Offshore bank accounts: FACTA rules and election year politics

Offshore bank accounts: FACTA rules and election year politics

Washington : DC : USA | Jul 23, 2012 at 7:49 AM PDT
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IRS running behind on tax returns

FACTA Background and Effects

FATCA, the Foreign Account Tax Compliance Act was enacted by Congress in 2010. The law targets non-compliance by U.S. taxpayers using foreign accounts.

The act requires all those living in foreign countries to file U.S. tax returns and detailed annual foreign account disclosure statements, going back to 2003. The law has created a dilemma for Americans living in Canada, most of them unaware of the law.

The act affects Americans with dual citizenship, including those that are legal landed immigrants, as an example, in Canada. While they have diligently paid their taxes in Canada, the IRS is pursuing them for disclosure of accounts and annual tax returns, subject to fines of up to $10,000 per year. It should be noted that none of this income is necessarily earned in the United States and some of these dual citizens have lived in the U.S. for decades and some are only dual citizens by birth.

To complicate the issue, foreign banks would be forced to disclose all accounts held by U.S. citizens and impose a 30% tax. Banks would be subject to heavy penalties. According to a an article in the National Post The Toronto Dominion Bank, which holds large assets in the U.S., estimates that compliance with FATCA, without penalties, would cost $100 Million. This, although it is a privacy issue, is the hammer the IRS holds against foreign banks.

While the act is intended to target U.S. taxpayers using foreign accounts for non-compliance, like most laws it is filled with legal speak that is open to interpretation. Needless to say the IRS has its interpretation and regulations to ensure compliance. Below is a short excerpt of an IRS Press Relase issued on February 8, 2012:

FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires FFIs to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid being withheld upon under FATCA, a participating FFI will have to enter into an agreement with the IRS to:

Identify U.S. accounts,

Report certain information to the IRS regarding U.S. accounts,

Verify its compliance with its obligations pursuant to the agreement, and

Ensure that a 30-percent tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information. Source: IRS Press Release

U.S. Citizens with Accounts Offshore

While there are US citizens targeted abroad, it is also a nightmare of US citizens that have interests in foreign companies. One such story came to me from a friend in the U.S. with a family business in the Netherlands. The male member of the family is a Dutch immigrant to the US and has been in the US for at least four decades. The friend asked to remain anonymous. The friend,s account is presented as it was received:

"This will all be in statement form other wise too wordy.

A phone call was received from a foreign bank that it is now law that all foreign banks report to the WH (white house) who has an account and lives in USA paying taxes here..

Were advised to seek a specialized tax/lawyer

Was done

Had to take 8 years of bank statements and document what was happening to all monies.. if withdrawal what was it spent for and if deposited where did it come from.. this took weeks and weeks to do with paper work all over DR table, floor, card tables. it was a mess.....even a CD I bought in Venice which was paid from by withdrawl from that account card....had to be documented plus the name of the CD.. groceries were documents. carrot for carrot because we have a condo there and do cook etc...

Every tax paid in Holland had to be documented

When all was done after many headaches .. there were 15 plus pounds of paper sent in a box to IRS, Washington DC which then went to Taxes

Every quarter we must document that account and any changes in it, interest etc, plus many other inquirey phone calls about this transaction and that..

It was submitted Aug. 30th in the Amnesty program... and the lawyer will do all the negotiations when he hears from them.. so far not a word.. they are swamped with amnesty people especially in this area due to German, Swiss, Austrian and other foreign businesses.....

The lawyer here calls when he needs more info.. he is the tax man also..

By the way, the paper work has to be done by a tax/lawyer we had to employ two people, a tax specialist lawyer and a lawyer to defend us."

This is just an example of what FACTA has done to some families in the US, let alone legal residents of other countries, including Canada, and those that are US citizens by birth.

Below is the plight of US citizens living outside of the US, as expressed in a letter to Jim Flaherty, Canada's Finance Minister:

"Furthermore, if the IRS is allowed to monitor the income of the legal residents of Canada, there is no assurance that the minimum income/assets threshold would not change, thus at some point potentially leaving American expatriates living and working in Canada with a US tax liability. This kind of uncertainty leaves the US government with unlimited opportunities to extort Canadian residents and citizens of a sovereign nation with threats of tax liabilities and penalties. Expatriates would of necessity have to divide their attention between US and Canadian politics and policy changes; such a bifurcation would weaken people’s relationship to Canada. Were Canada to agree to such a faustian bargain, there would be significantly less incentive to reside in Canada; American expatriates would, in effect, not have actually left the US system and its threat to the inviolability of the individual’s freedom of choice and movement. Those among us who have become citizens of Canada would conceivably become targets of suspicion and reprisal." Source: Renounce US Citizenship

The author wrote a letter to the Canadian government on this, including copies to his membe of parliament and the official opposition. Canada's government and politicians remain quiet on this issue. A year after the letter was submitted there is still no response.

Mitt Romney's Tax Returns and alleged offshore accounts

Liberal Bloggers, journalists and the Obama campaign have been adament that they want Mitt Romney to release more than two years of income tax returns. With the enactment of FACTA, it is not clear what this would prove. It would appear that Mitt Romney would have fallen into that category like any other US citizen.

While the pressure on Mitt Romney to release additional tax returns is, at best, a side show, even if he had offshore bank accounts, which had investment or other sources of income, FACTA would have required that they be reported by now.

Romney maintains that he doesn't deal with his investments and that he does pay taxes on foreign funds. The enactment of FACTA appears to confirm this.

Related Story: IRS goes after Americans living in Canada

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Tax Frustration
US Citizens abroad get hammered by intrusive IRS
Karl Gotthardt is based in Edmonton, Alberta, Canada, and is an Anchor on Allvoices.
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