Who would be an American abroad with 27.5% of your net worth at risk?

No, I don't mean that nastily, but I have just read how penal the US Internal Revenue Serive (the IRS) is.

I am looking at FATCA, the legislation aimed at tackling the pereceived tax evasion by US citizens abroad. The intention is to get the world's financial institutions to identify US persons and start reporting details on balances over $50,000 initially to the IRS. There is not benefit to the institution, but there is a threat that if they do not comply then US paying agents will be required to deduct 30% withholding tax on payments to them, including (re)payment of principle amounts.

While this withholding tax may be reclaimed if the circumstances are right, just the disruption of cash flow has been enough to herd most of the world into expected compliance.

There is plenty of comment on the rights and wrongs about this so I won't be addressing that.

What I did want to comment on was some things I learnt from an article in the Financial Times today.

It laid out some of the penalties that the IRS can levy on non-compliant US Persons. It seems that there is a voluntary scheme running at the moment to let US Persons come clean and get their tax affairs in order under a "voluntary disclosure programme". Under this scheme there are penalties up to 27.5% of the person' net worth! Just think about that.

The type of person at risk is most likely wealthy and 27.5% of a large number is still a large number. This can affect people with what was described as "derivative US citizenship" but living abroad who might not have though they were caught within the IRS ambit of operation.

There is also something called Foreign Bank Account Reports (FBAR) and if an idividual is deemed to have wilfully failed to report the the penalty can be half the account balance. Again considering the targets of this those could be hefty numbers.

Now it maybe that HMRC in the UK can be heavy handed, but these US penalties just look excessive and truly intended to scare people into compliance. I wonder if they will have the desired effect or just set the thought of "bully" in more people's minds.

There was a time when it seemed that gaining US citizenship was a desirable and much sought result by many outside the continental US, but is that still so if this is representative of how you will be treated/threatened?

Just my opinion.