For many expatriates living in México the first they ever heard of FATCA (the Foreign Account Tax Compliance Act) was when they got notices from Banamex USA that the bank would be closing their bank accounts on June 30th. The forums around the country lit up with people asking what was going on.
As broad brushed, expansive and invasive as the Foreign Account Tax Compliance Act is, the U.S. Congress tacked it on as an amendment to the Hiring Incentives to Restore Employment (“HIRE”) Act and passed it in 2010. In legislative procedure in the U.S. Congress it is known as a rider. A rider is an additional provision added to a bill or other measure under the consideration by the legislature, having little connection with the subject matter of the bill. FATCA clearly has absolutely nothing to do restoring employment.
Riders are usually created as a tactic to pass a controversial provision that would not pass as its own bill. As the provisions of FATCA come into effect, many people are beginning to realize why the legislation probably would not have passed on its own merit. I think all of us support Congress’s efforts to combat tax evasion, but to me, and many others, FATCA is not the way to go about it.
A few weeks ago I wrote about the Law of Unintended Consequences and it is certainly at play with FATCA. The purpose is to capture the billions of dollars taxable in the United States that escape. However, the consequences of Congress’ efforts include invading personal privacy, turning Americans abroad into unwanted customers in international banking, costing foreign financial institutions billions of dollars to comply, and discouraging foreign investment in the United States.
I will now step down from my soapbox and speak to the subject matter of this article.
Starting July 1, 2014, under FATCA foreign financial institutions will be required by the United States government to actively seek out and identify their customers who are “U.S. persons” (defined as, but not limited to, U.S. citizens and green card holders.) living in the U.S. and abroad. Once they have identified their “U.S. persons’” they must then report to the Internal Revenue Service their account information. Foreign financial institutions that do not become compliant will be subject to a 30 percent withholding on their U.S. investments when they are cashed in.
The requested documentation creates extra compliance costs for every U.S. person’s account.Bloomberg has reported that making sure overseas Americans are filing the right tax forms will cost banks about $7,000 per person. With the compliance requirements coming into effect on July 1st many foreign banks have taken the road of eliminating the “problem” by notifying their “U.S. persons” customers they are closing their accounts on June 30th.
Banamex USA is the U.S. banking arm of Banco Nacional de México (Banamex). Since it is a foreign financial institution and did not want to incur the expense of reporting, it decided, along with many other foreign banks, to close the bank accounts of US persons before the compliance requirements came into effect.
Those foreign financial institutions who intend to comply with FATCA are now beginning to gather information to determine which of their customers are “US persons.” For those customers who have been identified as such some banks are beginning to ask those account holders to fill out forms giving the bank permission to hand over their account details to the U.S. government.
So far México and 47 others countries have entered into Intergovernmental Agreements with the United States. These agreements set forth the rights and responsibilities of the foreign countries that agree to require their financial institutions to comply with the FATCA reporting requirements
So if in the near future you hear from your Mexican or other foreign financial institution requesting personal information from you, do not be surprised. And make sure you are complying with your financial reporting requirements with respect to foreign assets, because someone else may be providing that information to Uncle Sam.
For a U.S. person to comply with FATCA the U.S. taxpayer must annually report his interest in certain foreign financial assets on Form 8939 (Statement of Specified Financial Foreign Assets) when the taxpayer files his Form 1040. Specified Financial Foreign Assets (SFFA) includes bank accounts and stock issued by a foreign corporation.
Generally speaking Form 8939 must be filed by a single taxpayer or a married taxpayer, if filing separately, if the value of all SFFAs exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year. For married taxpayers filing joint returns the amounts double. If a taxpayer lives abroad during an entire tax year or lives abroad for at least 330 days during a tax year, the amounts increase even further.
The penalties for failure to file and accurately disclose are high: $10,000 for failure to file and a 40% penalty on any understatement. Although many expatriates were not aware of the possible need to file Form 8939, the filing requirement began with the taxable year 2011.
As most U.S. citizens living in México now know, they are also required under FBAR, the Foreign Bank Account Report, to file a report by June 30th of each year, if they have one or more foreign bank account(s), which at any time during the year reached an aggregate balance of over $10,000.
FATCA picks up assets not required to be disclosed under FBAR. For example, FBAR only covers foreign financial accounts, e.g., bank accounts and brokerage accounts. FATCA requires reporting on these assets, i.e., foreign financial accounts, but also assets like an interest in a foreign partnership and foreign stock not held in a financial account.
Bloomberg has also said that U.S. citizens living overseas may find themselves paying out up to $4,000 a year to remain on the right side of the law.
A final unintended consequence of FATCA is the record number of Americans who are renouncing their citizenship, as they seek to remove the burden of filing complicated and costly tax returns simply for living in another country.
The United States is the only nation that taxes its citizens wherever they reside on their worldwide income in the same manner it taxes its residents. A foreign tax credit is given for some foreign taxes paid, but not all.
According to the figures released in May of this year by the Federal Register U.S. expatriates giving up their nationality rose to 1,001 in the first three months of 2014, up from 679 a year earlier. Internal Revenue Service data shows that last year 3,000 U.S. citizens renounced their citizenship, up three fold over the average for the prior five years.
Of course, FATCA and FBAR will not affect many who have chosen to retire and live in México. However, it has never seemed logical to me to dismiss an important issue just because my ox wasn’t the one getting gored. In my opinion there are serious issues in the Foreign Account Tax Compliance Act that deserve discussion.
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