Who Wants A Domestic Foreign Account Tax Compliance Act?

A friend recently asked about retiring overseas and succumbing to the lure of an exotic lifestyle. The proposed move would have involved him retaining U.S. citizenship while establishing a permanent foreign residence. I told him not to bother, in no small part because the U.S. tax system makes his considered move burdensome.

True, the IRC section 911 exclusion from gross income is a generous benefit. But it applies to earned income like your salary or wages – and my friend would be retiring. Plus, he’d need to worry not only about foreign bank account reporting obligations, but also the U.S. Foreign Account Tax Compliance Act.

FATCA is the scourge of the U.S. expat community. Recently, something resembling FATCA was almost imposed on U.S. citizens who don’t live overseas. A proposal from the Biden administration called for new bank reporting obligations on business or personal accounts with inflows or outflows of at least $600. That dollar threshold was so low that it would have reached most financial accounts in the country.

Some observers referred to the idea as a “domestic FATCA” regime, which certainly didn’t help its popularity. The justification behind the proposal was that it would help the IRS identify suspect accounts, to and from which large volumes of money flow.

As concerned citizens, we should have no patience for tax evasion, but there are lingering doubts regarding whether enhanced bank reporting is a suitable enforcement tool for those purposes.

Given the bad rap FATCA has earned over the last decade, one wonders whether a domestic FATCA regime would be plagued by disproportional overreach and unintended consequences.

On encountering blowback from lawmakers, proponents raised the threshold from $600 to $10,000. The revision was sensible, but even that couldn’t save the proposal. In late October congressional Democrats dropped the measure altogether, recognizing it as unwanted baggage likely to hamper other things they’re trying to achieve.

I’m glad they did (and I say that as someone who believes firmly in progressive income taxation and shrinking the annual tax gap). The reason is simple: Existing U.S. bank reporting rules should be sufficient to match taxable income to taxpayers.

I’m not yet convinced we need a domestic version of FATCA, at least not for individual account holders. If we absolutely had to have stronger bank reporting of the kind envisioned by the Biden administration, I would prefer it be limited to business accounts.

At the end of the day, the mood of lawmakers (including moderate Democrats) might have been best summed up by Jim Nussle, a former Iowa representative who is now the CEO of the Credit Union National Association. Commenting on the proposal’s defeat, Nussle said, “The last thing Americans want right now is the government snooping on their accounts.”

Nussle’s probably correct as far as public attitudes on snooping go, but his remark overlooks that our government already routinely monitors our financial activities. Take away third-party reporting, and the tax compliance rate would no doubt plummet. Ditto for third-party withholding. We need those things if we want a tax system that doesn’t depend entirely on self-reporting.

It’s difficult to gauge how much “snooping” the public is willing to tolerate at any given time. For policymakers, the situation will always require striking the right balance between privacy and enforcement. In this case, privacy interests won the day – but that won’t always be the case. Proposals like a domestic FATCA regime have the potential to raise a lot of revenue, so they might remain on the shelf for years, waiting for an occasion when Congress needs the money to finance a spending project.

My thinking is that enacting a domestic FATCA regime will always face an uphill battle because it suffers one obstacle the actual FATCA regime never had to contend with: the nature of the affected constituency. The number of U.S. taxpayers with overseas bank accounts is tiny compared with the population as a whole, so burdening them can be spun as collateral damage. It’s another thing entirely to burden the public at large.

In the meantime, lawmakers need to focus on more acceptable ways to narrow the tax gap – certainly not an easy task.