Searching for Uncle #FATCA: Where is he? What does he do? Why is he a danger to America? Can Congressman Meadows and Senator Paul save America?

 
Searching for Uncle #FATCA: Where is he? What does he do? Why is he a danger to America? Can Congressman Meadows and Senator Paul save America?
 

 
 
 
 
 

A Guest Post by
John Richardson

 


 
Congressman Mark Meadows has recently introduced H.R. 5935 – a
bill to “Repeal FATCA”. The title is:

“H.R.5935 – To repeal the
violation of sovereign nations’ laws and privacy matters.”

The title provides strong clues of the motivation for the bill. I
received an email asking exactly how the Meadows Bill would “repeal
FATCA”. This post is an attempt to answer that particular question. In
order to understand how the Meadows Bill would repeal FATCA, one must
understand exactly what is the FATCA law that would be repealed.
(Note that a repeal of FATCA would leave the FATCA IGAs
intact.) I have previously written about the origins of Mr. FBAR. This
“Search For Uncle FATCA” – a search for what America
has become – is a companion post.

Part 3 – What does it mean to repeal FATCA and how exactly does
the Meadow Bill repeal FATCA? A section by section analysis

I apologize for the long post, but don’t have time to write a
shorter one …

I was asked to answer the question:

“What exactly would it mean to repeal FATCA?”

The short answer to the question is:

“We make FATCA go away by reversing all the changes to the Internal Revenue Code that collectively comprise FATCA.”

The real question becomes: “How do we reverse FATCA?”

The detailed answer is long and technical.
It includes (as appendixes) the complete text of Part V of the HIRE
Act (which created FATCA) and the complete text of H.R. 5935 – the Meadows Bill. I would not expect people to read the text of the legislation (it is overwhelming).

The Three Faces Of FATCA

Whether you support FATCA or oppose FATCA,
a broad understanding of the original FATCA legislation will help in
your “FATCA Discussions”. It will also help you understand that there
are actually “Three Faces To FATCA”. When you find
yourself in a “FATCA Chat” you should be clear on whether you are
talking about:

  • Face 1 – The part of FATCA that is aimed at
    foreign financial institutions (Internal Revenue Code Sections
    1471 – 1474 – Chapter 4)
  • Face 2 – The FATCA IGAs that have for all
    practical purposes replaced “Chapter 4: Sections 1471 – 1474”
    (the part of FATCA that applies to non-U.S. financial
    institutions) of the Internal Revenue Code
  • Face 3 – The various amendments to the
    Internal Revenue Code (particularly Section 6038D) which presume
    that Americans abroad are tax evaders and (1) force disclosure
    of much of their financial lives and (2) impose punitive
    taxation (particularly in the case of “foreign trusts” and
    penalties (form 8938) on them.

 
Question: What does the Meadows bill do actually do?

Answer: It gets rid of Face 1 and Face 3 but leaves Face 2 (The FATCA IGAs intact). This is an important point. Because the FATCA IGAs were never authorized by FATCA, the repeal of FATCA would leave the FATCA IGAs intact!

The full text of Meadows Bill is here. You will see that it reverses (section by section) the HIRE Act amendments to the Internal Revenue Code that created FATCA. It converts the Internal Revenue Code (at least in terms of FATCA provisions) to what it was before FATCA.

But, to appreciate the Meadows Bill, we must first understand FATCA in its original incarnation.

In the beginning, Congress created …

In order to understand the Meadows Bill, you must understand the legislative origins of FATCA – specifically the HIRE Act which is found here:

https://www.gpo.gov/fdsys/pkg/PLAW-111publ147/html/PLAW-111publ147.htm

All legislation must have an “Offset Provision” (which
explains how to pay for the new law). (Almost all legislation
affecting Americans abroad is found in “Revenue Offset Provisions”.
The effect is to force a politically powerless group to pay for a
powerful majority. On this point, See the following submission made to
the Senate Finance Committee in 2015.

richardsonkish-revenue-raising-measures-april-14-2015-international-tax-1-1)

In this case the “Offset Provision” (which created FATCA) is Title 5 of
the HIRE Act. The “Offset Provisions” are summarized as follows. I have
added IN BOLD what the significance of this is. Please note that
Subtitle A is the “Income Taxes” section of the Internal Revenue Code.
Remember that FATCA contains two specific targets. Target 1 is
“foreign financial institutions“. Target 2 is
“Americans abroad” (and a few Homeland Americans) who
have accounts (mostly for legitimate reasons) at Foreign Financial
Institutions.

Explaining the FATCA legislation …

What follows is an explanation of what the “FATCA legislation really is.
It will explain how FATCA has two specific targets: (1) Foreign
Financial Institutions and (2) The “U.S. Persons” who make use of their
services.

