Concerns over FATCA

[rodiy2k]

I'm aware this forum does not necessarily have a lot of expatriates and there are other forums that might be a better place but in the interest of "you never know", I am posing the question: If anyone happens to be in a similar situation or thinks they may be affected by the new FATCA rules, I am looking for any and all advice, suggestions, comments or whatever may help me make an educated decision on how best to handle this entirely illegal act that the IRS has now imposed on every country on Planet Earth.

Fidelity has just announced they have begun prohibiting Americans whose account addresses are foreign from trading ALL U.S. mutual funds rather than attempt to comply with FACTA rules that just took effect. The new rules would require extra record-keeping and specialized reporting for every single red dime held outside of the United States by its citizens; Apparently mutual funds have the strictest rules regarding disclosure so I guess they have targeted them. Unfortunately, most everyone I know wants to spend their retirement enjoying themselves instead of trying to pick individual stocks or even ETF's; not to mention the cost savings of being a self-directed investor that prefers no transaction fee funds from a discount broker.

This has me in a bit of panic mode; long story short; We are expatriating to Penang, Malaysia next year and thus applying for an "MM2H" social visit pass on April 15, 2015 as soon as I turn 50. (the equivalent of a residency visa). I was laid off last year and my odds of finding similar work are slim to none as I worked in financial services. Therefore we are selling the house which is almost paid of and retiring 5 to 7 years earlier than planned.

We have about $750k in securities. Half is in Fidelity (in tax sheltered accounts: my wife will continue to work until next year). The other half is in TD Ameritrade in IRA Rollovers ROTHs and one taxable account).

While we plan on keeping the house proceeds out of the market to live on for about 15 years (which is easy in Southeast Asia), the investments MUST stay fully invested so that they can hopefully grow to an ample amount when we both run out of liquid cash and will be in our mid 60s. We intend to keep the house proceeds liquid, mostly in CDs and equivalents (yes, rate suck but we want to ensure a guaranteed lifestyle that includes travel while young and healthy)

Last time I spoke both TD and Fidelity told me the foreign address will pose NO restrictions. Yes, I understand I can just change our address to an Earth Class mailing service address but that is technically not legal as that is not a residence. Besides, since I am not one to not play legally our tax returns will show a Malaysian address starting next year anyway. As we will only have small taxable incomes there would be no reason to trigger any suspicions with IRS but I'm scared that Fidelity (and TD) will find out and close our accounts since we never disclosed our foreign adreess. Or worse off , liquidate the accounts though I believe that is illegal

I have heard Charles Schwab can be an alternative as they have no foreign branches that would need to spend money complying but I hate to sever 20 year relationships with my brokerage firms.

Is anyone in a similar situation and can anyone please provide suggestions, advice or alternatives? It's SO unfair and the entire act is illegal under international law yet every bank is subservient to the empire since they have all been caught and fined for something illegal and don't want regulatory issues even at the expense of losing high net worth clients. The brokerages are obviously too cheap to hire ample staff and upgrade systems that would allow them to comply so their decision is to blow off all their self-directed clients even at the expense of losing millions in assets under management.

Insane and ridiculous. Ideas?

[Dd852]

Vanguard currently services me well overseas but you never know. My own plan B is to use a mailing service in a state without state income tax. I don't think it matters that the tax returns have your "real" address as the brokerage never sees those. The irs simply wants things reported and paid correctly. I agree FACTA has been a real disaster for ordinary people overseas. And the ones they want to catch will probably find ways of evading anyway!


Sent from my iPhone using Early Retirement Forum

[fh2000]

I keep less than $10,000 total in overseas accounts so I do not have to report them, and banks don't report me ( < $50,000), and I do not plan to move my assets out side of US, though I thought about it until I saw FATCA.

So, the question is, after you sell your house, can you still maintain US residency somewhere? Parents' place? Siblings?

[MichaelB]

As I understand it this affects mutual funds but not stocks or ETFs. You can still have an IRA and brokerage account, you would need to liquidate fund investments and allocate the money to equivalent ETFs. I'm not sure which brokerages are open for US in investors abroad but Schwab for sure.

Another option is to keep the accounts domiciled under a US address.

