FATCA Hurts Law-Abiding Americans Abroad: Heritage
The Heritage Foundation has issued a report to demonstrate how the United States Foreign Account Tax Compliance Act (FATCA) is hurting Americans living abroad, and has recommended that it should be reformed.
In particular, Heritage noted that FATCA is burdening Americans living overseas with “enormous financial and legal burdens” through increased compliance costs and denials of service from foreign banks that do not want to have to deal with the law. “More importantly,” it said, “Congress should turn its full attention to broader tax reform that would help curtail tax evasion in a more effective way without resorting to onerous and intrusive regulations such as FATCA.”
FATCA, enacted by Congress in 2010 and taking effect on July 1, 2014, is intended to ensure that the US obtains information on accounts held at foreign financial institutions (FFIs) by US persons. Failure by an FFI to disclose information on their US clients will result in a requirement to withhold 30 percent tax on payments of US-sourced income.
Heritage pointed out that “FATCA granted the Internal Revenue Service (IRS) a new level of intrusiveness into the lives of Americans. … Under the legislation, the IRS is granted enhanced regulatory power in determining, based on its judgment, whether Americans with these accounts have wrongfully evaded US taxes.”
Prior to FATCA, it said, “the US had many tax information exchange agreements with other countries to help curb the use of foreign accounts to facilitate tax evasion. These agreements require FFIs to provide certain information on customers to the IRS. FATCA goes much further, requiring FFIs – including banks, stock brokers, hedge/pension funds, insurance companies and trusts – to report more detailed information to the IRS about their American customers each year.”
“FATCA’s costly IRS reporting requirements and its significant legal and financial risks make it unprofitable and arduous for foreign financial companies to serve Americans,” Heritage confirmed, and many FFIs have “adopted another strategy for avoiding FATCA: simply denying service to American customers. Some institutions have already closed the pre-existing accounts of their American clients, (and) lack of access to financial services has made it extremely difficult for Americans living and working abroad.”
While reducing tax evasion is looked on as a “laudable goal,” which FATCA may reduce to a certain extent, Heritage concluded that “whatever reduction it achieves is coming at a significant cost that could far outweigh the potential benefits,” and that “Congress should reform FATCA’s heavy-handed approach to tax enforcement now to lessen the burden it is imposing on Americans living abroad and to prevent it from becoming an even bigger problem as it goes further into effect – one that runs the very real risk of exposing law-abiding Americans working overseas to greater IRS exploitation and targeting.”
