Most Americans—even those reading business papers such as The Wall Street Journal—probably have never heard of a Treasury regulation called FATCA, but the obscure acronym has become a commonly read epithet in the foreign press.
While Americans are absorbed by an IRS scandal involving harassment of taxpayers politically opposed to the administration, foreigners are scandalized by a sweeping U.S. law requiring foreign financial institutions to collect data on U.S. citizens or clients with foreign bank accounts worth $50,000 or more, or send the IRS a 30% withholding tax on securities transactions originating in the U.S.
Foreign banks, overwhelmed by the difficulty of locating customers whom the U.S. regards as citizens and reluctant to divert their revenue to the IRS, won a brief respite Friday when the IRS announced a six-month extension of the compliance deadline to July 1, 2014. Implementation of the law has been extended many times since its 2010 approval.
The U.S. Treasury has imposed FATCA — the Foreign Account Tax Compliance Act — through intergovernmental agreements as part of its ongoing effort to tackle tax evasion by wealthy Americans. But its requirements have a quite broad reach.
In an op-ed in The Wall Street Journal online Wednesday, Colleen Graffy, a law professor at Pepperdine University in Malibu who also serves as director of the university’s London Law Campus, says the government’s reliance on FATCA as an enforcement tool is like using a sledgehammer to crack a nut:
“Imagine this: You were born in California, moved to New York for education or work, fell in love, married and had children. Even though you have faithfully paid taxes in New York and haven’t lived in California for 25 years, suppose California law required that you also file your taxes there because you were born there. Though you may never have held a bank account in California, you must report all of your financial holdings to the state of California. Are you a signatory on your spouse’s account? Then you must declare his bank accounts, too. Your children, now adults, have never been west of the Mississippi but they too must file their taxes in both California and New York and report any bank accounts they or their spouses may have because they are considered Californians by virtue of one parent’s birthplace.”
Graffy, who must file taxes in both the U.S. and U.K., even more laments the burden on U.S. citizens (unlike her) who live full time in a foreign country. While it is increasingly common for U.S. citizens to retire abroad, some have even more attenuated ties to the U.S. Writes Graffey:
“Many, like the very British mayor of London, Boris Johnson, are ‘accidental Americans.’ He was born in New York, where his father worked for the U.N. And unless Mr. Johnson has actively renounced his citizenship, which requires an appointment at a U.S. Embassy, forms and fees, he is still an American citizen… Mr. Johnson, have you filed your taxes and reported all your U.K. bank accounts to the U.S. Department of Treasury yet?”