FATCA Fallout: This was NOT what the IRS intended with the upcoming FATCA Regulations

This image depicts the total tax revenue (not ...
This image depicts the total tax revenue (not adjusted for inflation) for the U.S. federal government from 1980 to 2009 compared to the amount of revenue coming from individual income taxes. The data comes from the Office of Management and Budget’s record of the ‘Budget of the US Government FY 2011’, specifically the ‘Historical Tables, Table 2.1.’ The information is also here. (Photo credit: Wikipedia)

I have been all over FATCA since March 18th, 2010 when President Obama passed the Hires Act through Congress, aimed at getting Americans working and taxing the wealthy (isn’t that what all socialist and democratic governments do?)  Out of this Act comes FATCA, the Foreign Account Tax Compliance Act which is set to become law January 1st, 2013 and unlike most new taxes, FATCA changes the way taxation is administered globally.I’m going to outline why FATCA was brought in, what the US government is trying to do, and why there have been a couple of events in the past 2 weeks which have come to light which leads me to believe that this was not what the US government was thinking when they pushed the Hires Act through Congress.

So FATCA, in case you are unaware, is on its way to becoming the world’s first global tax on Americans, administered by financials institutions and non-financial entities around the world… OR else.  Can the IRS do this, you ask?  Apparently yes they can.  Why do they need to do this you are wondering?  Because US investors have been evading taxes by hiding their identities from the IRS or they have created offshore companies to hold their investments out of sight and out of reach of the IRS.  The net result here is that the IRS needed to find a way to track down all these US persons who should be filing US tax returns disclosing all their worldwide income but are either not filing, nor including these items.

The estimated lost tax revenues from these US taxpayers using offshore schemes to evade US income taxes is in excess of $100 billion dollars per year.  Think the US could use these funds?  Yeah, I thought so too.  Say hello to FATCA.
So how can the US crack down on these US persons who are hiding their funds?  Well first they tried asking some foreign banks for a list of Americans who they had on their registry.  That did not go over well at all.  The banks said, you have a specific person you want information on, we will give you details, however the IRS didn’t know, they wanted everyone and the foreign banks we not going to give us their revenue sources.  So the US government sued beginning with  Switzerland.  Not the best way to win friends, globally, by suing them, so the US government and the IRS them began pushing FATCA on everyone.
In a nutshell, it requires all foreign banks and foreign institutions to provide information to the IRS as soon as they find a US person on their system / in their bank.  The IRS intends on using this information to locate, audit and potentially prosecute US persons who are evading the paying of their fair share of taxes.  The scope of FATCA is global.  The complexity of FATCA is massive.
The IRS figures through FATCA that every organization globally will opt in to FATCA and will become agents of the IRS and within 5 years will have flushed out every US person to the IRS – both those who are complying and those and those who are not (those who are not have a catchy new name: recalcitrant).
The IRS even offers a way out of FATCA if you are an US person… Just give the IRS 1/3rd of your worldwide income and renounce your US citizenship and you’re out.  For good.
Recently, however, I came across two fantastic articles through my FATCA research which clearly shows me that the IRS and the US government may not have thought through the full implications of FATCA.
So here is problem number 1, in a great article from Bloomberg;

http://www.bloomberg.com/news/2012-05-08/u-s-millionaires-told-go-away-as-tax-evasion-rule-looms.html.  This article outlines the international response to FATCA as the deadline to sign up with the IRS gets closer and closer.  Instead of gearing up systems to flush out these US investors who have been hiding millions and millions of dollars (the FATCATs), these foreign financial institutions (FFI’s) and non-financial foreign entities (NFFE’s) are going through their foreign policies to find ways to instead remove Americans from their business.  The costs associated with complying with FATCA outweighs the benefit of US monies.  Oh oh.

Does the IRS and US government really want to prohibit US persons from investing outside of the US?

Problem number 2 came recently when Brazilian-born Eduardo Saverin, the billionaire Facebook co-founder, renounced his US citizenship he gained as a teenager in advance of the company’s impending IPO and moved to Singapore to avoid paying capital gains taxes on his approximately $3 billion stake in Facebook.

This is FATCA response #2.  Renounce your citizenship and you’re out.  So instead of staying in the US and paying taxes, the very rich do not appreciate carrying the taxation burden for a tax and spend government and they take their wealth to another country where it will be appreciated.

