The Foreign Account Tax Compliance Act (FATCA), was enacted into law in 2010. Its aim was to stop US citizens and residents from using overseas investments to avoid paying tax. This goal is being achieved by forcing ‘foreign financial institutions’ to notify the US Internal Revenue Service (IRS) if any of the institution’s customers are US taxpayers – whether directly or indirectly (for example, through an entity having an account at the institution).
Many clients ask me whether FATCA might be repealed or struck down. My answer, while not in these precise terms, boils down to: “Not a snowball’s chance in Hell.”
FATCA IS NOT, GOING, AWAY.
FATCA Challenge — Case Dismissed
Just three days ago, a U.S. district court in Ohio dismissed a lawsuit brought by Senator Rand Paul and several other US citizens and former citizens who were asking for relief against enforcement of FATCA, its associated intergovernmental agreements (IGAs) entered into between the US and certain foreign countries, and the notorious so-called FBAR and its associated penalties (Form 114) administered under the Bank Secrecy Act by the Financial Crimes Enforcement Network or FinCEN.
In dismissing the case, the court did not consider the merits of FATCA, the IGAs or the FBAR report or penalties. The court determined that the plaintiffs lacked what is called “standing to sue”.
As explained by the court, “standing” generally involves three factors.
“First, plaintiffs must have suffered an injury in fact—an invasion of a legally protected interest which is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical. Second, there must be a causal connection between the injury and the conduct complained of—the injury has to be fairly traceable to the challenged action of the defendant, and not the result of the independent action of some third party not before the court. Third, it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.”
No Foreign Bank Accounts or Mortgages for Americans? Non-US Spouse is Angry About FBAR Disclosure? Too Bad!
Among the plaintiffs was a US citizen named Mark Crawford. Mr. Crawford objected to FATCA’s effect on him because his brokerage firm did business with a foreign bank that had an official policy against taking on any American clients. Mr. Crawford also felt uncomfortable and did not want to disclose the “financial details of his accounts” to the US government; finally, he feared the “unconstitutional” and excessive fines that might be imposed upon him if he willfully failed to file an FBAR. All of Mr. Crawford’s claims were dismissed by the court as lacking grounds to provide Mr. Crawford with the requisite “standing”. The action of a third party (here, the foreign bank that refused US clients) that is not part of the lawsuit does not provide grounds for standing which meant essentially that the US government cannot be held responsible for the decision of the bank to refuse US customers. As for Mr. Crawford’s discomfort with the information reporting requirements of FATCA, this “did not establish the concrete, particularized harm required to confer standing”. With regard to the fear of excessive FBAR penalties, since Mr. Crawford did not allege that he had failed to file any required FBAR or that an FBAR penalty had been assessed against him, the court determined he could not establish any “harm”; his concerns were merely speculative and not concrete injuries.
The other plaintiffs were a group of US citizens and a former US citizen living in various foreign countries, including Canada and Switzerland. They presented various claims such as alleging injury because a US citizen married to non-US spouse had to separate their financial holdings since the non-US spouse objected to disclosing information to the US government; alleging privacy violations, or alleged harm because they could not open accounts or refinance mortgages in the foreign jurisdictions in which they lived. All of the claims were dismissed since the court held that none of the plaintiffs could establish the concrete, particularized harm that is a prerequisite to standing.
No Joy for Rand Paul
As for Rand Paul, who sued in his official capacity as a US senator, and who brought a measured degree of sensationalism to the lawsuit, his claim was dismissed for lack of standing since the injury complained of was not concrete as he suffered no injury himself. Senator Paul contended that the IGAs exceeded the proper scope of Executive Branch power and should have been submitted for Senate approval. The court noted that Senator Paul had an adequate, non-judicial remedy of enacting legislation to repeal the laws he objected to.
In a nutshell – the Courts will uphold FATCA, its IGAs and FBAR reporting. None of it is going away; the transparency trend will simply continue to grow. Live with it.
UPDATE April 30 2016 My post found its way to the Isaac Brock Society, Twitter and goodness knows where else. It generated some thoughtful commentary on Isaac Brock. In light of the comments, I thought I would include in this post, my own comment made in reply.
“Dear Readers/Commenters, thank you for all your comments. My post was not intended to discourage you from your ADCS lawsuit; nor was it intended to be viewed that noncompliant dogs are “bad” dogs; that CBT is equitable; that the 4th and 5th Amendment to the US Constitution should die and so on. I absolutely do believe that FATCA is here to stay, whether one likes it or not; I absolutely do believe that that the trend toward transparency will continue worldwide. Sorry to say, but all signs point in this direction (e.g., this Ohio court decision; GATCA; government responses to Panama Papers). Whether or not you may agree, I think (and last I heard, I am still entitled to think and have an opinion) one has to be ready for this very realistic premise and see what can be done about it. Maybe it means looking forward! What do I mean by this? Here are some thoughts – after appropriate advice is taken — consider separating assets formerly owned jointly between US and non-US spouses to limit reporting? Re-examining assets and gifting to non-US spouses and family members? Discontinuing all nominee arrangements when a US person has been the nominee on a foreign financial account or asset? Coming into compliance (or not, provided you fully understand and accept what this means for you) and then expatriating? “Doing nothing” when you fear you might still be a US citizen even though you think you expatriated 50 years ago? Everyone must make their own decisions, but I think it’s wise to look at the tools available to you as you are in battle. Maybe the tools can help you prevent further injury “just in case” FATCA and its progeny remain in place and (gasp), even proliferate.”
Follow me on Twitter: @VLJeker