GAO Report on Foreign Asset Reporting and Related Issues (4/4/19)

GAO Released this report:  Foreign Asset Reporting, Actions Needed to Enhance Compliance Efforts, Eliminate Overlapping Requirements, and Mitigate Burdens on U.S. Persons Abroad (GAO-19-180 April 2019), here.

Excerpts from opening summary:

What GAO Found 

Data quality and management issues have limited the effectiveness of the Internal Revenue Service’s (IRS) efforts to improve taxpayer compliance using foreign financial asset data collected under the Foreign Account Tax Compliance Act (FATCA). Specifically, IRS has had difficulties matching the information reported by foreign financial institutions (FFI) with U.S. taxpayers’ tax filings due to missing or inaccurate Taxpayer Identification Numbers provided by FFIs.  Further, IRS lacks access to consistent and complete data on foreign financial assets and other data reported in tax filings by U.S. persons, in part, because some IRS databases do not store foreign asset data reported from paper filings.  IRS has also stopped pursuing a comprehensive plan to leverage FATCA data to improve taxpayer compliance because, according to IRS officials, IRS moved away from updating broad strategy documents to focus on individual compliance  campaigns. Ensuring access to consistent and complete data collected from U.S. persons—and employing a plan to leverage such data—would help IRS better  leverage such campaigns and increase taxpayer compliance. 

Due to overlapping statutory reporting requirements, IRS and the Financial Crimes Enforcement Network (FinCEN)—both within the Department of the Treasury (Treasury)—collect duplicative foreign financial account and other asset information from U.S. persons. Consequently, in tax years 2015  and 2016, close to 75 percent of U.S. persons who reported information on foreign accounts and other assets on their tax returns also filed a separate form with FinCEN. The overlapping requirements increase the compliance burden on U.S. persons and add complexity that can create confusion, potentially resulting in inaccurate or unnecessary reporting. Modifying the statutes governing the requirements to allow for the sharing of FATCA information for the prevention and detection of financial crimes would eliminate the need for duplicative reporting. This is similar to other statutory allowances for IRS to disclose return information for other purposes, such as for determining Social Security income tax withholding. 

According to documents GAO reviewed, and focus groups and interviews GAO conducted, FFIs closed some U.S. persons’ existing accounts or denied them opportunities to open new accounts after FATCA was enacted due to increased costs, and risks they pose under FATCA reporting requirements. According to Department of State (State) data, annual approvals of renunciations of U.S. citizenship increased from 1,601 to 4,449—or nearly 178 percent—from 2011 through 2016, attributable in part to the difficulties cited above.  

Treasury previously established joint strategies with State to address challenges U.S. persons faced in accessing foreign financial services. However, it lacks a collaborative mechanism to coordinate efforts with other agencies to address ongoing challenges in accessing such services or obtaining Social Security Numbers. Implementation of a formal means to collaboratively address burdens faced by Americans abroad from FATCA can help federal agencies develop more effective solutions to mitigate such burdens by monitoring and sharing information on such issues, and jointly developing and implementing steps to address them. 

The following is from the Background (some footnotes omitted):

Reuters Article on End of Swiss Bank Secrecy and the Common Reporting Standard (10/5/18)

Michael Shields, Era of bank secrecy ends as Swiss start sharing account data (Reuters 10/6/18), here.  Excerpts:

The era of mystery-cloaked numbered Swiss bank accounts has officially come to a close as Switzerland, the world’s biggest center for managing offshore wealth, began automatically sharing client data with tax authorities in dozens of other countries. 

The Federal Tax Administration (FTA) said on Friday it had for the first time exchanged financial account data at the end of September under global standards that aim to crack down on tax cheats. 

* * * * 

The initial exchange was supposed to be with European Union countries plus nine other jurisdictions: Australia, Canada, Guernsey, Iceland, Isle of Man, Japan, Jersey, Norway and South Korea. 

* * * * 

About 7,000 banks, trusts, insurers and other financial institutions registered with the FTA collect data on millions of accounts and send them on the Swiss tax agency. The FTA in turn sent information on around two million accounts to partner states. It put no value on the accounts in question. 

The information includes the owner’s name, address, country of residence and tax identification number as well as the reporting institution, account balance and capital income. This lets authorities check whether taxpayers have correctly declared their foreign financial accounts. 

The annual data swap will expand next year to about 80 partner states, provided they meet requirements on confidentiality and data security. The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes reviews states’ implementation of the accord.

JAT Comments:

Drucker's Article on Panama and U.S. as Tax Havens and Failure to Adopt CRS

Jesse Drucker is one of my favorite reporters on the international finance scene and often writes on tax issues.  His latest is Source: Panama Has Company as Bank-Secrecy Holdout, as U.S. Offers Haven (Bloomberg 4/5/16), here

The teaser opening:

Panama and the U.S. have at least one thing in common: Neither has agreed to new international standards to make it harder for tax evaders and money launderers to hide their money. 

Over the past several years, amid increased scrutiny by journalists, regulators and law enforcers, the global tax-haven landscape has shifted. In an effort to catch tax dodgers, almost 100 countries and other jurisdictions have agreed since 2014 to impose new disclosure requirements for bank accounts, trusts and some other investments held by international customers -- standards issued by the Organization for Economic Cooperation and Development, a government-funded international policy group. 