Caught red-faced the US government needed to respond so they looked to do to Saverin what they did to the foreign banks who had US persons on their registry.  They threatened to sue.  Then they changed the law.  The US senate introduced a bill under which any expatriate with either a net worth of $2 million, or an average income tax liability of at least $148,000, will be automatically presumed to be leaving the country for tax purposes — enabling the IRS to impose a tax on any investment gains that person makes in the future.  Crazy.  Greedy.

Apparently Saverin filed to give up his US citizenship in January of 2011, but the news didn’t surface until the federal government released the information in a routine report. Saverin may be barred from re-entering the US if authorities decide he left the country for tax reasons because you don’t want a super-rich guy coming into your country and buying things!  That will show him.

Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign- sourced income.”  Saverin won’t escape all US taxes because Americans who give up their citizenship owe what is effectively an exit tax on the capital gains from stock holdings.

Saverin maintains that his renunciation of American citizenship, which actually took place last September, wasn’t a ploy to skip out on American taxes, but rather an attempt to free himself from FATCA, which he described as a burdensome restrictions on American investors abroad. US citizens are severely restricted as to what they can invest in and where they can maintain accounts.  Many foreign funds and banks won’t accept Americans so it was for financial reasons and not tax related.

It’s true that FATCA is making life more difficult for US persons, including the IRS’ global reach (many countries tax based on residency); foreign bank account reporting rules; and FATCA.  As a result of all the regulations, some foreign banks are dumping more U.S. customers.

Saverin is hardly the only one taking this particular route to big tax savings. The number of those renouncing US citizenship stands at around 1,800 last year.

While I cannot see the US government pulling back on FATCA I think they need to look again at what they are trying to accomplish and how they plan on getting there before all their high-income earners not in the US disappear from the radar within 5-10 years of FATCA being in force.  So the tax pool will grow, then diminish and the IRS will be looking for newer ways to increase tax revenues.

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Author: Warren Orlans

Welcome to the blog for Intaxicating Tax Services, www.intaxicating.ca. My name is Warren Orlans and I am the owner of inTAXicating Tax Services. With over 17-years experience in the taxation industry, 11 of them working for the Canada Revenue Agency (CRA), and the rest working in the private sector at large financial institutions responsible for resolving tax issues for corporations and individuals and the Canadian lead for a large US bank on FATCA implementation. My tax career began pretty much out of university at the CRA, in Collections, where I moved up, across, over and up again through their division with stops in Enforcement, Taxpayer Relief (then Fairness), Audit, Directors Liability, Training, Mentoring, GST, GST/HST, Payroll, Corporate Tax, Personal tax, and probably much more. If you have a collections, compliance or audit issue with the CRA, MRQ, IRS or with the CRTC, WSIB or any aspect of those agencies, inTAXicating is the place you need to contact. inTAXicating Tax Services has strategic partnerships which allows my team to include amazing tax lawyers, insolvency practitioners, mortgage brokers, debt counselling experts and much more. When dealing with governments, knowledge is power. We possess strong understanding of government so we know what the next step is before the government does. When you have a collections problem with the CRA, do you hire a graphic artist? No, you get a former collector who trained the staff, and who worked as a resource officer for 5 years. Then you know you are on the right track to resolving your tax problem(s). Others offer suggestions. We offer solutions! info@intaxicating.ca

7 thoughts on “FATCA Fallout: This was NOT what the IRS intended with the upcoming FATCA Regulations”

  1. Thanks for this expanded narrative on unintended consequences. You are on the right track, but… there is always more to the story, so let me add some that you may not have considered.

    I too have been following FATCA closely, but have been following since pre FATCA times when the IRS launched its 2009 OVDP (offshore Voluntary Disclosure Program) now morphed into the 2011 OVDI or “I” for Initiative.

    This again, was started to go after the US homeland offshore tax evasion of Rich Whales seen to be hiding income and funds in secret offshore accounts. (Who knows if that $100 Billion is right. It is a WAG) The nature of the program was that it swept up thousands of Expat and new immigrant minnows into the net who were in benignly non compliance of FBAR requirements (who would have known?) and income reporting generally not done due to unawareness of the unique nature of US Citizenship tax.

