Opposition to the US Foreign Account Tax Compliance Act (FATCA) has moved to the courts as lobbyists have launched a legal challenge against the law.
The suit filed at a federal court in Dayton, Ohio, claims FATCA is unconstitutional and steamrollers a taxpayer’s right to privacy.
The opposition is led by Senator Rand Paul, a Republican candidate for next year’s US presidential elections.
Both the Treasury and Internal Revenue Service (IRS) are named as defendants in the court papers.
FATCA was introduced and supported by President Barak Obama – who is a Democrat.
“The law imposes huge compliance costs on individuals and financial institutions,” said a spokesman for the claimants.
“FATCA also takes away the right to privacy concerning their financial affairs that individuals should have as a right. FATCA is severely affecting the finances of US citizens who live and work abroad.”
FATCA demands that foreign financial institutions holding accounts or assets controlled by US taxpayers should make an annual report to the IRS naming the taxpayer and detailing any income or chargeable gains arising from their holdings.
Financial details on US residents are required if the balance of the account is $50,000 or more.
For expats, the threshold is lifted to $200,000.
Taxpayers do not have to take any action to comply with FATCA other than to file a personal tax return detailing any interest or gains they have earned from offshore accounts.
More than 165,000 financial institutions have signed up with the IRS to make FATCA reports, while the US government has nearly 120 tax information swapping agreements in place with other countries.
Most of these agreements allow foreign tax authorities to report the financial affairs of US taxpayers to the IRS and the IRS to reciprocate by collecting data from US financial institutions to transmit to foreign tax authorities about any accounts or assets they may control in the States.
Unconfirmed stories about FATCA suggest that foreign banks are the closing accounts of US customers to avoid reporting under the rules.
Penalties for failing to meet FATCA rules can mean the IRS imposing 30% withholding taxes on foreign financial institutions dealing in the US, or in the worst case barring them from trading in the US.
No date is set for the hearing.