I'm in Japan, as I start to write this piece. I'm visiting Tokyo to see our daughter, who is attending university here. During my stay, the northeastern United States suffered - and still is reeking from the impact of hurricane Sandy. Sea walls were breached. My oh my, what a great phrase to use as a title for this essay: Breaching the FATCA Seawall!

On Thursday, 25 October, the Treasury Department announced yet another delay in time for incepting FATCA, The Foreign Account Tax Compliance Act, a bizarre and phenomenally naive and (in my opinion) stupid piece of legislation that absolutely no one really understands, even though it has been over two years since the Treasury Department of the United States introduced this legislation. This is legislation which requires rules for implementation; rules that have, as of today, still not been introduced.

FATCA and F(u)BAR require all US tax filers (not just tax payers, not just US citizens) to annually disclose information regarding foreign bank accounts and brokerage accounts.....and, with the introduction of Form, 8938, all foreign financial assets.

FATCA requires all foreign banks to enter into a blanket information sharing agreement with the IRS. If they do not, then those 'delinquent' banks are subject to a 30 percent withholding penalty on US sourced funds. Of course, if a bank outside of the United States has no foreign assets, how can the IRS penalize? Will there be an introduction of ‘renegade’/non-U.S. asset holding banks coming to the fore in pursuit of the U.S. tax filer? Undoubtedly, there will be – there is, right now…..but that’s another story! To 'equalize' treatment of foreign banks, the Treasury Department also is insisting that U.S. banks report the income and banking details of foreign nationals with U.S. accounts to the home countries of those nationals - whether or not those countries even want that information. Germany is apparently asking for this reciprocity, whether they actually want it is open to conjecture, because fulfilling reciprocity might just be the straw that breaks the proverbial camel’s back of FATCA. The U.S. banks are fighting this because they have no idea who is a foreign account holder: U.S. banks still are not asking to look at passports - a driver's license will suffice and the the U.S. bank will be happy to take all the money you want to give them!

Immediately after the Treasury Department's announcement, Andrew Quinlan of the Center for Freedom and Prosperity, a Washington DC advocacy organization stated:

"The continued inability of regulators to release final FATCA rules provides yet further evidence that the law was ill-conceived and should never have been passed in the first place. We already know that it will inflict higher costs on the financial industry than it will deliver in tax revenue, is driving foreign investment out of the U.S., and is pushing more and more Americans living abroad to renounce their citizenship, but now we can add regulatory uncertainty to the list of burdens.

While foreign and domestic financial institutions are taking a beating, it's ultimately the American people who will bear the brunt of FATCA. Consumers who engage in financial activities will face higher costs, and reduced investment will mean fewer jobs for American workers. Unfortunately, as this is a mess wholly created by Congress, only Congress can fix it. They must repeal FATCA now."

On the same day that the Treasury Department announced the additional delay (to 2014 - at least!), DBS Bank in Singapore and Nordea Bank in Sweden announced that neither of these financial institutions would register with U.S. authorities for FATCA and Dodd-Frank law provisions covering swaps. Dodd-Frank? Retiring Senator Christopher Dodd and retiring Congressman Barney Frank are the legislators behind additional legislation - over 2,000 pages long, that makes it awfully difficult for foreigners to do business in the U.S., or with U.S. citizens. Absolutely no one (probably including Mr. Dodd and Mr. Frank - perhaps that is why they are retiring) understands Dodd-Frank. Dodd-Frank has its own implementation 'intricacies' for which the agencies responsible have not even begun to set up their own rules.

And yet, as it becomes apparent that implementation simply ain't happening, the IRS and the U.S. Department of Justice continue with a campaign of scare tactics in its attempt to frighten people into entering the offshore voluntary disclosure initiative. On 21 October, Tax Analysts in an article on this subject, cited an unnamed senior Justice Department official as stating that the government is collecting significant information about offshore account holders in ways that have not yet been made public, making discovery of accounts even more likely. Why is that official unnamed? That same day, Katherine Keneally, assistant attorney general for the Justice Tax Division stated at the New York University School of Continuing and Professional Studies annual Institute on Federal Taxation: "Our investigations are continuing, they are expanding - it is a big world, but we are looking throughout the world and are investigating beyond where you have seen us.....There will be cases brought where there was no indication in the press that our investigations were going that way prior to when you see prosecutions. We have a number of of interesting initiatives that I cannot discuss, but we are every day developing information and getting account holder information. Failure to come into the offshore disclosure iniative is getting increasingly dangerous." Ms. Keneally, I am of the opinion that you are a liar and I challenge you on this subject!

