Republicans, Expatriates and FATCA

fatca wordle

Last week I posted about the possibility of renouncing my American citizenship due to the onerous requirements the US government imposes on expatriate Americans. That post broke the record here at Rachel’s Ruminations: the most “hits” ever.

And, in the process, I’ve learned a lot more about the situation from the many people who responded, reposted, and generally informed me about it.

FATCA

What I didn’t know was how far the FATCA law goes. (FATCA stands for Foreign Account Tax Compliance Act.) It requires foreign banks to report Americans’ private bank balances to the IRS, the US tax authorities. This seems incredibly unfair to me: banks in the US are only required to do so if there’s a reasonable indication that a crime has been committed. All they normally report is interest income or dividends, etc., not balances.

Also, through the FBAR form, we are required to report our account balances as well, presumably so that the IRS can compare the two reports. Again, residents in the US don’t have this requirement.

This implies that we expatriates are assumed to be criminal tax cheats unless we prove ourselves innocent. Sounds a bit backwards, doesn’t it?

And never mind any right to privacy! Not only do I end up revealing my own finances, which are none of the government’s business, but I also end up revealing my husband’s finances. He’s not a US citizen, but if I have signing power on an account, I have to report it.

Republicans and Democrats

But here’s what has surprised me more than anything this week: it’s the Republicans who are fighting FATCA.

If you’ve read this blog before, you know that I’m a Democrat through and through: a “bleeding-heart liberal” even. I’ve always voted for Democrats (and, very occasionally, Independents) in the US, and generally vote Green in Holland. It’s extremely rare that I agree with Republicans on anything! Yet, here I am, siding with them.

Apparently, the Democrats in the House and Senate are the ones who voted FATCA in. The idea, and a great vote-getter, is catching the fat cats who move their money overseas. The problem is: they’re victimizing the small fry like me at the same time. The $10,000 fine for failure to file the FBAR form, for example, won’t matter at all to a multi-millionaire, but for me it would be hugely excessive and unreasonable.

Catching tax cheats

That multi-millionaire they’re trying to catch will have no trouble finding citizenship somewhere else: many countries encourage people with money to move in. Then he could move all his assets and businesses out of the US and renounce his US citizenship. The $2350 fee for renunciation is a night at a chic hotel for him. So the IRS won’t get the tax money it wants from him, and the US will lose the advantages of having his assets and businesses reside there. No one wins.

The rest of us are struggling with trying to comply. The Republicans Overseas are bringing a lawsuit on our behalf. A group of Canadian citizens is suing the Canadian government for signing a FATCA agreement because of the requirement to report private bank accounts. And the number of renunciations is rising steadily as people move their accounts out of the US, fed up with these onerous requirements.

It’s a mistake. If you want to catch overseas tax cheats, find some other way! Don’t punish the rest of the more than seven million expatriates, most of whom just want to live our lives and don’t owe US taxes, or, if we do, we pay them faithfully.

In any case, as I pointed out last week, only two countries impose taxes on worldwide income: the US and Eritrea. Country of residence taxation is the norm, and the US should join the rest of the world. People the US is defining as tax cheats are more than likely paying taxes where they live, as I am, which makes sense, given that taxes are meant to pay for the services we receive from the government.

If any Democratic Senators or Representatives read this: you’ve actually managed to push a dyed-in-the-wool Democrat to the Republican camp on this issue. There are more than seven million expatriates around the world. We are also your constituents, and it’s time to listen to us!

Please feel free to comment below, or to share this post!

My whole US citizenship series:

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about Rachel

Hi, I’m Rachel!

Rachel’s Ruminations is a travel blog focused on independent travel with an emphasis on cultural and historical sites/sights. I also occasionally write about life as an expatriate. I hope you enjoy what I post here; feel free to leave comments! Read more...

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Paul Ryan has just been chosen to carry out tax reforms. We may write our comments about FATCA following this article. If you briefly present your dilemma, I will follow and present my case too. What do you all think?

http://www.washingtonexaminer.com/five-tax-reforms-paul-ryan-should-propose-as-ways-and-means-chairman/article/2556360

I tend to be libertarian but I appreciate the basic Republican money attitude of “I earned it, keep your nose out of it.” Hopefully they succeed.

