The FATCA: Newest Example of American Imperialism
As part of the 2010 Hiring Incentives to Restore Employment (HIRE) Act, the authority of the Internal Revenue Service (IRS) will soon reach across international borders to tax or fine foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs).
The FATCA Makes FFIs and NFFEs Do the IRS’s Dirty Work
Effective January 1, 2013, the Foreign Account Tax Compliance Act (FATCA) will seek to combat tax evasion by requiring U.S. taxpayers to report their foreign financial assets and offshore accounts to the IRS. The FATCA will require FFIs to give the IRS certain information about financial accounts belonging to U.S. taxpayers. NFFEs will be required to give the IRS information about U.S. taxpayer ownership interests.
FFIs and NFFEs failing to provide the required information on clients with accounts and assets over $50,000 will be charged 30 percent of the interest, dividend and other payments due to those clients. Failure or refusal to do so will result in a bill to the institution for the tax amount with a 40 percent penalty.
How the FATCA Impacts Individuals with Offshore Accounts
The FATCA will require U.S. taxpayers with $50,000 or more in financial assets outside of the U.S. to provide information about those assets in their annual tax return. Failure to report qualifying assets will result in a $10,000 fine, increasing to $50,000 for non-compliance after IRS notification. Moreover, underpaid taxes on non-disclosed assets will be penalized at 40 percent.
However, many foreign institutions are making compliance with the FATCA easier by simply closing the accounts of many Americans. American expatriates in many countries have experienced just that. The cost of compliance with the FATCA vastly outweighs what little (if any) benefit it provides to FFIs and NFFEs.
The FATCA is the U.S. government’s attempt to use FFIs and NFFEs as foreign extensions in its tax collection arm. While the FATCA may very well reduce tax evasion on foreign assets, it may do so more indirectly than planned with foreign institutions refusing investment opportunities to U.S. taxpayers. Unfortunately, many foreigners are also getting rid of their U.S. Treasury Bills to avoid the FATCA’s requirements. In this respect, the FATCA may end up actually causing damage to the U.S. economy and taxpayers.