NCPA - National Center for Policy Analysis

The IRS Taxes Americans on Money Earned in Foreign Countries

March 19, 2015

The United States is one of only two countries in the world that taxes its citizens on everything they earn anywhere in the world. Every other country taxes its citizens only on the income they earn at home. However, the Foreign Account Tax Compliance Act (FATCA) requires U.S. citizens with foreign accounts to file a Form FBAR along with their annual tax return, declaring their foreign bank accounts. Failure to declare an account incurs a $10,000 fine.

The U.S. Treasury still believed it was losing as much as $100 billion annually in unpaid taxes from offshore sources.

  • FATCA imposes reporting requirements not just on U.S. taxpayers who hold foreign accounts, but also, and more importantly, on the foreign financial institutions (FFIs) in which those accounts are held.
  • FFIs were required to enter into a special agreement with the IRS by June 30, 2013, obligating them to identify and account to the IRS on their U.S. accountholders, and to impose and pay the IRS a 30% withholding penalty on any payments of American source income made to accountholders who fail to provide sufficient information to determine whether or not they are American.
  • According to the Treasury, more than 145,000 foreign financial institutions have now registered, in effect having been forced to become agents of the IRS, and raising all sorts of banking privacy issues both here and in their own countries. Other financial institutions have reportedly chosen to shut their doors to U.S.

This problem stems from United States insistence, unique among developed countries that its citizens — corporate and individual — pay taxes on all worldwide income. This is the same tax policy that has driven corporate tax inversions.

Source: Jeffrey Lerner, "The Foreign Account Tax Compliance Act - The Heavy Hand of the IRS Reaches Outside U.S. Borders," National Center for Policy Analysis, March 19, 2015.  

 

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