The United States Congress most shamefully failed in its attempt to repeal or replace the obnoxious Foreign Account Tax Compliance Act (FATCA) as part of the Tax Cuts and Jobs Act bill passed in December, 2017.

This provision of the tax code requires foreign financial institutions to report the identities of American customers with foreign financial assets such as mutual funds, private equity funds, and depository accounts above a $50,000 threshold – if the taxpayer is single or filing separately from a spouse, or twice that amount if the taxpayer files jointly – to the IRS. Also, if a U.S. citizen living abroad is married to a foreign national and the couple maintains a joint banking account then the spouse’s financial information too must be reported to the authorities.

Further complicating filing requirements, and the consequent financial and legal burden for individual taxpayers, is the additional need to file an FBAR, a report on Foreign Bank and Financial Assets, if the individual owns an interest in a foreign financial account above a $10,000 threshold. So, if the taxpayer has a savings account in, say, France above the threshold he is obligated to report it in keeping with FBAR reporting requirements. The FBAR is not a requirement of the tax code, per se, but of the Office of Financial Crimes Enforcement Network, an agency separate from the IRS.

A failure to file a report on the part of the institution can lead to severe penalties. Individual taxpayers who receive a so-called FATCA letter from their foreign bank are notified that their information will be shared with the IRS directly or with their national government who in turn will disclose the information to the IRS. In some cases, the bank will ask the taxpayer to fill out an IRS Form W-9 and return it to the bank. A failure to do so can lead the bank to freeze the taxpayer’s account or close it altogether. In addition, the taxpayer can face hefty fines. A failure to report foreign financial assets or an interest in a foreign financial account can run to $10,000 per violation and then some.

This has nothing to do with a citizen’s obligation to pay taxes. In our hypothetical above, if the taxpayer’s bank account in France generates interest income then the taxpayer must report such income to the IRS. Never mind that the United States is the only industrialized nation on earth that taxes a citizen’s offshore income. FATCA and FBAR are nothing more than the latest round of assaults on the freedoms of the United States citizen.


It is noteworthy to recall the brief but critically important text of the Fourth Amendment to the Constitution:

“To be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”

President Obama signed FATCA into law in 2010 after the Democrat-controlled Congress folded the provision into an unrelated “jobs” bill. Predictably, the bill was passed along strict party lines. The ostensible reason for passage of the bill was to avoid tax evasion and money-laundering on the part of U.S. citizens. How much tax evasion was at stake has never been reported with any certainty. In the event there was money to be had, however, the Obama administration sought this bill as a way to raise revenues to help finance the jobs bill. The demagoguery had thus come full circle.

A consequence of the law’s enactment has been its trampling of citizen rights under the Fourth Amendment of the Constitution and its prohibition against unreasonable searches and seizures without a warrant and without probable cause. Apparently, this has had little sobering effect on the lawmakers who originally passed the bill as they punted on an opportunity to repeal it as part of the Tax Cuts bill passed in December, 2017.

It gets worse. In 2012, the U.S. Treasury began negotiations with many countries to enter into bi-lateral Intergovernmental Agreements (IGA’s) to enforce compliance with FATCA. These IGA’s are shameful because they were never authorized as part of FATCA and as they are country-to-country agreements they are unconstitutional: Congress never ratified such agreements. Incidentally, these IGA’s are reciprocal so the U.S. has a commensurate obligation to report to foreign jurisdictions on their citizens invested in our country.

Senator Rand Paul of Kentucky has been the loudest voice in Congress in opposition to sharing confidential taxpayer information with other countries. Senator Paul’s animus toward FATCA runs so deep that he sued the federal government to overturn it. Unfortunately, the Sixth Circuit Court of Appeals ruled against the Senator because, the court said, the senator lacked “standing.” Aggrieved plaintiffs, also, have sued the government but they too have been rebuffed by the same Circuit Court and for the same reason: “no standing.”


According to the State Department, there are nearly nine million Americans living abroad that must pay attention to FATCA and FBAR reporting requirements. That is just the expatriate count. To that number must be added the number of Americans living in the U.S. with offshore accounts. That number is more difficult to get at but we do know that according to the IRS approximately one million Americans – expatriates and citizens living in-country – have filed an FBAR. In any event, that represents a sizeable voting block that is probably licking its wounds over the government’s failure to repeal FATCA.

If the Trump Administration proposes to repeal FATCA or significantly modify it at some future date, it might win wide support from this large voter base which normally is in a deep slumber during elections. Clearly, FATCA is as overreaching as it is obnoxious. The “death tax” which was repealed in December, 2017 was as obnoxious but it affected a smaller fraction of the number of taxpayers affected by FATCA.

As is the case with much of the legislation coming out of Washington this tax policy originally intended to prevent money laundering has had its share of egregious unintended consequences. Since country of residence is meaningless to the IRS when it comes to taxing its citizens what motivation does a person have to maintain his American citizenship? In fact, many Americans living overseas have renounced their U.S. citizenship to avoid FATCA’s unwarranted intrusion.  Further, and more troubling, is that more and more foreign financial institutions have found it anathema to have American customers with modestly-sized accounts. It simply does not pay to offset the compliance costs or the potential risk of onerous financial sanctions.

Unfortunately, offshore banking has gotten a bad rap by many in the popular press as well as by many in Congress as the domain of the super-wealthy seeking to defraud the government of tax dollars or by those who want to shield assets for some nefarious reason. Actually, one can argue that asset holders who do not protect their holdings are negligent and are doing a disservice to their families and their estates.

That is regrettable because there are many, many legitimate reasons for offshore banking many of which have been around since early Roman times:

  • Many immigrants maintain accounts in their country of origin as a convenience to themselves when traveling or as an aid to help with family financial matters.
  • Citizens move assets off shore to shield such assets from attack by malefactors or from lawsuits.
  • Expatriates have an obvious need for offshore banking in order to deposit employment checks, pay household expenses, or withdraw cash.
  • Business owners with international accounts find it much easier to handle finances where their customers are domiciled.

As a Cuban-American who went to the United States as a child with his parents in search of opportunity, I sense that the “land of opportunity” is rapidly slipping away from us. The Trump administration is inspiring in its attempt to resurrect that American dream but much work remains to be done when it comes to reining in government intrusiveness, encroachment , and overreach.

Management Advisor


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