Tax-Evader Crackdown Puts Banks On Notice

Investor's Business Daily

Fidelity Investments' decision to bar U.S. clients overseas from buying or trading its mutual funds looks like the latest unintended consequence of the government's efforts to collect taxes no matter where Americans live and earn.

Bailed out during the financial crisis several years ago, the banking sector seems to have recovered enough for the U.S. government to take a pound of flesh.

In May, Credit Suisse (CS) pleaded guilty to conspiracy to aiding U.S. taxpayers in filing false income tax returns. It agreed to pay $2.6 billion in fines.

Fellow Swiss giant UBS (UBS) in 2009 agreed to pay a $780 million fine to settle charges it helped wealthy Americans evade taxes.

But critics say the legal and regulatory burden on ordinary U.S. citizens living abroad is so high that many financial firms are deciding not to deal with the hassle of serving them.

Unlike most nations, which levy taxes on those who reside within their borders, the U.S. also taxes its citizens who live abroad — even if they haven't set foot in the U.S. in years.

The Foreign Account Tax Compliance Act was passed in 2010 with the aim of preventing tax evasion by Americans with overseas accounts. But FATCA — which finally went into effect July 1 — imposes significant burdens on banks that do business in the U.S. They must turn over to the IRS information on their U.S. clients or hand over to the IRS 30% of their payments received from U.S. sources.

Banks can get a two-year enforcement delay if they show that they're working to comply.

But bank compliance costs are high, especially given the sums the Treasury will likely reap. FATCA reportedly has led Deutsche Bank (DB), HSBC (HSBC) and other foreign banks to turn away Americans.

The U.S. has always taxed its citizens living outside its borders. But FATCA made additional disclosures mandatory, requiring new paperwork and new punishment for noncompliance.

"(Congress) just didn't understand about citizenship taxation," said Allison Christians, a professor at McGill University in Montreal. "It has all these pernicious effects that people don't realize.

One such effect has been an increase in Americans giving up their U.S. citizenship. Renouncements numbered around 500 per year a decade ago but hit a record of nearly 3,000 last year. That's a sliver of the roughly 7 million Americans living abroad. But critics say there is a growing sense that expats carry too much regulatory baggage.

Fidelity cited "today's continually evolving global regulatory environment" for Tuesday's decision to bar U.S. expatriates from its funds.

Georges Ugeux, founder of Galileo Global Advisors, dual citizen of the U.S. and Belgium and an outspoken FATCA critic, said the crackdown has created a "poisonous" atmosphere that has led lenders to become "totally risk averse.

"The last thing the banks want is questions from regulators," he said. "I tried to send to my nephew (in Belgium) $100 for his birthday and I couldn't do it.

While the Republican National Committee in January backed a FATCA repeal, Congress is highly unlikely to take such action.

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