Monday, August 13, 2012

Understanding The FATCA Regulations: The Search For Suspected Americans With Offshore Accounts

Recently, a for profit promoter in London was able to convince the IRS Office of Chief Counsel to allow two of its very qualified senior attorneys to speak via satellite link to a withholding congress group about the new FATCA Regulations. This presentation has been released on YouTube and is made available to those who follow my blog here.

A few words of caution. In my experience, a lot of the blather on the internet (particularly from the more strident, hysterical websites) is published by people who have never read the FATCA Regulations and have no working knowledge about the concepts involved, namely exactly what it is going to take for a foreign financial institution ("FFI") like a Canadian bank for example, to fulfill its duties as a withholding agent for the US government. So for those readers who attempt to watch this video, it would be best to actually read the Regulations before attempting to understand what is being presented here. That said, this video is actually pretty scary! For all the complaints about US overreaching with FATCA, the dead seriousness of the presenters here shows that the US government is proceeding full steam ahead, as if foreign banks were forming a long line to submit their FATCA registration applications to the IRS in 2013 so that they can remain in the good graces of the IRS while they themselves cash in on FATCA and make it part of their business models. If there is any movement at all in mitigating the reach of FATCA, it is not present here. The FATCA train has long left the station and foreign financial institutions have quite a big job ahead of them before they are allowed to continue to play with the big boys.




  1. Being somewhat familar with the world of IT consulting I don't doubt there is a substantial amount of money being spent on compliance right now. It would not shock me if right now there are individual "FATCA Consultants" that are going to make personally over a million dollars this year. So while many might have concerns are things like "soveriegnty" I suspect if given a chance to personally make over a million dollars doing FATCA implementation consulting I suspect these types of concerns are quickly forgotten. Now also speaking from personal experience these types of projects have very high failure rates over fifty percent in many cases. Given the legal and technical conflicts there is little evidence from my standpoint to see as yet how FATCA is going to be in the sucess category. Now from the standpoint of the take the money and run FATCA "consultants" it will be very much a sucess for them personally.

    Now the two people from Counsel's office are quite serious in that video and I am sure very well educated in all but just in the course of doing the video the forgot something. That is that Canada and the US share the same international dialing code. Thus during the discussion about US Phone Numbers it is not as simple as picking out all of the +1 Country Code numbers as the two attorney's seem to imply it is really a question of digging down and sorting out all of the Canadian area codes from US Area Codes. Now there is a list that tells you what code belongs to what country but it is not as certain from a compliance standpoint as with top level country codes. Again from personal experience these types of software development specification will literally cost a major bank a couple of million dollars in compliance and programming costs.

    Now me personally if I was running a major bank(which I don't) and if I made a determination that we should become a participating institutions I would want my management team to come up with plans and processes for dealing with the following:

    1. Outreach to Canadian Customers both US Person and non US Person.
    2. Outreach to Canadian elected officials
    3. Outreach to Canadian Media.
    4. Strategy for dealing with litigation under Canadian law in Canadian courts
    5. Outreach to US Congress/Executive Branch
    6. Outreach to IRS
    7. Outreach to US Media.
    8. Plan for dealing with non-compliance if compliance is not possible.
    9. Plan for controlling IT and compliance costs. Make sure the bank doesn't make hired "FATCA Consultants" multi millionaries.

    Now if I was grading most institutions if not all institutions I would probably give them an F on just about everything other than maybe number 6. An F might actually be too harsh because could argue they maybe never even attended the course.

  2. The IRS has admitted that they haven't collected $385 billion in taxes owed INSIDE THE USA!

    Of this amount, $3 billion is owed by employees of the Federal government, including over $800,000 by Pres. Obama's advisors!

    Then the report just came from TIGTA that the IRS has deliberately not investigated sending refund checks to crooks to the tune of $21 billion.

