Democrats Abroad Position on FATCA

• Democrats Abroad supports strong policy that discourages and apprehends tax cheats.

• Congress passed FATCA to bring an end to illegal tax avoidance by Americans in the US who use overseas financial accounts to secret untaxed earnings out of the country.

• But Congress did not fully anticipate the impact the regulations would have on overseas Americans and we, therefore, are now burdened with a tax reporting obligation that treats us like suspected tax cheats and money launderers.

• Fortunately for overseas Americans, we can address the unintended adverse consequences of this important piece of anti-tax evasion legislation by reforming the regulations that implement it.

• In the last month a repeal effort has been launched that, if successful, will destroy this legislation entirely.

• It is clear that a global model for catching tax cheats is coming; FATCA is part of that. It will provide information the IRS can use to catch big time crooks using complex schemes and off shore bank accounts to avoid paying taxes.

• The discussion that Democrats Abroad and other organisations of overseas Americans are having with regulators at the IRS and Treasury are focussed on reforms to the regulation - reforms that have already provided and will continue to provide urgent relief to overseas Americans unintentionally impacted by the law.

JANUARY 2014 REPORT TO MEMBERS BY THE FBAR/FATCA TASKFORCE

In 2011, the Democrats Abroad international Executive Committee appointed the FBAR/FATCA Task Force to examine the reporting mandates imposed on overseas Americans by the Foreign Bank Account Report (“FBAR” also known as Form TD-F 90-22.1) and the Foreign Accounts Tax Compliance Act (“FATCA”).   Although the FBAR has been a reporting requirement to Treasury for many Americans(1) with bank accounts in foreign banks since 1972, it is only since 2004 that enforcement has escalated.  FATCA was enacted by Congress in 2010 for the purpose of providing information to the IRS that it will use to identify and apprehend Americans making use of illicit schemes, structures, accounts and facilities to move untaxed earnings out of the US.(2)

This report contains four things:

1. A summary of the key provisions of FATCA

2. Democrats Abroad’s position on FATCA

3. The impact of FATCA on Americans living outside of the US

4. Democrats Abroad’s Recommended Reforms

The Two Principal Provisions of FATCA

FATCA is a complicated piece of legislation and the way some of its provisions are interpreted is in constant flux.  What follows is a summary of its two basic components.

1. Reporting Requirement for Foreign Financial Institutions (FFIs)

Most Foreign Financial Institutions—such as banks and brokerage houses—are required to enter into an agreement with the IRS to identify their US account holders, disclosing their names, addresses and account details.  Any US financial institution making a payment to a non-compliant FFI must withhold 30% of the gross payment.

1. Reporting requirement for individual US citizens and their families

A US citizen living outside the US must file the FATCA Form 8938 if he or she holds or has signatory control over funds in FFIs totaling $200,000 in aggregate at the end of the year or $300,000 in aggregate at any time during the year.  The thresholds for couples filing jointly are $400,000 and $600,000, respectively.  There are severe penalties for under-reporting income in any FFI.  The thresholds for US-based citizens are much lower and US residents with signature power over jointly held overseas accounts may have to report even though the overseas citizen may not have to.(3)

Democrats Abroad Position on FATCA

Although Democrats Abroad supports strong policies to improve tax compliance and limit tax evasion, we Americans living abroad now find our financial lives exposed to a degree of scrutiny – under threat of severe penalties, fines and even  imprisonment – to which Americans living stateside are not subjected.  Implicit in this stringent reporting regulation is the unfair and unjustified suspicion that Americans living abroad are tax cheats and/or money launderers, which clearly the vast majority are not.  The Task Force has been working for more than three years to outline to legislators and regulators the nefarious implications of FATCA compliance and to promote reforms that both preserve the law’s intent and provide relief to law-abiding overseas Americans excessively burdened by it.

