Higher Court Decision Confirms – FATCA Is Here to Stay
The linchpin legislation of the U.S. government in its effort to combat tax evasion abroad over recent years has been the Foreign Account Tax Compliance Act (FATCA). Last week, the latest legal challenge to FATCA was thwarted when the United States Court of Appeals for the Sixth Circuit affirmed a lower court’s decision to dismiss the case against FATCA.
Quick FATCA Background
The main objective behind FATCA is to combat offshore tax evasion by: (1) requiring U.S. citizens, including those living abroad, to report their holdings in foreign financial accounts and their foreign assets on an annual basis to the IRS, and (2) requiring foreign financial institutions (“FFIs”) (which include just about every foreign bank, investment house and even some foreign insurance companies) to report to the IRS the balances in the accounts held by customers who are U.S. citizens.
If U.S. tax return filers don’t comply with the FATCA rules, they can be subject to severe penalties, and if foreign banks and other institutions don’t comply, they and their account holders can be subject to an automatic 30% withholding tax on U.S.-source payments such as interest and dividends.
FATCA has impacted U.S. expats in many important ways. Most importantly, it has allowed the IRS to extend its global tax reach further than ever before. Local foreign banks are requiring U.S. citizens to sign a Form W-9 or similar documentation verifying their citizenship. Mass amounts of account information are currently being sent to the IRS. It is, therefore, becoming an increasingly bad idea for non-filing U.S. expats to hide their heads in the sand.
In addition, annual IRS information reporting requirements have increased significantly with the addition of Form 8938, the so-called FATCA form which must be filed to disclose specific information about one’s foreign financial assets.
Complying with FATCA has also proved quite expensive for banks and other financial institutions, with costs relating mainly to making processes and systems compliant with the FATCA regulations. Banks that want to be viewed by the IRS as FATCA compliant must also make certifications to the IRS regarding its U.S. customers, including those who were account holders prior to starting the process of FATCA registration.
Latest FATCA Challenge
In Crawford, et al, v. Department of the Treasury, et al (CA 6, 08/18/2017), Senator Rand Paul, a Republican senator and ardent opponent of FATCA, and several individual plaintiffs, challenged aspects of both FATCA and the Foreign Bank Account Report (FBAR) requirements. The Court of Appeals cited numerous different grounds for its decision with respect to the provisions challenged by the plaintiffs. For example, it found that Senator Paul’s alleged harm due to being denied the right to vote on the FATCA rules was an insufficient injury for purposes of establishing “standing” before the court (i.e., the right to bring the lawsuit before the court).
Because the plaintiffs in the case were found to have no standing to bring the lawsuit, the case was dismissed by the lower court and affirmed in this case by the Court of Appeals. It remains to be seen whether the case will be appealed to the U.S Supreme Court.
While some members of Congress and activist citizens continue to challenge FATCA, it remains the law of the land for now and for the foreseeable future. We will continue to monitor government actions involving FATCA and provide updates to you on our blog and monthly newsletters.
Joshua Ashman, CPA is a U.S. trained and licensed tax accountant. Joshua specializes in the areas of international taxation and expat taxation. Joshua has extensive experience with international compliance and expat tax returns and the issues that typically arise, such as reporting related to foreign pension schemes, Passive Foreign Investment Companies (PFICs), FATCA and Form 8938, FBAR reporting, foreign trust reporting on Form 3520, and reporting related to ownership of foreign corporations (Form 5471). Prior to co-founding Expat Tax Professionals LLC, Joshua held a senior-managerial position in the tax compliance practice of PwC. Joshua can be reached at firstname.lastname@example.org
Ephraim Moss, Esq. is a U.S. attorney specializing in international tax matters. Ephraim has extensive experience in counseling clients on matters such as cross-border tax structures, tax return treaty positions, expatriation matters, and disclosure of foreign financial accounts. In recent years, Ephraim has focused his practice on assisting delinquent taxpayers with utilizing the various IRS disclosure programs and has regularly represented clients before the IRS. Prior to co-founding Expat Tax Professionals LLC, Ephraim held a managerial position in the international tax practice of Ernst & Young. Ephraim can be reached at email@example.com