Government Bytes

Blog 

Long Arm of Tax Complexity Reaches Overseas

by Douglas Kellogg / /

Being an American taxpayer is always a chore, but for those who may live abroad or have some foreign connection, their status as American taxpayers allows the U.S. government to further invade their lives. This continuing advance of the IRS on foreign residents is a major reason, in addition to high rates, that we’ve seen a rise in Americans renouncing their citizenship.

What is making this situation so, pardon the pun, taxing? Americans abroad have already been subject to a uniquely unfair double-taxation system, where they can owe the IRS income taxes even if they made no U.S.-based income. Now, new regulations, like those in the FATCA law, add to the pain and fear felt by taxpayers outside our borders.

There are many stories about the travails of taxpayers in these situations. A New York Times piece from 2012 highlights a variety of them. One typical example is a Canadian man who has never resided in the U.S., but who could lose his inheritance from his American-born parents because he had not been filing U.S. tax returns (of course making up the returns includes thousands in fees).

That type of difficulty is just the tip of the iceberg, but very much worth noting because it demonstrates how the double-tax standard affects people who are below the threshold for owing income tax but still (unbeknownst to many of them) must make out tax returns.

It is the 2010 FATCA regulations added on top of the 1970 Report of Foreign Bank and Financial Accounts requirement that subject taxpayers abroad to an even more invasive IRS than U.S. residents. And, it goes both ways. As Andy Quinlan of the Center for Freedom and Prosperity put it in a recent Daily Caller piece:

Included as a provision to help pay for the 2010 HIRE Act, FATCA essentially conscripts foreign financial institutions (FFIs) as deputy tax collectors for the IRS, and even expects them to pay for the privilege. FFIs are required to identify all of their American clients, spy on their financial activities, and report their information and activities to the IRS. …

It is this tag team that body slams taxpayers, requiring the full revelation of all foreign bank accounts if one has at least $10,000 total in non-U.S. banks. As a Reason article discusses, this can mean you are responsible for disclosing all your accounts to the IRS if your spouse has an old overseas account with $10,000 in it. Just one example of how easy it is to become subject to these laws that always seem to have been sought in the name of chasing down evil tax evaders.

It is FATCA that has gone so far as to cause foreign-based banks to even refuse to take Americans seeking accounts, even expelling American customers! The law requires the banks to provide the IRS with information on their customers who are “U.S. persons or foreign entities with substantial U.S. ownership.” Otherwise, most FATCA rules take effect in 2014, and with them the beginning of serious penalties non-compliant banks will face:

(paying the IRS) 30-percent of any payments of U.S. source income, as well as gross proceeds from the sale of securities that generate U.S. source income, made to (a) non-participating FFIs, (b) individual accountholders failing to provide sufficient information to determine whether or not they are a U.S. person, or (c) foreign entity accountholders failing to provide sufficient information about the identity of its substantial U.S. owners.

Is it any wonder Marylouise Serrato is quoted in the Daily Mail saying, “Americans abroad are terrified. We've had people pay tens of thousands of dollars in fines… Now…we're seeing a lot of people speak openly about it (renouncing citizenship) and come to us for information.”

These struggles for our compatriots abroad highlight a couple disturbing trends in tax complexity. First, that no power is too invasive for the IRS; and second, that Congress’ pursuit of  “the rich” continues to ensnare the decidedly non-rich in red tape and tax obligations that are completely unfair.