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August 30, 2017


Federal appeals court dismisses FATCA challenge

A collective of American expats living abroad filed suit back in 2015 to challenge imposition of the Foreign Account Tax Compliance Act (FATCA) as it applies to their international financial accounts. The group, with the self-imposed name of “Republicans Overseas,” engaged in a silent protest against FATCA prior to filing their legal claims: they each, to ensure that their funds were not subject to FATCA disclosure and taxation, drained foreign bank accounts below the mandatory reporting amount.

A federal district court judge dismissed the case. He found that the plaintiffs all lacked standing to challenge the law, since none of them could show any adverse financial impact to themselves because of it. Plaintiffs appealed that decision to the circuit court.

Senator Rand Paul was a party to the suit in the beginning. He argued that he lost the ability to vote against FATCA because of administrative actions of the IRS and Treasury Department.

The verdict

The United States Court of Appeals for the Sixth Circuit affirmed the lower court’s ruling, saying that:

  • Plaintiffs “Republicans Overseas” had no standing to bring suit because none suffered any loss in the form of reportable taxed income or a “passthru penalty” imposed by a banking institution
  • These particular plaintiffs are not eligible to file a pre-enforcement challenge of FATCA because none of them has reportable assets such that they would be affected
  • Even if foreign banks had chosen – or will choose in the future – to close accounts held by American citizens in lieu of deal with FATCA reporting issues, that is a business decision, and any injury from it is not imputable to the government’s action in passing FATCA
  • Any harm done to Senator Paul or other legislators needs to be addressed in a legislative forum, through motions to repeal FATCA or amend the regulatory actions that imposed it without legislative input 

The history and impact of FATCA

FATCA was passed in 2010 as a way to keep Americans who hold foreign assets from skipping out on tax liability by housing their funds in a “taxpayer-friendly” banking institution. For example, some countries or locations, like the Cayman Islands and Switzerland, had a reputation as being exceedingly discreet about account ownership information, thus allowing people to shelter funds from the IRS without fear of reprisal.

Not only does FATCA require the taxpayers themselves to report assets or face stiff penalties in the amount of the greater of 50 percent of the overall amount or $100,000, it imposes consequences on banks as well. Foreign banks must disclose the ownership information of accounts held by American citizens, or be charged up to 30 percent withholding tax on any U.S. income.

Americans, whether living domestically or abroad, must report all their foreign income and assets to the IRS and promptly pay any taxes due. Failure to do so comes with steep penalties courtesy of FATCA, FBAR and other tax code provisions.