updated 2:28 PM CEST, May 24, 2023

Glimmer of hope seen in IRS proposal to tweak FATCA regs

After more than eight years of lobbying Congress and the White House, opponents of the 2010 Foreign Account Tax Compliance Act are cautiously welcoming news that the Internal Revenue Service has issued a proposal to make major changes in that legislation and certain other reporting requirements that have made life difficult for Americans living outside of the U.S.

The news came in the form of a proposal that sets out ways that the regulatory "burden" created by FATCA could be reduced.

Comments on the proposed measures must be submitted within 60 days of their being published in the Federal Register, according to a copy of the proposal on the IRS's website.

However, observers stressed that it is far from clear that the proposed changes would do enough to mitigate the problems FATCA causes for expatriates, which many say are exacerbated by the fact that the U.S. taxes on the basis of citizenship rather than residency, like most other countries do.

'Step in right direction'

Solomon Yue, the Oregon-based chief executive of the Republicans Overseas and a long-time critic of FATCA, said the IRS proposal was "the first step in the right direction", towards reducing the regulatory burden caused by the legislation.

But he added: "the optimum reduction of the FATCA regulatory burden would be to suspend its enforcement [altogether], due to the fact that the IRS hasn't been able to honor" the reciprocity obligation the U.S. originally promised other countries, when they agreed to enforce it through the use of intergovernmental agreements (IGAs).

"That is FATCA's Achilles' heel.

"To honor the reciprocity, it would require another vote of the Congress. The IRS couldn't get the vote during Obama's years, [and] such a vote today would be even more difficult to get." 

John Richardson, a Toronto-based tax and citizenship lawyer and also an outspoken critic of FATCA, was even less optimistic that there was anything for Americans living overseas to be encouraged by in the proposals. "I don't see anything in this that would have any impact whatsoever on Americans abroad," he said.

"This is a bunch of technical stuff that constitutes amendments to the FATCA regulations, motivated by the fact that there are so many FATCA IGAs." 

 What the IRS is proposing

The IRS proposal, which the IRS refers to as "Regulations Reducing Burden under FATCA and Chapter 3", seeks to "[eliminate] withholding on payments of gross proceeds, [defer] withholding on foreign passthru payments, [eliminate] withholding on certain insurance premiums, and clarify the definition of 'investment entity'," according to a statement on the first page of the 50-page document.

It also "includes guidance concerning certain due diligence requirements of withholding agents and guidance on refunds and credits of amounts withheld." 

What it doesn't appear to do, however, is to address specifically the problems of American individuals who live overseas.

Those wishing to comment on the proposal, which is referred to officially as  IRS REG-132881-17, should mail their comments to the Internal Revenue Service, Room 5203, PO Box 7604, Ben Franklin
Station, Washington, DC 20044, or email them via the Federal eRulemaking Portal, which is at www.regulations.gov, again referencing IRS REG-132881-17. 

As reported, lobbying by a growing band of Europe-based “accidental Americans,” who have been campaigning to engage European government officials to back their calls for these officials to pressure the U.S. government to ease up on its use of regulations like FATCA to come after them, was seen to have played a role in persuading the European Parliament to vote unanimously in favor of resolution supporting their cause back in July.

Among other things the resolution, which was approved by a resounding 470 votes to 43, with 26 abstentions, called on EU member states as well as the European Commission to re-open negotiations with the U.S. over FATCA. 

In October,  the New York Times reported that IRS efforts to tackle tax evasion within the United States – which had been the argument for introducing the Foreign Account Tax Compliance Act in the first place – is pursuing significantly fewer cases than it was less than a decade ago, owing to cutbacks in the service's funding. 

"Last year, the IRS’s criminal division brought 795 cases in which tax fraud was the primary crime, a decline of almost a quarter since 2010," the newspaper reported, before quoting Don Fort, the chief of criminal investigations for the IRS, as conceding that this was "a startling number."

"Provided you’re not a close associate of President Trump, there may never be a better time to be a tax cheat," the NYT report noted, in a reference to the fact that tax evasion has been at the center of criminal cases involving two presidential associates.