At the end of the post I have included:

Appendix A – The Actual Text Of The “Offset Provision
in the HIRE Act which created FATCA

Appendix B – The Actual Text Of The Meadows Bill (which
in effect repeals the sections of the HIRE Act which created FATCA)

Explanation of what the FATCA legislation really is …

A Summary of the changes made to the Internal Revenue Code by
the HIRE Act

I have included links to the exact sections of the Internal Revenue Code
after the HIRE Act amendments. To see a discussion of
the pre-HIRE Act Internal Revenue Code, see Part B (the exact text of
the HIRE Act). This demonstrates how FATCA Targets:

  • non-U.S. financial institutions (FATCA Face 1); and
  • Americans abroad (FATCA Face 3).

Summary of the FATCA provisions in the HIRE Act

(NOTE THAT I HAVE ADDED MY COMMENTARY IN CAPITAL LETTERS.)

TITLE V–OFFSET PROVISIONS

Subtitle A (SUBTITLE A IS THE INCOME TAX SECTION OF THE INTERNAL REVENUE
CODE) –Foreign Account Tax Compliance

Part I–Increased Disclosure of Beneficial Owners–
AIMED AT FOREIGN FINANCIAL INSTITUTIONS

Sec. 501. Reporting on certain foreign accounts.

THIS CREATES CHAPTER 4 (SECTIONS 1471 – 1474) THAT ARE THE SECTIONS
AIMED AT FOREIGN FINANCIAL INSTITUTIONS. IT IS WHAT MOST PEOPLE
UNDERSTAND FATCA TO BE. SEE WHERE CHAPTER 4 APPEARS HERE:

screen-shot-2016-09-30-at-7-18-29-am

It’s right there. It’s Chapter 4. That said, Chapter 4 of the Internal
Revenue Code has been rendered largely irrelevant by the FATCA IGAs.
However, here is what Chapter 4 looks like:

screen-shot-2016-09-30-at-11-07-07-am

Sec. 502. Repeal of certain foreign exceptions to registered bond
requirements

Part II–Under Reporting With Respect to Foreign Assets –
AIMED SQUARELY AT AMERICANS ABROAD – INCREASES THE OVERALL
REPORTING REQUIREMENTS FOR U.S. PERSONS, CREATES FORM 8938 AND IMPOSES
PENALTIES ON NORMAL DAY-TO-DAY-LIVING

Sec. 511. Disclosure of information with respect to foreign financial
assets. – CREATES INTERNAL REV CODE 6038D WHICH RESULTS IN FORM 8938.
INTERNAL REVENUE CODE S. 6038D READS AS FOLLOWS:
 

26 U.S. Code § 6038D – Information
with respect to foreign financial assets

(a) In general Any individual who, during any taxable year, holds any
interest in a specified foreign financial asset shall attach to such
person’s return of tax imposed by subtitle A for such taxable year the
information described in subsection (c) with respect to each such asset
if the aggregate value of all such assets exceeds $50,000 (or such
higher dollar amount as the Secretary may prescribe).

(b) Specified foreign financial assets For purposes of this section, the
term “specified foreign financial asset” means—

(1)any financial account (as defined in section 1471(d)(2)) maintained by a
foreign financial institution (as defined in section 1471(d)(4)), and

(2) any of the following assets which are not held in an account
maintained by a financial institution (as defined in section 1471(d)(5))—

(A)any stock or security issued by a person other than a United States person,

(B) any financial instrument or contract held for investment that has an
issuer or counterparty which is other than a United States person, and

(C) any interest in a foreign entity (as defined in section 1473).

(c) Required information The information described in this subsection
with respect to any asset is:

(1)In the case of any account, the name
and address of the financial institution in which such account is
maintained and the number of such account.

(2) In the case of any stock or security, the name and address of the
issuer and such information as is necessary to identify the class or
issue of which such stock or security is a part.

(3) In the case of any other instrument, contract, or interest—

(A) such information as is necessary to identify such instrument, contract, or
interest, and
(B) the names and addresses of all issuers and counterparties with
respect to such instrument, contract, or interest.

(4)The maximum value of the asset during the taxable year.

(d) Penalty for failure to disclose

(1) In general If any individual
fails to furnish the information described in subsection (c) with
respect to any taxable year at the time and in the manner described in
subsection (a), such person shall pay a penalty of $10,000.

