The Fatca Menace!

I have now heard from the entirety of the U.S. expat population, in its millions-strong ranks, about the role of FATCA and FBAR in their lives -- along with dissenting views from a few locally based Americans. Here's an introductory sample of the range of arguments, after two crucial stage-setting explanations.

Something most "normal" Americans don't realize: U.S. tax policy, unlike that of most other countries, works on the principle of "citizenship taxation." If you're an American citizen, then wherever you live, however long you live there, however you earn your money, and wherever you spend it, you're still subject to US income tax law. No matter if you're living in Moscow or Manila, as long as you hold US citizenship you're supposed to send in your Schedule 1040 to the IRS, just as if you were living in Dubuque. This is so even though you're already paying taxes on that same income to the government wherever you happen to be.

There are escape clauses and caveats. If you're physically out of the US long enough (at least 330 complete days per calendar year), then you can exempt some or all of your income from taxes (now an exemption of as much as $92,900 per earner). Also, some or all of the tax you pay to a foreign government can be credited against the US tax you owe. It's very complicated, and I'll leave further nuances to the CPAs. The main point is, America's policy is unusual. No other major countries (that I'm aware of) apply the principle of "citizenship taxation"; they operate instead under "residence taxation" rules. If you're an overseas German, Canadian, Filipino, etc, you pay income taxes where you're making your living, not back to the motherland.

Something most overseas Americans don't realize: The home-bound population does not view them as a hardship class. A known risk category for long-term expats is becoming whiners -- I speak as someone who's lived outside the U.S. for several multi-year stretches and has been known to whine. (Naturally it goes without saying that all of my long-term expat friends and relatives are stalwart exceptions to this rule.) The $92,900 exemption on taxable income -- nearly twice the median household income in the United States -- means that from the start we're dealing with the kinds of problems many Americans-in-America would like to have, real as those problems are to the people encountering them.

With that out of the way, a few sample messages. First, from a reader in Sweden. This deals both with FATCA and the related FBAR rule, which I'll get into in another dispatch but basically requires expat Americans to report to the IRS any of the accounts they're holding in non-US banks:

I have a dream, an American dream.

I live in Sweden, which is hardly a tax haven.  I am a citizen of that country as well as a US citizen.  I have lived outside of the US for close to 25 years and thought I led a normal law abiding life. Unfortunately, the overzealous and poorly thought out attempts to catch US resident tax evaders have cast me and other overseas residents as criminals.

I am one of the few overseas residents who actually knew that I had to file taxes and did so. Last year, I needed to amend my US taxes due to a reporting error made by my overseas employer and I learned that as I had failed to file a form reporting my overseas bank accounts (the FBAR), the only option I had was to enter a so-called amnesty program, in which I have been told  for this omission, I  need to pay the US government 25% of my life savings, retirement plans, house, and car, all of which have been earned by legitimate employment overseas.

The  "bank accounts"  that I must report to the US government include life insurance policies, telephone prepaid cards, my customer card at the supermarket and my lunch card at work. The latter three must be reported, along with their highest balance (try to calculate that on a supermarket rebate card) all because they fit the definition of a debit card.  All of this under threat of a penalty of USD 10,000 per account if I make a mistake in reporting. I think the most my lunch card has ever had on it was USD 60.

To add insult to the injury I described above, during 2011, FATCA began to be implemented in Sweden and my Swedish bank informed me that I would no longer be allowed to have any investment accounts because of my American citizenship.

FATCA also requires that for my 2011 taxes, I will need to file another form that repeats a lot of the information on the FBAR form and will cost me at least another three hours of accountant time.  The much loved number of USD 10,000 in penalties is again threatened if I make a mistake on this form.

American information reporting requirements have become so demanding that I have made all kinds of new friends in my Swedish bank and tax authority.  I get to challenge them  to provide documentation that makes no sense in Sweden, but helps me to meet the US requirements.  Without these wonderful FATCA requirements, I might have just led an unobtrusive life and like most other residents here, had very little to do with these people. Now I stick out like a sore thumb.  FATCA has afforded me with the opportunity to prove to Swedes that Americans are different, demanding and difficult.

I no longer have any family in the US and I have spent less than a year there in the last 25 years.  Where you spend your childhood stays with you and I have a strong emotional tie to the US.  So even though indications are that it would be in my best interest to renounce my citizenship, I plod stubbornly along in the face of all the abuse and try to believe in the American "truth and justice" I was taught about as a child.

That is why I appreciate your article. It will help to make public the unfortunate consequences of the poorly conceived FATCA legislation.  Maybe it will help me and other overseas US citizens to be able to return to leading a normal life.  That is all I desire in my American dream.

After the jump, an account from Canada -- and then a contrary view from someone who strongly supports the law.

From a reader in Canada:

Thank you for writing about this issue which is affecting as many as 6 million American citizens who live outside of the US.

You stated that you have many links to the problems that FATCA is causing in "Asia, Latin America, the Middle East, and Europe about people and institutions going crazy over this law. "

You didn't mention Canada, which has more expats than any other country. Due to the fact that Canada shares the longest undefended border in the world, Canadian expats are more deeply enmeshed in the US economy than expats anywhere else, and therefore have suffered some of the most horrendous personal pain and financial damage due to the effects of FATCA, and citizen-based taxation in general.

We also have a large and growing protest constituency. You can find many of our stories on expat sites such as, where we have an entire sub-forum dealing exclusively with the issues raised in the past four months by the effects of FATCA on our personal and professional lives.  

