US Tax Overreach: Enforcing Against Expats
The US is one of the few countries in the world to tax nonresident citizens. But enforcement overseas has never been easy, or much of a priority. That is, until the authorities uncovered some big-time asset offshoring by resident citizens (yes, in Swiss bank accounts) for purposes of tax evasion.
That resulted in legislation directed at foreign holdings of all US citizens, resident and non, in the form of the Foreign Account Tax Compliance Act, FATCA. A core purpose is to systematize data collection on the earnings and assets of Americans abroad – the estimated 4-6 million of them.
For those of you not studying your NY Times on the day after Christmas, you can find a good description here. FATCA will pose a huge burden on any foreign financial institution that have US citizen depositors. For big institutions that will inevitably have US customers, the law represents a big administrative expense. Smaller ones will just start turning away US customers. For nonresident citizens, it means lots of extra paperwork (James Fallows collects some vignettes here and here). It’s also meant to send a clear signal that the IRS is going to get serious about collecting on Amcits abroad (though it apparently will forgive those who have failed to file in the past).
I see two possible endpoints to the FATCA gambit:
1) The US will have to back down. Read the comments to this WSJ article on FATCA – some very unhappy folks out there, with strong arguments hinging on American competitiveness. See also this round-up of diaspora efforts to fight back. US citizens overseas are allowed to make campaign contributions, and you can bet this is the kind of issue they care about. (Presidential candidates now swing through London to do fundraisers.) Other governments can’t be happy about it, either, as they feel the heat from financial sector constituencies.
2) If the US can make FATCA stick, some nonresident citizens will renounce, especially those with large tax exposures. But the law will also spawn a new class of secret Americans. Unwilling to go through the hassle of filing annual tax returns and switching their checking accounts to compliant institutions, they will keep mum about their US citizenship status (at the same time that they hold citizenship in their country of residence). These individuals won’t go through with formally renunciation, which may be tricky if they haven’t been tax compliant in the past. These secret Americans will have the passport in a drawer, good for a rainy day and their children’s right to claim the status (on the expectation that FATCA won’t be forever), but they otherwise won’t identify themselves as such. The IRS doesn’t have a master list of US citizens. It will collect from some but drive others underground.
This will be interesting to watch but looks like a bad move. Any extra revenue will be outweighed by all the bad blood. Another reason not to wave the flag.