    Add to that damaging report, the next TIGTA report of illegal immigrants submitting false tax returns claiming fictitious children and receiving refunds. Then is all the fraud related to ITN lack of screening in the IRS processing centers that has shocked the TIGTA Auditor General, and has resulted in calls for Shulman to resign by a member of the House Ways and Means Committee.

    The Federal Reserve estimates that $150 billion is send in cash overseas each year. The assumption is most of this is from illegal immigrants sending it to their families.

    That's $150 billion that hasn't been taxed either. Levying just a 1% tax on those transfers would yield TWICE the amount of money the IRS estimates it will get through the entire FATCA process!

    And yet, America continues to focus offshore, when the biggest Tax haven in the world, is right on shore, and nothing much is being done! Oh, I guess it is, as capital flight has aready started as a result of the IRS unilateral imposition of the domestic version of FATCA.

    Talk about misplaced priorities with this FATCA freight train. No wonder the world sees the hypocrisy in all these "serious" efforts by those two little bureaucrats on the video! The "Best and the Brightest" Is there any wonder so little respect and trust in the IRS is left!

  3. I haven't read FATCA regulations and doing so won't result in banks no longer refusing to refinance my mortgage since I'm still a US person. So, maybe those who read FATCA regulations can explain why it failed to protect the innocent from being unnecessarily harmed. When regulations cause unnecessary harm to the innocent, such as with the case of FATCA, then they are obviously seriously wrong and need to be scrapped until they can be redesigned in such a way that they protect the innocent.

    1. And expatami; I'm glad you said it. Because when I watch those people from the IRS, and they are so cold, talking about tracking us all down like we're rabid dogs - they don't see that most of us are just ordinary people. And they obviously don't want for anything - and all on the public tab - how much do you think they cost the US in taxes? And I know that I don't even owe the US any tax money. I don't even make enough to pay much tax where I live - but I've always paid whatever was owed here at home. I have two jobs that don't even make one fulltime, with no benefits, and no guaranteed hours. I make 14. and change an hour and I'm having trouble doing my jobs because I've got glaucoma and my eyesight is going. My eyedrops cost 70. for a teeny bottle every month. I need new glasses, but can't afford them. I'm using up the savings that were set aside for my kid's education, but is now going to pay the special US tax accountant and lawyer.

      And I've been waiting for months for those 'special' 'commonsense' 'simplified' methods of getting compliant. And I don't have any reason to believe that they'll do anything for the innocent. If the US just wanted to see what taxable interest I had on my accounts, I could just have given them my government tax slips from the bank. But that's not what they want - why? If they say that all they really want is to see what's in our accounts outside the US? Which are only considered 'foreign' by the US, but are local to me because I don't live in the US? And that is after already having the US tax returns with our income on them?

      So, at 14. per hour, how many hours will it take me to pay for having someone do my returns and bank forms, and then hopefully give up US citizenship - and pay $450 for exit tax? Was that worth it to the US? And do they owe me anything if I'm a citizen enough to be taxed and fined, then, what do I get in exchange?

      I thought a lot about killing myself, I was so depressed when I found out about all this, and found out how much the accountant and lawyer would be. You can imagine how mad my husband is, and he's not an American. I couldn't eat or sleep at all - and couldn't understand the forms or the instructions, which is why I had to pay for help. And, I was too afraid of making a mistake. All I could think about was that this was some kind of hallucination - because nothing this crazy and wrong could be possible. We're not in Syria or Iran right?

      What do I tell my child about why their education money is gone? I never even lived in the US as an adult, or worked there. My parents moved away when I was a tiny kid.

  4. A broken man on a Halifax pierAugust 15, 2012 at 10:36 AM

    How are banks which never collected birthplace or nationality information from their customers in the first place supposed to identify their US customers?

    1. Broken Man: the FATCA regulations contain a detailed road map/check list on the drill foreign and correspondence banks have to go through to see if there are any “indicia” or indications that the true account owner is an American. Examples are, using a post box address, sending correspondence in care of an attorney, asking the bank to refrain from sending statements etc. The theory is they may not get them all, but they hope that the rules are broad enough to catch some of them.