(2) Increase in penalty where failure continues after notification If
any failure described in paragraph (1) continues for more than 90 days
after the day on which the Secretary mails notice of such failure to the
individual, such individual shall pay a penalty (in addition to the
penalties under paragraph (1)) of $10,000 for each 30-day period (or
fraction thereof) during which such failure continues after the
expiration of such 90-day period. The penalty imposed under this
paragraph with respect to any failure shall not exceed $50,000.

(e) Presumption that value of specified foreign financial assets exceeds
dollar threshold If—

(1)the Secretary determines that an individual has
an interest in one or more specified foreign financial assets, and
(2) such individual does not provide sufficient information to
demonstrate the aggregate value of such assets, then the aggregate value
of such assets shall be treated as being in excess of $50,000 (or such
higher dollar amount as the Secretary prescribes for purposes of
subsection (a)) for purposes of assessing the penalties imposed under
this section.

(f) Application to certain entities To the extent provided by the
Secretary in regulations or other guidance, the provisions of this
section shall apply to any domestic entity which is formed or availed of
for purposes of holding, directly or indirectly, specified foreign
financial assets, in the same manner as if such entity were an
individual.

(g) Reasonable cause exception No penalty shall be imposed by this
section on any failure which is shown to be due to reasonable cause and
not due to willful neglect. The fact that a foreign jurisdiction
would impose a civil or criminal penalty on the taxpayer (or any other
person) for disclosing the required information is not reasonable
cause.

(h) Regulations The Secretary shall prescribe such regulations
or other guidance as may be necessary or appropriate to carry out the
purposes of this section, including regulations or other
guidance which provide appropriate exceptions from the application of
this section in the case of—

(1) classes of assets identified by the
Secretary, including any assets with respect to which the Secretary
determines that disclosure under this section would be duplicative of
other disclosures,
(2) nonresident aliens, and
(3) bona fide residents of any possession of the United States.

(Added Pub. L. 111–147, title V, § 511(a), Mar. 18, 2010, 124 Stat.
109.)

 

THE FOLLOWING POINTS ARE NOTEWORTHY:

  1. THE REFERENCES TO S. 1471 AND OTHER SECTIONS OF THE CHAPTER 4
    FATCA PROVISIONS.
  2. THE SECRETARY HAS THE AUTHORITY TO EXEMPT NONRESIDENT ALIENS
    FROM THE FORM 8938 FILING OBLIGATION AND HAS CHOSEN TO DO SO.
    THE EXEMPTION EXTENDS TO GREEN CARD HOLDERS
    WHO ARE, BY VIRTUE OF TREATY TIE BREAKER RULES, NONRESIDENT
    ALIENS.
  3. THE SECRETARY MAY PRESCRIBE A REPORTING THRESHOLD WHICH
    EXCEEDS $50,000 (WHICH HAS BEEN DONE IN THE CASE OF AMERICANS
    ABROAD)
  4. THE SECRETARY HAS THE A BROAD AUTHORITY TO PRESCRIBE
    REGULATIONS TO CARRY OUT THE PURPOSES OF S. 6038D. THIS IS
    PROBABLY BROAD ENOUGH TO EXEMPT AMERICANS ABROAD, WHICH
    PRESUMABLY IS THE BASIS FOR THE SUGGESTED FATCA SAME COUNTRY
    EXEMPTION    . NOTE THAT IN DECEMBER 2016 TREASURY SPECIFICALLY
    CONSIDERED AND REJECTED THE FATCA SAME COUNTRY EXEMPTION
    PROPOSED BY “ACA”     AND “DEMOCRATS ABROAD”.
  5. IN A CONFLICT BETWEEN U.S. LAW AND THE FOREIGN LAW, THE U.S.
    LAW WILL TAKE PRECEDENCE – SEE INTERNAL REVENUE CODE S.
    6038D.

 
The Secretary may prescribe – The FATCA Regulations – AND THE
REGULATIONS ARE HERE …

 
https://www.law.cornell.edu/cfr/text/26/1.6038D-2

https://www.law.cornell.edu/cfr/text/26/1.6038D-3

https://www.law.cornell.edu/cfr/text/26/1.6038D-4

https://www.law.cornell.edu/cfr/text/26/1.6038D-5
 

S. 6038D gave birth to IRS Form 8938 …

FATCA Form 8938 is the
Form that is used to report the “Foreign Assets” mandated by Internal
Revenue Code S. 6038D.

Effects:

1. Americans abroad are required to report virtually
all of their “foreign assets” (but local to them) to the IRS.

2. This creates a “paper trail” which will make it more likely that Americans abroad will pay an Exit Tax if (when) they renounce U.S. citizenship.

