The infamous bank robber Willie Sutton was once asked why he robbed banks. His response was simple, “Because that’s where the money is!” Taking a page from Willie’s play book, Sen. Max Baucus, Rep. Charlie Rangel and Sen. Harry Reid are about to embark on a worldwide search for money.
In 2010, Congress passed House Resolution 2847, the Hiring Incentives to Restore Employment Act, or HIRE. This legislation included a number of tax breaks meant to encourage businesses to put people on the payroll. This law also called for greater scrutiny of foreign accounts that U.S. citizens hold in an effort to improve tax compliance, thereby bringing in more tax revenue and helping to offset the tax breaks of the HIRE Act. This portion of the law is called the Foreign Account Tax Compliance Act, or FATCA.
The tax breaks went into effect quickly. Were more people hired than otherwise would have been? Who knows? The greater scrutiny of foreign accounts took more time to implement, and just recently went into effect on July 1. The reason for the long lead time was the complexity of the process.
The U.S. essentially has mandated that every foreign financial firm report back to the IRS on accounts that U.S. citizens hold. The scope of this can’t be overstated. The idea that a government would demand foreign companies proactively report on account holders is a huge change. Typically, governments require reporting from their citizens, not the institutions their citizens work with. That’s because a government has some sway over its citizens. It can impose fines and even send them to jail. But the U.S. government also has some leverage over foreign financial firms that other governments don’t have.
Since the U.S. dollar is the world’s reserve currency, acting as the basis of so much trade, our government can penalize foreign firms who don’t comply with the new tax law. In essence, if the IRS determines a foreign bank hasn’t complied, it can withhold a portion of any proceeds due the foreign bank if they are processed through the U.S.
To avoid this, the foreign bank — or pension fund, or trust company, or whatever — must complete IRS documents about their accountholders, regardless of whether or not their American clients want their information released. As a result, FATCA is causing shockwaves around the world. Some of them were expected, as people holding foreign accounts and evading taxes realize they have fewer places to hide, which was the point of the law.
Some shock waves are a surprise. Many U.S. nationals that are legally living and working abroad are being told by the banks where they live to “shove off.” It appears that many foreign financial institutions would rather close all of their U.S. national client accounts than deal with the headache of complying with the law and the possible ramifications of withholding if they accidentally run afoul of the law. This is leaving law-abiding Americans, who are simply going about their lives, in a state of chaos.
So while FATCA is probably snaring some of the tax cheats, as it was intended to do, it is also upending the lives of many people who are simply innocent bystanders. However, what FATCA is not doing, and won’t do, is cause the collapse of the U.S. dollar by driving foreign financial firms completely away from their dollar dealings. We know this is true because it hasn’t happened yet, and prior to July 1 we would have already seen most of the shakeout from this law.
You may have heard reports that FATCA was going to cause the collapse of the dollar and lead to global financial chaos as the world abandoned the dollar. This is complete nonsense and usually promoted by someone trying to sell you gold or some other so-called remedy to the demise of the U.S. Remember that FATCA was part of HIRE, so it was passed in 2010. For the past four years, foreign financial firms have been working with the IRS to determine if they want to muddle through compliance or simply kick out all of their American accountholders.
In other words, the fallout from the law is happening, or has happened, ahead of implementation and no foreign companies or even entire countries have turned their backs on the dollar because of FATCA. While it could cause some problems or inconvenience for U.S. citizens abroad if their foreign bank decided they didn’t need the hassle and kicked them out, that has nothing to do with foreign commerce where the majority of international trade still takes place using the dollar. For better or worse, the dollar is still the dominant trade currency. My view remains that the dollar will not fall and, in fact, will be going up in this current environment.
What does bother me though is this has the distinct smell of a new agency, such as the Energy Department, which will employ thousands and become mired in a governmental process for decades to come. This is a typical program governmental bureaucrats love to start.
The revenue believed to be raised will be about $800 million per year for the U.S. Treasury. That sounds like a lot until you consider the cost of people, technology, travel expenses, investigative follow-up and more, all government documented of course, which has been estimated to be billions of dollars. Less money coming in versus more money going out — another governmental winner right out of the chute. It’s just not worth it.
Willie Sutton had a better way. He didn’t think the money was there, he knew it was there. The common sense thing to do is not create another bureaucratic agency costing billions of dollars, accomplishing nothing and creating more international intrigue on the suspicion the money is there. Let the game of hide and seek FATCA-style begin! Thanks for reading.
NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Investment advice offered through Householder Group Estate and Retirement Specialists, a registered investment adviser.