When politicians fight and bicker and threaten each other with lawsuits and impeachments, it’s nothing new. But when Senator Rand Paul sues President Obama over FATCA, anyone with an interest in offshore finances or living better take notice.
Whether it’s just political posturing for his 2016 presidential bid or not, Paul’s July 14 announcement that he and six other plaintiffs from Republican Overseas Action are filing suit could have major implications for the future of FATCA.
The lead lawyer on the case is James Bopp, the same lawyer behind the controversial 2010 Citizens United ruling, which removed restrictions on corporate political donations.
The lawsuit argues that Paul’s position as a Senator gives him a privileged position as a plaintiff because Obama failed to obtain consent from him and the 99 other senator before implementing FATCA agreements with foreign countries. The argument hinges on the constitutional requirement of two-thirds of senators to approve foreign treaties. Paul alleges that the FATCA agreements between the Treasury Department and foreign governments.
The lawsuit also mentions the burden placed on U.S. expats. Many Americans have had their accounts closed, either by themselves or their financial institution, because of the onerous reporting requirements involved.
Some U.S. expats are going further than checking out of their banks and are checking out of the U.S. instead.
According to figures from the IRS, 1,335 U.S. citizens renounced their citizenship in the first quarter of 2015. Renunciations for 2015 are on track to shatter last year’s record setting 3,415. In 2008, a measly 231 renunciations were registered.
The trend of U.S. citizens saying sayonara has casued the State Department to take notice. In September 2014, the fee to renounce U.S. citizenship rose more than 400%, from US$450 to US$2,350.
Paul has long been an opponent to FATCA; this is neither the first nor likely the last time Paul will be heard from on the issue. And it’s not only his libertarian base that are joining him in voicing concern over FATCA. Democrats Abroad, like their Republican counterparts named in the lawsuit, have criticized FATCA.
Carolyn Maloney and Mick Mulvaney, co-chairs for the congressional caucus for Americans living abroad, have shown support for a FATCA exemption on reporting of financial accounts in the country of residency for Americans living overseas. They are circulating a letter to Treasury Secretary Jack Lew, which they say is on behalf of the more than 8 million U.S. citizens living abroad.
Opposition isn’t only from politicians looking to win favor among their electorate but from within the IRS, too. The suggestion to exempt some U.S. expats from having to report their financial accounts when held in the same country where they reside has been made before by the IRS’s own Taxpayer Advocate Nina Olson, too.
FATCA was made law in 2010 and now links tax authorities in more than 110 countries and 145,000 financial institutions with the IRS to ensure that individuals and institutions are not dodging their U.S. tax obligations.
Banks must comply with IRS rules under FATCA, which means either reporting account information on American clients with accounts worth more than US$50,000 or signing a statement to the IRS that states they have no U.S. clients. Noncompliant banks see a 30% withholding on U.S.-dollar wires to their bank.
The United States is the only developed country that collects taxes based on citizenship instead of residency. The only other countries—developed or not—to tax nonresident citizens based on worldwide income are Eritrea and China.