FATCA, DODD FRANK & RECENT HISTORY

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BY GRANDPA, UPDATED TO  AUG. 2013

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Thirty years ago, long before Bye Bye Big Brother was written, there were about 5 million Americans living abroad. Official figures lie, and indicate about the same number as of now. However, the reality is closer to 14 million. Under the existing laws, all Americans living abroad (with a few exceptions) were and still are required to file informational income tax returns, even if they owe no tax. Most of the Americans living abroad did not in fact owe   tax because there was a generous exemption. Today this exemption is around $95,000 of earned income. Back then in inflation adjusted dollars, it was even  more in terms of purchasing power.

Americans living abroad had to make choices: to hire a tax specialist to prepare their returns or to keep detailed records themselves & spend a few weeks preparing their own tax returns. The third choice was to become (technically at least) a criminal non-filer and simply not file anything.

Literature of the period indicates that approximately 99% of the Americans Living Abroad (with the exception of those employed by American companies) chose the non-filing option. This made them (technically at least) criminals.

In those days, we (Grandpa)  had a few clients who wanted to be straight arrows; to obey the letter of the law. Perhaps the law was unfair in that only the USA passport carried with it the obligation for non-resident citizens to pay taxes. The obligation remained just as if they had never left –with the exception of the generous exemption mentioned earlier.

Wealthier retired people living on interest, etc, did however look for ways to convert their “unearned income” from bonds, dividends and rents into “earned income exempt from taxes.” The answer was easy. The assets could be owned by corporations which then paid the “American taxpayer” a salary and expense money exempt under the law. The only catch was that if the IRS ever took a close look they might conclude that the corporate ownership was just a clever scheme to avoid taxes, and the perpetrator of such “tax fraud” was a criminal. The penalty in the good old days was 5 years in jail. This was “nothing” in comparison to the new life sentences and multimillion dollar fines and penalties under FATCA. This situation leads many individuals to conclude that they will be criminals in any event. For them the best course of action would be to put their passports into a drawer, obtain a second citizenship, and avoid returning to the USA.

However, in the old days before FATCA there was no need to renounce USA citizenship. Why? Because the penalties were never imposed &  “who knows” maybe some day they would want to return.

Then things began to change. The State Department that handled passport renewals, and was previously separate from the IRS, as of (insert date???) now required that all passports to be renewed abroad, had to include proof of income tax filing and compliance. Millionaires like Dart (inventor of the heat proofed insulated foam-plastic coffee cup) began renouncing USA citizenship because they could no longer be straight arrows and keep their USA passports.

The renunciation of USA passports has since piked up steam, and is dealt with in my Grandpa Gem titled “Renunciation.”

Next Question:

Is  my relatively recent book BBBB  out of date because among other things, it ignores the Dodd Frank Law?

Let’s start with Dodd Frank :

In my opinion, this law has little or no impact on PTs. It was and is a law to prevent another financial crisis of the 2008 variety. What does it do?

It regulates credit fees, including credit, debit, mortgage underwriting and bank fees. It protects homeowners in real estate transactions by requiring they understand risky mortgage loans. It also requires USA banks to verify borrower’s income, credit history and job status. The CFPB is under the It created theFinancial Stability Oversight Council to look out for risks that affect the entire financial industry and oversee non-bank financial firms like hedge funds.A purpose is to prevent another AIG from becoming too big to fail.

The Volcker Rule bans banks from using or owning hedge funds for the banks’ own profit. That’s because they’d often use their depositors’ funds to do so. Banks can use hedge funds for their customers only. Determining which funds are for the banks’ profits and which funds are for customers has been difficult. Therefore, Dodd-Frank gave banks seven years to divest the funds. They can keep any funds if that are less than 3% of revenue. Banks have lobbied hard against the rule, delaying its implementation until at least 2013.

Dodd-Frank requires that the riskiest derivatives, like credit default swaps, be regulated by the Securities Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). In this way, excessive risk-taking can be identified and brought to policy-makers’ attention before a major crisis occurs. A clearinghouse, similar to the stock exchange, must be set up so these derivative trades can be transacted in public. However, this Dodd-Frank rule has become mired in a series of studies.

Bring Hedge Funds Trades Into the Light:

One of the causes of the 2008 financial crisis was that, since hedge funds and other financial advisers weren’t regulated, no one knew what they were investing in or how much was at stake. That’s why the Fed and other agencies thought the mortgage crisis would be confined to the housing industry. To correct for that, Dodd-Frank says that hedge funds must register with the SEC and provide date about their trades and portfolios so the SEC can assess overall market risk. States are given more power to regulate investment advisers, since Dodd-Frank raises the asset threshold limit from $30 million to $100 million. As of 2013, 65 banks around the world had registered their derivatives business with the CFTC. (Source: NYT Dealbook, Banks Face New Checks on Derivatives Trading, January 3, 2013)

Oversee Credit Rating Agencies:

Dodd-Frank created an Office of Credit Ratings at the SEC to regulate credit ratings agencies like Moody’s and Standard & Poor’s. Many blame the agencies for over-rating some bundles of derivatives and mortgage-backed securities. This mislead investors who didn’t realize the debt was in danger of not being repaid. The SEC can require agencies to submit their methodologies for review, and can de-register an agency that gives faulty ratings.

