With the enactment of the 2010 HIRE Act, Congress aimed to increase employment
and increase its revenues by going after foreign accounts owned by
Unfortunately, the legislation doesn’t draw a distinction
between honest Americans living and working abroad, and those citizens who are
indeed hiding tax revenues from the American government. The legislation,
Foreign Account Tax Compliance Act (FATCA), requires that individuals report
their accounts held overseas and that foreign financial institutions report to
the IRS about their American clients.
FATCA burdens American individuals
and businesses overseas, as well as the foreign banks that wish to service
The billion dollar question is whether the burden of FATCA will
outweigh its benefits.
The potential for losses are great on both the
individual and institutional side.
On the individual side, these
regulations threaten to undermine the social contract that binds Americans to
Extreme paperwork may make Americans living overseas
reconsider maintaining their citizenship. This means that America won’t benefit
from the taxes from those people who give up their citizenship. With Social
Security’s worker base shrinking and other issues facing America, it would seem
as if America would want to encourage compliance among its tax-base, and not
make reporting onerous enough so leaving the system is a feasible alternative. I
imagine that Congress did not intend to have Americans abroad renounce their
citizenship as a consequence of FATCA.
While the IRS’s desire to prevent
US-based taxpayers from hiding large sums of income producing funds in offshore
bank accounts is understandable, the current enacting of the law hurts millions
of law-abiding Americans who, for whatever reasons, don’t live and work on
In addition, the regulations are turning American citizens
overseas into undesirables.
Bank doors and job opportunities are being
denied to them because organizations don’t want to subject themselves to
Expat US citizens who fail to report and pay taxes on
the income from the assets that they hold in foreign financial institutions may
be subject to a severe penalty and prosecution.
consequence of FATCA will be its impact on US businesses investing and operating
overseas. It remains to be seen if additional regulation abroad will make it
possible for American companies to open accounts at foreign institutions, and
whether the American businesses will want to devote the extra time and money
necessary to report their overseas investments.
The threat of disruptive
reporting requirements (in addition to the already existing dual-taxation
reports ) might be the straw on the camel’s back that will cause American firms
to miss out on promising foreign investments. If American businesses stop
growing and expanding, it is only a matter of time until this impact trickles
down the economic ladder and affects the average American living and working in
the mid-west. This implicit value destruction could be problematic for the US
On the institutional side, the cost of becoming FATCA compliant
may be prohibitive for some foreign institutions, and therefore they will divest
from their American holdings. This lack of capital investment may be more
detrimental to the American economy than any tax revenue generated by the plan.
After all, a steady infusion of funds, particularly from global markets, is
necessary for the American economy to continue to grow.
Treasury Department claims that FATCA compliance is entirely voluntary for
foreign banks, the stiff penalties that the law levies on institutions that
ignore its requirements suggest otherwise.
Faced with the choice between
paying to implement the new rules or divesting from US-based assets, smaller
foreign banks that can’t afford to shoulder these costs may choose the latter.
After all, there are plenty of promising new markets in which to
According to the US Bureau of Economic Analysis, total investment
by non-US persons in American assets exceeds $20 trillion.
private equity group BlackRock released a report last year where it indicated
that it expected many small and mediumsized foreign banks to divest from the
United States in response to FATCA.
And then, there’s the question of
whether America can impose its demands on foreign institutions and force foreign
governments to become its accomplice in its hunt for tax evasion. Extradition
agreements are one matter, but forcing a bank to violate customer privacy issues
is another matter entirely.
The full impact of FATCA remains to be seen.
In all likelihood, the laws’ effects will be widespread and highly
Some independent analysts estimate that global banks will
have to spend more than $8 billion in order to revamp their systems and become
compliant with FATCA.
Fortunately, the US government can easily solve the
problems posed by FATCA. It has the power to amend the rules to protect the
rights of US citizens who wish to make targeted investments in overseas accounts
and assets, and not infringe on the independence of foreign
America should pursue tax evaders. But that has nothing to do with
requiring expats to file additional tax forms in order to report on financial
accounts abroad. After all, do you think tax evaders will comply with reporting
requirements? Furthermore, the current forms require reporting of accounts held
in institutions, but not cold cash: if you hoard foreign currency under your
mattress, there’s no place to report it on your FBAR or 8938. So it’s not the
money per se, the IRS wants to know about, but if you hold an
Because the United States taxes its citizens on worldwide
income, it has the right to create filing requirements. It is another thing to
require additional reporting on foreign accounts on top of filing income tax.
Even in a FATCA-less world the IRS wouldn’t lose revenue, since Americans abroad
would still be obligated to file and pay via standard tax forms.
this: the abolition of FATCA (and FBAR, too) might actually enable the IRS to
downsize its staff, reduce its budget, and appear heroic in the eyes of
Americans looking for a more fiscally responsible government.
government should also waive FATCA’s reporting requirements for foreign
financial institutions. The law should be changed to reflect its original
purpose: prevent the use of so-called tax shelters. The IRS should work on its
own to identify tax evasion and not require foreign banks to report to a
government other than their own.
FATCA’s demand on foreign financial
institutions and American citizens alike may ultimately do more damage than
good. Forget the fiscal cliff. Instead, it may be FATCA that derails the US
economy in 2013.
Douglas Goldstein is the author of the new book The
Expatriates Guide to Handling Money and Taxes. He is a licensed financial
professional both in the US and Israel and is the director of Profile Investment
He helps international clientele with US brokerage