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FBAR, 8398, FATCA, And Capital Controls - The Trail That Leads To The Forced Repatriation Of Your Foreign Assets
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[Editor's note: the following post is by Jim Karger, TDV Legal Correspondent]
American taxpayers worldwide face a June 30th deadline to file with the U.S. Department of Treasury the Form TD-90-22.1, Report of Foreign Bank and Financial Accounts, also known as the FBAR.
On its face, the FBAR is just another form in a long line of forms required by the US government of its citizenry.
But, as with all government incursions on privacy and freedom, the FBAR is much more than a form. It is a first step to the US government having access to American taxpayers' assets worldwide. To understand how the FBAR fits into the puzzle, one must follow the legislative bread crumbs.
FBAR - "Tell Us Where Your Money Is"
Any U.S. person with a financial interest in, or authority over, a foreign financial account (accounts that exceed $10,000 in the aggregate) must file an IRS Form TD-90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). This requirement also extends to U.S. citizens or residents with signature or other authority over a foreign financial account.
Exactly what constitutes a "foreign financial account" has been hotly debated. Suffice it to say that the IRS takes a broad view of the term. See their document here. (If you have or believe you may have a foreign financial account, you should consult with your tax attorney or tax advisor immediately.)
The FBAR is not a part of the US tax return. Rather, it is an independent report that must be filed with the US Treasury, to be received (not mailed) by June 30 of each year.
It is important to be right on what foreign financial accounts to report and to be timely since there are no extensions available for the FBAR filing and since penalties for failing to file the FBAR are severe, including a civil penalty of $10,000 for each non-willful violation, and the greater of $100,000 or 50% of the amount in the account for each violation, with each failure to file a separate violation.
Form 8398 - "Tell Us Where Your Foreign Assets Are"
In addition to the FBAR, beginning in tax year 2011, every US taxpayer with "specified foreign financial assets" must report them on IRS Form 8938, which was due for most US taxpayers April 15, 2012, this pursuant to Foreign Accounts Tax Compliance Act (FATCA).
Any individual who holds “any interest” in a “specified foreign financial asset” must attach to their income tax return certain required information (in the Form 8398), if the aggregate value of such assets exceeds $50,000. A “specified foreign financial asset” includes any financial account maintained by a foreign financial institution, and if not maintained by a foreign financial institution, any stock or security issued by a non-U.S. person, any other financial instrument or contract where the issuer or counterparty is a non-U.S. person, or any interest in a foreign entity.
Exactly which assets are covered (and which are not), both for FBAR and Form 8398, remains subject to dispute, including, for example, foreign real estate owned in a trust or corporation.
Unlike the FBAR, Form 8398 must be attached to your Form 1040. It does not replace the FBAR. Many Americans are required to file both. Much of the information is duplicative, but other information is not.
Many Americans will, no doubt, fail to file one form or the other, or both, or fill in the blanks incorrectly, not understanding what is covered and what is not. It has been posited that the complexity and duplicative nature of these filings reveal an intent by government to insure non-compliance in order that the taxpayer can be fined and threatened into submission.
We will know soon enough.
FATCA to Banks - "In Case You Didn't Tell Us, They Will"
The 8398 required by FATCA will, no doubt, prove to be a challenge to many taxpayers, but it is not the worst, nor the most invasive, requirement of FATCA. Rather, it is the requirements imposed by the US on foreign banks that requires them to report to the IRS all their U.S. account holders starting in 2013.
Foreign financial institutions with US account holders stare into the face of a compliance nightmare. They will have three basic choices: (1) enter into an agreement with the IRS to put procedures in place to identify and disclose U.S. account holders, (2) accept the 30% withholding tax on U.S. payments, or (3) restructure their businesses to stop serving U.S. customers, stop offering (and owning) U.S. investments, or both.
Many foreign banks are already closing American accounts, not willing to jump through the hoops of an American government gone wild with power and hubris. Other banks and financial institutions will comply if only because they fear the financial repercussions of losing American accounts or having their rights to wire funds into and out of the United States summarily terminated.
Capital Controls - "Now That We Know Where Your Money Is . . . "
All of the above is frightening enough for most, but it is just the beginning.
The combination of FBAR, Form 8398, and FATCA's gross impositions on foreign financial institutions puts the US government just one short step from being able to force US citizens to repatriate their financial assets to the United States.
