As USA celebrates independence, FATCA drives wealthy Americans to declare independence from USA

Two hundred thirty-eight years ago, the USA declared its independence from an oppressive English government, largely over the issue of taxes. Today, wealthy U.S. citizens are declaring their independence from an oppressive U.S. government, largely over the issue of taxes. The latest chapter in this developing crisis is called FATCA.

Just a few days ago, on July 1 of this year, the “Foreign Accounts Tax Compliance Act(FATCA) went into effect. But instead of raising income tax revenue by more than $800 million per year, as its promoters claimed it would, it now appears that the government will actually take in far less revenue, as a result of FATCA.

According to a March 2010 report from the Joint Committee on Taxation, FATCA was supposed to raise more than $800 million in revenue from the foreign held accounts of U.S. citizens. However, it’s now becoming obvious that the Committee seriously failed to consider the motivations of both foreign bankers and U.S. citizens, living abroad.

FATCA imposes severe requirements on foreign banks that serve U.S. clients. Among these requirements is that foreign banks provide detailed reports on the banking activity of their U.S. citizen clients. In fact, FATCA demands far more details from foreign banks, than the government is legally allowed to demand of U.S. banks. FATCA also demands that foreign banks withhold U.S. income tax and remit it to the IRS, based on estimated taxes.

Of course, the U.S. government can’t “force” foreign banks to do anything. IRS enforcement rights end at our borders. So for example, the U.S. government can’t impose a direct fine on those foreign banks. But FATCA attempts to impose what is effectively, an indirect fine on non-compliant banks, in the form of an extremely punitive tax on the bank’s U.S. investments. In other words, bank earnings generated in the USA would be tax at a punitive rate, before it would ever leave the USA. The proponents of FATCA incorrectly thought that all foreign banks would rush to comply with FATCA, in the way they proposed, rather than pay that hefty tax on their U.S. investments. Well, although they were partially right, it hasn’t exactly worked out the way they planned.

You see, the tax and spend crowd is comprised almost exclusively of politicians who have never spent a single day running a business, where they had to make a profit or lose everything. So it’s not surprising that these business neophytes failed to consider that there were several other options for those foreign banks than just the option that they wanted those banks to take. The option that they hoped the banks would take was to simply start reporting the details of the banking activity of their U.S. clients and to start withholding U.S. income tax and remitting it to the IRS. It sounded simple enough to simple-minded politicians.

But only a very tiny handful of banks have moved in that direction and some of them have already reversed course. Instead, the options chosen by almost all foreign banks have fallen into one of two categories.

  1. Many smaller banks have chosen the option of selling off the portion of their portfolio that represents U.S. investment and putting that money into non-US investments. By doing this, they take away the U.S. government’s ability to punish them with onerous taxes on their U.S. investment, since there is NO U.S. investment to tax.
     
  2. The vast majority of foreign banks have been telling their U.S. clients that their money is no longer welcome in their bank. They figured out that if they have no U.S. clients, then they are in compliance.

Both of those options serve exactly the opposite of the desired effect. Let’s take a look at them one at a time.

The first option means less foreign dollars supporting U.S. businesses and U.S. jobs. This will have a negative effect on the U.S. economy. But in general, since the only banks that can afford to take this option are smaller banks that tend to be more agile, the negative effect will be somewhat limited.

On the other hand, the huge number of banks taking that second option is already having a devastating effect on our economy. As we reported in May of this year, formal citizenship renunciations by wealthy U.S. citizens, which had reached a record low in 2008, are now up by more than 1700% since Obama assumed office. Obama’s “soak the rich” agenda has been largely to blame for this disastrous rise. But FATCA has complicated it even more.

Taxpat Chart for Q1 of 2014
Hover over image to view at full size.

You see, there are millions of U.S. citizens currently living and working offshore. Millions more are retired offshore. And of course, we can’t forget the American businessmen who run businesses offshore. But there are two things that these people all have in common. First, by retaining their U.S. citizenship, they must continue to pay U.S. income taxes. Second, they all maintain a residence and incur monthly bills offshore – bills that, for all practical purposes, must be paid with a check or deposit from a local bank and therein, lies the rub.

Within the last year, millions of U.S. citizens who work and maintain a residence offshore have been told by their local bank that their business is no longer welcome, because they are U.S. citizens. The banks have chosen to comply with FATCA by not having U.S. clients.

Now keep in mind that even those U.S. workers, who go offshore for what would be considered a low paying job in the USA, are probably earning a premium wage offshore. Though it’s not common, it’s not uncommon for salaries in some fields to be three times what the same job would pay in the USA. But one and a half to two times is more common. The point is that all of these people have a very strong financial incentive to stay where they are, for as long as the job lasts. Retirees, on the other hand, have planned for years where they want to retire and are not going to be willing to move back to the rat race.

So what happens when these people can no longer pay their bills, in the country where they live, because no local bank will accept their business?

They have only two options. Workers and businessmen can leave their current lucrative job or business or retirees can kiss their dream retirement goodbye and they can return to the USA or they can get a second citizenship and renounce their U.S. citizenship. The quite logical decision by foreign banks to opt out of FATCA, by denying the business of U.S. citizens, leaves U.S. citizens living offshore no other choice. It’s return to the USA or renounce.

