On Friday, December 30, 2022, the IRS issued Notice 2023-11, which provides temporary relief from the FATCA reporting rules for non-U.S. banks (known as FFIs, “foreign financial institutions”) in about 90 countries (known as Model 1 Jurisdictions). The notice specifically provides relief for reporting of U.S. TINs (Social Security or ITIN numbers) for 2022, 2023, and 2024.
Democrats Abroad is encouraged by the recognition by Treasury and the IRS that modifications to the FATCA-reporting regime are necessary. Although temporary relief for non-U.S. banks is a positive step, the temporary relief is provided to FFIs rather than directly to Americans abroad. We would prefer permanent relief that resolves the core problem caused by FATCA: loss of access to non-U.S. bank accounts for Americans abroad.
In 2022 the Democrats Abroad Taxation Task Force met with IRS and Treasury officials to raise awareness of the ongoing tax and financial-access issues experienced by our constituency. We are pleased to see some of our views are recognized in this IRS notice. We look forward to an ongoing productive dialogue with these government agencies and Congress in order to resolve the tax and financial-access issues that severely impact the daily lives of Americans abroad.
Highlights from the notice that are relevant to Americans abroad include:
- Treasury and the IRS acknowledge that foreign countries, non-U.S. banks, and U.S. citizens (including for Americans living abroad) are concerned about account closures when a U.S. TIN has not been provided.
- Treasury and the IRS acknowledge notification that some non-U.S. banks are refusing to open or maintain accounts for Americans abroad, or are “otherwise providing access to accounts on less favorable terms than apply to other account holders, even if the U.S. citizen provides a U.S. TIN.”
- One of the requirements for FFIs to receive relief is for the relevant country to encourage its banks not to discriminate against Americans abroad who do provide a U.S. TIN.
- Even though Americans abroad and FFIs had up to 6 years to provide U.S. TINs for FATCA reporting, TINs were still not provided.
- Relief to FFIs is limited to reporting on accounts opened before a certain date and is conditional upon the bank providing U.S.-citizen customers with information on how to come into tax compliance and/or renounce citizenship.
- Relief also obliges banks to take steps to encourage tax compliance by U.S. citizens like providing links to the IRS and U.S. State Department’s websites.
What is FATCA?
FATCA is the Foreign Account Tax Compliance Act passed in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. Intended to generate revenue to be used to pay for tax breaks to incentivize businesses to hire unemployed workers, it requires that FFIs report the accounts held by their U.S.-citizen customers or be subject to a 30% withholding tax on U.S.-source payments. Bizarrely, it is a U.S. law enforced on foreign jurisdictions, both non-U.S. banks and foreign countries themselves.
The intention of FATCA was to prevent overseas tax evasion and money laundering by American citizens, but there have been significant unintended consequences for Americans living abroad. Rather than complying with FATCA reporting requirements, many FFIs have chosen to refuse new U.S.-citizen customers and to close down pre-existing accounts held by U.S. citizens. As a result, U.S. citizens living abroad face discrimination when it comes to opening or maintaining a bank account in their country of residence. This lack of financial access is unique to Americans abroad: Citizens of no other country - not even Cuba, Iran, or North Korea - face this type of global discrimination.
In the Democrats Abroad 2022 Tax Survey of Americans Abroad, 20% of respondents who attempted to open a bank account in the previous 2 years were unable to do so, which is a major hindrance since some countries require that salary be paid into, or bills paid from, a local account. Americans abroad often can’t live a normal life without one. An "offshore account" from the point of view of the U.S. is actually a "local account" for an American living abroad. This problem can be particularly acute if the person is an “accidental American” who may not even have a U.S. social security number.
What is the Democrats Abroad policy on FATCA?
While supporting Treasury and the IRS in seeking to prevent money laundering and tax evasion, Democrats Abroad calls for reform of FATCA. In March 2014, Democrats Abroad passed a resolution urging the government to immediately change the FATCA definition of an offshore account to be one in a country other than the one where the U.S.-citizen taxpayer legally resides, thereby focusing on U.S. citizens with accounts in FFIs outside their country of residence which is more suspect to money laundering or tax evasion.
In 2017, Representative Carolyn Maloney (NY-12) introduced H.R. 2136, The Overseas Americans Financial Access Act (aka the FATCA Same Country Exception Bill) to address the unintended consequence of FFIs denying Americans abroad basic banking facilities where they live. The bill directs the IRS to exclude from FATCA reporting financial accounts held by American citizens in countries where they are bona fide residents. Democrats Abroad has supported this bill, re-introduced in each Congress since.
What is the Democrats Abroad Taxation Task Force’s current view on FATCA?
A government report released in April 2022 showed that FATCA had generated only $14 million in revenue - while costing the U.S. government $547 million to implement - far below the $8.7 billion estimated benefit the Joint Committee on Taxation claimed it would generate. FATCA has failed to achieve its purpose of reducing tax evasion and money laundering. FATCA is a symptom of the extraterritorial nature of the U.S. tax code, which is why Democrats Abroad continues to support changing the U.S. to a Residency Based Tax system: taxing based on residency and source of income.
Given the evidence that DA has collected for over a decade confirming the material harm that FATCA has caused to Americans abroad - including, in the most extreme circumstances, divorce from a non-U.S. spouse and suicide - and to demonstrate our continued leadership on issues that impact Americans abroad, the Taxation Task Force submitted a resolution in April 2022 to change DA policy from FATCA reform to FATCA repeal. This resolution would have been voted on at the Democrats Abroad May 2022 Global Meeting, but time expired and the resolution did not come up for debate or a vote. The next global meeting is tentatively scheduled for March 2023, and it is the Taxation Task Force’s intention to resubmit the FATCA-repeal resolution at that time.
What is a Model 1 Jurisdiction?
Model 1 Jurisdictions are countries that collect FATCA reporting from banks via their tax agency and then send the reports in aggregate to the IRS. Model 2 Jurisdictions allow banks to report directly to the IRS without an intermediary. This update only applies to Model 1 Jurisdictions. There are currently about 90 Model 1 Jurisdictions.
Countries with a FATCA Intergovernmental Agreement (referred to as an IGA) in place are listed here: https://home.treasury.gov/policy-issues/tax-policy/foreign-account-tax-compliance-act
What is a Model 1 FFI?
A Model 1 FFI is a foreign financial institution (banks, investment firms, other financial institutions, etc.) based in one of the 90 countries with a FATCA Intergovernmental Agreement (IGA) that will be impacted by this FATCA update.
All FATCA-registered FFIs are listed here: https://apps.irs.gov/app/fatcaFfiList/flu.jsf
What is a U.S. TIN?
TIN is a Taxpayer Identification Number. The TIN of a U.S. citizen is the individual’s Social Security Number (SSN). An ITIN (Individual Taxpayer Identification Number) is issued by the IRS to individuals who are not eligible for a U.S. Social Security Number.
In an effort to resolve banking-access issues, the U.S. State Department recently held “Social Security Walk-In Days” at Embassies in Europe to assist U.S. citizens seeking a Social Security Number to prevent bank-account closure or lockout. To what extent these Walk-In Days were successful is unknown.
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