Money Rant 2: Americans and Foreign Banks

Us Americans generally hate the Internal Revenue Service, and rightfully so. It’s only natural to hate the prospect of our government taking from our paycheck before we get them. We hate how long and complicated the tax code is and how tough the penalties are.

In particular, I hate how Americans have to file extra tax forms. We have to do this for extra income, like personal winnings from gambling, which is taxable past certain amounts. And although I never had to deal with this, I really hate how Americans living abroad can be taxed for foreign bank accounts.

I want to delve into that last issue in this post. I briefly broached the issue of Americans and foreign banks in the first post in this series and I wanted to research it more.

Many Americans may remember a time when U.S. citizens could hide their money overseas, particularly in Swiss bank accounts. Oh wait, this still happens…for the wealthy, if they know how to do it. Some poor saps may still have dreams of being able to do that. They need to give up the dream, because they can be dinged without knowing about particular aspects of tax law as it pertains to Americans and foreign banks.

The first thing all Americans — as well as newer immigrants and permanent residents living in the U.S. — should realize is that the United States has a worldwide tax system (CNN Money). It is also citizenship based, and the United States and Eritrea are the only countries with those types of tax systems (The Local). The United States having a worldwide tax system means all holdings, regardless of their location can and will be scrutinized by the IRS and taxed accordingly…provided the agency finds out about them. If and when that happens, those in violation of tax laws can be fined, or worse, imprisoned.

When Americans use foreign banks, that money must be declared. This is true for American signatories. It doesn’t matter when or how the person became connected to the account or if there was any accruement in a particular year or multi-year period. The bottom line is that there must be full disclosure in tax forms.

I first learned of a specific case when I was pointed toward an article from The Local Italy earlier this year. The article was about an American living abroad who found out that he had to pay taxes to the IRS. This was despite the fact that he had not been in his birth country since the age of ten. Jonathan Weiss had spent the last 25 years of his life living in Asia and Europe and he has been living and working in Switzerland in the last 10. Two weeks after being contacted by the IRS, he would find out that his bank account was frozen.

One important term to remember from the article was the acronym FATCA. The Foreign Account Tax Compliance Act was passed in 2010, as a rider to the jobs bill. Its provisions took effect in 2014. So far, over 100 nations, including Canada, Mexico, Brazil, and all of Western Europe, have agreed to comply with FATCA in some degree.

Under FATCA, participating nations have to report to the IRS for account holders who fit certain criteria. The nations who don’t comply with the bill’s stipulations may be penalized up to 30% in transactions with the United States. Individuals might have to attach an 8938 form as they file their taxes if their foreign accounts total at least $50,000 (Hicks Rowe). A Form TD F, 90-22.1 Report of Foreign Bank and Financial Accounts (FBAR) must be filed by signatories by June 30 each year. According to an article from CNN Money, an individual found to be “willfully non-compliant” could be penalized between $10,000 and $100,000 for each year of nondisclosure (for up to six years). These penalties may have been lessened in May, but those found willfully non-compliant still have to pay between 50% and 100%, based on their highest balances for each year in a certain period.

The bill was advertised as a way to deal with wealthy individuals who hid funds in offshore tax shelters, but there have been unintended consequences, since the bill was poorly crafted. Instead of just targeting those evading taxes, FATCA negatively impacts immigrants who may still have accounts in their birth nations and Americans living abroad who have no economic connections to the United States whatsoever. Also, there are now a number of banks who refuse to carry accounts of American citizens. Current American account holders are referred or directed to try elsewhere. There are still some banks who will carry American accounts, but the choices are limited.

What options do individuals have? There are a few, but most if not all are undesirable. Being up front with the IRS only reduces the penalties, even if one was unknowingly non-compliant. In that case, back taxes and interest are still required. By using the 2012 Offshore Voluntary Disclosure Program — which could be ended at any time — one could avoid being subject to criminal and civil penalties, but they would still have to pay 27.5% or 50% on their highest balance for up to eight years and file as many revised tax returns. The Streamlined Disclosure Program assesses only a 5% penalty on the highest balances, but taxpayers might still be subject to extra penalties. Additionally, expatriates might have to hire tax lawyers, which can cost a pretty penny. There is Taxes for Expats, which does offer a $350 flat fee for federal tax returns for U.S. citizens.

Now consider this: This is all made worse by the fact that corporations have such good lawyers and accountants that they can avoid paying taxes at all. In some cases, some corporations are even being paid by the U.S. every year. It’s stuff like this that really pisses me off.

I wish Congress would think before crafting these types of laws because, yet again, they eventually end up targeting the wrong people. I’m all for the government going after the worst tax dodgers, meaning those who can afford to hide their money elsewhere — and find loopholes for new regulations. I just don’t see the point in taxing those fully living abroad, especially if they will receive no real benefit from their tax dollars going into the U.S. Treasury’s coffers. They are being punished and inconvenienced, to put it mildly.

Works Cited

“2012 Offshore Voluntary Disclosure Program” IRS. United States Treasury. Web. <http://www.irs.gov/uac/2012-Offshore-Voluntary-Disclosure-Program>.

“The age of financial privacy is over.” The Local Italy. The Local Europe AB. 27 Jan 2015. Web. <http://www.thelocal.it/20150127/fatca-age-of-financial-privacy-is-over-taxes-expats-tlccu>.

Hicks Rowe, Randi. “Can Americans Have Foreign Bank Accounts?” Opposing Views. Web. <http://people.opposingviews.com/can-americans-foreign-bank-accounts-7995.html>.

Kocieneiwski, David. “G.E. Strategies Let It Avoid Taxes Altogether.” The New York Times. 24 Mar 2011. Web. <http://www.nytimes.com/2011/03/25/business/economy/25tax.html>.

“Our Flat Fee Structure.” Taxes for Expats. Web. <http://www.taxesforexpats.com/services/our-fees.html>.

Sahadi, Jeanne. “You’ve never seen IRS penalties like these.” CNN Money. Cable News Network. 4 June 2015. Web. Web. <http://money.cnn.com/2015/04/01/pf/taxes/irs-penalties/>.

“Streamlined Filing Compliance Procedures.” IRS. United States Treasury. http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures

Zemelman, IJ. Taxes for Expats. New York, NY. Web. <http://www.taxesforexpats.com/>.

Advertisements

Have any thoughts on the subject? Time’s yours.

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s