Many U.S. citizens who might never have thought of renouncing their U.S. citizenship are now renouncing. They realize that it was their own government that put them in this unenviable position and they wonder what’s next. For many U.S. citizens living offshore, FATCA has become the tipping point.

It’s sad that, on this July 4th, while we celebrate U.S. Independence from England, more and more disenchanted U.S. citizens are declaring their independence from the USA. What makes it even more sad that this is all because our elected representatives, who are already spending far more money than the government takes in, felt it necessary to try an inane scheme like FATCA, to get even more money to spend.

So regardless of Whether you are celebrating American Independence or your own Independence from America, “Happy Independence Day!”

It’s not possible to lose all of Lerner’s emails. Here’s why.

“Business Continuity”

Those two words speak volumes to anyone who has ever run an IT department. Furthermore, the larger the business, the more those words mean. Then consider that the U.S. Government is the largest “business” in the world, with a $3.6 trillion budget for 2014.

For many years I ran large IT departments and in every case, there was one issue that was far more important than the daily maintenance of systems. That was “Business Continuity.”

We backed up everything!

The primary questions that senior officers of all large corporations ask of their IT management is, “How would our business continue to function if there were a major natural disaster, such as a tornado, hurricane, flood, or earthquake, that caused massive damage to the building and many computers? What if the building burned down and destroyed the on-site backups? How then, would we recover?” These are the questions that always lead to a structured backup plan.

At each company where I worked, we had a slightly different backup strategy, depending upon the Business Continuity needs of that company. But in every case, we kept a variety of on-site and off-site backups. As soon as the technology became available, we began backing up important files on the disk drives of individual computers. Among the most important of those files was the Outlook Database that contains all emails sent, received, saved or placed in the trash folder and not yet permanently deleted, along with the contacts and calendar of that user. This kind of backup scenario is standard procedure among large companies and remember that the U.S. government is even larger than the largest corporation and Business Continuity is even more important to them.

Today, these backups are generally kept in a variety of formats. Some are simply moved to another disk array on another server, to make accessing accidentally deleted recent files easy. But other backups are saved to removable media (such as DVD) that can be easily stored off-site, to protect against the possibility of fire or other disaster in the building. However, since that removable media is meant for long-term storage, that media will never be re-used. So in order to save money, companies use non-rewritable WORM (Write Once Read Many) media. In other words, instead of using DVD-RW, they would use DVD-R.

The government might also use an online backup system. But being the government, they would most likely keep that service in-house, but at a different location. Even so, such systems make it next to impossible to delete just one file out of an entire backup. To do so would take a serious hacker and even he would need to be elite in his field.

So let’s look at what this all means, as regards Lerner’s emails. There are two possible scenarios, so I’ll cover both.

First Scenario – Lerner’s emails were kept on her PC:

  1. Since Lerner’s computer is a Windows-based PC, all of her emails would be necessarily kept in one file (database).
  2. If Lerner really did lose all of her emails, then she would have lost all of her contacts and calendar records, as well. We have not heard that. But someone should be asking that question. With Microsoft Office, it’s not possible to lose just emails without also losing contacts and calendars. They are all in the same database file
  3. Since backups are certainly WORM or specialized online storage, you can’t delete just one file from the backup media. Any attempt to delete just one file on a WORM disk would corrupt the entire disk, so you would lose all files on that media. Online storage software is designed specifically to insure that the backups remain untainted.
  4. There are certainly multiple copies of that file, both on-site and off-site.
  5. Anyone who says that Lerner’s emails are lost and cannot be recovered is either lying or repeating someone else’s lie.

Second Scenario – Lerner’s emails were kept on a mail server:

  1. If the files are kept on an email server then the emails are certainly the primary things that are backed up from that server.
  2. Emails for all users would be backed up at the same time, to the same media, which would certainly be WORM or specialized online storage. Any attempt to delete just one file on a WORM disk would corrupt the entire disk, so you would lose all files on that media. Online storage software is designed specifically to insure that the backups remain untainted.
  3. There are certainly multiple copies of the backups from the mail server, both on-site and off-site.
  4. Anyone who says that Lerner’s emails are lost and cannot be recovered is either lying or repeating someone else’s lie.

Even if we assume that the IRS’s IT director is a typical government worker, who couldn’t hold a job in the real world, we must conclude that if he has been capable of getting far enough to be considered for such a role, even as a government employee, he has to have at least basic knowledge of backup strategies.

There is no doubt but that those backups exist somewhere – more likely, several somewheres. Furthermore, it’s not possible to delete just Lerner’s emails on WORM media, without destroying the whole disk and all of the other Business Continuity files on it and online backup software is designed to prevent deletion of files in the backup till the files are automatically deleted due to age.

In fact, I wouldn’t be surprised if the IT director who made the original email files “disappear” didn’t keep a copy for his own protection, in case he is ever called to task for it. Although such backups are almost always against company policy, it’s far from uncommon for IT geeks, who know that their boss is having them do something wrong or even illegal, to make a covert backup for their own protection. More importantly, since one of those various backups will turn up sooner or later, turning those covert backups over to authorities, before other backups are found by law enforcement, might be the only thing that will keep the IT director from becoming a scape-goat and going to jail, for the crimes of Obama and Lerner.

It’s not a matter of “if,” but “when” one of those sets of backups is found. It’s only going to be a matter of time.