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Monday, December 9, 2013

A Very Fine FATCA Q & A

Allison Christians, a professor at the McGill University Faculty of Law and author of the blog Tax, Society and Culture, has just published a post with a very clear and concise FATCA Q & A. If you are new to the subject and need to learn something about FATCA for professional or personal reasons this is a good place to start. If you are someone who has been in the FATCA fight for some time then this is an excellent reminder that sometimes the best communication is simple, straightforward, and above all, digestible.

Some very good questions in this Q & A: What is FATCA? Why was FATCA part of the HIRE Act? What was its purpose? What are the costs versus benefits? What is an IGA? What is the impact on financial institutions and the final customer?

These questions are relatively easy to answer. There are facts and a reasonable person's interpretation of those facts. But the last question is the hardest one because here we venture into the unknown: What should people who are worried about FATCA do?

A tough question because everyone has an opinion.

The US government via Robert Stack's FATCA Myths is saying: Don't worry, it's all in your head. If you've done nothing wrong then you have nothing to worry about. Furthermore, all those folks around the world getting their banks accounts shut down, groaning under the compliance burden, and dumping their US passports? Myths. They don't really exist.

Uh, guys? Since this whole boondoggle began we (the American diaspora) have been talking to each other (ain't the Internet grand?) We know the people who have lost their bank accounts, got shafted through the IRS "amnesty" programs or who have renounced citizenship. And now through the BBC and other international and national media outlets, the world is getting to know them too.

At best Stack's statement looks woefully out of touch. At worst it confirms the thinking of those who believe there is a conspiracy in the U.S. government to crush the American community abroad. Either way I think I'm on safe ground when I say that no American abroad slept better after reading that statement. So no help there.

Compare that to other messages Americans abroad are getting right now which do insist that there is something to worry about:

Cross-border tax experts who do say there is something to fear and they have the solution: compliance or a restructuring of ones finances to lower the compliance burden. They are more than happy to help for a fee. Some Americans abroad can pay and some can't. That's not the only impediment - there are many stories floating around of innocent Americans abroad on fixed incomes getting sucked into IRS programs on the advice of the experts and ending up losing a substantial portion of their retirement savings to lawyer fees and penalties (not taxes due).

To those who are reading this and thinking that Americans abroad are just paranoid and should be a bit more trusting in the goodwill of the US government and the compliance industry, this interview with Bill Yates, a retired IRS attorney (IRS International Division), which was widely circulated and read, did not inspire confidence. In his words, this is what happened to US citizens who were unknowingly non-compliant but still came forward using experts and tried to make things right with the US government through one of the IRS tax amnesty programs (OVDI/OVDP):
"Whatever course of action taken by a taxpayer, the OVDI terrified and angered a great many people. I received calls from many practitioners who told me stories about “accidental citizens” who had RRSPs [Canadian retirement savings accounts -  like IRA's in the US]  who came forward and eventually were handed a 20% penalty of an account which represented their entire savings. From what I was hearing, an RRSP with approximately $100,000 was pretty much the norm. So, IRS takes a $20,000 chunk out of it. Practitioners told me that many of their clients were in tears when they were informed of what was going to happen to their savings. This is unacceptable."
There are organizations like ACA (American Citizens Abroad) or AARO (Association of Americans Resident Abroad) who have their own advice: join their organizations and start sending letters to elected representatives back in the U.S. This is action that is easy and doable - most of the lawmakers in the US have tools on their websites where they take letters from their constituents. The problem is what to do after that and as Americans abroad watch and wait to see the impact of their actions, it's not looking good.

FATCA is marching forward, there are still millions of Americans abroad who are non-compliant and deeply worried and, as far as I can tell, the US government is not paying much attention. OK, we wrote our letters. We talked to our reps. Now what?

ACA does have two proposals on the table that are very well done and everyone should go and read them. There is a proposal for Residence-based taxation (RBT) and another for a new amnesty program called the Comprehensive Compliance Program. Both were released last summer but there's no news about what impact they have had (if any). Perhaps it is too soon but it would be nice to hear some follow-up from time to time lest we lose heart.

