Obama is preparing to send hundreds of IRS snoops abroad and no and it is not for an IRS team-building conference in Cancun.
America’s tax collector hopes to raise $8.7 billion over the next decade from Americans living abroad or with foreign assets overseas, a group its says chronically underreports.
The Obama administration thought they had put their finger on a long-forgotten cash cow when they decided to put American expats through the fiscal wringer. Instead, they have provoked a rebellion and left millions of law-abiding Americans feeling like criminals.
The 2010 legislation passed by the Obama administration imposes an array of expensive reporting obligations on foreign financial institutions that serve Americans abroad. FATCA, as the law is known, requires all foreign banks to turn over lists of U.S. citizens and people with connections to the U.S. along with their financial information on an annual basis.
This photo taken March 22, 2013, shows the exterior of the Internal Revenue Service (IRS) building in Washington. (AP Photo/Susan Walsh)
The law is meant to crack down on tax evaders, which is a commendable pursuit in and of itself, but, in typical government fashion, it has ended up hurting the vast majority of law-abiding Americans overseas. The U.S. State Department estimates that there are 7.2 million citizens living abroad. Despite popular perception, the large majority are hard-working, modest people. Many are dual citizens whose only link to the country is an American mother or father.
The principal concerns with the law are that it costs foreign banks millions to comply and is unconstitutional to turn over such private information in many countries. FACTA doesn’t just cover American citizens, but also ‘U.S. persons’, including green card holders or even anyone with a Social Security number. For example, a British student who worked a part-time job a decade ago while studying abroad at an American college could see all of his or her financial information sent to the IRS annually.
Because FACTA requirements are illegal in many countries, the U.S. has been forced to set up special inter-governmental agreements with over 50 countries around the world. The agreements are reciprocal, meaning foreign governments get juicy details on their own citizens living in the U.S. in exchange for forcing their banks to skirt privacy laws.
JP Morgan has estimated that the compliance costs for overseas institutions serving Americans could reach $100 million for each of the major banks and Uncle Sam will levy heavy fines for those that refuse to comply. Because of the cost of complying with the rules, many banks have begun to close Americans’ bank accounts and have refused to sell financial instruments, such as insurance or mortgages.
It will become increasingly difficult for Americans to open a bank account abroad, take out a mortgage, get insurance coverage or even find a job. Under FACTA, legislation enacted as a part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010, a company that employs an American citizen with signing authority over an account that has more than $10,000 will have to disclose financial information to the U.S. government. Ironically, many companies are becoming more hesitant about hiring Americans.
Many Americans were unaware of their obligations to report income and assets abroad, are fearful of heavy fines, which can reach $10,000 for failing to fill out an "FBAR" form for a foreign bank account. Sorting out the mess can take up to 18 months and cost upwards of $20,000 in legal fees, even in the IRS’ voluntary disclosure program.
With the small, despotic nation of Eritrea, the United States is one of two countries that has a citizenship-based tax system. Contrary to a residency-based system, in which you pay taxes to the country’s government in which you reside, this means that American citizens are subject to tax and reporting requirements regardless of where they live, even if their income was not earned in and has no connection to their native land.
The small African country of Eritrea and America are the only other nations in the world to tax based on citizenship rather than residence. Credit: Google Maps Screenshot
In Eritrea, citizens are shot if they try and leave the country and, if they make it out alive, local embassies extort expats for every dime they have to fill the coffers of the bankrupt regime. Luckily, things are a little bit easier for U.S. taxpayers overseas. As an American business-owner abroad, I only have 65 pages of IRS forms to fill out every year on top of taxes in my country of residency.
Tax time can be painful, but I’ve come to accept the idea that I still have a lot of things I owe to the United States, even if its a foreign country assuring most of the government services I benefit from on a day-to-day basis. But, while millions of Americans living overseas are happy to pay taxes, they’d prefer not to be treated like second-class citizens for their choice of residency. However, the Obama administration prefers to treat expats as potential criminals rather than assets.
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