Sixth Circuit Rejects Challenge to Taxes on Foreign Accounts

(CN) – U.S. citizens living abroad, joined by Sen. Rand Paul, lack standing to challenge the Treasury Department’s new taxes on their foreign bank accounts, the Sixth Circuit ruled Friday.

The taxes, established by the Foreign Account Tax Compliance Act in 2010, were called “draconian” by the attorney representing several citizens that sued the federal government in July 2015.

FATCA requires foreign banks to report all accounts held by U.S. citizens to the IRS or risk being assessed a 30 percent withholding tax. Willful failure to file a foreign bank account report invites a penalty of 50 percent of the value of the account or $100,000, whichever is greater.

U.S. Sen. Rand Paul, R-Ky., was among the plaintiffs in the original lawsuit, which alleged FATCA gave the IRS carte blanche to collect account information from citizens living abroad.

The plaintiffs – Sen. Paul plus five U.S. citizens who reside overseas – also claimed foreign banks purged accounts held by Americans to avoid being taxed by the IRS.

The suit was eventually dismissed by U.S. District Court Judge Thomas M. Rose, who ruled that all of the plaintiffs lacked standing to bring their claims because none had been adversely affected by FATCA.

On appeal, Jim Bopp, the plaintiffs’ attorney, argued before the Sixth Circuit in January that even though FATCA has not been enforced against his clients, the U.S. Supreme Court’s ruling in Susan B. Anthony List v. Driehaus allows for a pre-enforcement challenge of the law.

But the Sixth Circuit affirmed Judge Rose’s decision Friday, finding that the plaintiffs have no standing to challenge FATCA.

“First, no plaintiff has alleged any actual enforcement of FATCA such as a demand for compliance with the individual-reporting requirement, the imposition of a penalty for noncompliance, or [a foreign financial institution’s] deduction of the Passthru Penalty from a payment to or from a foreign account,” Judge Danny Boggs said, writing for the three-judge panel.

“Second, no plaintiff can satisfy the Driehaus test for standing to bring a pre-enforcement challenge to FATCA because no plaintiff claims to hold enough foreign assets to be subject to the individual-reporting requirement,” the 28-page opinion continues.

A foreign bank’s refusal to accept U.S. clients may be related to FATCA’s reporting requirements, but it is the bank’s decision and that injury cannot be imputed to the U.S. government, the panel ruled.

The Cincinnati-based appeals court also rejected Sen. Paul’s claim that he has been denied the opportunity to vote against the FATCA intergovernmental agreements, or IGAs, negotiated by the Treasury Department and IRS.

“Any incursion upon Senator Paul’s political power is not a concrete injury like the loss of a private right, and any diminution in the Senate’s lawmaking power is not particularized but is rather a generalized grievance,” Boggs said. “Senator Paul has a remedy in the legislature, which is to seek repeal or amendment of FATCA itself, under the aegis of which Treasury is executing the IGAs.” (Emphasis in original.)

Indeed, Sen. Paul introduced a bill to repeal FATCA in April, according to a footnote in the ruling. It has been referred to the Senate Finance Committee.

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