Increase Supervision of Insurance Companies:

It created a new Federal Insurance Office under the Treasury Department, which identifies insurance companies like AIG that create risk to the entire system. It will also gather information about the insurance industry and make sure affordable insurance is available to minorities and other underserved communities. It will represent the U.S. on insurance policies in international affairs. The new office will also work with the states to streamline regulation of surplus lines insurance and reinsurance. It was supposed to release a “Study and Report on the Regulation of Insurance” in January 2012. It was also supposed to report to Congress the impact of the reinsurance reforms prescribed by the Nonadmitted and Reinsurance Reform Act of 2010, and release an update by January 1, 2015. (Source: CFT News, Federal Insurance Office Requests Comment On Scope of Global Reinsurance Market, (June2012).

As you see from the above Dodd Frank law has nothing to do with PTs, who are Grandpa’s target audience.

Further, we don’t consider the impact of every “proposed” new hair brained law. We have enough to do considering how to deal with the ones already in effect.

However, the basic PT theory never changes.

“Obey the local laws of where you live, to the extent that they apply to  tourists who are merely passing through. Keep a low profile.

Unless it’s a tax haven, never become a legal resident of anywhere. Beware of tax havens because if they change the rules, you are a sitting duck.

Follow the Six Flags -which I won’t repeat here….”

FATCA is a different story that may require reactions by Americans living abroad. . It has been dealt with extensively in other Grandpa Gems that serve as updates for Bye Bye Big Brother and previous articles. But the bottom line is this: As an American living abroad, you are or shortly will be classified as a criminal. The doctrine of “Selective Prosecution” will cause prosecutors to go after easy catches (within the USA)  and big fish. So the actual risk of prosecution for low profile PTs living outside of the USA is almost nil. But you are now a criminal. The IRS can look at your past history, and with very few exceptions, have enough evidence to convict anyone they choose to go after. Does that leave you any viable options?

Consider this example:

You were of draft age & classified as A-1 during the Vietnam war period.

You had very few options.

You could “serve your country” in a war you probably felt was unjust. You could leave the country asking for asylum another country like Canada or Sweden. If you settled abroad, as tens of thousands did, you were a criminal draft evader subject to harsh prison sentences – even death if you deserted after induction. This sword of Damocles hung over your head until many years later, when President Bill  Clinton pardoned everyone opposed to the Vietnam War in a general amnesty. Many Americans by then, had discovered that the USA was anything but the “Land of the Free”… they remained in new countries, where they are still today.

But until the Amnesty , the “draft evaders” were “Criminals!”– at least in the eyes of the USA.

That is where Americans living abroad are with FATCA today; “Criminals!” They will  need to report everything concerning their assets — or else they are criminals. The authorities could construe  any harmless error as tax fraud. Their conviction rate is around 98%. The USA government has applied pressure all over the world to eliminate any vestiges of privacy. Unless one buries gold coins and other treasures like the old time Pirates of the Caribbean, it is possible that unreported assets of Americans living abroad will be discovered . If of sufficient size, or if the owner is a loud-mouthed tax protester, the owners of unreported or  under-reported assets may be prosecuted.

However, we can be sure that  priority persecution will be given to Americans resident inside America who have foreign undisclosed accounts. Or those who are picked up during cross-border visits.

There are some more important “ifs.” Americans who live quietly abroad will seldom come to the attention of the American authorities. They will be much like Jews who escaped Nazi Germany. Hitler had more important priorities than tracking down and abducting the relatively few Jews who had escaped the death camps. He had six million chickens to kill that were already in his hutches & clutches. Besides that, the Nazis had a two-front war to run.

Likewise, the USA has other distractions: Terrorists, Drugs, Tea Party Members, Guantanamo inmates, and possibly 100 to 200 million minor league tax evaders within its borders. They can’t bother with non-filing  PTs living abroad who neither crave nor seek attention.

So what should a PT do? If we as writers, got too specific we might end up in a body bag.

Thus, we can only offer some common sense suggestions in print.

Low profile for one. We have many Grandpa Gem and other articles on the “how to” of hiding in plain sight.

We give some other solutions in our articles like “Toxic Americans” , but just like the Vietnam war draft avoiders, Americans who don’t report everything & make it easy for the “Homeland” to seize their assets, are “Criminals.”

FATCA is a very bad law for the USA . Most lawyers and intelligent people agree that it will do as much damage as those now forgotten Jimmy Carter era laws. The ones that prevented American companies abroad from competing effectively with foreign companies. Without going into detail, we recall that before “Jimmie Who?” the top ten international companies in many fields, construction, real estate, automobiles , banking, etc.— were almost all American based and owned. Once they were obliged to withhold taxes on all “American Persons” and never to pay fees that could be construed as bribes, (among other things) the financial landscape changed drastically.

A couple of years later, the top ten international companies in any field were no longer American. American. USA exports declined (arguably) by 90%. From the world’s greatest manufacturer & exporter of cars and many other products, the made in America Brands went to near zero. America’s biggest exports became low profit agricultural commodities often (like rice!)   subsidized and sold at a loss abroad.

The USA went from being the worlds largest creditor nation to the worlds largest debtor.

That was then. Now with FATCA, the USA is shooting itself in the only other foot they have left.

In another Grandpa[a Gem we will explore what FATCA is supposed to accomplish, and what it is already starting to accomplish: What’s that?  Bottom Line?

The final demolition of what was only fifty years ago, the world’s greatest economy.

In another Grandpa Gem, as I said,  we will have a good look at FATCA and it’s implications for PTs.

Post your comments, thoughts, related personal experiences, corrections, or questions below.

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