The Foreign Account Tax Compliance Act’s Unintended Consequence

The Foreign Account Tax Compliance Act (FATCA) was passed in 2010 to crackdown on tax evasion. This Act is an extremely important piece of legislation meant to catch and ultimately stop wealthy individuals from evading taxes. This study examines the inadvertent negative externality on millions of U.S. citizens living abroad who are now subject to new compliance requirements under FATCA and a new form (Form 8938) that will add to the hassle at tax time. Considering that FATCA goes fully into effect in 2015, we apply a cost-benefit analysis to a hypothetical average U.S. citizen living abroad with holdings at a bank. We find that this seemingly innocuous consequence of the Act does more harm than good on an average American abroad. This externality is actually quite significant when generalized to all U.S. citizens living abroad. The results indicate that FATCA is not equitable and places a heavy burden on U.S. citizens living overseas. One implication is to amend FATCA to specifically target potential tax evaders rather than all with foreign accounts or that a system of residence-based taxation replaces the U.S.’s current citizenship-based taxation system.