#FATCA: Where citizenships collide – Turning #Americansabroad over to the IRS and Foreign Governments

I was recently attempting to explain FATCA, FBAR and U.S. taxation practices to a friend. After deciding that I was NOT fabricating a story, she remarked:

“It’s unjust! It’s inhumane! I didn’t choose where I was born!”

(Fortunately she was not born in the U.S.).

The truth is that issues of FATCA, FBAR and citizenship-based taxation are more “citizenship problems” than tax problems.

Incompatible tax systems create problems for people subject to both tax systems.

Incompatible citizenship laws create problems for people who have dual citizenship.

U.S. tax lawyer, Virginia La Torre Jeker has just published a fascinating post where she describes the problems of “incompatibility of citizenship”. Ms. Jeker describes the problems where a country:

1. Does NOT allow dual citizenship; and

2. Makes it a criminal offense to have dual citizenship.

I quote from her insightful post:

Not only are many desperately struggling to become US tax compliant, many GCC nationals are becoming quite concerned that their government will learn they hold a prohibited “second” nationality. Under FATCA, foreign financial institutions must agree to verification and due diligence procedures – meaning they  must be on the look-out for customers, owners or beneficiaries evidencing any “US indicia”. They must identify  and report directly to the US Internal Revenue Service or to their own government via an intergovernmental agreement (IGA), information on US account holders.  FATCA will help expose GCC nationals who hold US citizenship by a financial institution’s transmission of that information directly to the home country government agency responsible for gathering information under the IGA. America, in its quest to root out tax cheats, has now put many of its own innocent citizens in a very perilous position.

This fear of detection seems particularly acute right now in the Kingdom of Saudi Arabia.  In Saudi Arabia, Saudi citizenship can involuntarily be lost if a Saudi citizen obtains a foreign citizenship without the prior permission of the Prime Minister. See Articles 11 and 13 of the Saudi Arabian Citizenship System. 

Now, some may be thinking, “so what?” What’s the big deal? How would you like to be stripped of the citizenship of your country of residence just because you were – as Bruce Springsteen would say – “Born In The U.S.A.”?

What are the consequences of being stripped of your Saudi Citizenship? Quoting again from Ms. Jeker’s article:

Article 13 provides that “By Decree, in any case, Saudi Arabian nationality can be stripped from Saudis, if they have any other nationality in violation of article 11 of this regulation”, stressing that “Saudis would be notified of the consequences of such actions, a legal notification, three months prior to the execution date of the Decree of the loss of Saudi Arabian nationality”. Under the provisions of this article “the liquidation of the property of the person who lost his nationality, in accordance with the legal system of property ownership, and be denied residence in the territory of the Kingdom and barred from any return to it”.

It’s hardly a surprise, as Ms. Jeker points out:

Many of my GCC dual national clients are now looking at renouncing their US citizenship. Many more thought they had already given up their US citizenship years ago when they took on, say, Saudi citizenship (usually after marriage to a Saudi national) and pursuant to Saudi law specifically renounced their US citizenship at such time. They are now learning, many years later, that this might not have been enough and that they are still US citizens because they did not give notice to the Department of State that they had the intent at that time to give up their US citizenship.  They never obtained that critical document called a Certificate of Loss of US Nationality (CLN). If they try to get the CLN now with a retroactive relinquishment date, they will have to demonstrate they had the intent to relinquish US citizenship at that earlier time. This is often a very difficult burden to meet.

And let’s not forget the FATCA “security risks” (noted by Americans Citizen Abroad) that Americans abroad are subjected to.

Risk of identity fraud

Form 8938 provides full disclosure of personal assets and bank account information. It will be filed with the 1040 that details the tax filers name, address, phone number and Social Security number, thus putting Americans abroad at high risk of serious identity fraud, in particular, since the IRS is pushing to have all of this reporting done on-line in the near future. James White, director of strategic studies for the GAO, told the House Oversight subcommittee on Government Organization that there were close to 250,000 incidents of taxpayers’ identity theft in 2010, up from just under 52,000 in 2008. xviii) This is a five-fold increase in the number of instances in just two years. When 100% of all private financial information is acquired with such identity theft, the potential damage inflicted on Americans overseas will be substantial.

There is more to FATCA than tax! For example:

U.S. citizenship is now the most dangerous citizenship on the planet!