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Too Many FATCA Loopholes?



According to the 175-page bipartisan staff report FATCA’s implementing regulations have created multiple loopholes, without statutory basis, in the disclosure requirements.

Among other problems, the Senate Subcommittee stated that the FATCA regulatory loopholes will:

1. require disclosure of only the largest dollar accounts;
2. permit banks to ignore, in most cases, bank account information that is kept on paper rather than electronically;
3. allow banks to treat accounts opened by offshore shell entities as non-U.S. accounts even when the entity is owned by a U.S. taxpayer; and
4. remaining disclosure requirements can be easily circumvented by U.S. persons opening accounts below the reporting thresholds of $50,000 at more than one bank.

Treaty Requests Not Obtaining Compliance

The Senate Subcommittee stated: “the revised U.S.-Swiss tax treaty, which has yet to be ratified by the Senate, applies only to requests for accounts that were open after its signing date in September 2009, which excludes the years in which the bulk of misconduct by Swiss banks and their U.S. clients took place. The treaty also has a convoluted process for obtaining the names of accountholders who can seek to block disclosure in Swiss courts, and Swiss law has created new evidentiary burdens for U.S. requests seeking information about unnamed U.S. taxpayers with accounts at Swiss financial institutions.”

The Senate Subcommittee cited a 2011 GAO study of how the United States leveraged its treaty network, including tax treaties, TIEAs, and MLATs. “GAO found that the United States had used the agreements to establish automatic information exchanges with 25 foreign jurisdictions that, in 2010 alone, provided the IRS with about 2.1 million data items. GAO also determined that, over the five year period from 2006 to 2010, the IRS had made a comparatively limited number of requests for information about specified taxpayers, initiating a total of about 900 such requests, ranging from a low of 165 to a high of 236 requests per year. Each of those requests could refer to one or multiple taxpayers. GAO further noted that the U.S. request activity was concentrated among a small group of countries, and that about 700 of the 900 requests made by the IRS involved a single foreign jurisdiction… GAO also observed that the median time to resolve a U.S. request for information was 149 days, or about five months.”

$6 Billion Collected Over 6 Years

According to the GAO Report and the Subcommittee report, the 2008, 2011, and the ongoing 2012 offshore voluntary disclosure initiative (OVDI) have led to 43,000 taxpayers paying back taxes, interest and penalties totaling $6 billion to date, with more expected.

However, the vast majority of this recovered money is not tax revenue but instead results from the FBAR penalties assessed for not reporting a foreign account.  The Taxpayer Advocate found that for noncompliant taxpayers with small accounts, the FBAR and tax penalties reached nearly 600% of the actual tax due!  The median offshore penalty was about 381% of the additional tax assessed for taxpayers with median-sized account balances.

Is $150 Billion Actually Lost Each Year to Offshore Noncompliance?

see my next article here on TaxConnections….

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William H. Byrnes has achieved authoritative prominence with more than 20 books, treatise chapters and book supplements, 1,000 media articles, and the monthly subscriber Tax Facts Intelligence. Titles include: Lexis® Guide to FATCA Compliance, Foreign Tax and Trade Briefs, Practical Guide to U.S. Transfer Pricing, and Money Laundering, Asset Forfeiture; Recovery, and Compliance (a Global Guide). He is a principal author of the Tax Facts series. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, and practiced in Southern Africa, Western Europe, South East Asia, the Indian sub-continent, and the Caribbean. He has been commissioned by a number of governments on tax policy. Obtained the title of tenured law professor in 2005 at St. Thomas in Miami, and in 2008 the level of Associate Dean at Thomas Jefferson. William Byrnes pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school (International Taxation and Financial Services graduate program).