In April 2017, U.S. Senator Rand Paul (R-KY) finally brought efforts to repeal the Foreign Account Tax Compliance Act (FATCA) to U.S. Congress. Senator Paul further testified before the U.S. House Oversight and Government Reform Committee’s Government Operations Subcommittee on the benefits of FATCA repeal. According to Senator Paul, “FATCA disregards the Fourth Amendment and privacy rights by requiring the bulk collection of innocent Americans’ financial records.” FATCA, enacted in March 2010 to December 2012, purportedly serves to detect, document and collect taxation on non-US financial assets of U.S. citizens and legal U.S. immigrants. According to the IRS, over nine million U.S. corporate entities and individuals fall under FATCA reporting requirements. FATCA has been supposedly introduced to provide transparency in international tax policy, especially pertaining to traditional offshore private banking activity. In 2015, the now infamous leak of Mossack Fonseca’s Panama Papers further exacerbated banking privacy laws, forcing an even more punitive FATCA enforcement regarding offshore transactions.
Good governance requires transparency. However, should transparency hold a country’s citizens to reporting ransom without taking context into play? Most U.S. citizens holding accounts abroad may have professional duties that require a foreign checking account, or that requires dual signature on guardianship accounts with parents, children and other family members. Not all offshore accounts are created to hold nameless shell companies such as was exposed via the Panama Papers fiasco. Yet, U.S. citizens under onerous FATCA reporting pay a heavy price in both documentation and in dollar amount. Since 2010 the international offshore community has found it nightmarishly difficult to handle new U.S. clients that may cause bureaucratic and legal issues with the IRS. Chapter 4 of Code Sec. 1471, FATCA, demands that IRS withholding agents garnish a whopping 30% of foreign financial institution income concerning U.S. citizen accounts, even on minor reporting errors.
The FATCA reporting process is confusing at best. The FBAR filing, also known as the Report of Foreign Bank Accounts, FinCEN Form 114 or TD F90.22-1, is not the only filing that is due to the IRS. The majority of fined U.S. taxpayers fall under this unfortunate category. All U.S. citizens with non-U.S. financial assets must also file Form 8938, which is the Statement of Specialized Foreign Financial Assets. As confirmed by Parent & Parent LLP, IRS penalties for non-filing are as follows:
- A non-willful penalty, not to exceed US$10,000, may be imposed on any taxpayer who violates or causes any violation of the FBAR filing and record keeping requirements;
- A willful penalty may be imposed on any taxpayer who willfully fails to file the FBAR, with the cap on the penalty being the greater of US$100,000 or 50% of the balance in the account at the time of the violation.
As we see, IRS penalties are enforced regardless of intention, and can also be implemented if the filer has all documents correctly submitted, but may be one day late. It is noteworthy that any account in question need not be active and running over with funds to be penalized. In other words, Grandma’s account opened for her dual citizenship grandchild abroad, with no more than US$1500 in total, will be up for an IRS fine of up to US$10,000 if reporting errors are unintentionally made.
In addition, while the statute of limitations for FBAR penalties is 6 years, the statute for Form 8938 is limitless, and applies to an individual’s entire tax return. Specifically, this means the IRS can choose to conduct yearly audits on the faulted individual for an entire life span. The need for tax governance and transparency should not amount to such legal punishment, especially for individual clients.
Double taxation and or double tax reporting under FATCA have made U.S. citizens residing abroad vulnerable to legal shenanigans. And contrary to popular sentiment large corporations and multi-billionaires are not being punished as harshly as are U.S. expats, U.S. professionals abroad, and U.S. citizens who have foreign families with regular accounts abroad. As Parent & Parent LLP satirically stated, a foreign drug lord with stacks of cash parked offshore is safe tax-wise in comparison the average U.S. citizen affected by FATCA’s punitive international tax dictates. Senator Rand Paul and Congressman Mark Meadows (R-NC) have recommended the following steps to U.S. Treasury Secretary Steve Mnuchin regarding FATCA repeal:
- To introduce the issuance of a Statement of Administration that welcomes the FATCA repeal not only as a stand-alone tax problem, but as an integral part of the total tax reform package to be drafted and enacted by the Trump Administration.
- To cease and desist the signing of any new intergovernmental agreements (IGAs) enforcing FATCA reporting until the U.S. House can review and act on the FATCA repeal bill.
- To review existing IGAs under the U.S. Treasury’s jurisdiction, and to declare invalid ab initio any IGA that the U.S. Treasury deem unfit upon examination.
- To grant temporary compliance to foreign financial institutions that have been found unfairly impacted by FATCA dictates until full review by the U.S. Treasury.
- To instruct the IRS on granting provisional ‘mercy’ to U.S. individual taxpayers who especially have not willfully made errors on FATCA reporting.
We applaud Senator Paul and Congressman Meadows in their endeavors to repeal FATCA and redefine such an abysmal international tax policy that serves to burden the U.S. individual taxpayer involved in international banking. In addition, U.S. citizens involved in long term financial transactions abroad should seek U.S. legal counsel in regards to FATCA reporting, and not leave such documentation solely up to the discretion of a foreign financial institution or a foreign CPA.
- Garst, Brian. 2017. “Effort to Repeal FATCA Gains Steam.” Cayman Financial Review Online.
- Gindel, Claudine. 2016. “FATCA Penalties for Individuals.” IRS Medic: Parent & Parent LLP Online.
- Paul, Rand. 2017. “Sen. Rand Paul Introduces Bill to Repeal FATCA.” Rand Paul Online.
- Thomson Reuters. 2017. “FATCA and CRS.” Thomson Reuters Tax & Accounting Online.