FATCA’s Impact

Using evidence gained in a survey of our global membership - which generated thousands of responses - and a website to collect tax stories from overseas Americans, in addition to numerous inquiries, accounts and complaints from members around the world, Democrats Abroad has identified and documented FATCA’s unintended adverse impact on overseas Americans.  These are examples, in brief, of some of the issues raised by overseas Americans in addressing the challenge of meeting FBAR and FATCA compliance:

Impacts on employment opportunity:

• Discriminatory impact on US senior managers in foreign companies where an American signature on corporate accounts triggers a reporting obligation to the IRS;

• Loss of job opportunities at all levels for Americans in multi-national corporations due to the cost of compensating for US tax reporting;

• Weakening of entrepreneurial opportunities for overseas Americans due to onerous reporting obligations.

Impacts on personal affairs and privacy:

• Escalation in tax filing complexity and cost;

• Inability to open new financial accounts or forced closure of existing accounts;

• Assets and accounts held jointly with non-nationals subject to IRS scrutiny;

• Exorbitant and confiscatory penalties for non-compliance;

Democrats Abroad’s Recommended Reforms

From our analysis of the data on the impact and our discussions with regulators, legislators and tax advisors, the Task Force established the following proposed reforms:

• Implement the "Same Country Exemption": Exempt the accounts of Americans living overseas in banks and brokerage houses in their country of legal residency from disclosure by the American taxpayer and by the Foreign Financial Institution holding the account.  This would also relieve the IRS of the burden and distraction of scrutinizing filings that detail legitimate overseas accounts.

• Index the reporting threshold to inflation so that it goes up every year just as the Section 911 income exclusion does;

• Merge the FBAR reporting requirement with the developing FATCA legislation to eliminate duplication in filings;

• Offer true amnesty to overseas Americans who are delinquent taxpayers, inviting them to pay what they may owe and restore their status as tax-compliant citizens.

URGENT, ACHIEVABLE ACTION IS DEMOCRATS ABROAD’S PRIORITY

In the best of all possible worlds, the US would have a policy of residency-based taxation rather than citizen-based taxation, and so foreign financial account reporting requirements established to catch tax cheats would focus exclusively on Americans who reside in the US and shift untaxed earnings abroad.  US federal debt levels and funding needs suggest that it is not realistic to expect the US Congress to give serious consideration to residency-based taxation in the near term nor for the IRS to ease up on its implementation of the law.(5)

Urgency in providing relief to overseas Americans is our highest priority. 

Our efforts, and those of some non-partisan organizations of overseas Americans, over more than three years to lessen the adverse impacts of the law have yielded significant results.  The FATCA threshold for all individuals was originally $50,000 —regardless of where they lived.  Democrats Abroad and others lobbied successfully to get the threshold raised for overseas Americans to the $200,000/$400,000 thresholds noted in the first section.(6)  Our on-going advocacy plan will continue to focus on reforming the regulations established by the IRS and Treasury because we are confident that our reforms are achievable in the short run and will be effective.

Democrats Abroad will continue to provide full-throated support to strong, good faith efforts to block and catch Americans using illegal means to avoid paying taxes; we will also continue to urge the government to recognize that most overseas Americans are honest citizens, not tax cheats or money launderers.  The burden of FBAR and FATCA compliance will be profiled during our March 2014 Congressional door knock, as it has been during Congressional door knock events over the past five years.  The Task Force will also continue to engage with regulators (at the Treasury and IRS – including the Taxpayer Advocate) and legislators (especially on the Senate Finance Committee, House Ways & Means Committee and Americans Abroad Caucus) in the promotion of our recommended reforms.

We are very pleased to provide this update on our work.  Please be reminded that we do not provide advice on US tax issues and obligations.  Many Americans living abroad may find it necessary to seek professional tax advice.(7)

Respectfully submitted,

Democrats Abroad FBAR/FATCA Task Force

Joe Green (Canada)

Stanley Grossman (UK)

Maureen Harwood (Canada)

Carmelan Polce (Singapore) - Chair

Joe Smallhoover (France)

__________________________________________________

Endnotes

1 Where Americans or US Citizens are noted herein the terms also include Legal Permanent Residents/green card holders.

2 This is how Wikipedia defines FATCA.  “The Foreign Account Tax Compliance Act (FATCA) is a portion of the 2010 Hiring Incentives to Restore Employment (HIRE) Act. The FATCA requires individuals to report their financial accounts held outside of the United States, and requires foreign financial institutions to report to the Internal Revenue Service (IRS) about their American clients. FATCA was designed primarily to combat offshore tax evasion and to recoup federal tax revenues.”

