We help make your business a success

How FATCA and FBAR made American taxes FUBAR

Americans are an incredibly patriotic people – I know because I’m married to one. They love their country, and plenty of them don’t ever want to leave. In fact, just 38% of the population of the US hold a passport, compared to almost 85% in the UK.

As an American, leaving America just isn’t something you normally do. Which is why, when the Department of the Treasury and the Internal Revenue Service published data showing a record 1,336 Americans had renounced their citizenship in the first quarter of 2015, many questioned what could be causing this exodus. Objectors to the continued US military presence in the Middle East? Islamophobes still convinced Obama is a secret Muslim?

The answer is a troubling tax system operated by just two countries in the entire world: The USA and Eritrea. This unlikely pair are in the unique position of demanding tax payments based on citizenship rather than residence. Put simply, if you’re an American citizen the US Government wants a slice of your paycheque, wherever you are in the world, and no matter how long you’ve been there.

The idea of a tax on worldwide income first appeared during the American Civil War, around 1861. Fearing wealthy Americans would simply abscond to avoid the military draft, lawmakers introduced a tax of 3% on domestic income, and 5% for “any citizen of the United States residing abroad.”

Fast forward 150 years and a different kind of crisis engulfed the US – the largest recession in living memory. Once again fearing wealthy Americans would move their riches to greener pastures the Obama administration passed the Foreign Account Tax Compliance Act (FATCA) and the Report of Foreign Bank and Financial Accounts (FBAR) in 2010 to ensure Americans abroad were paying taxes back home.

The legislation is a one-two punch of tax compliance. FBAR requires Americans to report when their combined foreign bank balances exceed $10,000 in the year, even if the combined total is the same cash. For example, if they move $5,000 from one account to another the combined maximum balance of each account in that year would be $10,000, meaning they have to file or face a $10,000 penalty. Meanwhile FATCA requires foreign banks to identify which of their customers are American citizens and report on how much money they hold.

The IRS estimated the rules would claw back $8.5 billion in avoided taxes. Against a backdrop of a collapsing economy and a rising tide of anger towards individuals and corporations not contributing their fair share, FATCA and FBAR were whisked through the legislative process by then-Senator Max Baucus, who led the Senate Finance Committee.

With the recession over and FATCA and FBAR finally in full effect after several delays, the laws are having many unintended consequences. American citizens living overseas – the vast majority for reasons other than tax evasion – are finding themselves subjected to rules designed for billionaire Facebook co-founder Eduardo Saverin, and buried under tax compliance work.

The recent increase in defecting Americans is threatening to turn into an avalanche. According to a study by the University of Kent earlier this year almost a third of Americans living abroad are considering renouncing their citizenship to escape FATCA, FBAR, and the obligation to file a lengthier US tax return every year, even if they earn nothing.

There have been two notable reactions from the US Government in response to the swathes of citizens expatriating. They raised the price of renouncing citizenship from $450 to $2,350, and are in the process of passing a law – H.R.22 – which would revoke the passport of any US citizen with over $50,000 in tax debts.

Banking problems

FATCA has proven particularly problematic for many Americans living abroad, especially business owners. The legislation includes reporting duties for foreign financial institutions on all US citizens who hold accounts with them, which has led to many simply turning Americans away rather than face the burden of FATCA compliance.

The University of Kent study found that, of their 1,546 respondents, many had “severe difficulties in retaining – or opening – investment accounts, bank accounts and, in some cases, securing mortgages, as banks increasingly refuse US customers.”

Many US expats hold dual citizenship and open bank accounts in their country of residence using their non-US passports, making identifying US citizens tricky for banks. Some, including Metro Bank in the UK, now send out “self-certification” forms to all account holders to confirm they are not US citizens.

This has led to a startling jurisdictional overreach where UK banks need to contact UK citizens to confirm their tax residency, or else be subject to US reporting requirements.

Why don’t the banks simply ignore the requests? The US Treasury has imposed a 30% withholding tax on any financial institution within their reach not meeting FATCA reporting requirements. Given the US Dollar is the de facto currency of international trade the vast majority of financial institutions are registered with the US Treasury and so can be hit with the 30% penalty.

David Mckeegan of Greenback Taxes, a firm which helps US expats meet their filing requirements, said:

“We’ve seen companies like Fidelity have already started closing overseas accounts. The rules are making it incredibly difficult for Americans to live normal lives overseas.

“What does this mean for expat kids? Are they going to be able to live and work anywhere in the world, or are they not, because they have a US passport and they won’t be able to open a bank account?”

Cost of compliance

Tax laws designed to curtail evasion by millionaires aren’t easy to comply with, and the millions of expat Americans affected by the rules are paying the price. One former US citizen interviewed for the University of Kent study said:

“I can’t pay an accountant €2,000 in order to pay the USA $0 in the end. To maintain tax compliancy with my pension account I was going to have to pay my accountant at least £1,500 per year and I only earn £18-20,000 per year.”

Although a foreign tax credit allows US expats to report how much tax they pay in their country of residence and offset those payments against their US tax bill, tax-free UK benefits such as ISAs and pensions are treated as foreign trusts by the IRS, and taxed accordingly.

The situation is exacerbated for self-employed Americans working in the UK, as a tax treaty between the two countries means US citizens must manually opt-out of Social Security or end up paying into both countries’ welfare systems. An American working as a freelancer in London who failed to file taxes could – if H.R.22 is passed – have their passport revoked once their total earnings UK topped around £220,000 (remember – the IRS would still know about their earnings by way of their bank complying with FATCA reporting duties).

In a plot twist worthy of the next Great American Novel, FATCA and FBAR’s roots in the American Civil War mean its victims are now subject to the same mistreatment that sparked America’s preceding war with Britain – taxation without representation. There is no Senator or Congressman for expatriate Americans, even though they number some 9 million – effectively the 11th largest state by population. There is no-one fighting for the repeal of FATCA and FBAR – not least because no sensible politician would want to oppose a law pitched at tackling tax avoidance by rich citizens.

To escape the treadmill of disastrous tax compliance costs Americans abroad are left with a simple choice: pay up, or tear up their passport. Hopping off the treadmill isn’t that easy though; Americans aren’t allowed to renounce their citizenship unless their taxes are up to date.

Invoice templates


Our invoice templates are professional and sharp. Use them to directly invoice your clients and get paid fast.

Business guides

Business guides

From understanding expenses to starting a limited company, our downloadable business guides can help you.

Payment reminders

Payment reminders

If a client hasn't paid an invoice, download our late payment reminder templates and get that invoice paid fast.

The best accounting advice

Our accredited team are on hand to help you choose the best package

We understand that it can be difficult deciding whether or not to switch accountants, but at Crunch we’ll offer you fair, unbiased advice on what’s best for you.

Find out more