FATCA: Punishing Law-Abiding Americans Living Abroad

June 18, 2014

Congress passed the Foreign Account Tax Compliance Act (FATCA) in 2010, aiming to reduce tax evasion by making it harder for tax cheats to exploit tax havens, explains Anthony B. Kim, Senior Policy Analyst at the Heritage Foundation, and Research Fellow Curtis S. Dubay. However, Congress seems not to have recognized a side effect of FATCA: it burdens law-abiding Americans living abroad by imposing massive financial and legal costs.

FATCA demands that foreign financial institutions dealing with Americans -- from banks to insurance companies to trusts -- disclose increasingly detailed information about their American clients every year to the IRS. Armed with that information, the IRS becomes the judge of whether wrongful tax evasion has occurred.

But by asking foreign institutions to comply with the United States' incredibly complex tax laws and standards, FATCA places a huge burden on them and subjects non-compliant institutions to financial and legal penalties.  As a result, working with and for American clients is becoming increasingly risky and unprofitable for foreign financial institutions.

  • In order to avoid FATCA, some foreign financial companies have begun to deny service to Americans abroad. Some institutions have closed existing accounts of American clients.
  • Law-abiding Americans abroad now face difficulties even cashing their paychecks.

Americans living abroad are responding to the tax regime:

  • The number of Americans giving up their American citizenship increased by 221 percent between 2012 and 2013.
  • Almost 70 percent of Americans living abroad have considered giving up their citizenship, purely due to FATCA.

While Kim and Dubay write that reducing tax evasion is a positive, important objective, the law needs to be reformed, as any progress against tax evasion is coming at massive costs.

Source: Anthony B. Kim and Curtis S. Dubay, "FATCA Hurts Law-Abiding Americans Living Abroad," Heritage Foundation, June 10, 2014. 

 

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