In March of 2010, President Obama signed the Foreign Account Tax Compliance Act (FATCA) into law as part of the HIRE Act, requiring foreign financial institutions (FFIs) to report to the IRS specific data pertaining to U.S. persons (citizens, green card holders, “accidental citizens” born to Americans abroad, etc.), including annual debit and credit totals and any movements out of bank accounts. As a consequence, foreign banks, as a matter of policy, are currently denying U.S. persons banking services, closing long-held accounts and refusing to open new accounts, including run-of-the-mill accounts used to receive salary, pay bills, service mortgages, write checks, service debit/credit cards, and more. Reporting is too cumbersome and expensive, the legal risks for these banks too high. Financial institutions that do not comply with the requirements (before June 2013) will be subject to a 30% withholding tax on all their US-source income; the fear is that they will very understandably divest themselves of their US securities, causing a serious hit to the US economy.
Increasing numbers of Americans living and working abroad will therefore soon be denied access to financial services. Pension funds, investment instruments and other financial vehicles that are essential to the financial security of middle-income Americans (traditionally not vehicles used by tax evaders) are also haphazardly lumped into FATCA, putting these American citizens in serious financial jeopardy.
At the same time, more and more stories are circulating about Americans with foreign spouses or partners unwilling to disclose their personal financial information to the IRS, as will also be required under FATCA. Rules have now been issued for IRS form 8938 (effective for tax year 2011 - not a substitute for but in addition to the current Foreign Bank Account Report, FBAR). These instructions raise the reporting threshold significantly but make it clear, for example, that assets jointly held with foreign spouses must be reported as if solely owned by the American. For those in this latter situation, one possible drastic result is the transfer of all assets and bank accounts to the foreign spouse or partner, leaving the American in a situation of severe financial vulnerability, all the more distressful when the person’s bank refuses to comply with the extensive reporting requirements soon to be imposed by the IRS. For others with dual nationality, an equally drastic and regrettable possibility is the decision to renounce U.S. nationality.
Foreign banks and financial institutions have, in great numbers, warned the United States that compliance with FATCA obligations will be impracticable if not impossible, ruinous for some banks, illegal in some countries due to privacy laws, and counterproductive because of the risk of divestment in US securities.
Americans living and working abroad, too, can and should make their position known to their legislators. The intended target of FATCA is wealthy tax-evaders who are mostly resident in the United States, not middle-income Americans working overseas, some because their corporation, NGO, church or school requires them there. Yet these are precisely the kinds of Americans who are facing the brunt of FATCA. For a sample letter expressing your concern that you can personalize to your situation and send to your legislators, click . For tips on communicating with your legislators, click .
As always, given the complexity of the rules governing reporting requirements and the huge penalties incurred for non-compliance, FAWCO strongly recommends that you consult a tax professional as to your obligations and the solutions most appropriate to your situation.
