Rarely is there a policy or legislation that doesn’t have a cute acronym to help legislators sell it to the public. The Foreign Account Tax Compliance Act is no different. FATCA is the stunted acronym for “fat cat,” a term used frequently by President Obama, when referencing the so-called rich eluding taxes. However, FATCA isn’t just about targeting cartoonish tax-eluding billionaires - it is already causing trouble for many making well-below seven figures.
According to the IRS if you are a US individual holding just over $50,000 in foreign financial assets on the last day of the tax year, you too will be under the scrutiny of FATCA. But it isn’t just US citizens who are facing the consequences.
The vague wording in FATCA is extending its reach beyond US “citizens” to US “persons.” According an article in The Economist, foreign banks and other financial institutions must choose between turning over information on clients who are “US persons” or handing 30 percent of all payments of US source income as well as gross proceeds from the sale of securities that they receive from America to the IRS. “US persons” not only includes citizens but also current and former green card holders and non-Americans with various personal and economic ties to the United States, such as marriage. Of those non-American citizens impacted, it appears that Canadians will be the most directly affected.
Take Ruth Anne Freeborn for example. After the passage of FATCA in 2010, Oklahoma born US citizen Freeborn had to choose “between country and family.” Freeborn has been living in Canada for over 30 years with her Canadian husband who receives an income of $51,000 a year as an electronics technician and is the sole income earner in the family. Despite her family’s modest income, Freeborn was fearful enough of FATCA’s overreach to renounce her US citizenship. Freeborn explained, “My decision was either to protect my Canadian spouse and child from this overreach or I could relinquish my US citizenship.”
It is unlikely Freeborn’s Canadian family will be alone in their decision. Many banks are giving their American associated customers the boot to avoid entanglement with FATCA. It may not be hard for Americans to choose their family’s financial wellbeing over their US citizenship. According to FATCA News “any Canadian holding a dual US-Canadian citizenship is a US person and will be impacted by the FATCA provisions. Individuals who have spent a large amount of time in the US are also considered US persons. Others include estates, trusts, US corporations and partnerships.” Even some Canadian “snowbirds” who travel to America for a small portion of the winter will be subject to FATCA.
This is just a small snapshot of the rifts FATCA could be creating across the world – either causing discomfort for anyone interacting with Americans, or making any U.S. “person” persona non grata abroad. If these experiences become more widespread, it seems more than just “fat cats” are getting a shave.