The expat forum led directly to the creation of the Isaac Brock Society, a public blog that is gathering information and resources to help Canadian expats find answers to their questions and provide support for those caught in the myriad dilemmas into which FATCA and citizen-based taxation has thrown them. An astonishing number of these people are "accidental Americans" who did not know they were Americans, or thought that they had lost their US citizenship long ago. And many many more are "US persons" who, as a result of FATCA, are renouncing their US citizenship in such large numbers that some US embassies in Canada have had to carry out official renunciation ceremonies en masse.

Isaac Brock, you may know, is considered a Canadian hero for defending Canada against US incursions during the War of 1812. There is an ironic symbolism felt on this side of the border that two hundred years later, Canadians once again are uniting to fight off the threat of a US invasion that threatens their property and their future.

We are aware that most Americans know nothing about the enormous impact that FATCA is having on US citizens who live normal lives abroad but are being treated as if we are criminals guilty of willful tax evasion. I have found that, in general, Americans know virtually nothing about how deeply offensive their government's action are perceived by those outside the US, especially in countries that consider themselves friends and allies of America. Not even the world's greatest power and largest economy can survive alone.

For what it's worth, if I were organizing a group whose goals include changing mainstream American opinion and ultimately changing U.S. legislation, I would not name it after someone who was a hero for fighting against U.S. troops. Good symbolism in Canada, perhaps -- but not so effective here south of the border. (I guess "Tokyo Rose Society" was already taken? Just a little joke -- but how about the Thomas Paine Society, or something?*)

While I'm at it, here's one just in from Germany:

I'm glad to see you speaking out against the idiocy of FATCA.
I, for one, have already given up my US citizenship. I want to continue to be able to have a bank account.
I moved to Germany over 30 years ago and I considered myself a "somewhat germanized American" for the longest time. That's over. I'm a German. Germans are (mostly) reasonable and logical. The US government is crazy.
FATCA is not only a problem for American expats, it is also incredibly audacious in the way it attempts to interfere with other sovereign nations and their laws.

What is particularly annoying is that FATCA is trying to force foreign banks to do something that US banks are prohibited to do. US banks are prohibited by US law from giving information about the accounts of foreign nationals to their governments. But this is supposed to be OK the other way round? What hypocrisy!

On the other hand, we have this note from a Congressional staffer in Washington, with emphasis added:

I should begin by saying that I work on the Hill for a Member of Congress who voted for FATCA, in case that's disqualifying.. That said, I've heard a lot about FATCA this year, from domestic banks and expats, expressing many of the arguments you did. A surprising number of the expats were misinformed about the extent of the law and its exemptions and, apparently, this was due to ignorance or misinformation received from their foreign banks.

The biggest of these is that the reporting requirement is only for accounts of over $50K. You can make all of the necessary 99% connections about how many and which people would, therefore, be affected. The domestic banks are similarly horrified about the idea of reporting on non-resident alien (NRA) deposits but the arguments they tend to focus on don't hold up to scrutiny. There are legitimate concerns, but most could be remedied by exemptions similar to those in FATCA...

My suggestion is that very few people actually have more than $50K in their [foreign] bank accounts and, thus, very few would be subject to FATCA's requirement. Because most are unaware of the $50K minimum, apparently including many of the foreign banks, these people who would not be subject to FATCA are expressing concerns about the bill. The small percentage of people who would be affected have a strong incentive not to point out the distinction, and foreign banks and even newspapers have contributed to this confusion.

I've found that many of these expats are much relieved and no longer troubled by the law when they find out that it would have no direct impact on them. I've not had the opportunity to explain the distinction to the foreign banks or press, so I cannot speak to the indirect effect...

Somewhat like the debate over the upper-income Bush tax cuts, a large portion of the unaffected population has been told that they'll be impacted so as to protect the truly affected population who can, in point of fact, afford the small extra burden imposed....

My knowledge of the issue is largely the result of constituents coming to our office because they'd been scared out of their wits by what turned out to be gross misinformation. As we've seen well, this can easily generate a great deal of comment and concern from a mass of people, and it's hard to undo the damage afterwards.

For now, I'm just reporting these perspectives, rather than trying to parse them. (Yes, I understand that to avoid the problem of "false equivalence" I will need to sort them out eventually.) For instance, I know that one response to the Congressional staffer's view would be that some "ordinary" people, who had worked and saved for years in Sweden or Canada, might easily have more than $50,000 in their lifetime-saving assets and thus be subject to the law. As might immigrants in the U.S., who are concerned about their lifetime-savings being reported back to governments in Mexico, China, the Philippines, or wherever. That's for later. For now, get ready for the FATCA and FBAR wars of 2012. Perhaps a welcome relief to the FUBAR spectacle that is the presidential primary race.

* Update. When I made this point in an email to Peter W. Dunn, one of the organizers of the Isaac Brock Society, he responded thus:

Your response comes to us, I think, too late.  I.e., we move forward from the standpoint that we have no hope that we could change American opinion.. It also has something to do with the reason why it is wrong to tax people in a far away country: we have no representation in the decision making process and we feel that the lawmakers and people in the United States don't care about our situation.  Thus, we are only hoping to reach Canadians and our own elected officials to protect us from the long arm of the IRS and the United States government.
I am no longer able to vote in the United States and no longer under the jurisdiction of FATCA.  I've moved all my investments out of the United States.  Once everyone in Canada realizes what the United States is doing, I think they will also be reluctant to invest there too.  The same scenario will be repeated throughout the world.  You wrote about it in your article.  My job is to mobilize this awareness before Canada becomes a protectorate of the United States. Your job is to try to stop the more detrimental effects of FATCA, to foreign investment in the United States, before they happen.  Good luck to us both.