There are some really basic questions here that are unanswered: What do I do if my local bank closes my accounts? I just found out that I'm a US Person but I've never filed - how should I proceed? I've been filing 1040's but I didn't realize I had to file FBAR's too - help! I'm looking for a cross-border tax expert - can you recommend an honest, reliable and affordable one? I've read the IRS streamlined compliance program description on their website and I don't understand how it works. Can you clarify - give me something in plain English so I can figure out for myself if I should do it or not? I've been filing and I just got a statement from the IRS saying I owe a few thousand dollars in US taxes - I don't understand the bill because I am well under the foreign income exclusion. Who do I talk to about this? I've heard about the Taxpayer Advocate Service - who are these people and can they help me?

Into this information void marches the Isaac Brock Society - an Internet-based social movement that tries to answer these questions and much much more. It's not experts giving definitive answers - its members simply responding with what they did or what they have seen others do. It's a forum and almost anything goes. It has the merit as well of being a very broad movement that includes all US Persons under its umbrella, even Accidental Americans (folks who had no idea they were US citizens) and former US citizens. 

To be very clear, they will propose one option that the US government and all the advocacy organizations won't talk about and that is renouncing U.S. citizenship. I just checked and the website is now up to over 5 million hits. The secret of their success? Action and options that go beyond what one will hear in other places and above all, this message, "You are not alone. You are not a myth. And we will try and help as best we can." Powerful stuff. What the Brockers are not well-placed to do, however, is to negotiate with or lobby the US government. They could protest, however, either in the US or abroad - something that they are already doing.

That is the landscape as I see it. Everyone has a little piece of the puzzle and someone looking for an answer to the question, "I'm worried about FATCA - what should I do?" will get a different message depending on where he or she lands after googling the topic.

Here is my unvarnished opinion of the situation today:

 ACA's RBT proposal will go nowhere. At most they and other advocacy organizations might get a redefinition of "foreign" so that local bank accounts in the host countries will be exempt. That, I think, is possible. But a complete change of US tax policy? Not a chance in hell right now.

Renunciations will continue and even accelerate. I doubt this will be reflected in the US government's quarterly renunciant list because, as we have already seen through Eric's excellent research, those lists are inaccurate and I don't see any real desire on the part of the US government to fix that. It's simply not in their interests and that says to me that the data will be manipulated so that the "renunciation effect" (aka "voting with their feet") will be muted.

Everyone else is going to live with it by paying to get compliant, taking a chance on a QD (quiet disclosure) or by finding a way to get and stay under the US government's radar. Not easy to do but don't underestimate people's creativity fueled by fear.

FATCA itself, I believe, is going to implode at some point. A badly written law with too wide a scope - there will be too much information coming in and even the IRS is having trouble getting their IT systems up to speed (and just imagine what the banks are going through). The "final" regulations keep changing, every country so far has its own little specialized IGA with rules and exemptions tailored to that country, and there is serious domestic (U.S.) opposition to reciprocity with lawsuits and the like. And, for the cherry on the cake, coming soon is another information exchange model about to be voted on by the EU. What does this say to me? That it's going to take a long long time for all this to get hashed out and there will be revision after revision for the foreseeable future. No one has any idea what all this will look like a few years down the road. In the meantime, the collateral damage will pile up.

I could be wrong about some or all of the things I just said.  If you have a different take on it, please feel free to say so.

Back to Allison's (and our) question:  What should we do NOW?

The only thing one can do under such uncertainty - take a deep breath and give everybody a fair hearing. Read Stack's note, have a look at what ACA and AARO are saying in their position papers, pay for (if you can) a quick consult with an international tax expert, go to Isaac Brock and say a few words about your situation or ask a question and see what comes back.

Once you've done your due diligence, find a quiet place to sit and think. I can't guarantee that you'll make THE right decision (whatever that may be) but I do think you'll find a solution you can live with.


P. Moore said...

Great post! I agree with your take on the whole situation, particularly the notion that FATCA will implode. The law is such a piece of junk that I think it will make Obamacare look simple. The question is how much damage will be done before something more workable and reasonable gets adopted. The USG has put so much into this, including propaganda, that it will be difficult to find a face saving way out.

