On July 01, 2014 the Foreign Account Tax Compliance Act (FACTA) will come into effect, with the goal of targeting non-compliance of U.S. Tax Payers using foreign accounts. While presumably designed to target millionaires hiding money in foreign or offshore accounts, it will also affect more benign US Citizens such as the thousands of retirees in Mexico who live off of their fixed retirement income.

Under the FATCA, all foreign banks will now be required to provide annual reports to the IRS in relation to accounts owned by US Citizens, or face stiff penalties levied on any foreign bank's U.S. affiliates or investments. According to the Act's website, for banks that fail to comply with the reporting requirements "withholding is the cost of not reporting."

FATCA is not only going to affect the way banks conduct business, but could also have an effect on expats with foreign accounts on tax day. All US citizens with foreign financial accounts will be required to declare these on Form 8938 with their U.S. tax return if the aggregate value of foreign financial assets exceeds $50,000 (the threshold varies for married and unmarried filers). At such a low threshold, it appears as though this new Act could have a serious impact on retirees' life savings deposited in foreign bank accounts—previously thought secure—which had been earmarked for their living expenses and "golden years."

The IRS already had mechanisms for filers to report foreign assets for informational purposes, but the main goal of FATCA is not merely information, and was implemented to be able to determine whether unreported assets are tied to income that should be taxable by the IRS. This is the epitome of long-arming via strong-arming.

The US is the only industrialized country in the world that taxes its citizens regardless of where they live. Some banks, such as Banamex USA, have already started requesting information from clients in order to comply with these mandates, and failure to comply will likely result in customers' accounts being shut down, and could also put individuals at risk of IRS penalties starting at $10,000. Other customers of Banamex USA report receiving notices giving them 30 days to close their accounts out with no explanation. For people that have money transfers, such as Social Security deposits, linked to their account, 30 days is not nearly enough time. Especially when many US banks require that you open your account in person or that you have a US address.

What qualifies as a foreign asset under the reporting requirement? Foreign assets include deposit accounts, foreign stock, foreign securities, foreign partnership interests, foreign mutual funds, foreign accounts for which the individual is a grantor, and foreign hedge funds. It does not include foreign real estate held directly.

In the past, many expats were able to live in Mexico for years without bothering to open a Mexican bank account, as banks such as Bank of America offered free withdrawals at their affiliate Santander banks. But, effective November 8th of last year this benefit was eliminated and withdrawals are now charged 3% in fees. For retirees living off of fixed incomes in Mexico this was a huge blow. Now, it seems as though opening a foreign account in Mexico may have its own additional caveats under the FATCA.

Unfortunately, there appears to be no good alternative right now, unless you are able to attain Mexican citizenship and open a bank account that way, or are willing to pay ATM withdrawal fees.

Many strategies suggested by international tax specialists, such as specially set-up offshore trusts, are not a viable option for middle-income retirees.

The FACTA reaffirms the observation made by Benjamin Franklin in 1789, that "in this world nothing can be said to be certain, except death and taxes."

Chime in and tell us about your experience, and any advice you have for our readers.

Disclaimer: This article is not intended nor shall be construed to constitute tax advice or investment advice of any kind.

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