Patricia Moon posted part I:

Legislative History Reveals FATCA Had Nothing To Do With Collecting Tax Revenue From U.S. Persons With Foreign Accounts Evading Taxes (Part I)

In Part II, the author argues (among other things) that FATCA is nothing more than a continuation of the “FBAR Fundraiser“.

Here we go …

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Reposted with permission of Tax Connections.

Written by Gary Heald | Posted in FATCA • Gary Heald

In FACTA Part I, I argued that in light of the Joint Committee on Taxation (JCTX-5-10),[1] Congress failed to engage in the necessary due-diligence to reasonably relate FATCA to the collection of tax revenue lost through “tax schemes” and “tax evasion” by U.S. persons with foreign financial institution accounts. Congress operates as America’s legislative fact-finder. They are charged with determining whether relevant and reliable evidence negates the underlying policy-purpose for a particular law, when presented with evidence to that effect. JCTX-5-10 was directly relevant because it offered a direct answer to the question of “how much” FATCA revenue. As for reliability, the Joint Committee on Taxation produces some of the most reliable evidence on The Hill, and this was no exception to that general rule. Congress knew FATCA would collect less than one-half of one-percent of what was sworn to during the Ways and Means hearing estimates.[2] They also knew that even after ten-years, FATCA would not fully-fund the Hiring Incentives To Restore Employment (HIRE) Act (and that does not take into account the costs for implementation and renewed requests for additional expansion and implementation funding).

In Part II, I want to touch on three related areas of concern. First, and as has been discussed by more than a few other people, the $10B that the IRS collected between 2009 and 2016 included a disproportionately low amount of tax revenue coupled with a substantial amount of penalties associated with FBAR. Further, alongside a disproportionate amount of penalties, FATCA and Offshore Voluntary Disclosure Programs (OVDP) illegally filled the gap left by Qualified Intermediaries (QI) pooling, forcing foreign financial institutions to report on the account value of U.S. persons in violation of their own law, and if reproduced domestically, in violation of our own laws as well.[3] Finally, FATCA has become a continuation of the IRS war on FBAR perpetrated by Treasury’s Financial Crimes Enforcement Network (FinCEN), federal law enforcement and the intelligence community all of which sought to curtail the use of secret foreign bank accounts for illegal purposes (e.g., tax evasion as well as securities manipulation, insider trading, evasion of Federal Reserve margin limitations, storing and laundering funds from illegal activities, and acquiring control of U.S. industries without detection by the SEC) [4] by establishing a worldwide-financial-industry informant system.[5]

According to the U.S. Treasury, FATCA and Offshore Voluntary Disclosure Programs (OVDP) increased individual reporting to the IRS by 19% ($75B), resulting in an overall increase in taxes, interest and penalties of $10B.[6] My-oh-my that sounds like a success. In fact, the exact language “Updated data shows 55,800 taxpayers have come into the Offshore Voluntary Disclosure Program (OVDP) to resolve their tax obligations, paying more than $9.9 billion in taxes, interest and penalties since 2009.” Neither the 10-year $8.7B JCTX-5-10 FATCA estimate, nor Treasury’s reported $10B increase in taxes, interest and penalties breaks down how much of that $9.9B collected, was from tax revenue, interest or penalties.

Back in April of 2017, Associate Dean and Professor William Byrnes at Texas A&M School of Law wrote a piece for Wolters-Kluwer entitled: Is FATCA ‘Much Ado About Nothing’? Is FATCA’s Tax Revenue Going to Offset its IRS and Industry Costs? In this piece, Professor Byrnes noted that “according to the Government Accountability Office Report of 2013[7], for small accounts of less than $100,000 that over a six-year period had only an average of $103 tax owing (that equals $17 a year additional tax revenue), the IRS imposed a FBAR penalty of $13,320 (i.e., $2,220 a year FBAR penalty on average for $17 dollar tax understatement, in additional to the tax penalty and interest).” Calculating that penalty as a percentage of the non-reported income reveals that just a little over one-half-of-one-percent of the total revenue collected was in-fact tax revenue (0.0076), for the smaller accounts. As you will see below, the larger accounts pay half or less the penalty percentage on average of the smaller account holders. That means, on average, their tax revenue was about 1.5% -2.0% of the total revenue paid.