3 Here is a link to the official IRS publication on FATCA. http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA).  More details and copious references can be found in the Wikipedia article on FATCA: http://en.wikipedia.org/wiki/Foreign_Account_Tax_Compliance_Act#cite_ref-17

4 Deleted.

5 See Bloomberg reporting this on 6 January 2014.  “Newly confirmed Internal Revenue Service Commissioner John Koskinen said some of the top priorities for his office include improving compliance, ensuring the IRS has enough money as part of the budget process, building employee morale and working to restore the public's trust in the wake of controversy.

Speaking to reporters during a 45-minute meeting Jan. 6, Koskinen said implementing both the Affordable Care Act and the Foreign Account Tax Compliance Act are key goals, with FATCA expected to provide a significant amount of information to help the IRS fight offshore tax evasion.

It symbolizes ‘the increasing capacity of the IRS and the U.S. to be able to track down offshore accounts and those who have been avoiding income taxes,’ Koskinen said.  FATCA is expected to be a big step forward in tax compliance, he said.”

6 Republicans Abroad has been conspicuous by their absence in lobbying for reforms to FATCA.  Political operatives at the RNC have woken up to the issue and have formed a new entity called Republicans Overseas to make political capital out of a FATCA repeal effort.  They hope the movement will stir sentiment and drive overseas votes to Republican candidates and raise money.  Their plan is at best quixotic and at worst a blatant political ploy – in either case it is likely to fail given the commitment that regulators have demonstrated to implementing the law and the recognition in the US and globally that tax dodging must be stopped.  

7 Many US Consulates and Embassies include a listing in the American Citizen Services section of their website of local accountants who provide US tax advice.  

click to download https://www.democratsabroad.org/sites/default/files/2014FATCAREPORTWITHENDNOTES.pdf 

ABOUT THE FBAR/FATCA TASKFORCE

Although the requirement for Americans to report accounts held in foreign financial institutions (the FBAR report) has existed for many years, new and more invasive reporting requirements were imposed in 2009 with the passage of the Foreign Account Tax Compliance Act (FATCA).  FATCA is the result of Congressional and IRS efforts to improve tax compliance among U.S. citizens, both living in the US and living abroad.The majority of us living and working around the world understands and supports our government’s efforts to close the loopholes that enable tax evasion.  FATCA and the regulations established to implement it do not, however, sufficiently distinguish between those Americans with foreign accounts that live within the US and those with foreign accounts who legitimately reside offshore.  Overseas Americans have the same needs as stateside Americans for access to basic financial instruments of personal banking, business banking, investments, and savings, based in our country of residence.  Living and banking offshore clearly does not equate to illegal tax avoidance.  

Because of FATCA overseas Americans now find our financial lives exposed to a degree of scrutiny – under threat of severe penalties, fines and even imprisonment – to which Americans without foreign financial assets are not subjected.   The impact on the personal affairs and privacy overseas Americans has in many cases been very serious, including -

• An escalation in tax filing complexity and associated costs;

• The inability to open new financial accounts or forced closure of existing accounts;

• Assets shared with non-national spouses subject to IRS scrutiny;

• Exorbitant and confiscatory penalties for non-compliance;

• And finally, the unjust assumption that Americans living abroad are tax cheats and/or money launderers.

