NYT: Law to Find Tax Evaders Denounced

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Law to Find Tax Evaders Denounced

By DAVID JOLLY and BRIAN KNOWLTON

The New York Times
Published: December 26, 2011

Legislation meant to help the United States government locate overseas
assets of American tax cheats created little stir when it was quietly
slipped into a jobs bill last year.

But the Foreign Account Tax Compliance Act, or Fatca, as it is known,
is now causing alarm among businesses outside the United States that
fear they will have to spend billions of dollars a year to meet the
greatly increased reporting burdens, starting in 2013. American
expatriates also say the new filing demands are daunting and
overblown.

“Congress came in with a sledgehammer,” said H. David Rosenbloom, a
lawyer at Caplin and Drysdale in Washington and a former international
tax policy adviser for the Treasury Department. “The Fatca story is
really kind of insane.”

Congress created the act after the Justice Department’s successful
pursuit in 2009 of UBS that resulted in the Swiss bank — which had
encouraged American citizens to set up secret offshore accounts —
paying $780 million and turning over client details to avoid criminal
prosecution.

The law is meant to ensure Americans cannot use hidden trusts overseas
to evade taxes, a goal that is widely applauded. But critics say that
it amounts to gross legislative overreach, and that the $8 billion the
Treasury expects to reap in taxes owed over 10 years pales next to the
costs it will impose on foreign institutions. Those entities are being
asked, in effect, to pay for the cost of tracking down American tax
evaders.

The law demands that virtually every financial firm outside the United
States and any foreign company in which Americans are beneficial
owners must register with the Internal Revenue Service, check existing
accounts in search of Americans and annually declare their compliance.

Noncompliance would be punished with a withholding charge of up to 30
percent on any income and capital payments the company gets from the
United States. Under the law, for example, if Deutsche Bank, having
agreed to register with the United States authorities in compliance
with the law, were to transfer $25 million to a noncompliant Polish
bank, Deutsche Bank would be required to withhold part of that sum,
transferring it to the I.R.S. The Polish recipient would then have the
option of challenging that withholding by filing an American tax
return, claiming the money, despite not being an American citizen.

In practice, tax experts say costs like that might drive the Polish
bank out of business.

“They’re trying to force every financial institution in the world to
sign onto this regime,” said Denise Hintzke, who heads the global tax
compliance initiative at Deloitte in New York.

Financial institutions outside the United States also say that the
law’s costs will be imposed overwhelmingly on them, giving a
competitive advantage to United States rivals.

The European Banking Association estimates that its members would have
to pay at least $10 to vet each existing account plus overhaul data
systems and procedures.

In Japan, where savers often maintain several small accounts, only a
tiny minority of the 800 million total accounts are held by Americans.
The Japanese Bankers Association has said that manual verification of
each account would be “extremely burdensome.”

The Treasury and I.R.S. say that they are addressing the concerns of
Japanese and other institutions and that electronic screening, not
manual checks, will be acceptable for most types of accounts.

The I.R.S., under pressure from angry and confused financial officials
abroad, has extended the deadline for registration until June 30,
2013, and is struggling to provide more detailed guidance by the end
of this year.

But beginning in 2012, many American expatriates — already the only
developed-nation citizens subject to double taxation from their home
government — must furnish the I.R.S. with detailed personal
information on their overseas assets.

American Citizens Abroad, an advocacy group, estimates the new form
will add three hours to tax preparation. Considering that the law
provides harsh penalties for even unintentional errors, the
organization says it is “simply not realistic for a vast swath of the
normally law-abiding filer community unable to afford the expensive
services of a professional tax adviser.”

Even with the new requirement, American expatriates must continue
reporting their foreign financial assets to the Treasury Department,
meaning they will be reporting twice, to different arms of the
government, according to different standards.

“The Fatca legislation treats all Americans with overseas bank
accounts as criminals, even though most of them are honest, hard-
working individuals who happen to be living and working or retired
abroad,” said Jacqueline Bugnion, a director of American Citizens
Abroad.

United States officials say that in the final version of the law, to
be released next summer, the pursuit of information will not be quite
as expansive as some fear.

“Searches of the predominant number of pre-existing accounts will be
electronic,” Manal S. Corwin, deputy assistant secretary of the
Treasury for international tax affairs, said during a recent
interview.

More extensive searches will be conducted mainly in the case of
private banks, or individuals holding assets exceeding $500,000, she
said, though the details are still being worked out. Ms. Corwin said
the United States would not be asking any institution “to
affirmatively ask every one of their account holders the nationality
question.”

In Canada, where hundreds of thousands of United States passport
holders reside, the outcry has been great. Andrea Taylor, director of
the Investment Industry Association of Canada, said compliance costs
could prove devastating for smaller investment firms already facing
tough times. “This will kind of be the last nail in the coffin for a
lot of them,” she said.

Mario Frankovich, chief executive of Burgeonvest Bick Securities, said
his Toronto firm currently required no data from new clients that
would show United States links, so any electronic search “would be
showing zero U.S. passports.” He said his sense was that Fatca
required companies “to prove your innocence.”

Enforcement of the law will be tricky, as many countries, including
the 27 members of the European Union, forbid banks or companies to
transfer such information directly to a foreign government.

Emer Traynor, a spokeswoman for Algirdas Semeta, the European Union
tax commissioner, said talks were under way with the United States to
permit European companies to transfer data to their national
authorities, which would then pass that information on to Washington.
A United States official confirmed this.

There are also questions about whether the I.R.S. will be ready for
millions of complicated new filings each year, with critics charging
that Congress failed to provide the agency with the capacity to handle
the coming avalanche of data. An I.R.S. spokesman, Dean Patterson,
said that the agency was “allocating the requisite resources and
personnel to implement Fatca” and that “we are committed to laying out
a constructive framework for implementation.”

Then there is a question of reciprocity: Would the United States
accept the same demands for information from the tax authorities in
other countries — say Russia or China?

Some analysts nonetheless see hope that, once the initial acrimony and
confusion clear away, Fatca could lead to more cooperative information
sharing.

Jeffrey Owens, a tax expert at the Organization for Economic
Cooperation and Development, said catching tax evaders was “a concern
that many member countries share.” If countries could agree to new
global reporting standards for exchanging information, he said, then
“maybe there’s a way forward.”


Mia Li contributed research.