Places like Switzerland and Bermuda are agreeing, at least in principle, to share bank account information with tax authorities in other countries. Only a handful of nations have declined to sign on. The most prominent is the U.S. Another, Panama, is at the center of a storm over tax evasion and global cash flight that broke out over the weekend.

The article then goes on to discuss the state of global disclosure, calling out the U.S. for not entering the Common Reporting Standard ("CRS") promoted by the OECD.  The Commissioner of the IRS has called for the U.S. to adopt CRS.  See Commissioner Koskinen Calls On Congress to Adopt Common Reporting Standard (Federal Tax Crimes Blog 3/15/16), here.

Another Article on the Erosion of Swiss Secrecy (4/3/16)

Gideon Rachman, The gnomes of Zurich are silent no longer (FT 3/28/16), here.  The article starts:

What is the link between the following political scandals? The Petrobras case in Brazil, the 1MDB affair in Malaysia, the unravelling of Fifa, the prosecution of a French minister and a party funding row in Spain. The answer is Swiss bank accounts. 

Customers used to be able to rely on the legendary discretion of the “gnomes of Zurich” but Swiss bank accounts are no longer as secret as many clients once assumed. These days, if a prosecutor in another country asks the Swiss for co-operation in a corruption probe, they will get it. As a result, powerful people who might have hidden money in Switzerland are increasingly vulnerable to investigation. 

The biggest changes in Switzerland’s banking culture followed the huge fines that the US levied on UBS, a Swiss bank, in 2009, for enabling Americans to evade tax. Further US prosecutions of Swiss banks followed, as well as a tightening of American tax law. The EU also began to increase pressure on the Swiss. 

Partly as a result, Switzerland has made decisive moves away from its traditional culture of bank secrecy. The consequences are playing out worldwide.

The article then goes through examples for the countries mentioned in the opening paragraph and then concludes:

The Lagarde list [delived to Greece by Christine Lagard, France's finance minister] had been stolen by a disgruntled employee. The more recent revelations to come out of Switzerland have emerged through official channels. In 2018, Switzerland will move to automatic exchange of information with other global tax authorities. There may well be further scandals to come.

Commissioner Koskinen Calls On Congress to Adopt Common Reporting Standard (3/15/16)

A Tax Notes Today article reports that, in a speech to the Tax Executives Institute, IRS Commissioner Koskinen called for Congress to approve the U.S. use of the Common Reporting Standard ("CRS") to replace reporting under FATCA.  William Hoffman, Koskinen Calls on Congress to Approve Common Reporting Standard, 2016 TNT 50-1 (3/15/16) [no link available].  The OECD brief explanation of the Common Reporting Standard with links is here.  The brief explanation is:

The Common Reporting Standard (CRS), developed in response to the G20 request and approved by the OECD Council on 15 July 2014, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

The TNT article indicates that the reason the IRS has not moved to the standard is that it lacks authority to do so without congressional approval.  The article says:

The IRS asked for the authority to use the CRS in Treasury's green book  2016 TNT 27-25: Treasury Reports explanation of the Obama administration's fiscal 2017 revenue proposals. Fifty "early adopter" jurisdictions have pledged to implement the CRS by January 1, 2016, starting to exchange account information from their financial institutions with their partner jurisdictions in 2017. Almost 100 more jurisdictions signed on to implement the CRS by January 1, 2017, beginning information exchanges in 2018.

More on Transparency for Entities Acquiring Valuable Real Estate in Some U.S. Markets (1/23/16)

I recently reported on a common complaint against the U.S. which insists on more transparency from foreign countries but has some gaps in its transparency for foreign countries with respect to hiding ownership of real estate.  One Step in Attacking Lack of Transparency in U.S. (1/13/16), here.  Foreigners have been able to use entities to hide the true ownership of valuable real estate, particularly in such attractive destinations as New York.  In that blog, I noted that the U.S. is now attempting to require information about the true owners and, of course, the next step is making the information available to foreign countries.

Tax Notes Today, has a very good article on the issue in considerable more depth.  William Hoke, Reporting Rule Might Deflect Some Criticism of U.S. as Tax Haven, 2016 TNT 15-3 (1/25/16), no link available.  I recommend that those with a subscription to TNT or the sister publications in which it is printed read the article.  Some key points from the article that I thought interesting are:

1. There is criticism of the U.S. failure to join CRS, which was inspired by FATCA, but may operate to require more transparency in some cases.  Two quotes from the article:

J. Richard Harvey of Villanova University said that by implementing FATCA, the United States paved the way for more international reporting of financial assets, such as through the CRS. "Thus, it is somewhat ironic and disappointing that the U.S. has failed to fully participate in CRS," Harvey said. "Such failure could make it more difficult for the U.S. to successfully implement FATCA to the extent [that] other countries decide to not provide certain information with the U.S." 