  5. @A Broken Man: Not only have the banks in Canada never gathered that information in the first place, doing so under current Canadian law is a violation of Canadian banking, privacy and human rights laws.

    Canadian banks know it, Canadian government knows it and we know it. If the banks violate our rights, we may have grounds for a lawsuit against the banks. If Canadian government changes the law to accommodate a foreign government, we may have grounds for a Charter challenge against the government. Either way, lawsuits, await.

    Of course, IRS simply does not care about laws and constitutions of other countries. They think only those of United States of Arrogance have any place in the world.

    Canada needs to give IRS bullies a clear message. Canadian laws are made in Ottawa, not in Washington. Canadian laws will not be changed to accommodate a foreign government. IRS has absolutely no jurisdiction in Canadian courts. That should be the end of the story (but I suspect it isn't).

    1. Hi Blaze: thanks for commenting. My friends like you in Canada obviously know the Canadian law and I do not purport to do so. What I do know is the banks in other parts of the world who have already decided that they are going to comply with FATCA are saying to themselves, “this is the drill we have to go through to get the United States to sign off on our Know Your Customer rules. We can only do our best to identify our American depositors and report them to the IRS. If we miss some, tough luck, we’ll do the best we can.”
      Also don’t forget about the country to country FATCA agreements where foreign banks will report their Americans to their respective treasury departments who in turn, will deal with the IRS. It will be interesting to see whether the FATCA architects can find a way to avoid the privacy concerns Blaze points out through the details of those agreements.

    2. Steven and Blaze,

      One perspective I view this whole issue from is that FATCA is not actually so much about the nuts and bolts of complying with the law as it deterance. At the end of the day the Income Tax as they like to say is a "voluntary" "self asessment" system. Thus I suspect and this is what others in the industry have told me from the perspective of the IRS they would actually prefer to do "Intergovernmental Agreements" with countries like Switzerland, the Cayman Islands, Jersey etc and deal with the complexities of the Canada's, China's and Russia's down the road. From the perspective of the IRS putting out a press release saying we have signed an intergovernmental agreement to implement FATCA with the Cayman Islands is far more valuable from a deterance and "PR" standpoint than signing agreements with Canada, Australia, etc. No US "resident" tax cheat ever thought of Australia or Canada as a tax haven to begin with.

    3. Very good article in Canadian Tax Journal on Canadian specific issues related to FATCA and FBAR. One problem before today I was not aware of is beyond everything else discussed already some of the information requested of FFI's like account balances is information Canada Revenue cannot even request of Canadian financial institutions on Canadian tax payers.

    4. Tim, thank you for posting that extremely valuable article. All those concerned with this issue should read it closely. It is well worth the effort, and addresses several of the questions that have come up on extraterritorial enforcement and claims in Canada. Underscores the true utility of FBAR and FATCA to the US - since they focus on transactions and post-tax assets, and not on the interest earned on post-tax funds in accounts for the purposes of calculating any actual US 'income' tax liability. FATCA and FBAR is purported to be about prevention of money laundering, terror funding, etc. in US public statements. The author lays out clearly that the true purpose is creating a new revenue stream, and generation of revenue via draconian penalties where no actual and traditional type of US taxes could possibly be assessed or owed from many of those 'abroad' due to the FEIE and Foreign Tax credit - who in any case have already paid tax to the country where they reside (and often have dual citizenship). The true intent of the US is not about assessing and collecting actual US taxes 'owed' based on unreported income. It is in fact a method to sidestep traditional tax on earnings and income, and go around provisions of the US/Canada treaty and provisions for the prevention of double taxation by the US under citizenship-based extra-territorial taxation. The author points out the layering and interaction of FBAR and FATCA requirements and penalties. Since FATCA and FBARs focus only on 'foreign' (non-US) accounts, which those deemed US taxable persons (ex. dual Canadians inheriting US status merely through parentage) living outside the US must possess in order to live, and given that their local (Canadian) accounts are deemed 'foreign' by the US; all those thus affected outside the US are being deliberately subjected to a discriminatory and confiscatory tax on post-tax assets rather than on the income and earnings basis their US resident counterparts enjoy. Most US residents hold US bank accounts where interest is reported and taxed by the IRS, but no penalty generating equivalent to FATCA's structure exists for purely domestic US held assets. The penalty revenue design is of a kind not generally applicable to those within the US who open their 'local' accounts in the US - and thus FATCA and FBAR discriminates against US citizens and 'persons' born, living and working outside the US - who have no choice but to bank where they live. Even if one entertains the slim possibility that this was not the first purpose of FATCA, there has been enough evidence of the impact on those deemed US taxable citzens/persons abroad that there can be no doubt that the potential revenue generation, and not 'compliance' is what the US intends.

