European banks shut Americans out over U.S. tax rules

Bill Hinchberger, Special for USA TODAY | USATODAY

PARIS – Scott Schmith started a photography business in Switzerland after a stint in the U.S. Army that included deployments in Germany and in the Middle East during the first Gulf War.

He's still an American citizen, even though he's lived and worked outside the United States for more than 20 years. But new U.S. financial regulations on bank accounts overseas have him, along with many other Americans working in Europe, mulling whether to renounce his citizenship.

That's because European banks are balking at IRS demands that they disclose the assets of Americans overseas. Complaining that the regulations are too burdensome, European banks are in some cases banning Americans from doing business with them.

"I am still an American – I was born there," said the native of Sioux City, Iowa. "But why should I be thrown to the wolves? Why should I be punished for being an American who chose to live outside the U.S.?"

The U.S. legislation is aimed at preventing tax evasion. But banks in Switzerland and elsewhere that say the requirement is too expensive and in some cases violates their country's privacy laws are instead closing Americans' bank accounts, banning new U.S. customers and even terminating mortgages.

One of the regulations -- The Report of Foreign Bank and Financial Accounts (FBAR) -- has existed since the 1970s but only recently has been enforced against small account holders. The other -- The Foreign Account Tax Compliance Act (FATCA) -- was passed by Congress in 2010 and requires foreign financial institutions to report to the IRS information about financial accounts held by U.S. taxpayers.

Banks contacted about the issue declined to discuss the matter publicly, but financial experts familiar with the situation say bankers do not want to act as de-facto agents of the IRS.

"Foreign banks that don't comply with FATCA reporting rules could have a 30% tax imposed on all their U.S.-based transactions and those of their U.S. clients," said Robert Bauman, legal counsel for International Living magazine and a former U.S. representative from Maryland, writing on its website. "But if they refuse to comply, the banks face a choice of paying that punitive 30% withholding tax or withdrawing completely from U.S.markets."

Some are doing just that rather than comply with the U.S. regulations. Banks in Switzerland, Germany, France and Italy have been curtailing business with American account holders, according to Bauman.

Schmith has been shut out of two bank accounts. His longtime Swiss girlfriend refuses to consider marriage because she does not want to be subject to the reporting requirements that also apply to accounts of Americans that are held jointly with foreigners.

Genette Eysselinck, 65, was born in Fort Bragg in North Carolina and grew up on military bases around the world. But she has lived abroad with her Belgian husband for most of her adult life and has decided to switch her citizenship to her adopted European homeland.

"It was a difficult decision," she said, "and I am glad my father did not live long enough to see it."

According to the Treasury Department, nearly 1,800 individuals renounced their U.S. citizenship last year – six times more than in 2008. And those numbers may be low, according to anecdotal evidence from former U.S. citizens and lawyers who specialize in such cases. Many people who have renounced don't make the lists periodically released by the U.S. government.

FBAR requires that U.S. citizens declare foreign accounts in which they have a financial interest, or accounts for which they have signature authority, if the aggregate value of those accounts exceeds $10,000 at any time during a calendar year. But most low-net-worth individuals, many of whom prepare their own taxes or use cut-rate preparers or basic software, had no knowledge of this requirement until the IRS escalated enforcement over the past few years. FATCA takes effect in January.

Threats of fines and penalties – including for past inadvertent non-compliance – and the prospect of life without a bank account have sown "a sense of fear and anxiety" among expatriates, according to a report by the Americans in Switzerland Working Group, a coalition of prominent individuals and organizations such as American Citizens Abroad and the Swiss branches of Republicans Abroad and Democrats Abroad. That report also highlighted evidence of companies that do not want Americans in jobs that give them signature authority because those accounts would be subject to the reporting requirements.

Until recently, most Americans abroad went along with the extra filing requirements, taking advantage of what is now a $95,100 foreign earned income exemption to reduce their U.S. tax burden -- even though they are often still liable for other taxes such as the self-employment tax for independent contractors. They also overlooked things like reduced Social Security benefits for individuals who have also paid into foreign retirement systems, which is often mandatory as a resident of another country.

"FBAR and FATCA seem to be tipping points," says Mike Heimos, an American attorney based in Uruguay who specializes in cross-border issues. "Americans who reside abroad have a lot of different annoyances and problems that come with citizenship. With FBAR and FATCA, it is like, 'What else have you got for me?'"

The new reporting requirements are seen as so complex that many people with even modest incomes feel compelled to hire high-priced accountants and lawyers to help.

"You pay a few thousand bucks to get to zero for Uncle Sam," said Heimos.

The new rules may also be stirring a diplomatic scuffle with Canada.

Canadian Finance Minister Jim Flaherty recently warned of FATCA's "far-reaching extraterritorial implications. It would turn Canadian banks into extensions of the IRS and would raise significant privacy concerns for Canadians."

Americans abroad do not have direct political representation back home, since they are allowed to vote only in the presidential election. Rep. Carolyn Maloney, D-N.Y., has introduced legislation that would create a commission to study tax and other issues, but she has reportedly had trouble finding co-sponsors.

"There was never much expectation that her bill would get adopted by this Congress," said Joseph Smallhoover, a Paris-based former member of the Democratic National Committee. "Since we have no state, no representative and no governor, we are orphaned."