It occurred to us recently that we, as financial advisors, have become complacent about FATCA. When the legislation was first announced in 2010 it introduced a host of new IRS reporting requirements for US expats and the banks that work with them, and over the last ten years it has changed the way that expats access banking and investments. Despite this, we realised that we had become so familiar with the Act that we expected other US expats to understand the implications as well. As a result, we thought we could help our fellow US citizens in the UK get a better handle on FATCA and its impact on all of us.

Background

FATCA: the Foreign Account Tax Compliance Act was (at the time) a little known act within a wider piece of legislation – The Hiring Incentives to Restore Employment (HIRE) Act of 2010.  The HIRE Act was the Obama administration’s response to economic depression that followed the credit crisis of 2008.  Generally the HIRE Act was intended as a stimulus to the US economy; however FATCA was tucked into the wide-ranging Act, despite having little to do with stimulating the domestic economy.

As the name suggests, FATCA is concerned with foreign accounts owned by American citizens and the tax compliance of those accounts. This interest has been driven by the simple fact that the State Department estimates there are over 9 million Americans living abroad[1] and yet the IRS receives a fraction of that number in tax returns. FATCA was enacted to close the tax collection gap (as perceived by the US Government).

Who is Affected?

Squarely aimed at global financial institutions, FATCA legislation requires non-US financial institutions to report clients who are US citizens to the IRS. Failure to do so will result in a 30% withholding being applied to any US transactions by that institution.  This high penalty for non-compliance has led bank and insurance companies, fund and investment managers, and many financial advisors to do a wholesale review of their client bases.  As you can imagine, for large institutions identifying who is an American is an expensive and onerous requirement before taking into account the creation of systems to monitor existing and new clients. Many companies decided that the easiest solution was to simply eject US citizens from their business and file a “zero” return to the IRS. Others have introduced complex systems to ensure that they can accurately report who is American.  It is estimated that UK institutions alone have spent over £1.6bn[2] on implementing FATCA and this begins to explain why many US expats have increasingly found it hard to open brokerage and investment accounts, as non-US financial institutions are increasingly refusing to work with US citizens.

But it is not just foreign institutions that are required to comply. The FATCA legislation also introduced a new tax form for US taxpayers. If you are an American living abroad (or even an American with foreign assets) you must complete IRS Form 8938 as part of your annual return (or pay additional fees to your accountant to complete this new form for you), adding another layer of complexity to America’s already complex tax requirements.

Unintended Consequences

We are sure that when Congress passed the HIRE Act it did not consider the detrimental effect it would have on ordinary, hard-working, tax-paying US expatriates.  Initially, the biggest impact for US citizen expatriates was the wave of European banks withdrawing their services. Since 2010 when FATCA was first announced the number of non-US banks and investment custody service providers who are prepared to open new accounts and administer accounts for US citizens has dwindled and US expats have become persona non grata.

However, the impact spread further, and it has manifested itself in the USA as broker dealers and investment platforms have closed their business to American expatriates and non-US resident account holders citing more complex reporting and increasingly complex due diligence requirements.  And the results have been palpable for ordinary expats with investment accounts. Since FATCA was passed, Morgan Stanley, Merrill Lynch, UBS, Charles Schwab, Fidelity, and Wells Fargo have all made concerted efforts to remove existing US clients who are living overseas. Unfortunately, that means that they often need to move their accounts quickly or have their accounts liquidated and transferred out. We have been approached by a variety of clients ranging from American families based in the UK to British retirees with US pensions who have been asked by their existing custodian, broker dealer or bank to move their accounts. While this is a complex space, Tanager partners with investment platforms and custodian banks that understand the issues and is prepared to work with US expats and other UK residents with US investment accounts.

Perhaps the biggest unintended consequence has been the record numbers of American citizens expatriating. Headlines for the last decade have reported more and more American citizens renouncing their citizenship each year , with the only break in that trend coming when embassies shut down for COVID-19. [3]

And Another Thing

FATCA has brought back into focus the requirement for American citizens to report any foreign financial accounts with balances in excess of $10,000. Form TD F 90-22.1 “Report of Foreign Bank and Financial Accounts” (FBAR) is required under the Bank Secrecy Act and the penalties for non-filing are significant.

We always ensure that our clients and other US expats we meet understand that they need to retain the services of a properly qualified UK and US accountant to ensure not only that their taxes are filed on time, using the correct forms but also to make sure they do not fall foul of the FBAR rules, FATCA and other changes to the system.

Footnotes

[1] https://travel.state.gov/content/dam/travel/CA-By-the-Number-2020.pdf

[2] www.international-adviser.com/news/tax-regulation/fatca-is-stranger-than-fiction?page=1

[3] https://www.prnewswire.com/news-releases/americans-gave-up-citizenship-in-record-numbers-in-2020-up-triple-from-2019-reports-tax-specialists-americans-overseas-301222817.html