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Diversify, Foreign Investment, Plan, Retirement

‘Long Arm of the Law’ Gets A Little Longer for US Taxpayers in 2013

US citizens and residents with funds and/or investments in foreign banks or companies have just less than 6 months before this sneaky legislation from the 2010 Hiring Incentives to Restore Employment (HIRE) Act takes effect in January 2013:

“Any funds transferred from the US to any overseas account are subject to a new tax equal to 30 percent of the total amount of the payment – unless the payment is sent to a foreign bank that has agreed to report all American-owned accounts automatically and electronically to the US government.”

The IRS provides a summary of key Foreign Account Tax Compliance Act (FATCA) provisions of 2009 which were expanded in relation to the components of the HIRE Act of 2010 intended to raise revenue to ‘off-set’ the costs involved with the HIRE Act and to enforce compliance of the additional disclosure and reporting requirements.

Stiff penalties are involved for those individuals failing to disclose and report foreign assets and financial accounts – $10,000 for the initial infraction up to $50,000 for continued non-disclosure.  In addition,  the penalty for any portion of an underpayment of tax on  non-disclosed gross income and assets increases from 20% to 40% of the understated amount.  

To top it off, the statute of limitations for IRS audits on certain unreported income from foreign financial accounts has been increased from 3 years to 6 years, allowing the government to reach back further to tap into potential revenue from non-disclosed accounts and holdings of US citizens and residents.

But all the IRS strong-arming isn’t just limited to US taxpayers.  

Starting in 2013, Foreign Financial Institutions (FFI) which include any non-US banks, securities firms and other investment funds will essentially be forced to choose – either agree to disclose sensitive personal and transaction information about accounts held by certain US persons and/or entities OR accept a penalty of 30% withholding tax on ALL payments received from any US institution or other source.

US institutions will essentially bear the responsibility of ‘collecting’ the 30% withholding tax on behalf of the IRS.  Since it will be difficult to determine exactly which transactions are and aren’t subject to withholding – and since the same law provides that US institutions will be held harmless for improper withholding even when tax is not due! – it stands to reason that banks will withhold 30% tax on ALL foreign payments to countries or institutions that do NOT have what is considered the required information-sharing agreement in place with the US.

As predicted by many with a vested interest when the law was first introduced, there has already been a huge uproar in the global financial community.  Big banks everywhere began lobbying against the legislation as soon as it was passed in 2010 and several key European institutions (Deutsche Bank, HSBC and Credit Suisse) have already balked at the onerous and costly reporting requirements, systematically refusing business with American clients since 2011.  In fact, some countries and institutions may be precluded from compliance with US law due to client privilege and privacy laws of their own.

What was initially purported to be a crackdown on tax evasion by wealthy US taxpayers with non-disclosed off-shore holdings and accounts has such overreaching consequences that some economists are inclined to believe the law is part of a concerted effort by the US at currency control, certainly discouraging Americans from diversifying their portfolios by sending or holding assets abroad, but also essentially creating an ultimatum for the rest of the world – play by our rules or don’t play with us at all.

In this case, the burden of accountability seems misplaced.  Instead of encouraging responsible reporting by US citizens or targeting and penalizing specific non-compliant taxpayers, foreign institutions are being coerced by the parent-like IRS into ‘tattling’ on its US taxpayer clients like the older siblings of naughty children, under pain of the 30% withholding penalty.  

Such strict limitation and regulation, though, often produces unintended resulting consequences.

Instead of encouraging a healthy flow of information in an effort to close the ‘tax gap’ and ensure proper reporting by US taxpayers, the law could serve to deter other countries from choosing to do business with the US or any of its citizens worldwide.

It could also discourage other nations from using US currency for international trade transactions, potentially resulting in a shift away from the US dollar as the de facto world currency.  Many analysts have already expressed concern that the cost and hassle of compliance will far outweigh the benefits of working with US capital and investors.

So what does all this have to do with us regular folks who just want to be able to create a secure, affordable retirement with a decent standard of living?

If it hasn’t already, US taxpayers living, working and/or investing abroad will undoubtedly face significant obstacles to opening foreign bank accounts and conducting foreign financial transactions of any kind.  In fact, some banks may close or reject US citizen-held accounts entirely, making it virtually impossible for Americans to function, let alone compete, globally.

For those with accounts at participating foreign financial institutions, the IRS will soon have a very real and extensive system in place to track US taxpayer holdings and transactions, along with the power to go back 6 years to collect and impose harsh penalties.  Americans currently living overseas with the bulk of their assets in foreign institutions will definitely need to review the law, institutional policies and the overall potential impact on their individual situations.

Americans may be rejected from participating in joint-venture international projects, making real property purchases or any number of other investments involving fund transfers internationally.  Anyone (including pending and non-resident immigrants) considering foreign real estate purchases, extended travel, full or part-time retirement abroad may be forced to reconsider those plans simply on a practical level.

The American Citizens Abroad (ACA) has called for a Repeal of the FATCA legislation citing many of these problematic issues and more.

The true extent and potential repercussions of this legislation may not even be fully realized until after the fact but this law is certain to change the way business is done BY and WITH Americans in the future.

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About Jacqueline Ross, CCIM

Jacqueline Ross, CCIM is an experienced investor, educator and real estate professional. She founded Investment Strategies, Inc. to help property owners and investors nationwide strategically plan to create income, build wealth and achieve personal and financial goals. Learn how to tap into 'lazy' equity and get your investments working for you.

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