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Wednesday, July 17, 2013

FATCA: How to Lose Friends, Citizens and Influence

Wall Street Journal op-ed:  FATCA: How to Lose Friends, Citizens and Influence, by Colleen Graffy (Pepperdine):

Beware the sledgehammer used to crack the nut. In this case, the nut is the U.S. government's laudable goal of catching tax evaders. The sledgehammer is the overreaching effect of legislation that is alienating other countries and resulting in millions of U.S. citizens abroad being forced to either painfully reconsider their nationality, or face a lifetime of onerous bureaucracy, expense and privacy invasion. The legislation is FATCA, the Foreign Account Tax Compliance Act. ...

A particularly alarming aspect of FATCA is that it seeks to co-opt foreign banks as long-arm enforcement agencies of the IRS—even when it might contravene that country's own privacy or data-protection laws. If financial institutions don't report U.S. citizens holding accounts with them, these institutions face a 30% withholding tax on securities transactions that originate in the U.S. Given this threat, why allow an American, or even suspected American, to bank with you? The reporting costs, and the consequences of a mistake, are too onerous. ...

The core injustice in America's tax policy is that it is based on citizenship rather than residency. This novel approach is practiced by only two countries in the world: the U.S. and Eritrea. Ironically, then-U.S. Ambassador to the U.N. Susan Rice condemned this practice by Eritrea in 2011 as "the extortion of a 'diaspora tax' from people of Eritrean descent living overseas." Many would describe U.S. practice in similar terms. ... Let's find another way to crack this nut.

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Comments

I'm a tax professional, and I see even worse potential effects on our Asian clients.

In many of those countries, there isn't any working system of inheritance law. So the usual way to provide for your children's future is to put their names on the house or the bank account, without telling them.

Result: When one of those kids moves to the US, he/she is an instant felon, without even knowing it. And a huge number of those people are going to be screwed by the system if this law is allowed to stand.

The law also imposes $40k penalties on preparers who make mistakes on the FATCA forms, or file them late, or fail to file them when required.

I'm not a lawyer, but it seems to me there ought to be an open-and-shut Eighth Amendment (excessive fines) case against this law. How hard is it likely to be to get the courts to go along with that view?

Posted by: John David Galt | Jul 30, 2013 9:25:00 PM