Democrats Abroad established the FBAR/FATCA Task Force to represent the concerns of overseas Americans by outlining the impacts of the FBAR/FATCA reporting requirements to the elected officials that make the laws and the government agencies that implement the laws and write the accompanying regulations.  We advocate for reforms to FBAR/FATCA reporting requirements with the ambition of alleviating onerous and harmful impacts on overseas Americans.  In this area we have had some success, including lifting the threshold for required reporting.  Our advocacy goal is to support government efforts to improve tax compliance and thwart/catch tax evaders by providing advice on what would make the laws and regulations function more effectively.

Although none of the Task Force’s members work specifically in the area of tax accounting/compliance, we maintain an active watch on developments occurring in the area so that we can keep our members up to date and make relevant reform recommendations to the appropriate committees and agencies.

October 2013

Dear Democrats Abroad Members Worldwide,

It has been a while since your FBAR/FATCA Task Force has been in touch.

Since the last update at our London AGM in March there is little to report that might offer some significant relief to those of us still burdened by US tax filing requirements and the angst that has been created by them.

IRS Resources for International filers

As you may know the IRS has developed web-based resources that are focused on overseas Americans.  They appear to be under continual development, with new resources added all the time.  You may find these sites useful.

1. U.S. Citizens and Resident Aliens Abroad

http://www.irs.gov/Individuals/International-Taxpayers/U.S.-Citizens-and-Resident-Aliens-Abroad

This we would suggest is the most useful.  It has practical information and advice and our cursory testing of the links suggests that they work and lead to further useful resources, especially this new page of Frequently Asked Questions.

http://www.irs.gov/Individuals/International-Taxpayers/Frequently-Asked-Questions-About-International-Individual-Tax-Matters#GeneralFAQs

We suggest you have a look.

2. IRS Tax Map:  International Tax Topic Index

There is also a webpage featuring an alphabetical index of topics relevant to international filers that might be useful.

http://taxmap.ntis.gov/taxmap/internationalindex.htm

There is a modest search function.  By no means is the site user-friendly; it won’t serve the needs of those just entering the realm of expatriate tax compliance.  If you don’t know what you don’t know then you will struggle to make productive use of these references.

The IRS still largely leaves it up to the individual taxpayer to sort through the process.  The helplines and support services do not, for example, include international toll free phone numbers.

Taxpayer Advocate

The Taxpayer Advocate, http://www.irs.gov/uac/Taxpayer-Advocate-Service-6,

continues to support and argue for significant changes in how the IRS treats overseas citizens.  Little has come of that support so far, although we certainly welcome it!

Now that the Government has reopened we are organizing a discussion to catch up on a range of things with the Taxpayer Advocate.

Other Developments

Recently, American Citizens Abroad, a non-partisan group founded in 1978, based in Switzerland and now with a virtual office in Washington DC, presented to the IRS, Treasury and members of Congress, a proposal that argues for a more direct and simple program for becoming tax compliant than the IRS’s existing programs.

While Democrats Abroad takes no official position on the ACA proposal, the Task Force finds it impressive and well worth distributing.  We offer it for your further awareness of what is happening in this most important area of taxation and reporting requirements for overseas Americans.  You can download the letter here:

http://americansabroad.org/issues/taxation/aca-proposes-comprehensive-compliance-program

We will be interested to hear the Taxpayer Advocate’s view of the proposal and its prospects for generating support.

The Task Force will continue to follow these issues as they arise in the agencies (IRS and Treasury) and Congress (both houses and their respective committees). They will be a significant part of DA’s advocacy in support of Bill HR597, the proposal for a “Congressional Commission on Overseas Americans”.

Finally, the FBAR/FATCA Task Force will soon have a prominent place on the DA website to post information and resources.  Please stay posted.

Respectfully submitted,

Democrats Abroad Task Force on FBAR/FATCA Issues

Joe Green, Chair (Canada)

Stanley Grossman (UK)

Maureen Harwood (Canada)

Carmelan Polce (Australia)

Joe Smallhoover (France)

• About the FBAR FATCA Task Force.doc
• Oct. 2013 FBAR-FATCA update final.doc
• November 2013 FBAR-FATCA update email.doc
• 2014FATCAREPORTWITHENDNOTES.pdf