Christophe said...

Great post, Victoria.
I also agree with your assessment of the situation.

The US government is so dysfunctional right now, that I agree that no meaningful tax policy change will happen.
Republicans and Democrats can't even agree on the basic stuff and the last move by the democrats of using the "nuclear option" to force the confirmation of Janet Yellen is only adding oil to the fire.
I am afraid we're headed for another debt ceiling gridlock early next year.

@P. Moore
The face saving way out for the US administration on FATCA is working on a tax exchange framework in the context of the OECD which would supersede FATCA that could then be scraped - something they should have done from the beginning. They'll get laurels for having started the thing and the rules created by the OECD might be better and more manageable. This MIGHT end the discrimination and collateral damage. That's what I hope they'll do.

My main angst about the whole thing is the collateral damage and discrimination happening against US persons. I can't believe we're seeing that in this century. This is persecution. Foreign governments should be ashamed to let their banks/insurance companies discriminate. And we're seeing that is so called democratic free countries. Makes me puke.

Blaze said...

This sentence on Allison's blog is one of the best descriptions of FATCA I have read: "There are numerous rules and exceptions and exceptions to the exceptions..."

Allison says IGAs are not tax treaties. "Just what exactly they are is a mystery."

How did we get here?!?

kermitzii said...

The most important thing is that RBT will go nowhere. There is no interest in Congress of USA for fixing things for no votes. It is that simple.

Anonymous said...

I renounced, and it was clearly the right thing to do for myself. I wouldn't have my US citizenship back if they offered it to me. The US is clearly dedicated to treating us unjustly and oppressively. I resent how I and others were insulted and treated like criminals before the fact. And guess what? I owed the US NOTHING, and all my assets were already taxed by my country of tax residence where I have lived for over 50 years. I never worked in the US, and never lived there as an adult. I was a very small child when I left. I have only precarious part time work, make very little money and could not afford the tens of thousands I nevertheless was forced to pay in order to demonstrate that I am not a criminal.

The US government operates without any regard for morality or justice.

Victoria FERAUGE said...

@P. Moore, Oh yeah it's looking just awful right now. I heard as well that the folks are starting to ask for even more time extensions.

Let's look at this with a cold clear eye. This thing was voted in 2010 - we are now on brink of 2014 and it's still not implemented. I'd say that anybody who was really out there evading taxes is now long gone and the only people FATCA will catch are the small fry who can't move their money as easily as the big fish.

@Christophe, I hadn't thought of that but that would be a good exit strategy for the US. Question is what would Congress say to that?

@Blaze, Well, that governments make stupid laws with unintended consequences isn't new. Just watch Hollande work. :-)

@Kermit, Yeah I hate to say it but getting something out of a dysfunctional political system is jsut going to be too hard. Personally I think we need to look at mitigation - stuff that is doable and realistic. I'd also like to see more practical help for Americans abroad who are facing all these problems and have all kinds of questions. I'm OK with the big picture but I'd like to see a lot more focus on people and how to help them. Brock does a lot of that right now and it is a very honorable role for which they should get credit.

@Anonymous, In this area, I have to agree with you 100%.

Anonymous said...

I am a dual who renounced after DIY compliance and much information from Isaac Brock. I think that many more duals permanently abroad will do the same.It is just not worth the stress and worry to continue being in an official relationship with the U S.

Victoria FERAUGE said...

@anaonymous, Yes, I think when we look at the renunciations right now which are driving by cost and hassle of compliance we also need to look at other factors which have made it possible. One sure is the change in US policy to accept dual citizenship back in the 1990's(and this really was a policy change not a new law) which meant that the number of Americans abroad who became duals grew. Another was the loosening of residency requirements for US citizenship for children born abroad who are duals from birth. Where there is already a second citizenship, giving up the US one is easier. And finally I think that US citizenship has also become one nice citizenship to have among many others. It really is a toss-up these days whether it is better to be a Canadian, a Brazilian, an EU citizen or an American. I think there's a post there....

Shreya Muralidhar said...
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