Ms. Keneally, I agree that, as a U.S. tax filer, one should disclose. But I cannot possibly conceive of a reason why one should use an initiative where one voluntarily gives up the three year statute of limitations in order to enter a program asking for up to eight years of prior data.......and, if for no other reason than the fact that most of the IRS letters and billings sent to tax filers are incorrect, I am, frankly, quite skeptical about the IRS's 'we have ways of finding out.’

The new forms of FATCA

O.K., my friends, I've got some forms for you! Two forms to be precise: W-8BEN-E, the "Certificate of Status of Beneficial Owner for United States Tax Withholding (Entities)" and W-8IMY, "Certificate of Foreign Intermediary, Foreign Flow-Through Entity, of Certain U.S. Branches for United States Tax Withholding". The former was issued as a draft, on the 31st of May. The latter was issued, also in draft form, on the 13th of August. As usual, the IRS cautions potential users to wait until the forms are issued in final format (although, I sincerely doubt that there will be any changes). Have instructions been issued for either form? While the IRS claims that they have been issued, alas, I - nor anyone I know who will have to be knowledgeable about these forms have yet to see them.

Both forms are six pages long. Both forms clearly project that which the IRS intends to do: collect withholding on all transactions involving foreign entities and beneficial owners involved in U.S. business, regardless of whether business was generated in the U.S. or overseas. Both forms have a page one, part one, check-the-box question 4 - FATCA Status. Here are your choices for checking that box for the W-8IMY (there are some differences for line 4 of the W-8BEN-E, but, in essence, they are the same):

* Non-participating FFI (Foreign Financial Institution)
* Non-participating FFI with exempt beneficial owners
* Participating FFI
* Registered deemed-compliant FFI
* Certified deemed-compliant non-registering local bank
* Certified deemed-compliant retirement plan
* Certified deemed-compliant non-profit organization
* Certified deemed-compliant FFI with only low-value accounts
* Restricted Distributor
* Entity wholly-owned by exempt beneficial owners
* Excepted non-financial holding company
* Excepted start-up company
* Excepted non-financial entity in liquidation or bankruptcy
* Excepted hedging/financing center of non-financial group
* Territory financial institution
* Excepted Territory NFFE (Non-Foreign Financial Entity)
* Active NFFE
* Passive NFFE
* QI branch of a U.S. financial institution
* Other

Which one would you, the foreign entity, fall under? Would IRS instructions help? If you are a conscientious foreign entity, do you know about these requirements? If you are a conscientious foreign entity, are you willing to pay the price of either learning about the form or having a professional firm fill it out for you? Would you, the reader of this article, care to guess the answers to these questions? Or, would you care to guess whether or not your FFI or bank will give you ‘walking papers’, telling you to go elsewhere if you are obligated to file U.S. tax returns?

I asked three banks in three different countries about compliance. Two of those banks are rather large institutions. The third bank, while ‘small’, is a very long-established organization. I got blank stares from each of the three. I asked two of the leading investment firms in India, both of whom clearly fall under the category of 'foreign financial intermediary' about compliance, vis a vis investors of theirs who just might have U.S. tax filing obligations. Not only is their knowledge of these forms and potential filing requirements non-existent but upon looking at these forms, both the investment firms and the bank executives clearly indicated that they would not pay any attention to these forms.

Wake up, members of the U.S. Congress! Take heed, high-ranking officers of the U.S. Internal Revenue Service!! You are boxing yourselves into a corner from which you are going to have trouble getting out of - You are not going to be able to tax legitimately out-of-the U.S., financial transactions from financial entities who are going to follow the expanding example started by DBS Bank of Singapore and Nordea Bank of Sweden - there is going to be willful and public non-compliance of more than just swaps.

China once built a Great Wall and locked itself from the rest of the world for quite some time. The United States is shamefully building its own Great (Tax) Wall, trying to exclude Americans (both those living in the U.S. and expatriates) from investing outside the U.S. You are making it difficult for non-Americans to invest in the U.S. The Great Wall was an unmitigated disaster for China. The Great (Tax) Wall beckons the decline and fall of the U.S.