[brett]

One of my former colleagues renounced his US citizenship last year (he was dual with Canada).

Two of our friends here in Canada (dual citizens) are just now starting the process and two of their children will be next. All based on advice from their accountants/tax accountants. They all seem to feel that it is hardly worth the hassle, the high cost of filing, and the exposure to risk if they do not file properly. We live in a city with lots of dual citizens...it is a hot topic.

[eta2020]

Quote:

Originally Posted by brett One of my former colleagues renounced his US citizenship last year (he was dual with Canada). Two of our friends here in Canada (dual citizens) are just now starting the process and two of their children will be next. All based on advice from their accountants/tax accountants. They all seem to feel that it is hardly worth the hassle, the high cost of filing, and the exposure to risk if they do not file properly. We live in a city with lots of dual citizens...it is a hot topic.

Expatriation tax - Wikipedia, the free encyclopedia

But if wealthy person renounces US citizenship he/she may pay higher exit taxes than Jews payed when escaping from Nazi Germany.

US taxation really is unique in sense that non resident US citizens must pay US taxes. It is what it is.

[rodiy2k]

Quote:

Originally Posted by fh2000 I keep less than $10,000 total in overseas accounts so I do not have to report them, and banks don't report me ( < $50,000), and I do not plan to move my assets out side of US, though I thought about it until I saw FATCA. So, the question is, after you sell your house, can you still maintain US residency somewhere? Parents' place? Siblings?

Just had long conversation with TD Ameritrade. They basically told me to technically lie because from their standpoint, they would rather keep their clients than help the government enforce the rules

They have an option for "physical" and "mailing" address, which normally defaults to the physical address. Even though the help screen defines that as "where you live" as opposed to "where you want your mail sent", I was told that their legal obligation is to check the mutual fund company's rules and that most generally require a US address and a Tax ID # to be purchased. If you purchase a fund online, the order goes to a system that checks your profile to ensure you have this.

AS far as the "physical address" being the place on the street that your mail gets sent to, they don't care because the only reason they are required to follow this rule is so they may forward legal documents like a prospectus in the event your email address gets rejected. (assuming you direct all correspondence to be sent by email). In that case, as long as they are able to send whatever the fund company requires by SEC law and it doesn't come back to them as "returned to sender", they have fulfilled their legal obligation.

He even sees notes on my account that say I am moving to Malaysia next year (the government actually sends a letter to your financial companies before they grant the visa so we had to tell them so it wouldn't be seen as spam). He says nobody would ever care as long as the order is placed on the internet and the account profile sees that "US mailing address". He told me "we don't know if you're living there or on vacation or what". And they don;t seem to care. They said their FATCA compliance is focusing mostly on backup withholding tax of US sourced income for "non US persons" anyway.

So as it turns out, it's kind of "don't ask, don't tell". We could use my parents address in NY but as that is a high tax state and we wish to sever state tax obligations, we will just use the mail drop address with a non-taxable state like Florida or Nevada and keep all never actually tell the brokerage that we "live" overseas.

WE could probably actually do the same with Fidelity but why even chance it when they went out of their way to announce that their overseas clients mean nothing to them when compared to the costs of FATCA compliance. So I guess that will work.

[rodiy2k]

Quote:

Originally Posted by MichaelB As I understand it this affects mutual funds but not stocks or ETFs. You can still have an IRA and brokerage account, you would need to liquidate fund investments and allocate the money to equivalent ETFs. I'm not sure which brokerages are open for US in investors abroad but Schwab for sure. Another option is to keep the accounts domiciled under a US address.

Not an option for me. I buy active funds in order to beat the market, not make the market. And it almost always works. I refuse to change my investment strategy when no law exists that prevents US clients from owning US mutual funds while they live abroad. In fact, the SEC rules for each mutual fund usually say "for sale to US residents only" but nobody cares as long as your brokerage account has a "legal street address" and it's in the USA.

[M Paquette]

Quote:

Originally Posted by eta2020 US taxation really is unique in sense that non resident US citizens must pay US taxes. It is what it is.

