Next time you start to stress over tax forms, keep this in mind: U.S. citizens living overseas have to deal with 667 pages of IRS forms plus 7,332 pages of instructions in order to pay taxes in a place where they no longer live. And that’s not even the worst part. Thanks to the recent Foreign Account Tax Compliance Act, or FACTA, Americans abroad are being stripped of their right to privacy.
What is FATCA?
FATCA was created to prevent wealthy Americans from hiding their assets in foreign bank accounts—a timely legislation in light of IRS investigations into several Swiss banks. FATCA was tucked into the unrelated “HIRE act” and passed without fanfare in 2010.
Although FATCA may look like a timely solution to a long-standing problem, it blatantly violates the constitutional rights of Americans and attempts to police financial institutions in 70 countries across the world. The Foreign Account Tax Compliance Act requires taxpayers to report foreign financial accounts holding a minimum of $10,000. It also requires foreign banks to report all accounts held by American citizens to the IRS. If a bank refuses, a 30% withholding tax will be levied on all U.S. transactions.
Attorney Joe Garza, who provides tax and estate planning services to clients on over 27 countries, says that FATCA is the most heinous privacy violation he has seen in his career. “When I began practicing tax law, I never dreamed that the U.S. government would make such a blatant grab at private information. FATCA doesn’t even attempt to appear constitutional.”
A Huge Blow to Citizens Overseas
Perhaps the most unfortunate effect of FATCA is the troubles it causes for middle-class Americans living abroad. These Americans were already being forced to pay federal income tax and had been saddled with reams of IRS paperwork in the process. Only one other nation—the gangster ruled Eritrea—attempts to tax citizens who reside in other nations. “FATCA’s aggressive policies are causing foreign banks to abruptly shut down American accounts,” explains Garza. “I would say that the tax evaders had it coming, but most people affected by FATCA aren’t looking for tax shelters. Their foreign accounts are a basic necessity.”
Financial institutions aren’t just turning Americans away on principal. Compliance costs are crippling: some estimate the cost to be in the hundreds of billions. Politico reports that the 30 largest banks outside the U.S. will have to spend $7.5 billion just to comply with FATCA requirements. It simply isn’t profitable for foreign banks to open themselves to Americans anymore. That’s an inconvenience for Americans on the hunt for an illegal tax shelter, but for those living and working abroad, it’s a deal-breaker. Many are left without basic banking services, and have found themselves unable to create retirement and savings accounts or apply for mortgage loans. In order to maintain basic financial security, hundreds of Americans living overseas have renounced their citizenship.
A Grave Expense with Little Payoff
Given FATCA’s magnitude, it would only be reasonable to assume that it will result in a significant payoff for the IRS. This couldn’t be farther from the truth. The law’s supporters in Congress touted that FATCA would secure $8.5 billion in taxes over the next ten years. For a little perspective: the IRS collected about $2.77 trillion in tax revenue in 2013. That means that FATCA will only raise about 0.03% of the annual federal budget each year.
Garza says that FATCA’s attempt at omniscience is its downfall. “No single law can eradicate tax evasion through foreign accounts. If it comes close, it can’t do so constitutionally,” he explains. “If Congress wants to recover more tax revenue, it will have to stop misallocating limited IRS resources and start paying attention to how financial institutions actually operate. Most of those institutions,” he adds, “value privacy.”