Offshore Tax Evasion: IRS Tax Compliance FATCA/FBAR
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The reason FFIs across the world have largely complied with the new reporting requirements is because of the strong enforcement mechanism provided for in the law.
FBAR & FATCA Information
Non-compliant FFIs — those who refuse to take adequate steps to identify and report on their U. These concerns have been largely circumvented by the U. Under such agreements, the foreign government will often act as an intermediary, collecting information on U. According to the Department of Treasury, the U.
Offshore Tax Evasion - Get into FBAR & FATCA Compliance Now!
The degree to which various stakeholders have been or will be impacted by FATCA is difficult to gauge given that FFIs only began reporting on accounts in and other provisions of the law are not yet fully in effect. Both the IRS and Forbes have noted that the threat of FATCA enforcement may be incentivizing non-compliant taxpayers to voluntarily come into compliance through the programs.
There is no official measure of how effective FATCA has been at increasing international tax compliance; however, given certain assumptions about the effect third party reporting has on the rate of compliance, FATCA is likely to result in a higher rate of compliance. Third party reporting is an integral part of our U. For instance, if you earn taxable dividends from your investments, your financial institution is responsible for reporting this income to both you and the IRS.
This allows the IRS to compare the income you report on your annual tax return against the amount supplied by your financial institution. As referenced in the previous section, U. In instances where information is not reported, it is often a technical violation of U. With regards to the disclosure of foreign financial account balances, the Bank Secrecy Act has for years required many U. When FATCA was enacted in , it occupied a unique space as the first financial reporting standard with a global application.
Although FATCA and CRS differ in some fundamental ways, both systems were developed with the explicit intention of curbing international tax evasion. As of , over jurisdictions have signed on to CRS, with about half committed to begin exchanging information in Since its implementation, reports have intermittingly surfaced documenting instances in which U.
Unfortunately, there is no verifiable source of information documenting the total number of individuals affected, or the degree to which they continue to be affected. As of March , the number of registrations has grown to include , financial institutions. While reports that the number of U. Department of State Bureau of Consular Affairs estimates that in , 9 million Americans were living overseas.
Banks that facilitated offshore tax crimes have also borne fairly light consequences. Apart from Wegelin and Credit Suisse, offending Swiss banks have largely escaped prosecution. Moreover, the Swiss Bank Program has not been replicated for banks in other countries, some of which undoubtedly also facilitated offshore tax evasion. With few exceptions, banks in other countries have not been prosecuted or sanctioned. Deferred or nonprosecutions of corporate entities are commonly justified based on political or systemic risk concerns. However, the use of these DPAs and NPAs has also been critiqued on the ground of undue leniency, unfairness, inappropriate insertion of prosecutors as regulators, and other grounds.
Thus, we should at least ask the question of whether banks and other serious offenders have been adequately punished, particularly in light of the high costs that have been imposed on other actors. The second potentially problematic policy commitment embraced by the United States is a hyperfocus on revenue and compliance that largely ignores the high externalized costs that its initiatives have inflicted on various actors.
These high costs render the U. But offshore tax compliance is costly, and the magnitude of these costs paired with their potentially unfair incidence is concerning and merits scrutiny and consideration.
Additional FATCA reporting
Moreover, these costs likely outstrip the expected returns from offshore enforcement. Research Serv. The important question is how much of this cost can be recouped through offshore tax enforcement. As commentators such as the NTA have observed, the projected revenue gains from offshore tax enforcement will likely be smaller than its costs, many of which have been externalized on other countries, taxpayers, and FFIs. However, estimating the costs of offshore tax enforcement is tricky, particularly because Congress enacted FATCA without a cost-benefit analysis.
Many have had to build technology platforms and upgrade computer and compliance systems to identify U. Costs to FFIs also include manpower, training, legal, and other administrative costs. Post Oct.