    The FBAR penalties were the bludgeoning tool of choice (pulled from the 1970s anti terrorist statutes) to force compliance suddenly for something long ignored even by professional practitioners, let alone minnow Expats and immigrants.

    This is the opposite of what the CRA does with it’s voluntary programs. Your program is more rationale and civil. You want the taxes and the interest for failures, but you don’t assert harsh penalties for old statutes if a person comes forward voluntarily and reports and pays up. That isn’t how the IRS (International Revenue Service) operates. 🙂

    With disclosure they administer severe punishment too. It is the American Way.

    The IRS dealt with Minnows harshly in a “one size fits all” regime and extracted draconian penalties that were all out of proportion for the “so called” failures. The IRS trumpeted the success (journalist scribes repeated in news stories without question) and Congress moved on to double down with FATCA under the justification that this would create $8.5 billion in new revenue over 10 years? What? That little for all this fuss?

    Now you may have missed this Reuters story, but there were a few of those abroad that seethed about this overreach and IRS application of penalties for failures. Here is a shortened link for your reference. http://reut.rs/uwDMt9

    I got caught out by this. Tried to do the right thing, and when through a 851 day process you wouldn’t wish on Kim Jong-il. I published my entire story of what it is like to be on the OVDP fish fertilizer processing belt. Not fun at all. A very expensive process in both $$$ and LCUs (life credit units) http://bit.ly/KLx6NL

    I also published some advice for those in Canadian (or in the US) who think they had to join the OVDI. It is called “OVDI Drudgery for Minnows”: http://bit.ly/NdQXGZ

    These OVDP/OVDI practices plus increased publicity about FATCA (indeed a global system in the creation-GATCA) caused a group of Canadians to create a blog dedicated to discussing the issues and countering what limited and wrong narrative there is in mainstream press in Canada about requirements.

    This was to counter the fear factor being marketed by Tax professionals in Canada to the million or so US. Citizens that need to “come clean” or “fess up”, implying that all living in Canada were active tax cheats that needed their expensive help. They must confess their sins and be compliant with these newly enforced Citizenship taxation and reporting requirements, regardless of their circumstances. Pay us, and pay the IRS was the message.

    They created a blog called the Isaac Brock Society. It first started as a .com address in December of 2011 and has just repatriated to .ca address. Here is the link to what it is all about, if you haven’t already discovered it. http://bit.ly/KVrjX3

    The web master, Petros, has gotten some recent press, as he is one of the non rich that are renouncing their citizenship as another of the unintended consequences of FATCA and IRS jihad. Here is a link to the Reuters story titled: “Tax time pushes some Americans to take a hike” http://yhoo.it/J7mJyR

    There are a lot more of them in Canada actively pursuing this route. Look at the 858 comments on this thread if you want to see interest in this subject. http://bit.ly/LQZTOK So this is a 3rd unintended Consequence, middle class Average US citizens cutting the ties that bind.

    If you are living over seas, and just an average middle class person, the cost of passport ownership just went very negative. So this is a story about more than the Rich like Saverin. So the narrative is switching a bit, from the Rich expatriating, to the average US Expat handing in their passport. BTW, here is Peter Dunn from his story as was interviewed here: http://bit.ly/MZq0I7

    Coming back to FATCA, here is a 4th unintended consequence:

    Did you know that there is also the domestic equivalent of FATCA, which I refer to as DATCA, where the IRS by its regulatory powers is now forcing US banks to turn over data on its non residents who have accounts in the US to the IRS? This is so it can use this DATCA information as a leveraging tool to force FATCA down the throats of the world. It helps by getting recalcitrant Foreign Countries on board, as they think they are getting some receprorcity, false though it is.

    There has been push back by the very members of Congress that voted for FATCA in the first place. Lovely irony. Here is a link to a recent Op-ed on the Miami Herald by the Florida Bankers Association and my comments / email to them. In their Op-ed complaints, they failed to connect the dots between FATCA and DATCA. bit.ly/LvLvP7 If they don’t like DATCA they need to repeal FATCA. It is that simple.

    Finally, to your point about a global system, you are very right in your analysis. Others have seen this coming too, and yet, surprising there is NOTHING being reported in the US media.

