The Foreign Account Tax Compliance Act (FATCA), a U.S. law passed in 2010 that requires foreign financial institutions to exchange information with the IRS about American account holders, is set to face challenges in both the courts and in Congress.
Since 2012, the Treasury Department has negotiated Intergovernmental Agreements with approximately 100 countries to implement FATCA. This includes most of the traditional tax havens like Switzerland, Liechtenstein, Panama, and the Cayman Islands.
Last month, Senator Rand Paul re-introduced S.663, a bill he previously introduced in 2013 to repeal certain provisions of FATCA, citing the "deleterious effects of FATCA on economic growth and the financial privacy of Americans." It has been referred to the Senate Committee on Finance. In addition to Senator Paul's efforts, the law is facing challenges in the court system. Plaintiffs supported by Republicans Overseas are set to file a lawsuit in May claiming that FATCA violates their Fourth Amendment right to privacy and the Eighth Amendment prohibition against excessive fines.
FATCA is also facing challenges abroad. In Canada, for example, a lawsuit has been filed alleging the American-Canadian agreement to implement FATCA violates the Canadian Constitution. The two plaintiffs were born in the U.S. to Canadian parents, but moved to Canada as young children and do not maintain any ties to the United States. They allege that the new law will cause them to be discriminated against by banks in Canada.
Since FATCA was passed, many American expats living abroad have renounced their citizenship, due to fears of substantial civil penalties or criminal prosecution for failing to comply with the onerous reporting requirements for foreign accounts. Notable examples include famous musician Tina Turner, who has lived in Switzerland since 1994, and Eduardo Saverin, a Brazilian-born entrepreneur who helped create Facebook. In 2014, 3,415 Americans renounced their citizenship, more than in any previous year.
FATCA, combined with the ongoing crackdown on offshore tax evasion by way of criminal and civil enforcement, has been a tremendous success for the government thus far. Despite the ongoing legal challenges, FATCA is most likely here to stay. These efforts have convinced more than 50,000 U.S. taxpayers to voluntarily disclose their offshore accounts to the IRS, reining in more than $7 billion in civil penalties.