Before FATCA, such a step would be formidable, requiring the US government to actually know of a non-compliant foreign account without a fishing expedition, then file suit in the foreign jurisdiction in which the taxpayer resided, and finally go through a long and costly legal process to seize an American's offshore financial assets.
Now, with a knife in each hand, one held to the throats of US taxpayers via FBAR and Form 8398, and the other to the throats of banks worldwide via FATCA, one need not strain credulity to envision a day US law will be extended (or simply interpreted by Executive Order) to require foreign banks and financial institutions to freeze or even repatriate foreign financial assets in response to a demand by the US government for a violation or perceived violation of US law, or for the "common good", or just because they want the money.
In times of desperation, due process, equal protection and any sense of decency or fairness go out the window.
Under what specific circumstances might the US government be interested in freezing, seizing and/or repatriating a US citizen's foreign assets? There are many, and they include:
1. To collect from US taxpayers in arrears. Considering the pending legislation that would permit the US to revoke an American citizen's passport for owing back taxes, it is not much of a reach to see the same government desirous of seizing those taxpayers' other assets, including their foreign assets.
2. To prevent capital flight. At such time as capital begins its flight from the US to other jurisdictions viewed more financially responsible or at least safer from government confiscation, there is little doubt the US government will institute capital controls, limiting the ability of US citizens to move money, gold and other assets out of the United States, all in attempt to stabilize what will then be a failing US dollar.
With over six million Americans now living outside the United States and more fleeing everyday, and an untold number of financial accounts held by those who still live in the United States, merely limiting capital flight from within the country may not be enough to save the dollar, even temporarily. With the knowledge of the whereabouts of all taxpayers' foreign financial assets via FBAR and Form 8398, and with foreign banks acting as reporting and collection agents of the US government, it is only one short step from forcing those with offshore financial assets to repatriate those assets to the United States where they will once again come under control of government.
The Only Way Out Is Out
Failing to file a FBAR on covered foreign financial assets is dangerous. The same is true for Form 8398. Once FATCA takes effect, just six months from now, foreign banking institutions will be providing identities of US account holders, leaving US citizens with foreign financial assets a Hobson's choice: Either file and identify the whereabouts of their financial assets, making them easy targets for possible seizure and repatriation, or do not file and subject themselves to Draconian civil and criminal penalties. There is little doubt that beginning next year, hundreds, perhaps thousands, of Americans will be made examples of in order to bring the herd into compliance.
The question that begs to be answered: "Is there any legal way to avoid identifying (and thus making a target) of my financial assets, while at the same time avoiding the risk of massive fines and possible imprisonment for failing to file the FBAR and 8398?"
Yes, there is.
Expatriation, the relinquishing or renouncing of one's US citizenship, turning in the US passport, may eliminate these reporting requirements going forward. But, the costs for some will be high, too high, including the possibility the expatriate may never be permitted back into the United States.
(See the proposed "Expatriation Prevention by Abolishing the Tax-Related Incentives for Offshore Tenancy Act," referred to as the Ex-PATRIOT Act, which provides that anyone who renounces U.S. citizenship and has a net worth of at least $2 million or an average income-tax liability of at least $148,000 over the previous five years would be presumed by the Internal Revenue Service to have renounced citizenship for tax purposes and would face a 30% tax on future capital gains on U.S. investments - twice the current 15% rate - and be forever barred from receiving a visa to enter the United States.)
The decision to expatriate should not be undertaken lightly or emotionally. Many factors and individual circumstances come into play and will be the subject of future articles.
The endgame, however played, is not to avoid filing forms, but to avoid being imprisoned inside the United States, either as the result of you or your assets being seized, repatriated or limited in movement.
In the meantime, the Hobson's choice remains.
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Jim Karger is a lawyer who has represented American businesses against incursions by government and labor unions for 30 years. He has been the subject of many feature articles, including, "Outlandish Labor Lawyer Gets No Objections From Staid Clients," published in the Wall Street Journal, and most recently was featured in an article entitled, "You Can Get There From Here," published by the American Bar Association. In 2001, he left Dallas, and moved to San Miguel de Allende in the high desert of central Mexico where he sought and found a freer and simpler life for he and his wife, Kelly, and their 10 dogs.
Today, Jim takes a handful of assignments each year, and speaks regularly to industry associations and employers on issues involving government regulation, overcriminalization, and privacy. His website is www.crediblyconnect.com.