FATCA: The Long Arm of the U.S. Tax Law

As the U.S. cracks down on tax evaders, FATCA legislation requires ­for­eign banks to report on its citizens’ holdings abroad

U.S. tax consultant James C. Sexton has come to Vienna on a mission: To educate Americans about their new obligations to the Internal Revenue Service. And there is plenty to learn.

“This is the first time there has been legislation enacted where you have foreign banks [acting] basically as IRS agents,” he said, “just like U.S. banks, reporting on the activities of Americans.”

If this sounds like “big brother” to you, you’re not alone. You could hear the gasps of the Americans present for Sexton’s presentation – disarmingly entitled “Death and Taxes” – at the Expat Center in mid-February, on tax obligations for U.S. citizens living abroad. President of the Las Vegas-based Esquire Group, Sexton has seen clients become so intimidated by the monitoring of the IRS that many are giving up their citizenship.

James Sexton

James Sexton wants to help American citizens comply with IRS requirements | Photo: David Reali

“Americans don’t have faith in our banking system,” Sexton told The Vienna Review. “Even if they don’t expatriate, you will see them moving their money outside of the U.S., because they feel it’s safer there.”

However it may not be safer for long; U.S. citizens with money in foreign banks are coming under increased scrutiny by the IRS.

Since 1913, when the 16th Amendment established the first permanent income tax, the United States has required its citizens to file tax returns regardless of residence. For most Americans living in Austria this has meant an additional annual procedure, alongside the Austrian Steuererklärung. Those who have filed tax returns often qualify for the Foreign Earned Income Exclusion (FEIE), meaning that those earning less than $92,900 for 2011 owe no U.S. income tax.

Now, in addition to the Foreign Bank and Financial Accounts Report (FBAR) that requires Americans and Green Card holders to report any foreign financial account over an aggregate of $10,000, the banks themselves come into play.

The Foreign Account Tax Compliance Act (FATCA) that became law in March 2010 obliges Americans to file an additional form (8938) with all foreign investments and partnerships, and requires banks to report on clients’ accounts of over $50,000. The idea is to create a mechanism to track American investments abroad, thereby making life harder for tax evaders. And everybody else.

As always, U.S. taxpayers must file income tax returns regardless of country of residence. Higher earners can, in most cases, take advantage of certain provisions: treaties to alleviate double taxation, a foreign housing exclusion for employees, or a housing deduction for the self-employed.

“Even if you make more than that, you can take a credit in the U.S. for the tax you pay in Austria,” Sexton explained. In countries like Austria, where taxes are generally higher than in America, many remain exempt.

“If you own part of a foreign corporation, a foreign partnership, a foreign trust, you’re supposed to file disclosure with your tax return,” Sexton said, “but all that has been around for 30 years, it just hasn’t been publicised.”

Due to the media coverage of FATCA, long-standing obligations are now more well-known, and the IRS has generated lots of publicity for legislation giving citizens the option to divulge undisclosed assets voluntarily without penalty.

Here’s how it works: Non-U.S. banks that comply with FATCA ask their American clients to fill out a W9 form, identifying them as an American taxpayer. The IRS then has the right to audit the foreign bank. In cases where the banks don’t comply, the IRS has the right to withhold 30% of their U.S. clients’ gains, dividends and interest on investments held in American -correspondent banks, for tax purposes.

“We have a lot of clients who live abroad who are having an increasingly difficult time conducting their business because of their American citizenship,” said Sexton. “The banks don’t want to deal with them.”

The penalties for non-compliance only affect the clients, not the banks, and fines can range from $10,000 for failure to file, to up to $50,000 if the non-compliance continues after IRS notification. The Esquire Group has also had a client whose passport renewal was held up until she filed her back taxes.

Changes in Austrian banking

Five EU countries (France, Germany, Italy, Spain and the U.K.) have already issued a joint statement of compliance with FATCA, under which banks report to their governments, which use existing tax treaties to inform the IRS.

The specific measures are not yet in place, but as Robert W. Wood of Forbes magazine suggests, “the approach under discussion would enhance compliance and facilitate enforcement to the benefit of all parties.”

However, some banks are saying no. Deutsche Bank closed the investment accounts of all American clients as of November 2011, pointing to the high cost of complying with the reporting requirements.

Austria is also not keen on cooperating with the Act, according to Harald Waiglein, spokesman for the Federal Ministry of Finance. “We spoke with our banks here and got the impression that they could not fulfil FATCA requirements,” he said, citing the effort and possible illegality of researching the investments and worldwide interests of each client. In any case, he said, it would be redundant because Austria already has a double taxation agreement.

Most of the Austrian bank staff we spoke to didn’t yet know about the new requirement, but it is definitely affecting business. Sexton guessed that banks that don’t comply with FATCA are “just not going to do business with Americans.”

Erste Bank has agreed to cooperate with FATCA, Bawag PSK is still evaluating, Raiffeisen wants to comply, but says it’s still a “work-in-progress”. According to Matthias Raftl of Bank Austria, which has 10,000 American clients in total, the bank “will continue to offer custodial accounts and all other services.” However Raftl stressed that the actual decision is with the U.S. citizen “whether it may be becoming too complicated to have investments in foreign banks.”

Sexton agrees it’s becoming a lot more complicated. “Foreign companies that want to do business have to certify that they don’t have American owners of 10% or more,” he said. “And if they don’t, there is withholding on payments to those entities.”

All in all, it is not an easy time to be an American abroad.

 

Frequently Asked Questions:

 

  • If I’m a dual citizen, do the same requirements apply?

–       Yes, if you have an American passport you are required to comply.

 

  • Do my tax obligations affect my non-American spouse?

–       Not when it comes to filing, but there can be effects on gift and estate tax.

 

  • What should I do if I haven’t filed in years?

–       File! If you file or correct a past tax return of your own accord there should be no penalty, but do get tax advice.

 

  • Will FATCA really help stop tax evaders?

–       Perhaps, many Americans say that the fact that five countries agree to comply is a sign of good will towards tracing tax evasion world wide.

 

  • Where can I get help with filing my U.S. Taxes?

–       Deloitte,  Price Waterhouse Coopers.

 

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