FATCA and “Trump Bump” Potential Causes for Record Amount of Citizenship Renunciations
The numbers are in from the Treasury Department, and 2016 easily broke the record for U.S. citizenship renunciations. 2016 saw a total of 5,411 renunciations, well above 2015’s previous record of 4,279.
Citizenship renunciations come with a number of important tax consequences, some of which are more obvious than others. We recently published an article on CNBC.com on this very topic – exposing the hidden tax costs of renouncing citizenship.
Two of the reasons that have been cited for the significant increase in renunciations are: (1) the global strengthening and influence of the Foreign Account Tax Compliance Act (“FATCA”); and (2) President Trump’s election win in November of last year (the “Trump bump”). While the Trump election falls under a more political purview, FATCA is a taxation-based concept that we have followed closely because of the enormous effects it has had on U.S. expats and financial institutions worldwide.
Foreign Account Tax Compliance Act (FATCA)
FATCA was originally enacted in 2010, but has been implemented in phases over the past several years. FATCA’s purpose is to combat offshore tax evasion by requiring U.S. citizens to report their holdings in foreign financial accounts and their foreign assets on an annual basis to the IRS. As part of the implementation of FATCA, the IRS requires certain U.S. citizens to report the total value of their “foreign financial assets” on the FATCA Form 8938, which is attached to the personal income tax return.
FATCA and Foreign Bank Accounts
In order to further enforce FATCA reporting, starting on January 1, 2014, foreign financial institutions (“FFIs”), including foreign banks, became required to report the balances in the accounts held by customers who are U.S. citizens, either directly to the IRS or to their foreign governments. The U.S. government has signed a number of intergovernmental agreements (“IGAs”) with many countries for the purpose of exchanging bank account information.
FATCA’s Growing Influence
Over the past several years, many of our clients have shared the same or similar “FATCA experience” with us – their local bank issued a letter demanding that they provide a Form W9 (declaring their status as U.S. citizens) and sign a waiver of confidentiality agreement whereby they allow the bank to provide information about their account to the IRS. In some cases, foreign banks have closed the accounts of expats who refuse to cooperate. In other cases, they have frozen accounts or liquidated investments.
In 2016, further provisions of FATCA were implemented across the globe, and large amounts of digital information were exchanged between the U.S. and its FATCA partner countries. This could well be the reason, or at least one of the reasons, so many Americans renounced in 2016.
While there have been some calls for a FATCA repeal or modification in Congress, FATCA remains the law of the land for now. We will continue to monitor governmental actions involving FATCA and provide updates to you in our blog and monthly newsletters.
By Ephraim Moss, Esq. & Joshua Ashman, CPA