    5. Given the specifi Canadian legal and policy context, the author does not address the plight of new immigrants to the US, who have pre-existing accounts in their countries of origin, but as the US would have known that the desired professionals and those with means that it would prefer to attract would necessarily have already savings and assets in their home countries - that precludes any truth in the disingenuous US claim that before the wouldbe immigrants were ever granted US status, their historic and pre-existing accounts were somehow 'hidden' from the US, and now, subject to correction via FBARs and FATCA. It would be very valuable to see equivalent and parallel articles coming from lawyers and policy experts in some of the countries from which substantial numbers of immigrants to the US originate (ex. India).

      If the US had wanted to correct the impressions above, and 'unintended consequences', it has had ample time to make that clear and to adjust policy, terms, requirements, enforcement etc. accordingly. Or to provide more information and assistance to immigrants BEFORE their pre-existing home accounts become liable for draconian penalties and complex reporting. As the US has done nothing significant in that regard to assist either those it deems taxable citizens and 'persons' in Canada, or those new to the US, I conclude, that FATCA combined with the redesigned terms and application of FBAR are actually revenue generation in disguise.

  6. @Steven: A government to government exchange of information would still single out individuals based on citizenship and require banks to demand the information about place of birth from customers. That is a violation of Canadian law.

    I find Know Your Customer offensive. I have been a customer at the same bank for 32 years and at the same credit union for 20 years. They both know me well. What does that have to do with a foreign government?!?

    There is already a tax treaty between Canada and US for exchange of information on residents of each country. That should suffice.

    1. @Blaze

      In Canada the KYC rules are found in the Proceeds of Crime and Terrorist Financing Act(PCMLTFA). They apply using the Federal Governments criminal law powers to both provincial and federal financial institutions along with "money service" businesses such as Casinos that handle a lot of cash. There is nothing in this law that asks for information on citizenship, nationality, or place of birth. It is mainly concerned customer indentification from a strictly Canadian standpoint thus the information required are things like address, occupation, name, and telephone number.

    2. Here is the link to FINTRAC's website that describes the act.

    3. @Blaze

      It is illegal for banks to ask for this information, as you indicate. But keep in mind that the rules are different for other kinds of investments, e.g. a defined contribution pension managed by a brokerage house. These are regulated at the provincial level. On enquiring about the situation in Ontario, I learned that investment accounts can be closed by a brokerage for any reason on 30 days notice. I do know that the company managing my affairs has my citizenship (Canadian), but my bank does not.

      This is the best info I have, but I stand to be corrected by those who have looked into this more closely.

  7. @Steven: You speak about people not understanding draft FATCA regulations.

    I invite you to give us a lesson in easy to understand language at Maple Sandbox. (http//

    @Others: Please join us at Maple Sandbox to explore, learn, and share as we stand up to the IRS bullies and FATCA Monsters trying to intrude on our honest, law-abiding tax-paying lives in other countries.


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