The government is trillions of dollars in debt and raising taxes is never a very popular option for politicians… but going after taxes that should have been paid, but weren’t? That rarely loses Congress a vote, and so today’s expats are the new white whale of the IRS. Specifically, the U.S. Foreign Account Tax Compliance Act, which requires all businesses to report assets held by Americans, is intended to help the U.S. government collect the billions upon billions of dollars it has lost, and continues to lose, to tax evasion.
The Government Who Knew Too Little
Whether you agree with FATCA or not, it will nevertheless have an impact on your finances, especially if you’re an expatriate living abroad. In fact, many expatriates have been renouncing their American citizenship in order to avoid paying their back taxes, but even this may not save you from the tax man. Successful renunciation of U.S. citizenship is conditional, pending the payment of all back taxes. The government can simply refuse to let you go until you’ve paid your tab, and even after you’ve renounced your citizenship, the IRS can still collect from former citizens who owe significant back taxes. This is an unusual situation for expats to find themselves in. Traditionally, expatriates have had an easy time of avoiding most taxes. Most recently, unless you made more than $95,000 in a year while working and living abroad, you paid no U.S. taxes, only local taxes… and in many countries, that doesn’t amount to much. When you then consider the opportunity to hide your funds and assets away in banks and other financial institutions, it wasn’t difficult to make well over $95,000 abroad and still keep every dime of it. That is no longer the case, as the U.S. government is working to strike at one of the great enablers of U.S. tax evasion: foreign banks. Specifically, foreign institutions must report every asset belonging to its American customers, including savings accounts, pension funds, investments, and more. Unfortunately, the cost of complying with FATCA could be considerable, while failure to comply could result in a 30% tax on U.S.-sourced income for a business.
First World Problems As a result, many foreign banks are releasing or turning away American customers. It is simply too expensive, and too fraught with risk, for some institutions to take on American clients and therefore become subject to FATCA’s strictures and penalties. Consequently, Americans are having difficulty acquiring financial services abroad, from mortgages to insurance policies to pension plans. As the law continues to see implementation and enforcement, Americans are expected to experience even more difficulties with foreign banking institutions. Generally speaking, expats who have previously undeclared assets must have a 27.5% penalty paid on them. If you have some rather hefty assets that you have been neglecting to declare, this can amount to quite a stiff penalty… but it is often better than renouncing citizenship, wherein you must still pay the penalty and then lack the benefits that come with American citizenship. There are some ways around these penalties. Some families set up foreign grantor trusts that allow them to choose one family member who does not have U.S. citizenship to be the settlor. In this arrangement, assets are typically placed in a trust for the family’s children who do have U.S. citizenship. The income from these trusts is not subject to U.S. taxes, but the settlor has the right to withdraw assets from the trust at any time. That takes a considerable amount of trust! (Pardon the terrible pun.)
How I Learned to Stop Worrying and Love the IRS
As American expatriates struggle with FATCA’s new paperwork and weight their options regarding back taxes, assets, and citizenship, it is important to keep in mind the benefits that come with being an American. American taxes are still among the lowest in the world outside of some nations where you probably don’t want to be a citizen anyway. Additionally, the benefits of citizenship – your rights, the protection of the U.S. government – are considerable, and many other nations will simply not afford you the same protections and benefits.
Rather than fret over these new laws, you are best off forming a relationship with an accountant who understands FATCA and other U.S. tax laws related to expatriates. Additionally, there are banking institutions who have departments that specialize in dealing with expatriates, and who will gladly accept business from Americans despite the new laws and regulations. If you are smart about FATCA, you can weather the storm and come out the other end just as financially healthy as before, if not more so.