This article features quotes by Paul Atkinson, Chair of the AARO Banking Committee.
By Rick Mitchell
Aug. 18, 2020, 8:00 AM
- Legal challenges have fallen short so far
- Recent EU data privacy ruling may offer path for opponents
Critics of a law requiring U.S. citizens to report their foreign assets to the IRS are hoping a EU data privacy challenge could finally end an almost decade-long fight.
For years American expatriates and those with U.S. citizenship by virtue of having been born in the U.S. to foreign parents, have sought to challenge what many argue is an unfair law. The U.S. is one of just a few countries in the world—along with Eritrea and recently China—that taxes based on citizenship rather than residency.
The Foreign Account Tax Compliance Act, enacted in 2010, requires many of the estimated 9 million U.S. citizens living abroad to report their foreign assets to the IRS, which then cross-checks the information against data provided by foreign financial institutions to catch tax cheats.
Accidental Americans and expats, faced with FATCA’s complex paperwork, can incur large expenses for tax preparation help. Beyond that, some foreign banks, faced with penalties if they fail to hand over detailed information about U.S. account holders, have decided that the easiest way out is to refuse business with Americans.
“They are dual nationals, a bit to their own surprise, and feel little connection to the United States,” said Paul Atkinson, a retired OECD economist who serves on the board of the Paris-based Association of Americans Resident Overseas. “But they’re caught up in this set of laws and regulations.”
Most accidental Americans lack Social Security numbers or other U.S. documents they need to comply with the law, he said.
Critics have little to show for their legal efforts so far. The U.S. Supreme Court declined in 2018 to hear a FATCA challenge led by Sen. Rand Paul (R-Ky.) and a group of foreign-account holders on the grounds that they lacked standing. The Senate last year finally bypassed efforts by Paul to hold up tax treaties over the issue. Lawsuits in Israel and Europe have also fallen short, and a Canadian challenge is bogged down in appeal of a 2019 Federal Court of Canada ruling.
Their hope now lies in a line of attack opened by the the European Court of Justice’s landmark July decision voiding the so-called EU Privacy Shield, which Facebook Inc., Google, and more than 5,000 other companies and organizations have used to transfer personal data from the EU to the U.S.
Filippo Noseda, a London-based partner at law firm Mishcon de Reya, is representing “Jenny,” a U.S.-born British citizen. Her first encounter with the 2010 law was a letter from her British bank telling her it was going to send her account information to the IRS.
Jenny challenged the law with a complaint to the U.K. privacy authority, in which she argued that the U.S. law and the U.K. tax office had violated U.K. and EU data privacy law. The complaint was rejected, and now she is planning to appeal to the U.K.'s top court, Noseda said. She’s raised more than $100,000 to fund her legal appeal through a crowdfunding effort.
Noseda said he’s filed privacy-related complaints in the EU against FATCA and the Common Reporting Standard for automatic exchange of taxpayer information. A key complaint: The networks used to gather sensitive taxpayer data for FATCA and the CRS are highly vulnerable to hackers.
Fabien Lehagre, a San Francisco-born marketing manager and president of an organization called Accidental Americans that seeks to challenge the law, hasn’t lived in the U.S. since he was an infant.
Both he and Noseda say the Court of Justice ruling could be a turning point. It raises the possibility, they argue, that the automatic exchange of financial information among nations at the heart of FATCA can be attacked on the same grounds.
“Things are changing, and the dominoes are starting to fall,” Noseda said.
Lehagre said Accidental Americans may use the Court of Justice decision to file a new suit with France’s Conseil d’Etat, which rejected their previous challenge of the decrees implementing FATCA. His group is also exploring the possibility of teaming up with plaintiffs in other EU member states, including Luxembourg.
Noseda said he would ideally like to use Jenny’s challenge as the vehicle to reach the Court of Justice with a data privacy case, though Brexit might complicate that avenue.
Jenny argues on her crowdfunding page that her personal information is irrelevant to the IRS, because she earns less than the U.S. foreign income exclusion, which was $105,900 in 2019. She says she doesn’t oppose FATCA’s objective—fighting tax evasion— just the law’s “disproportionate” means.
But one FATCA architect says the criticism is misplaced.
KPMG’s Danielle Nishida, who helped write the regulations while at the IRS, said initially some financial institutions closed the accounts of U.S. citizens living abroad instead of having to deal with reporting under the law. At the time, the global exchange of financial information under FATCA was seen as radical, she said in an email.
But as other global reporting efforts like the Common Reporting Standard were adopted, that kind of action by financial institutions tapered off, said Nishida, now a tax principal at the firm’s international reporting and withholding tax group.
While Nishida acknowledges that accidental Americans are in a tough spot because they must either secure a taxpayer identification number or renounce their U.S. citizenship, FATCA is following long- established U.S. tax policy.
“FATCA has not changed the manner in which these U.S. expatriates are taxed,” she said. “FATCA merely seeks to ensure that U.S. expatriates comply with their existing obligations and serves as an equalizer between those U.S. citizens living abroad that are currently complying with their U.S. income tax obligations and those that are not.”
The U.S. Treasury Department and the IRS didn’t respond to requests for comment.
Reproduced with permission. Published Aug. 18, 2020. Copyright 2020 by The Bureau of National Affairs, Inc. http://www.bloombergindustry.com