Foreign tax rules may be unfairly targeting US expats

by Ray Clancy on June 8, 2015

An organisation that represents American expats has called on the United States Treasury to amend tax regulations to exempt those living abroad from the Foreign Account Tax Compliance Act (FATCA).

FACTA was introduced in 2010 to tackle what was seen as a growing number of wealthy US citizens living abroad failing to disclose their income, but according to expat pressure group American Citizens Abroad (ACA), it is actually affecting more ordinary tax payers in a disadvantageous way.

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FACTA was introduced in 2010 to tackle the growing number of wealthy US citizens living abroad and not declaring income

It has led to some banks closing accounts for expats and some American citizens living abroad have even renounced their citizenship due to the onerous burden of FACTA.

Under FATCA foreign financial institutions (FFIs) may register with the IRS and agree to report certain information about their US accounts, including accounts of certain foreign entities with substantial American ownership.

FFIs that enter into an agreement with the IRS to report on their account holders may be required to withhold 30% on certain payments to foreign payees if such payees do not comply with FATCA.

According to the ACA this means that FFIs are being deterred from servicing existing and new US clients because of FATCA. Recent reports would appear to confirm anecdotal evidence that many FFIs want nothing to do with FATCA and are therefore ‘locking out’ US customers by closing existing accounts and refusing to open new ones.

While there are no concrete statistical reports to confirm the scale of the lock-out, a recent survey of expats conducted by Democrats Abroad, the overseas arm of the Democratic Party, suggests that one in six respondents have had their bank accounts shut. If this is applied across the entire expat community of 7.8 million people, these findings suggest that over a million Americans are being denied access to basic financial services.

All these reporting requirements and the threat of penalties if the reporting is not complete and accurate, are causing some foreign banks and other financial institutions to cut off access by Americans overseas to foreign financial tools, such as mortgages, bank accounts, insurance policies, and pension funds.

At the same time, Patriot Act legislation currently contains know you client guidance that is leading US banks to close domestic US accounts held by Americans who no longer can provide a mailing address in the United States.

Where a US person truly resides in a foreign country and has a normal financial account at a bank or similar institution in the same country, ACA is recommending the FFI should treat it as if it belonged to someone who is not a US taxpayer, and the latter would not have to list the account when reporting a Statement of Specified Foreign Financial Assets.

‘If the account in question is a garden variety bank account and it sits in a bank down the street in the same country, it’s realistic to assume that this account is used for normal, everyday purposes such as to buy groceries, to pay the rent, to pay for vacation travel, and so forth,’ said Marylouise Serrato, executive director of ACA.

‘This type of account should not be affected by FATCA. With this exemption, foreign bankers could relax a bit when dealing with their American customers. And Americans living outside the US would not need to feel that they are being unfairly targeted,’ she added.

{ 1 comment… read it below or add one }

Kyla4u June 8, 2015 at 2:23 pm

Hi,
I just wanted to clarify the information you’ve given in this statement:

“FACTA was introduced in 2010 to tackle what was seen as a growing number of wealthy US citizens living abroad failing to disclose their income,”

When FATCA was created, it had NOTHING to do with wealthy US citizens living abroad. It was created to catch wealthy citizens living IN THE US who were hiding income in secret overseas accounts. The creators of FATCA were unconcerned with US citizens living abroad and really couldn’t care less how FATCA affects them.

Most US citizens living abroad are not wealthy and are trying to live a normal life like everyone else. Unfortunately US expats have become FATCA fodder and are losing bank accounts, mortgages, insurance policies and all the other financial vehicles that most of people take for granted.

Sadly, the IRS has cottoned on to the fact that there are millions of middle-class hard working citizens living abroad that can be targeted for their lack of knowledge regarding tax filing requirements. The IRS is using this opportunity to levy fines and penalties that can be in excess of the amount of the original accounts in question.

Anyway, just wanted to clarify that US citizens abroad were not the original target of FATCA.

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