Finally, the main stream media is waking up to the coming train wreck of FATCA’s impact on Americans living abroad. On April 15, 2012, in the New York Times and on the 16th in the International Herald Tribune, reporter David Jolly published articles which bring to the fore, what is probably the most knuckle headed legal conundrum facing Americans abroad of recent memory.
FATCA was enacted in March of 2010. Implementation comes in stages: for those expats who file US tax returns, preparing for their June 15, 2012, filing for the 2011 year tax, this is their contact with new form 8938. This form essentially requires American taxpayers to disclose all of their foreign assets over a threshold amount in addition to disclosing foreign bank accounts to the IRS on FBAR forms.
By January 1, 2013, all banks wishing to comply with FATCA will be expected to make application to the IRS to have the privilege of becoming a withholding agent on behalf of the Unites States government and to file annual reports with the IRS detailing all their American depositors’ annual banking activities. During this time, all participating foreign banks must conduct a detailed search of their records to find any depositors who may be suspected of being Americans. By 2014, all participating foreign banks will be expected to have already asked their US depositors to waive any rights they may have had under their foreign country’s privacy laws to keep their banking records private or risk the closure of their accounts.
Also in 2014, the names of all depositors suspected of being American citizens (or US Persons) and their account information must be turned over to the IRS for scrutiny. Once the IRS has the list of suspected Americans, it will begin a process of information matching. They will check any treaty information it may have as well as prior filed returns to see if there are any obvious lies or inconsistencies, and determine who might need a little chat, who requires special scrutiny or a full blown audits, or worst of all, who should be picked for a criminal investigation which may lead to a public trial, nationally distributed Department of Justice press releases, and an appropriate stay in a federal facility where they can think about their sinful behavior while they are making license plates. The latter of course assumes the government can get its hands on these tax miscreants and hold them still long enough to receive the full treatment.
In my 43 years of experience in and out of the IRS, I have never seen a more controversial compliance issue. But to say that American ex pats have been specially targeted by Congress for rough treatment is not entirely true. The legislative history of FATCA and even FBARs makes no mention whatsoever of targeting Americans living abroad. Clearly Congress only had in mind, American residents who were using offshore financial institutions to hide money from Uncle Sam. It appears as though no one in Washington was even thinking about the ex-pat community when FATCA was enacted.
Our firm represents a number of American families who are in their third and fourth generations of living and working in foreign jurisdictions who now want to comply ahead of the 2014 foreign bank computer dump on the IRS. This is to only to find that they and their children not only have to file delinquent returns back to 2003 under OVDI and register their foreign accounts and assets with the IRS, but also may have to hire forensic accountants in their adopted countries to do a net worth analysis of their assets and businesses in order to properly determine the “value of foreign assets during the period covered by the voluntary disclosure.” See FAQ # 7.
The law which requires U.S. Persons to submit worldwide income to US taxation must be changed. It is unfair, it makes no sense, and it has a chilling effect on commerce, jobs creation, and free trade. Perhaps more importantly, our world image has suffered enough over the last few decades. People from all over the world who have been on the fence about whether America has lost its mind, can only be convinced that we have with this new compliance initiative.