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FATCA: What every expat needs to know

By Jim Karger

The following is the first part of a two-part interview with Mark Nestmann, a consultant in Phoenix, Arizona. Mr. Nestmann’s practice focuses on wealth preservation and international tax planning, with a focus on US citizens and green card holders living outside the United States.

Jim Karger: Thanks for your time, Mark. The term “FATCA” is on the lips of many US expats today.  What is FATCA?

Mark Nestmann: FATCA is an acronym for the Foreign Account Tax Compliance Act. This legislation was enacted in the US In 2010 and has two major parts: The first part requires non-US banks and financial institutions to report information on all US persons beginning on July 1, 2014. Beginning on that date, foreign banks and governments will begin providing the US government information that will assist the IRS to determine whether US citizens have been properly reporting their foreign accounts and foreign assets. Uncooperative banks and other “foreign financial institutions” and “non-financial foreign entities” may be subject to a 30 percent withholding tax on certain transfers out of the United States to their institutions.

The second part expands the reporting obligations a US citizen or permanent resident has with respect to reporting their non-US investments and certain assets. The individual reporting requirements include filing a FBAR (Form 114, formerly known as Form TDF-90-22.1). Specifically, US citizens and permanent residents with more than US$10,000 or equivalent have to file this form yearly with the US Department of the Treasury identifying their foreign banking accounts among other things. This predates FATCA and has been in effect since 1970, although it wasn’t widely enforced until a few years ago. FATCA adds an obligation to file Form 8938 with one’s US tax return by anyone who has any taxable income and who has US$50,000 or more in foreign financial assets, including shares in foreign corporations. This threshold is increased significantly if you are married filing jointly and/or have a bona fide residence outside the USA.

JK: What is the purpose of FATCA?

MN: The ostensible purpose is to cut down on US tax evasion. The US government believes US taxpayers evade US$100 billion or more in taxes through unreported and untaxed offshore investments annually. Unfortunately, there is no support for this number. That would require approximately US$350 billion in total annual unreported income. That means several trillion dollars of money sloshing around out there to generate that income- an amount approaching the gross national product of the US. That is, of course, ludicrous. The fact is there has been no critical analysis on exactly how much income has been untaxed outside the United States. Indeed, there is a question whether the cost to the US and other governments will exceed taxes recovered.

JK:Who does FATCA affect exactly?

MN: US citizens and permanent residents regardless where they live in the world.

JK: How can a US law be enforced against foreign banks not within their jurisdiction?

MN: Might makes right in this case. Congress cleverly imposed a very robust penalty framework in the form of a 30 percent withholding tax for many outgoing transfers to banks who do not comply. So, these banks will receive 30 percent less of all outgoing payments ordered from US banks. This has a real prospect of paralyzing the global financial system. Not only are non-compliant banks affected by this but compliant banks have to be concerned about doing business with non-compliant banks. The tendency after July 1, 2014 may be for banks to make precautionary 30 percent withholdings from payments leaving the US, send the money to the IRS, thus forcing the recipient banks to deal with the IRS. For US citizens and green card holders living outside the USA as expats, this could make life very difficult if they also bank outside the US.

JK: Will most foreign banks comply? Why?

MN: Hard to say, but banks seem to be working with one of two models – one is an intergovernmental agreement arrangement in which the foreign banks will turn over information on US persons to their own tax authority and that government, in turn, will turn the information over to the US IRS. About 15 of these agreements have been signed. Mexico is one of those. The other model is for foreign banks to turn over the required information directly to the IRS.

JK: What kind of information will the United States Internal Revenue Service be receiving from banks in Mexico or the Mexican government and when?

MN:They will receive the same information that would be shown on a Form 1099 – interest, dividends, short term gain, long term gain. The same kind of information the IRS expects from US banks.

JK: What will the IRS do with that information?

MN: They will match it up against the tax return sent by the American taxpayer. They will compare the information shown on the return with the FATCA information provided by foreign banks. If it shows an account that has not been disclosed on the FBAR or 8938, then the taxpayer will probably get a notice saying the IRS had not received the form and the return will be audited. Potentially, if it is enough money they may send IRS agents directly to the taxpayer’s door. This has already happened in Panama, even though the IRS has no jurisdiction there. I am not sure if this is happening in Mexico yet, but expats there should anticipate no less.

JK: The IRS, no doubt, will discover many unreported foreign accounts. What are the penalties?

MN: For an unreported offshore account, there is a negligence penalty as low as US$500 but if there is unreported income the government can demand 50 percent of the highest balance in the account over the preceding eight years. There are also criminal penalties if there is a significant unreported amount that can result in five years in federal prison. Enforcement has been and will continue to be ruthless. For example, the IRS recently attempted to put a Holocaust survivor who had unreported accounts in prison, indicating it is not just the big fish they want.

JK: What about gold? How is it regulated by FATCA if at all?

MN: Gold is a non-financial asset and so if you have physical gold in your own possession it is not reportable on either the FBAR or the 8938. But if you have a gold account, like GoldMoney, it is reportable on the FBAR form, and probably on the 8938. The IRS did try to provide a guidance on this last year and said if you hold gold “directly” it is not reportable, but were not clear on what that means. We take the position that having it in your possession there is no reporting, but if you don’t have direct access to it, e.g., you have to ask someone to open the safety deposit box or have a gold account as in with Gold Money or a Perth Certificate, these are reportable.

JK: I have read something about “accidental Americans” and how this group will be affected. Who are they and how will they be affected?

MN: A good example is a friend of mine I met when I attended the international tax law program at the Vienna School of Economics & Business Administration. He is Iranian by nationality but his father was stationed in the US as a military attache for a few years while the Shah was still in power, and he was born in the US. He is a US citizen and travels on a US passport. I asked him if he had been filing a US tax return and he was shocked at the question. He had never filed a US tax return, FBAR or 8938. Now it is just a matter of time before he and others like him are caught up in this, even though he pays far higher taxes in Austria than he would in the US.

Anyone born in the US is a US citizen under the 14th Amendment even if they remained there for only a few days. This happened to a fellow whose parents crossed over into the US from Canada to have him at a hospital close by. Many years later as an adult he attended a closing on a piece of property he was buying in the US. Not long afterwards, two IRS agents showed up and threatened to arrest him for failing to file US tax returns.

Canadian readers may want to take a look at this article:

JK: What are the choices, if any, that expats with unreported foreign accounts have today, less than six months before FATCA takes effect?

MN: If there is no unreported income, the taxpayer can file forms back as far as eight years and amended returns and there is no penalty, but if there is tax owed, there is a voluntary disclosure program where the taxpayer pays a penalty of 27½ percent of the highest balance in the account in the last eight years plus penalties plus interest for the promise of non-prosecution under US criminal statutes. About 15,000 have participated in this program to date. The rub is that if the taxpayer is audited before they enter the voluntary program they are ineligible to participate in the voluntary disclosure program. Also, the IRS can refuse to permit participation in the program even after the taxpayer has self-identified.

JK: Can the IRS take your Social Security for these kinds of unpaid taxes and penalties?

MN: Yes, unfortunately if you have an unpaid tax obligation, the IRS can levy on your social security check–up to 100 percent.

JK: What is your advice for those who are not in compliance or unsure?

MN: Consult with competent tax counsel and determine the best alternative going forward.

JK: Is there any way for a US citizen to avoid all of this?

MN: Yes, you can decide to no longer be a US citizen and expatriate. Thank you, Mark. We will discuss just that, expatriation, in our next interview.


Jim Karger is a 12-year resident of San Miguel de Allende, practiced law in the US. He does not provide tax advice to individuals.


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