All of these concepts are summarized by the IRS here …

https://www.irs.gov/businesses/corporations/do-i-need-to-file-form-8938-statement-of-specified-foreign-financial-assets

The relationship between Form 8938 and Mr. FBAR is described here
…

https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements

Sec. 512. Penalties for underpayments attributable to undisclosed
foreign financial assets. –

INCREASES PENALTIES WHEN TAXES OWED ON UNDISCLOSED ACCOUNTS ARE FOUND. THE INTERNAL REVENUE CODE REQUIRES THE
FILING OF NUMEROUS INFORMATION
RETURNS. AMERICANS ABROAD ARE “PERSONS SUBJECT TO SPECIAL DISCLOSURE PROVISIONS“.
THESE SPECIFIC DISCLOSURE PROVISIONS INCLUDE S. 6038 (FORM 5471 AND FORM 8865 – FOREIGN CORPORATIONS AND PARTNERSHIPS), S. 6038D (FOREIGN FINANCIAL ASSETS ON FROM
8398) AND FOREIGN TRUST REPORTING S. 6048 https://www.law.cornell.edu/uscode/text/26/subtitle-F/chapter-61/subchapter-A/part-III

Sec. 513. Modification of statute of limitations for significant omission of income in connection with foreign assets. –
WHEN IT COMES TO FOREIGN ACCOUNTS THE IRS CAN AUDIT FOR 6 YEARS INTO OF THE USUAL 3 YEARS

Part III–Other Disclosure Provisions

Sec. 521. Reporting of activities with respect to passive foreign investment companies. –

FOR THE FIRST TIME PFICS ARE REQUIRED TO BE DISCLOSED WHETHER THERE IS OR THERE IS NOT INCOME FROM THE FUNDS (THIS
IS INCREDIBLY SIGNIFICANT) – INTERNAL REV CODE 1298(f) https://www.law.cornell.edu/uscode/text/26/1298
WHAT THIS MEANS IS THAT AMERICANS ABROAD WHO OWN A NON-U.S. MUTUAL FUND ARE REQUIRED TO REPORT THIS TO THE IRS WHETHER OR NOT THEY ARE OTHERWISE REQUIRED TO FILE A U.S. INCOME TAX RETURN!

The disclosure takes place on Form 8621. The instructions to Form 8621 are incomprehensible to all but a select group of tax preparers. IT IS VERY
EXPENSIVE TO PAY A TAX PREPARER TO COMPLETE FORM 8621.

Effect: Americans abroad are effectively prohibited from owning
all but U.S. mutual funds.

Sec. 522. Secretary permitted to require financial institutions to file
certain returns related to withholding on foreign transfers
electronically.

Part IV–Provisions Related to Foreign Trusts

Sec. 531. Clarifications with respect to foreign trusts which are
treated as having a United States beneficiary. – SEE INTERNAL REV CODE
S. 679(f) – https://www.law.cornell.edu/uscode/text/26/679

Sec. 532. Presumption that foreign trust has United States beneficiary.
CREATES A PRESUMPTION THAT THE USA CAN TAX THE BENEFICIARY OF ANY TRUST
ANYWHERE. NOTE THAT THIS IS A PRESUMPTION, BUT IT DOES PUT THE ONUS ON
THE TRUST/BENEFICIARY TO SHOW THAT THE BENEFICIARY IS NOT A U.S. PERSON.

Sec. 533. Uncompensated use of trust property. –
BASICALLY THE USE OF TRUST PROPERTY IS NOW TREATED AS A TAXABLE DISTRIBUTION TO THE PERSON
USING THE PROPERTY – IRC SECTION 643(I)https://www.law.cornell.edu/uscode/text/26/643

Sec. 534. Reporting requirement of United States owners of foreign
trusts. –
AMENDS THE REPORTING REQUIREMENTS WITH RESPECT TO FOREIGN
TRUSTS – THE SECRETARY CAN SPECIFY WHICH INFORMATION IS REQUIRED TO BE
REPORTED

Sec. 535. Minimum penalty with respect to failure to report on certain
foreign trusts. –
CREATES A PENALTY FOR FAILURE TO DISCLOSE THE INTEREST IN THE FOREIGN TRUST (SEE S. 534 ABOVE) WHICH IS THE GREATER OF 10,000 OR 35% OF THE VALUE OF THE REPORTABLE AMOUNT OF THE TRUST. (INTERNAL REVENUE CODE S. 677)
https://www.law.cornell.edu/uscode/text/26/6677

Part V–Substitute Dividends and Dividend Equivalent Payments Received
by Foreign Persons Treated as Dividends

Sec. 541. Substitute dividends and dividend equivalent payments received
by foreign persons treated as dividends.

Subtitle B–Delay in Application of Worldwide Allocation of Interest

Sec. 551. Delay in application of worldwide allocation of interest