    A Global #FATCA is in our future: http://bit.ly/JPZQ3C

    Oh… This just out this last yesterday on the Financial Post in Canada. http://natpo.st/LMYlVR Read the comments:

    Finally. I love your blog name.

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  2. In Canada, there is big problem with FATCA, based on the substantive equality under law that all Canadians are guaranteed by our Charter of Rights and Freedoms:

    FATCA would make US-born Canadians second-class citizens in their own country. This would violate the Charter and Human Rights Act, along with well-established principles of sovereignty, Canadian bank laws, and Canadian court judgments regarding banking and foreign tax revenue claims.

    If Canadian financial institutions, with the complicity of the Canadian government, single out certain customers by birthplace, irrespective of actual economic activity, location of assets, residence or physical presence, it’s discrimination based on nationality or ethnic origin. And it exposes these individuals to harm. Canadians born in the US have no exemption from the protection of Canadian law; all Canadians are equal under the Charter, regardless of place of birth.

    Any Canadian government assistance in enforcement of the foreign law FATCA would adversely affect US-born Canadian citizens who earn, bank and invest solely in Canada – long-term Canadian taxpayers with no US economic ties or presence. This includes Canadians who were simply born there while parents were visiting, or through cross-border hospital arrangements, and Canadian-born children of US-born Canadians. These individuals would likely mount a challenge based on the Canada Charter of Rights and Freedoms.

    Let’s be clear. Whether this involves Canadian banks getting away with a soft-pedaled, half-hearted, less-than-diligent electronic search for US birthplace… or tagging US-born Canadians with a red,white and blue star on their garments…the principle is the same.

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  3. Really good commentary here. I think we’ll know a lot more when FATCA’s edges become more ’rounded’ with use.If of course the January 1, 2013 deadline is still on.

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    1. Well, “rounded” is a nice soft way to put it! 🙂 An Aussie might say, “She’ll be right, Mate!”

      I wonder what you make of this out of Hong Kong? http://bit.ly/KzEI3l Six months will pass very fast, and few will be ready to be compliant. What if the Big Daddy of the East, says NO! Do we need more confusion and uncertainty in the financial markets right now?

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    2. By the time FATCA’s edges become rounded some of us will have had to renounce our U.S. citizenship. By the time they figure out that this targeted innocent low and middle income people who could not afford the onerous forms and fees and fines on zero taxes owed a lot of damage will have already been done to people who were formerly good American dual citizens. The irony of FATCA is that now dual citizenship truly will be the reserve of only the uber wealthy. Citizenship based taxation is simply not workable or fair in any sense of that word. If you haven’t lived, worked, or earned any money in the U.S. in years and years then you should not be hounding to file paper work or be hit with high fines. Neither should you be asked to sign away your privacy rights, the privacy rights of your foreign spouse and children or be told you can’t have a simple checking account or mortgage. FATCA was supposed to go after people living in the U.S. who deliberately too lots of money off shore to hide it from the IRS. However, what it is REALLY doing is a lot more damage to those who never would have owed the U.S. any taxes in the first place in high tax countries where they live, work, have foreign family. It is also creating a huge amount of ill will around the world towards the U.S. The only people who seem to like it are those who don’t really know what it is doing, international tax attorneys and accountants. Those not affected by it’s KGB like tactics or having their foreign family object don’t care…..yet. But they will when they see the fall out from this over the years. Sadly, by then it will be too late for many of us who never would have otherwise HAD to renounce. My foreign spouse will not go along with it as he makes ALL of our income here in Canada at his Canadian job for a Canadian company. Silly him. He expects to be treated under the Charter of Rights the same as every other Canadian. He won’t accept less for simply being married to an American dual citizen. That leaves me and many like me with no choice but, to give up our U.S. citizenship and then further have to worry how we will be treated crossing the border to see our family back home. I’ve never had so much as a jay walking ticket yet the U.S. has deemed anyone who deigns not to live within it’s borders as a “tax cheat”

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  4. Greetings,
    This is my first visit to your blog! We are from a team of research staff in the UK, responsible for pensions of residents and ex-pats, some of which are Canadian. Your blog provided us beneficial information to work on because of FATCA and because we’re trying to see how Canada’s tax system works. It’s a lot of work, but your ability to essentially dumb it down certainly helps.

    You have done a extraordinary job!

    Thank you.

    Like

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