IRS sued over treatment of Americans who bank abroad

The Foreign Account Tax Compliance Act (FATCA) requires, in essence, that U.S. citizens who reside outside the U.S. disclose to the IRS all of their foreign banking assets including retirement plans, savings accounts, etc. It also requires foreign banks to assist the IRS in applying the disclosure rules or else face enormous penalties.

As its not-so-subtle acronym suggests, the Act purports to be an anti-fat-cat measure through which to crack down on super-rich Americans who want to hide funds in offshore tax havens. In practice, it inflicts adverse consequences — possibly unintended, but highly foreseeable — on millions of non-wealthy Americans living overseas and on American companies who business there.

A friend tells me that opening a simple bank account in Spain, for example, can take more than four months. In Luxembourg, he reports, only one bank will even agree to open bank accounts for US-held companies. These experiences are consistent with what I have heard from others, including my non-fat-cat daughter when she lived in France.

From the banks’ point of view, the unwillingness to open accounts for U.S. citizens (and in some cases to allow them to keep their existing accounts) is easy to understand. The compliance rules imposed by FATCA are extremely onerous, time consuming, and expensive to implement.

From the point of view of America, however, FATCA is making it difficult for U.S. citizens to do business abroad.

In response, a group of plaintiffs has filed a lawsuit in the U.S. District Court of the Southern District of Ohio against the IRS and the Treasury Department challenging the constitutionality of FATCA and its implementation. Sen. Rand Paul is among the plaintiffs.

(Unlike the other plaintiffs, Sen. Paul’s claim of standing to bring this lawsuit is not based on harm caused by FATCA’s substantive requirements. Instead, it is based on alleged non-compliance by the executive branch with constitutional requirements for concluding international agreements (FATCA has been implemented through intergovernmental agreements with foreign nations), which he says deprived him of his rights as a U.S. Senator. Paul’s argument may be of more than passing interest in light of other measures through which the Obama administration has bypassed Congress to one degree or another.)

The suit challenges FATCA on a range of constitutional grounds. The essence of the argument is that the Act mandates (1) unwarranted searches and (2) discrimination against U.S. citizens on the basis of foreign residency. You can read the plaintiffs’ memorandum in support of motion for preliminary injunction here. Bloomberg’s account of the suit is here.

Not surprisingly, given Rand Paul’s involvement, the complaint casts FATCA as a “bulk data collection program.” But my disagreement with Sen. Paul’s view of what our national security agencies are (and should be) permitted to do in the realm of data collection designed to thwart terrorists makes me no less sympathetic to his attack on FATCA. Nor is plaintiffs’ challenge to FATCA limited to Fourth Amendment grounds.

I haven’t studied the legal issues raised by the plaintiffs’ complaint, and thus take no position on the merits of the constitutional arguments. At a minimum, though, the lawsuit bears watching.