I was initially shocked that you would renounce your citizenship, but reading your reasons now I get it. Truthfully, most of the US citizens living here in Canada have threatened the same thing — if the IRS really continues pressuring them for taxation, then they will renounce the citizenship. Like you, many of those people have established their lives outside the US, so other than the benefits of the passport, the citizenship status really won’t affect their daily live.

But I would have traded you the citizenship in a second 🙂 Too cold here …

Paul
Toronto

Sorry to sound a bit thick – but basically is the U.S saying: if you legitimately earn money abroad, i.e.: you’re a teacher of English in another country, then your earnings in that other country are also not only taxed there, but also taxed in the U.S. too?
Isn’t there a double taxation treaty?
It sounds wholly unfair that your salary should be doubly taxed. And it sounds like punishment for daring to leave the U.S. and want to start a life abroad!

Rebecca Hall:
The first US$100K of annual wages by a nonAmerican employer is exempt from US tax. The problem is that interest paid on bank accounts is taxable. In some cases, all of the tax paid to a foreign government can be credited against US tax liabilities, but I can assure that that does not work for me at all. Moreover, US citizens who are expats have to file a return even if they owe no tax. It is a criminal offence not to file a return even when no tax is owed.
The main problem with FATCA is that the IRS is asserting a right to demand private information from foreign financial firms. A number of banks around the world have expelled the US customers they know about, and are not taking new customers who are American citizens.

Contrary to much of the information on this blog, FATCA was a bipartisan effort from the start as indicated by the idea starting with Nixon and McCain being a co-sponsor of the legislation. Republicans, including Republicans Abroad, are grand-standing to make a political issue of it. The Paul/Bopp law suit is ill conceived and has little chance of success.

I have been an expat American for 21 years, and am married to an American. If I renounce my citizenship, I lose my right to receive USA Social Security while living abroad. That’s a deal killer for me.
FATCA was passed in 2010, when Democrats controlled the White and both sides of Capitol Hill. My hunch is that a repeal of FATCA is not a GOP priority. The problem goes back to 1970, when Congress passed a law requiring that foreign bank accounts be disclosed to the IRS when the largest balance during the year exceeded 10K. No allowance was made for genuine expats. The law also covers foreign brokerage accounts and retirement plans. The problem is that the 10K floor for having to report to the IRS has never been raised since. The floor should be raised to 250K, better yet to 500K.
The USA signed a bilateral agreement with my country of residence, such that FACTA information requests always go to the income tax authorities here, and never to commercial banks. I am in compliance with FATCA, a nontrivial matter. I have a strong suspicion that the US Treasury is not interested in us expats, but won’t admit that fact, and is only interested in suspected big tax evaders, drug dealers, and hiders of ill gotten gains. US income taxes are lighter than those of nearly all other first world countries, and this is especialy true for income from stocks and mutual funds. Most people who invest overseas are paying more income tax to overseas jurisdictions than they would owe the IRS on similar investments domiciled in the USA.
I have filed a USA tax return every year I have been abroad. That return is complicated, but leaves me owing not much. The problem is there is now an information sharing agreement between the USA and my country of residence. Which means that my country can find out the $150 of interest my wife gets on a credit union account, that I declare to the IRS. The IRS can find out the US$1200 of interest we get on local bank accounts. On that interest I pay US$125 of local income tax. But Form 1116 allows me to claim only US$6.50 of that $125 as a credit against my US income taxes. So much for no double taxation.
The information sharing agreement required that I come clean to the local authorities about my USA mutual funds. While local income taxes are vastly simpler than the USA, that is not the case for foreign mutual funds, whose taxation is so complex that I have my local return done by a partner with a well known multinational accounting firm. He is friendly and competent, but charges $300/hour. Thus investment activities that generate around US$1000/year of USA tax liabilities, generate around US$20K in local tax liabilities. For reasons that would take me to far afield, I cannot credit the $1000 I pay the IRS against that $20K. The country I live in agrees to defer income tax only on IRA and 401k balances accumulated while one lived and worked outside the country. The local taxation of USA Roth and Coverdell accounts has yet to be determined.

I have renounced and I still receive my usual Social Security checks. No witholding here in Canada. Gary

James Bobb and Republicans Overseas appeal on FATCA will be heard soon. Also, Republicans Overseas members are meeting with US Congresssmen now to discuss repeal legislation. Both groups may require testimony of Americans damaged by FATCA. If you have given up your citizenship because of FATCA and could testify, your testimony could be helpful. Contact them at RO website

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