The Big FATCA Failure

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One of the most iconic scenes in movie history is from The Treasure of the Sierra Madre, based on a novel by the mysterious anarchist author B. Traven. In it, banditos pretending to be Mexican federales accost renegade gold-miner Humphry Bogart, who demands to see their badges. Memorably, they refuse.

How do you know that something a government agent demands of you is legal? How do you know they’re even entitled to ask in the first place?

After all, government agents illegally try to force people to do things all the time. For example, cops routinely instruct bystanders not to film them, even seizing and destroying cameras or erasing pictures and film. Yet there is no basis in the Constitution or any law for such actions. Every time they do it and someone challenges them, they are found to have acted illegally.

But they keep doing it. That’s because most people are deeply conditioned to respect authority and to assume that anything an “official” tells them must be backed up by valid law.

If you’re a foreigner banking in the U.S., you’re probably being subjected to illegal tax rules right now. You should ask to see the federale’s badge.

Bait and Switch?

The infamous Foreign Account Tax Compliance Act (FATCA) requires foreign banks to report certain accounts held by U.S. taxpayers to the IRS, under penalty of extreme sanctions. To implement it, the U.S. Treasury Department negotiated a series of intergovernmental agreements (IGAs). These IGAs oblige foreign governments to report U.S. taxpayer banking information to the IRS, and for the U.S. to report foreigners’ banking information to their respective governments.

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Most of the news we’ve heard about FATCA concerns its impact on U.S. taxpayers living abroad. Foreign banks have closed tens of thousands of American accounts, and refuse to open new ones. As I’ve had to tell many frustrated readers, it’s really hard to open a foreign bank account these days unless you have a lot to deposit. Thousands of Americans have even renounced their citizenship because of FATCA.

FATCA is deeply offensive to many foreign governments because it requires them to change financial privacy laws so personal information can be revealed to the IRS. Dozens of foreign governments have done this, with great reluctance.

But what if FATCA is illegal?

The 14th Amendment? Just a Piece of Paper

FATCA also affects foreigners who live or bank in the U.S. Earlier this week, the IRS proudly announced that it had just handed over the first batch of private U.S. banking information under FATCA IGAs.

But few people have asked whether this federale has a badge. He probably doesn’t.

Generally, it takes a subpoena issued by a judge to force U.S. banks to hand over most client-account information to the IRS, so the IRS can’t just go and get the information it needs to fulfill its obligations under the IGAs. But there is a controversial exception — form 1042-S, submitted by banks, which applies only to foreigners with U.S. source income, even though nonresident aliens are not subject to taxation on interest earned from U.S. accounts.

1042-S was rammed through by the IRS, in spite of bitter opposition. Congress has never bothered to address the legality of 1042-S, and there are serious doubts about its constitutionality. Nevertheless, the IRS uses information submitted by banks on form 1042-S to comply with the FATCA IGAs.

But there’s more. Pub. L. 114-38 states that “tax returns and return information shall be confidential … no officer or employee of the United States shall disclose any return or return information obtained by him in any manner in connection with his service as such an officer or an employee or otherwise.” There is no exception for information from form 1042-S, for foreigners, for foreign governments or for IGAs.

The 14th Amendment to the U.S. Constitution, which applies to everyone including foreigners in the U.S., forbids the government to “deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”

But both form 1042-S and the IRS surrender of private tax-return information under the IGAs appear to do just that.

And for the Pièce de Résistance

All that is bad. But even worse is the fact that there appears to be no basis in U.S. law for the Treasury to have entered into the FATCA IGAs in the first place. The IGAs are administrative agreements between our bureaucrats and foreign bureaucrats. They aren’t treaties, and they certainly can’t override existing U.S. law or the 14th Amendment. They are probably invalid.

Federale FATCA has no badge, folks. Maybe all it will take is one determined foreigner to file suit against the IRS to bring the whole house of cards tumbling down. Some brave Canadians have just done that in their own country, and they may well prevail.

Let’s hope some brave foreigner demands to see the IRS badge here at home. I’m betting that the federales won’t be able to produce it.

Kind regards,
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Ted Bauman
Offshore and Asset Protection Editor