Nah. Eritrea also taxes its nonresident citizens, although at a reduced flat rate of 2%. They are a bit more enthusiastic about collections than the US government, sanctioned by the UN Security Council (Resolution 2023 (2011)) for using extortion, threats of violence, fraud and other illicit means to collect taxes outside of Eritrea from its nationals or other individuals of Eritrean descent.

There appears to be some room for the IRS to expand its collection methodology.

[eta2020]

Quote:

Originally Posted by M Paquette Nah. Eritrea also taxes its nonresident citizens, although at a reduced flat rate of 2%. They are a bit more enthusiastic about collections than the US government, sanctioned by the UN Security Council (Resolution 2023 (2011)) for using extortion, threats of violence, fraud and other illicit means to collect taxes outside of Eritrea from its nationals or other individuals of Eritrean descent. There appears to be some room for the IRS to expand its collection methodology.

Sorry I meant within OECD. In fact we really are the ONLY country within OECD that does that.

[M Paquette]

Quote:

Originally Posted by eta2020 Sorry I meant within OECD. In fact we really are the ONLY country within OECD that does that.

That's what I thought.

I do think it's odd that the only other country with our odd nonresident citizen tax policy is one that aggressively recovers taxes on nonresidents and their descendants to fund its 'activities' with neighboring countries. Not a great example for us...

I'd love to see a breakdown of expenses in FATCA processing and enforcement compared to revenues recovered. I suspect it might not be the most effective revenue generation mechanism the US government has.

[Alan]

The FACTA laws are in place to catch people who are evading taxes by living and/or investing abroad.

My take on this is that as long as you play by the rules and continue to file a tax return each year as required by all citizens who reside abroad, and report all foreign accounts above the threshold to the Treasury each year, then having a US address on your brokerage accounts in order to maintain a full service with them is perfectly fine.

By the time we become tax residents in the UK in 2016 we will have converted all our mutual funds in our taxable accounts to Vanguard ETF's since the UK recognizes VG ETF's and gives them the favorable treatment that stock dividends and capital gain distributions attract. We will be retaining mutual funds in our tax sheltered accounts because distributions are treated the same (ie no tax on ROTH distributions and taxed as regular income from IRA distributions)

We will be maintaining a US address on our accounts with Fidelity and Vanguard, and Treasury Direct where our IBonds sit.

[eta2020]

Well I am both EU and USA citizen. I don't need to file anything or worry about criminal prosecution by my EU citizenship country while residing in USA.

If I return back to EU I will have to worry about "violating" USA laws and deal with lot of paperwork.

So you are unique.....

Now I made my millions in USA and not in EU. So I take bad with good .
As I said it is what it is.....

[Alan]

Quote:

Originally Posted by eta2020 Well I am both EU and USA citizen. I don't need to file anything or worry about criminal prosecution by my EU citizenship country while residing in USA. If I return back to EU I will have to worry about "violating" USA laws and deal with lot of paperwork. So you are unique..... Now I made my millions in USA and not in EU. So I take bad with good . As I said it is what it is.....

I am both an EU and USA citizen like yourself and I agree that being an EU citizen while residing in the USA is no big deal, it is living outside of the USA that is the big headache. I also made all my money in the USA and hold almost nothing outside the USA so I am hardly unique.

(if your post wasn't directed at me then ignore this post)

[eta2020]

Quote:

Originally Posted by Alan I am both an EU and USA citizen like yourself and I agree that being an EU citizen while residing in the USA is no big deal, it is living outside of the USA that is the big headache. I also made all my money in the USA and hold almost nothing outside the USA so I am hardly unique. (if your post wasn't directed at me then ignore this post)

No it was not directed at you. I am just mad when I think about headache/paperwork that I will have to deal with if I want to permanently reside in on of the EU countries.

I mean simple mistake of filing foreign bank account can result in 250k fine and years in jail. Some law will change...you are old...you miss it...and you can be criminally prosecuted. Is this good thing to do?

