The Economist: Taxing America's Diaspora: FATCA's Flaws

The Economist this week has an article criticizing FATCA. FATCA, like so many tax laws written out of political emotion (in this case, an escalating anxiety over expatriates (vaguely deemend "tratorious" because, after all, American citizenship is not the Civil-Law "nationality" relationship but rather "allegiance" as in "Pledge Of") sparked by a series of articles about wealthy expatriates in Forbes starting in 1994 (Brigid McMenamin, Flight Capital: Avoiding U.S. Taxes by Renouncing Citizenship, FORBES, Feb. 28, 1994, with follow-ups in 1996 and 1999). Earlier, the SCOTUS (Afroyim and Terrazas cases) had made US citizenship harder to repudiate. Today, the user fee for renunciation has rised from $450 to $2,350. Most "reluctant Americans abroad, without assets, income or heirs in the U.S., are likely to do nothing: if their passports do not show a U.S. origin, if their spouses are not American, why bother? Why forfeit family assets for OVDP if never visiting the USA will keep them out of TECS and out of sight? The IRS is a collection agency; it is not going to send its (few) overseas attachés around hunting for citizens. And even if it did, it has no standing to prove that a person who has never claimed a benefit of US citizenship but who was born abroad of a US parent is, himself, a US citizen: that depends on facts of parental marriage and residence.
What does all this mean for asset protection?



First of all, as The Economist points out, foreign assets, trusts and entities (other than cash, gold bars and real estate) are subject to greater reporting requirements when overseas than when within the US and its territories. Secondly although the laws were not aimed at them, there are many "accidental Americans" abroad, many of whom will never have availed themselves, ever, of an attribute of U.S. citizenship and some of whose status may be in doubt. Only a few hundred thousand US tax returns are filed from abroad. We can only guess at the number from IRS data on "other areas", which would include overseas military: http://www.irs.gov/uac/SOI-Tax-Stats-Historic-Table-2

The State Dept estimates 6.8 million (with 65 million overseas travelers) but as the US Government does not know who its citizens are unless they hold current passports or are present in the USA it's impossible to know. And in the past it cited a much smaller figure, 3.2 million, raising it only in response to pressure from "American Citizens Abroad", a Geneva organization. If the real number is 6.8 million that represents a lot of scofflaws. Over 45,000 have filed for relief through OVDP, often at great expense in professional fees and penalty payments, but that leaves many who have not. Perhaps for most, living paycheck to paycheck like most Americans, the only default is not to have checked a box on Schedule B because they never filed any US tax return at all.
FATCA’s flaws economist.com

IN THE depths of recession in 2010, a jobs-obsessed Congress passed the Hiring Incentives to Restore Employment Act. Bolted on to it was the arcane-sounding Foreign FATCA has and will, as The Economist points out, exclude many overseas Americans from banking facilities. PFIC rules make participation in tax-sparing programs risky and expensive (depending on the particular tax treaty; the UK treaty allows for pension schemes, some others do not). The penalties for failure to report even non-earning assets are draconian: enough to bankrupt many, and to take non-US spouse and children with them. If new tax treaties provide for mutual collection of tax debts (but perhaps, as with Canada, not dual nationals having the local nationality -- but query what about EU Freedom of Movement, or Irish citizens never being deemend aliens in Britian (Ireland Act 1949) then what? And what about new extradition treaties providing for extradition for tax crimes without regard to "dual criminality" or, perhaps, specialty (no prosecution for a crime other than that on which the extradition was originally based)?

My point is this: It won't be long before skip tracers and judgment creditors' attorneys find ways to get, and to use, this data. Courts are increasingly willing to enforce foreign judgments (and under the Brussels and Lugano Conventions, within most of Europe they are required to do so for signatory states' judgments -- and an American judgment could be "gamed" and made into a European judgment in an easy and cheap forum prior to collection efforts elsewhere).

It was long the case in Europe before consumer bankruptcies were "invented" there, that a bankrupted individual would -- like an illegal alien -- exist only in the cash economy. I rarely take new clients today, but I am introduced to a great deal of people of varying walks of life who have interesting conflict-of-laws and tax issues. One, who had an interesting (and successful) battle over a securities fraud matter with the British Government averred to me that he had a trunkful of €500 notes hidden in Spain. Given what I know about him, and what the British press has said of his case, it could be true.