Americans Abroad Are Fed Up with FATCA

It’s become a tiresome election season tradition: in the run up to voting, many people vow to leave the country if their candidate should lose. The ritual was alive and well this year as scores of celebrities vowed to flee the U.S. if Donald Trump were to win the presidency. On election night, as it became increasingly likely that Trump was heading to a stunning upset victory, many people who were angry with the results went online to research their options for moving. It wasn’t long before the scrolling news tickers on cable channels reported that Canada’s immigration website crashed under the traffic spike.

But it is likely that most of the oath takers will break their pledge. It is a related post-election tradition that those same people claim they were just joking. Since last Tuesday, many have already walked back their promise to move. Were they to actually leave, many would soon come to regret their decision once they become familiar with a particularly burdensome and onerous tax law known as the Foreign Account Tax Compliance Act (FATCA).

Enacted in 2010, FATCA nominally aims to crack down on the use of offshore banks and fight against tax evasion. The law requires “U.S. persons” (a legal term referring not only to citizens but also to certain nonresident individuals, estates, trusts, corporations, and partnerships) to report information to the Internal Revenue Service concerning their financial accounts held outside of the United States. This reporting burden is on top of a system that taxes – and in some cases double taxes – income regardless of where it was earned, even if those who earned it did not spend a day in the U.S.

Americans abroad have reported challenges finding banks willing to take them as customers, or found that their existing accounts were closed. This is because the law imposes cumbersome requirements on foreign financial institutions to report information concerning their U.S. clients to the IRS. These institutions that do not comply risk being frozen out of U.S. financial markets and will be subject to a 30 percent withholding tax on their U.S. earnings.

There are five forms for foreign institutions to register with the IRS and report on account holders (see the table below). In total, the IRS estimates that the filling out and submitting the forms will consume over 4 million hours of compliance time. Although some smaller overseas banks have decided it is not worth it and have turned away American customers, these are costs that will ultimately be passed along to account holders, squeezing out savings and investments. While the law was still being implemented, it was forewarned that the compliance costs of up to $8 billion per year would be ten times greater than the expected revenue.

A leading indicator of the problems with this law and the IRS’s extended grasp abroad is the number of people renouncing their citizenship. While the number of expatriates has been rising, the exodus has not been largely because of dislike of whoever is serving in the White House. Unfortunately, many citizens living abroad have found the compliance requirements of the law so imposing that they’ve determined that it’s easier to forego the benefits of U.S. citizenship despite the extra costs that entails. As the IRS data below shows (as compiled by International Tax Blog (ITB) through the third quarter of 2016), the number of expats has been steadily increasing over the past several years to record levels. The size of the exodus could actually be higher: ITB and this Forbes columnist believes that the IRS might be underreporting the number of expats compared to a similar set of data reported by the FBI which counted 4,240 in 2016.

 

 

It would seem that many Americans living abroad agree with the Taxpayer Advocate’s conclusion, that the IRS has “adopted a coercive approach to international taxpayers, reflecting an assumption that all such taxpayers are suspect of fraudulent activity.”  The good news is that relief might be coming next year. The platform adopted by the GOP this year included a direct call to repeal FACTA and to reform “residency-based taxation for U.S. citizens overseas.” So any individuals who are still thinking about relocating abroad to wait out the term of the Trump Administration, may want to wait to see what happens with this law next year.