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Foreign account reporting: when FATCA goes too far

Last week we wrote about the impending June 30 filing deadline for the FBAR form. As important as that requirement is, however, there is also a new element to be concerned with regarding offshore account tax compliance.

For taxpayers in Texas and across the nation, that new element is the Foreign Account Tax Compliance Act (FATCA). Congress passed FATCA a couple of weeks ago in an attempt to crack down on tax evasion through foreign bank accounts. But in practice, the sweeping legislation requires the cooperation of foreign governments and financial institutions to be fully effective.

Two weeks ago, Germany, the economic driver of the European Union, announced its intention to work out a tax treaty with the U.S. Such a treaty would be likely to put FATCA provisions in force between the two countries. 

Those provisions would require foreign financial institutions to supply information to the IRS about Americans with offshore accounts. Under FATCA, the financial penalties for failing to do so would be considerable.

From the perspective of the IRS, the premise of FATCA is that too many American citizens and green card holders are using foreign accounts to evade U.S. taxes. In reality, however, both the FBAR and FATCA requirements may pose an excessive burden on taxpayers who happen to live abroad or have accounts there.

For example, consider the case of an elderly man whose elderly parents lived abroad in a country with a FATCA agreement with the U.S. His parents gave him signatory authority over their bank account, to be used in the event they became unable to handle their financial affairs. 

Unfortunately, though, the account was frozen by the bank, which also asked the son to supply several years' worth of tax returns. This was arguably overly scrupulous behavior by the bank regarding FATCA compliance. But the anecdote illustrates the argument that the new reporting requirements are often overly onerous.

Source: The Atlantic, "The Unintended Consequences of Cracking Down on Tax Dodgers," Michael Scaturro, June 5, 2013

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