[kramer]

There has been a thread on this on the Bogleheads board and it is worth reading through as there are a lot of details in there by people in this situation:

Bogleheads • View topic - US citizens abroad cannot invest through [Fidelity]

Basically, this change just makes Fidelity rules the same as the other brokerages and is not necessarily related to FATCA. Based on what I have read and my own status as an expatriate, here is my advice:

* Stay under the radar as to your expat status which means US phone number, US mailing address, and, if you are a boy scout, maybe even US VPN for logins

* Before you move abroad, diversify yourself in brokerage accounts, US credit cards, and bank accounts. With the Patriot Act, you may no longer be able to start one from abroad and the rules for your accounts may change over time.

* Ideally, maintain your US driver's license or US state-based ID card as this seems to be the definitive residency document in the USA. Prefer no-income-tax state for ease of compliance. This is a required piece of identification for opening almost any new account in the USA.

* If possible, bias yourself toward trading in ETFs instead of mutual funds. It is mutual funds that are particularly coming under these restrictions.

As a retired expat with only passive income, I had been filing my USA taxes using my US address (Texas). However, with ObamaCare, I had to start filing taxes using my address abroad or fall under the new penalties imposed on US residents. Your health insurance abroad does not satisfy the ObamaCare requirement. My US driver's license comes up for renewal in a few months and I am really hoping I can just get it renewed remotely.

[george76]

Quote:

Originally Posted by kramer * If possible, bias yourself toward trading in ETFs instead of mutual funds. It is mutual funds that are particularly coming under these restrictions.

Do you by any chance know why mutual funds and not stocks/ETF's are coming under these restrictions? My concern is that eventually expats won't be able to trade stocks either.

[Neill]

I think that if your trying to retire in a foreign country then you should have high expectations that you renounce US citizenship.
You compliance costs will be huge. Your risks of making a mistake or your tax pros risk (reflected in their charges to do your returns) will be big. You will be crippled by two tax systems maximizing your taxes on each type of income (dividends, interest etc). You will be crippled by each system not letting you use all the account types or investment types you might want.
I just went through OVDP because of ISA ownership in the UK. The IRS pulled out all these crazy things on us (they wanted fake gains from the past but denied the fake losses etc).
The official statistics on who is paying from OVDP are clear. The IRS is taking ordinary people to the cleaners. People actually hiding money are doing much better. So if you think the IRS will be OK because they only want the big fish think again. This is a massive revenue grab.

[eta2020]

Quote:

Originally Posted by Neill I think that if your trying to retire in a foreign country then you should have high expectations that you renounce US citizenship. You compliance costs will be huge. Your risks of making a mistake or your tax pros risk (reflected in their charges to do your returns) will be big. You will be crippled by two tax systems maximizing your taxes on each type of income (dividends, interest etc). You will be crippled by each system not letting you use all the account types or investment types you might want. I just went through OVDP because of ISA ownership in the UK. The IRS pulled out all these crazy things on us (they wanted fake gains from the past but denied the fake losses etc). The official statistics on who is paying from OVDP are clear. The IRS is taking ordinary people to the cleaners. People actually hiding money are doing much better. So if you think the IRS will be OK because they only want the big fish think again. This is a massive revenue grab.

Unless you retire in country that has no tax obligations. I think Costa Rica, Uruguay and Panama fall in that category.

Retiring in Europe probably would include some headaches along the way.

[nun]

Quote:

Originally Posted by Neill I think that if your trying to retire in a foreign country then you should have high expectations that you renounce US citizenship. You compliance costs will be huge. Your risks of making a mistake or your tax pros risk (reflected in their charges to do your returns) will be big. You will be crippled by two tax systems maximizing your taxes on each type of income (dividends, interest etc). You will be crippled by each system not letting you use all the account types or investment types you might want. I just went through OVDP because of ISA ownership in the UK. The IRS pulled out all these crazy things on us (they wanted fake gains from the past but denied the fake losses etc). The official statistics on who is paying from OVDP are clear. The IRS is taking ordinary people to the cleaners. People actually hiding money are doing much better. So if you think the IRS will be OK because they only want the big fish think again. This is a massive revenue grab.

With sensible planning it isn't that difficult to negotiate the US and UK tax systems. Owning a UK stocks and shares ISA is one of the things to avoid if you are a US resident or citizen.

US companies refusing to service accounts with foreign addresses is a big potential problem......so far Vanguard is ok doing that.....if that changes I will have issues.