* * * *  

Andres Knobel of the Tax Justice Network said that while more than 70 jurisdictions have signed the multilateral competent authority agreement on the automatic exchange of financial account information under the CRS, a number of requirements regarding underlying treaties, national legislation, and confidentiality must also be met before the transfer of information can begin. Knobel likened the process to the Tinder online dating service. Automatic exchange of information "will take place only among jurisdictions that meet all the requirements . . . and that choose each other," he said.

That reminds me of the illusory contract illustration used by Hardy Dillard, former dean of UVA Law School, way back when I went there.  He illustrated the illusory contract of the boyfriend trying to bend the girlfriend to his intentions by promising that "I'll marry you if I choose to."  That, of course, was from a different era, with such illusory promises probably not necessary any more.

2.  Regarding the new initiative reported above to require ownership information for entities acquiring real estate:

Tax Justice Network Study of Financial Secrecy with U.S. Third Most Opaque (11/14/15)

The Tax Justice Network, an independent network providing "high-level research, analysis and advocacy in the area of international tax and the international aspects of financial regulation."  The Tax Justice Network's description of itself from the web site is here.  The Tax Justice Network has a "financial secrecy index," here, which "ranks jurisdictions according to their secrecy and the scale of their offshore finanical activities. A politically neutral ranking, it is a tool for understanding global financial secrecy, tax havens or secrecy jurisdictions, and illicit financial flows or capital flight."

The index seeks to analyze features moving and hiding money offshore, with distortion in tax and economic systems.  The index general conclusions from the Introduction are summarized here :

Shining light into dark places 

An estimated $21 to $32 trillion of private financial wealth is located, untaxed or lightly taxed, in secrecy jurisdictions around the world. Secrecy jurisdictions - a term we often use as an alternative to the more widely used term tax havens - use secrecy to attract illicit and illegitimate or abusive financial flows.  

Illicit cross-border financial flows have been estimated at $1-1.6 trillion per year: dwarfing the US$135 billion or so in global foreign aid. Since the 1970s African countries alone have lost over $1 trillion in capital flight, while combined external debts are less than $200 billion. So Africa is a major net creditor to the world - but its assets are in the hands of a wealthy élites, protected by offshore secrecy; while the debts are shouldered by broad African populations.  

Yet all rich countries suffer too. For example, European countries like Greece, Italy and Portugal have been brought to their partly knees by decades of tax evasion and state looting via offshore secrecy.   

A global industry has developed involving the world's biggest banks, law practices, accounting firms and specialist providers who design and market secretive offshore structures for  their tax- and law-dodging clients. 'Competition' between jurisdictions to provide secrecy facilities has, particularly since the era of financial globalisation really took off in the 1980s, become a central feature of global financial markets. 

The problems go far beyond tax. In providing secrecy, the offshore world corrupts and distorts markets and investments, shaping them in ways that have nothing to do with efficiency. The secrecy world creates a criminogenic hothouse for multiple evils including fraud, tax cheating, escape from financial regulations, embezzlement, insider dealing, bribery, money laundering, and plenty more. It provides multiple ways for insiders to extract wealth at the expense of societies, creating political impunity and undermining the healthy 'no taxation without representation' bargain that has underpinned the growth of accountable modern nation states. Many poorer countries, deprived of tax and haemorrhaging capital into secrecy jurisdictions, rely on foreign aid handouts. 

This hurts citizens of rich and poor countries alike.  

What is the significance of this index?

WSJ Article on Bank Information Sharing Among Countries under FATCA and CRS (10/31/15)

Laura Saunders of the WSJ has this good summary of the state of play on tax information exchange for banks.  A New Era of Tax-Data Sharing for the IRS (WSJ 10/30/15), here.  Excerpts:

Fatca requires foreign financial firms to report account data for their U.S. taxpayers or face stiff penalties. In many countries this information is bundled and submitted by the tax agency to the IRS. After Fatca was enacted, U.S. authorities said that in some cases they would share information on U.S. accounts held by foreigners, in an effort to counter charges the U.S. was acting unilaterally. 

Fatca supporters say the law has been a catalyst for historic change. Following its enactment, several non-U.S. countries decided to push for a similar effort, called the Common Reporting Standard. The CRS will enable countries such as Germany and France to exchange tax data digitally by 2018. 

So far, more than 90 nations have signed up for CRS. “Fatca and the Common Reporting Standard are fundamental changes in the tax landscape that could help countries around the world stem offshore tax evasion,” says Itai Grinberg, an international tax specialist at Georgetown University’s Law School. 

* * * * 

What information is being shared? Richard Kando, a director of Navigant Consulting in New York, says that in general, financial firms abroad have to report the name, address and taxpayer ID number of each U.S. account holder. They also must give the account number, account balance and gross amounts of dividends, interest and other income—including items such as the cash value of annuities. The threshold for reporting foreign accounts can be as little as $50,000. 

The IRS won’t send all the same information abroad about foreigners’ accounts held in the U.S. firms, Mr. Kando says. In general, the agency will provide the name, address, account number and tax ID number or date of birth for the client, plus the gross amounts of deposit interest, U.S.-source dividends and certain other U.S.-source income. But the agency isn’t required to provide the account balance. 

The IRS declined to say what the threshold is for reporting accounts held by foreigners.