts a lot more people than Swiss banking billionaires. The legislation has plenty of repercussions for the seven million plus U.S. citizens living abroad. Suddenly, dual citizens with negligible ties to the U.S. (say, they were born in the States but haven’t lived in the U.S. since infancy) realize they are supposed to be reporting their income and assets to the IRS, regardless of foreign location. Many of the unwitting lawbreakers and quiet law deniers have been waiting out the storm, not seeking resolution with the IRS as they think FATCA is not a fixed reality.
There is good reason why some people have hoped FATCA would be repealed, overturned, or perhaps ignored by other countries: (1) the conflicts between local laws and FATCA reporting requirements, (2) the significant costs to FFIs to implement FATCA compliance programs, (3) the unintended consequences to average expats that makes the legislation politically unpopular. The Alliance for the Defense of Canadian Sovereignty launched a legal challenge to FATCA in the Canadian courts. U.S. super lawyer, James Bopp Jr., has helped Republicans Overseas launch a challenge to the law in U.S. courts. And Senator Rand Paul has reintroduced legislation to effectively repeal the law. One would think Senator Paul’s efforts should get traction since there is a Republican-controlled Congress and the party has made FATCA repeal a part of the Republican National Committee platform. But power assumed is hard to retract.
Meanwhile, implementation of the law has trudged on. After a few delays, the law took effect July 1, 2014, and reporting has begun. More than 100 countries have entered treaties (intergovernmental agreements) with the U.S. to facilitate reporting and to get around local law conflicts. Countries with data privacy laws have agreed to have FFIs report to local tax authorities who in turn will report to the IRS. Even countries known for bank privacy protection and bank secrecy (like Switzerland, Hong Kong, and Austria) have agreed to comply with FATCA, eliminating secrecy for U.S. taxpayers.
Paving the way for large scale reporting, the IRS recently launched its web application, the International Data Exchange Service (IDES), for FFIs and foreign tax authorities. IDES is supposed to allow these FFIs and tax authorities to submit U.S. taxpayer information efficiently and securely by an encrypted pathway.
With treaties in play, reporting underway, and technological platforms built, the chances of FATCA getting repealed, overturned, or ignored are dissolving. This is especially true as more countries take their cues from FATCA and consider their own global tax enforcement efforts. Moving in this direction, the Organization for Economic Cooperation and Development has issued a new standard to facilitate intergovernmental sharing of financial data.
Expats that are behind on their IRS reporting need to face this fact and bite the bullet before they shoot themselves in the foot. It is important to address options, like whether or how to use the IRS’s Online Voluntary Disclosure Program or whether and how to renounce U.S. citizenship (note, you’ll still have to pay up for past deficiencies). But the reality is that FATCA is in force and the IRS is invested in ensuring all U.S. taxpayers comply. You may disagree in principle and you may (and perhaps should) advocate for repeal or revision. But in the meantime, find a way to face Uncle Sam.
Are you living the American dream … abroad? If so, you may be considering joining forces with Superman and changing your nationality. You face some unique burdens if you earn a cent while soaking up the sun in Saint Tropez or make a rupee while navigating the marketplace in Mumbai. The most obvious, from a financial perspective, is double taxation. America is one of the few countries to tax its citizens on their global income. That means that Americans must contend with tax liability and report requirements of the country where their income is earned. Also, they then must pay Uncle Sam taxes on that same foreign-based income. (The foreign tax credit offsets some of this burden, but it generally does not eliminate all double taxes.)
Now Americans abroad are facing a new financial challenge: finding places to park their money. Thanks to the Foreign Accounts Tax Compliance Act, which Congress passed in 2010, banks in foreign countries are refusing to hold accounts for American citizens. FATCA aims at enforcing American tax law on its citizens and ensuring those citizens are disclosing all income and assets to Uncle Sam. To confirm full disclosure, the law imposes reporting requirements on the foreign financial institutions that do business with Americans. Many of these banks have decided that the regulatory burden and penalties for non-compliance are too onerous so they have opted to refuse Americans’ money. The problem Americans face banking abroad has become big enough that members of Congress have called hearings on the matter. [Of course, unless Congress repeals the reporting mandates that FATCA imposes on foreign financial institutions, what impact could hearings have? Congressional members could acknowledge the problem, but there is really only one solution. Superman, where are you when we need you?]
Of the many concerns Americans have over FATCA, the law is seen as too intrusive, especially to bi-nationals who identify culturally with another nationality. The law requires individuals to file – in addition to FBARs – the already-notorious Form 8938, which demands details on foreign assets such as life insurance contracts, loans, and holdings in non-U.S. companies. Additionally there are the hefty civil and criminal penalties of $50,000 or one-half the value of accounts for individuals who have not complied with all reporting requirements (many Americans abroad, apparently have struggled with compliance).
So as FATCA takes hold (the U.S. is actively negotiating intergovernmental agreements with foreign jurisdictions to ensure enforceability of its laws), Americans abroad increasingly face the question: are the benefits of American citizenship worth the cost? More people are answering “no” and choosing to renounce their American citizenship. In fact, so many are answering “no” that we are breaking renunciation records. In 2011, more than 1,800 Americans renounced their citizenship, which was more than 2007, 2008, and 2009 combined. In 2013, that number jumped to almost 3,000, which is an all-time record. The number of American citizens wanting to renounce their citizenship is so high in Switzerland there is a waiting list (reported as 18-months long).
Some may think that 3,000 people renouncing their citizenship is a drop in the bucket, nothing to sneeze at, and small potatoes. The number of renouncers doesn’t compare to the 1 million who are legally immigrating to the U.S. every year. “Goodbye and good riddance,” some have commented.
But the trend is more troubling than it may appear. By raw numbers, the U.S. may be averaging a 997,000 surplus in immigrants versus emigrants, but Uncle Sam’s tax roll will not reflect the same surplus. The people who are renouncing their citizenship tend to be on the wealthier side. Not all are Eduardo Saverins (the Facebook co-founder who emigrated to Singapore “for business reasons” i.e. to reduce his tax liability). But expatriates are undergoing the pains of renunciation because they have greater than average networths and they see the writing on the U.S. budget deficit’s wall (many surmise that FATCA is an attempt to curb the deficit). The people who are immigrating to the U.S. tend to be those who are looking for opportunity, education, etc. They are bringing wallets full of hope, not gold. And when you recognize that the top 1 percent of American earners pay about 37 percent of all the federal taxes, a few thousand on the wealthier side become statistically significant.
A very popular phrase bandied about by politicians is that you can tell the health of the nation by the number of people who want to come and stay. That immigration reform is an issue, to many, means we have a good thing going here in the U.S. that others want to be a part of. But when the nation’s wealthy start opting out of the American dream, when they start thinking our borders as made of kryptonite, it’s time to pause and reflect.
 See Action Comics No. 900 in which Superman renounces his U.S. citizenship after a clash with the federal government.