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.