Posted By on 10/05/2012

In 2009, the U.S. government caught Swiss bank UBS helping Americans hide assets to avoid paying taxes. The next year, the U.S. Congress enacted legislation aimed at preventing similar behavior by banks and citizens in the future. That act, the Foreign Account Tax Compliance Act, or FATCA, which was barely noticed at the time, is now coming into effect piece by piece, and people around the world—including individuals, banks, and governments—are expressing shock and outrage at its provisions.

The act introduced a number of new requirements, some aimed at individuals and others aimed at banks. Some pieces took effect in 2011, while others won't become valid until as late as 2015. Almost all of them are under fire for requiring onerous financial reporting and for penalizing those who fail to comply by charging them massive financial penalties.

American expats have long had to file American taxes, even though their government may be the only in the world to tax its citizens who live abroad. This year, their job became even harder, with a new form and new penalties. American expats now have to file the Foreign Bank and Financial Accounts form, known as FBAR, almost all of whose requested information is requested on other, pre-existing tax forms. Nonetheless, it is now required. And the penalty for failure to file it can reach as high as $10,000.

Of course, that form only affects Americans living abroad, a group that numbers only about 6 million around the world. But millions more people, and tens or hundreds of thousands of banks, will be affected by other FATCA provisions.

Included in the law are requirements for foreign banks to report any account with an American owner that contains more than $50,000. While the logic and principle behind this—stopping banks from helping hide assets the U.S. government can rightly tax—is fair, it has vast negative consequences for many groups of people, including many non-Americans.

First, this allows the U.S. government access to the finances of any individuals, including non-Americans, who hold joint accounts with American citizens. Spouses, parents, children, and friends of American citizens can now be legally required to give financial information to the U.S. government, as can businesspeople who share joint business accounts with Americans. Penalties for failing to report such accounts are as large as $10,000 per account, meaning individuals—including non-Americans—could be required to pay tens of thousands of dollars for sharing accounts with Americans and failing to file American tax forms.

Second, it places massive compliance requirements on foreign banks, just for allowing Americans to bank with them. Banks are now required to determine the citizenship of all account holders and report any accounts greater than $50,000 owned by Americans. For large banks, especially those in Europe and Canada, the cost of complying with this may reach as high as $100 million per bank and may collectively cost non-American banks billions of dollars each year. Penalties for banks that fail to comply include withholding of up to 40 percent of revenue into and out of the U.S.

Numerous consequences of this law have been seen already, well before many of the requirements take effect. (The requirements on banks, for example, start in 2014.) European banks such as HSBC, Deutsche Bank, and Credit Suisse have already announced they will stop offering certain services to American investors. Canadian banks, most of which have too many financial ties to Americans to do this, will be forced to bear all the compliance costs—or the penalties.

And expats—as well as their spouses and business partners—are heading into uncharted territory of filing requirements and penalties for failing to report assets they didn’t know they had to report or don’t believe they should have to report. That might be one reason more Americans gave up their passports in 2011 than in 2007, 2008, and 2009 combined.

Learn more about FATCA: