The Impact of FATCA and why it turns bank tellers at foreign institutions into unpaid IRS agents

Some new meme needs to overtake Schumer's and Levin's and Bill Nelson's and Barbara Boxer's smearing of US persons abroad. The message should not be to tell the World that all expats, immigrants and green card holders are all Tax Evaders. Go find them ! Go FATCA them ! Go FBAR them !
As the administration and friends were looking for someone else to fund both their deficit and their new domestic jobs bills (such as 2010 HR 2847 Jobs for Mainstreet Act), they looked around for new ways to get money from people they didn’t like. However, they needed to get it from people who couldn’t fight back. They also needed to make sure that no one else would come in and defend those people. FATCA is founded in a U.S. tax code that attacks small business and lavishes tax holidays on the wealthy (tax inversions, for example). It came about because America is the only large economy which taxes its citizens on their worldwide income. The US is the only country that forces our citizens abroad, including those who are residents of another country, to pay tax at home.

“What is the largest segment of US citizens that can’t fight back? There are 7.6 million US citizens living outside the USA, and we make it difficult for them to vote–as difficult as we can, that is”.

Into this system comes FATCA. It basically turns bank tellers at foreign institutions in to unpaid IRS agents. The first impact of FATCA is to require all foreign banks to determine which of its clients are U.S. persons and to report all of their transactions to the IRS.

The problem is, proving someone is a U.S. person for tax purposes is tough. Of course, anyone with a U.S. passport is caught. But the law also tags those who spend 183 days a year in America. It expects the banker to determine who has “other substantial ties” to the United States and thus might be subject to income tax in the US. Here’s the best part–they don’t have to be those things, they just need to be suspected to be those things.

If the banker fails to report, the bank will possibly lose its ability to work with any U.S. banks, correspondents, and U.S.-based companies. While FATCA says U.S. banks must withhold 30% of all transactions going to non-compliant banks. This is unsustainable and means the offshore bank is effectively blocked from all U.S.-based transactions. Banks that don’t sign up are pushed out of the worldwide system.

The next impact of FATCA is to outsource tax compliance and policing to foreign banks. The law puts the onus on bankers and tellers to ensure everyone around the world is paying Uncle Sam. These people might have no understanding of the U.S. tax system, or the intricacies of the US law, but they become the gatekeepers. And, if they fail, the costs to their employer will be possibly swift and severe.

As an expat myself, the most direct impact of FATCA in my life is that very few foreign banks will to have anything to do with me. With over 7 million Americans abroad now wear a scarlet letter which causes most bankers to turn up their noses when we enter the room.

The majority of banks, brokerage firms, insurance companies and mortgage lenders are now closed to U.S. persons. Where it was once tough to get a loan or open an account, it is now nearly impossible. Those banks that are open to expats charge hundreds of dollars in extra fees and offer lower returns on investments than they did last year. This is done to recoup the hundreds of thousands, or even millions, of dollars they were forced to pay out to set up compliant systems.

The most notable unintended consequence of FATCA is that many foreign companies are now hesitant to hire U.S. expats. It is becoming more and more difficult to find a job outside of our borders. If the employer doesn’t already have American workers, they won’t want to deal with the risks and paperwork.

Having U.S. employees also comes with banking risks. The employer will be depositing money into an American’s account, be it onshore or offshore. This might trigger FATCA reporting by the bank on the company, bringing with it attention and problems they don’t want.

The impact of FATCA which garners all of the headlines is that record numbers of Americans are giving up their citizenships and passports. In fact, the latest numbers show that expatriations have quadrupled in anticipation of FATCA.