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Thus, compliance costs may be lower for smaller banks. Once initial cost outlays have been made, the ongoing maintenance costs to FFIs may decrease going forward. In addition to being difficult to estimate, we also do not know the incidence of these FFI costs. It seems likely that FFIs will find ways to pass these costs on to customers, both U. For example, various U. It is also possible that banks may pass costs on to customers in the form of higher fees.
Foreign governments have also had to incur compliance costs. Moreover, it is possible that foreign governments and countries may incur indirect costs as a result of FATCA. As with FFI costs, it is difficult to predict the incidence of these costs. As detailed below, it is also difficult to predict what foreign governments will do with the FATCA data they obtain.
This decision will have consequences as well. It may not adequately distinguish between solely held and joint accounts, for example, nor does it tell the United States the correct amounts of actual income inclusions.
If there are inconsistencies between the data obtained from FFIs and that reported on taxpayer returns, the United States may have to do some form of audit or follow-up inquiry, which would be another cost. Given the steep penalties for noncompliance, FFIs and foreign governments may have an incentive to over-include or over-report, which could generate additional costs to the United States to sort through the data. This is borne out by recent reports, which indicate that there may be problematic false positives in the FATCA data.
Governments and financial institutions aside, individual taxpayers also bear nontrivial compliance costs. The offshore disclosure rules are complex and the consequences of noncompliance serious. There are a multitude of required forms and disclosures, some duplicative. While there are dollar thresholds below which reporting is not required, these thresholds are quite low, even for Americans living abroad, but especially for those living in the United States. In fact, the FATCA reporting thresholds are low enough that compliance burdens are not imposed only on high-net-worth taxpayers, but also on ordinary taxpayers who may simply have some savings in a bank, retirement account, or foreign mutual fund.
Even if a taxpayer ultimately falls below the reporting threshold, she would need to spend time to figure out the law or pay a professional advisor to make this determination. Anecdotal evidence suggests that charges for professional services for offshore tax compliance are high, whether due to risk exposure to preparers, time spent, or a small pool of qualified experts resulting in the ability to capture rents due to preparer undersupply. For Americans living abroad, in particular, a limited pool of experts, treaty issues, and the need to compute the foreign-earned income exclusion and foreign tax credit may particularly necessitate costly tax preparation assistance, even if little or no tax is ultimately owed.
In short, offshore compliance is burdensome in terms of professional fees as well as time spent complying. Furthermore, as discussed, the potential consequences for mistakes and reporting failures for offshore assets are potentially far more severe than those in the domestic context. Many of those penalties and extended statutes of limitations apply regardless of exacerbating circumstances. And although penalties may be reduced or eliminated for reasonable cause, this outcome is not assured.
Compliance with the offshores tax rules may also give rise to anxiety and psychic costs to taxpayers because the rules are complex and their application uncertain. Moreover, the penalty for getting the rules wrong is high. Psychic burdens on taxpayers may persist whether or not the law is actually enforced.
Taxpayers who enter an OVDP may also incur significant costs in addition to actual offshore penalties because those procedures are difficult to navigate without legal representation. As noted by the NTA, taxpayers who entered OVDP without representation paid disproportionately severe penalties compared to those with representation.
While we do not know the exact costs to taxpayers of OVDP representation, they are likely nontrivial. One might argue that taxpayers who evaded taxes should not now complain about high compliance costs. However, as discussed, not all OVDP participants were willful offenders; some were arguably not willful at all, and as discussed the OVDPs generated regressive outcomes. Given the distributional problems with the program, the high costs of OVDP participation look more problematic.
Offshore Tax Evasion – Get into FBAR & FATCA Compliance Now!
Moreover, OVDP participation often involves costs of legal representation, which are captured by taxpayer representatives rather than inuring to the fisc. In addition to the quantifiable dollar costs of compliance, there are numerous other indirect costs that ought to be considered.
If taxpayers find more effective ways to avoid U. For example, sophisticated taxpayers may replace simple asset stashing with more complex structuring that is harder to detect. Others may relinquish their U. In fact, the data show that the number of Americans giving up their citizenship is at an all time high, and commentators point to FATCA a significant driver.