The penalty for FBAR was aimed at criminals and bad actors, but non-criminal benign actors have been impacted the greatest, eroding the distinction between willful and non-willful violations. It is pretty obvious that people who are unrepresented by counsel or have small accounts are perhaps more likely to make inadvertent reporting violations than those who are represented or have large accounts.[8] Under the 2009 OVDP the median offshore penalty paid by those with the smallest accounts was nearly six times the median unreported tax, as compared to about three times the unreported tax for those with the largest accounts.[9] Under the 2011 OVD program, the median offshore penalty for those with the smallest accounts rose to eight-times the unreported tax.[10] This undermines the policy purpose of FATCA further – FATCA is not only mostly FBAR penalty revenue, the penalty itself was designed to be imposed only as a punitive penalty to penalize purposeful tax evasion as well as securities manipulation, insider trading, evasion of Federal Reserve margin limitations, storing and laundering funds from illegal activities, and acquiring control of U.S. industries without detection by the SEC![11] Now, benign reporting violations make up the lion’s share of the penalty income.

For whatever reason, JCTX-5-10 did not break up total-revenue by tax, interest and penalties. Whether the JCT estimate actually included substantial FBAR penalty revenue as the offset base for HIRE, coupled with a small amount of tax revenue collection could be the subject of an interesting inquiry.[12] However, it is more important that the IRS did not to reveal the total amount collected was primarily penalty revenue related to FBAR non-compliance, that FATCA collects very little tax revenue. A good reason not to reveal this information is that it might interfere with petitions for additional implementation funding from Congress.[13] I am not blaming the IRS, really it is an issue with FinCEN, Treasury and federal law enforcement and their need for a more complete informant system, as the Qualified Intermediaries (QI) Program was unable to tie the individual identity of the U.S. account holders to all of the accounts.

What it looks like to me is that the IRS was forced to create a foreign financial institution informant structure to force U.S. persons with foreign financial institution accounts to report FBAR values.[14] Since 1970, when Congress enacted the Bank Secrecy Act (BSA) requiring FBAR compliance federal law enforcement had extreme difficulties enforcing FBAR compliance. In 2002, Treasury reported to Congress that the FBAR compliance rate was at 20%.[15] But by 2003, Treasury issued another report noting that FBAR civil enforcement had been delegated to the IRS noting in the report that “one could argue the FBAR is directed more towards tax evasion, as opposed to money laundering or other financial crimes that lie at the core mission of FinCEN”.[16] Put another way, the inability of federal law enforcement to mandate FBAR compliance caused FBAR enforcement to shift to the IRS because they were well-equipped to enforce compliance. As is made clear from the legislative history in Part I and in the revelation in Part II that the $10B collected was substantially from penalties associated with FBAR, FATCA should reasonably be considered a continuation of the IRS war on FBAR and the magnum opus of FinCEN, federal law enforcement, the intelligence community and others who seek to curtail the use of secret foreign bank accounts for illegal purposes (e.g., tax evasion as well as securities manipulation, insider trading, evasion of Federal Reserve margin limitations, storing and laundering funds from illegal activities, and acquiring control of U.S. industries without detection by the SEC) [17] by establishing a worldwide-financial-industry informant system.

[1] Technical Explanation & Estimated Revenue Effects of the Revenue Provisions Contained in Senate Amendment 3310, The Hiring Incentives to Restore Employment Act (HIRE), JCTX-4-10 and JCTX-5-10.

[2] Evidence revealed an estimated $150B was lost annually through offshore tax evasion in 2009, but by February, 2010 the JCT clarified that all FATCA should be expected to collect over ten-years, was $8.7B Banking Secrecy Practices and Wealthy Americans, House Ways and Means Subcommittee. on Select Revenue Measures, 111th Cong. (2009).

[3] The Fourth Amendment protects against unlawful search and seizure by requiring a warrant be obtained by federal law enforcement agencies, from a judge if and only if they are able to establish probable-cause (with a number of exceptions, but none for bank account values). As a point of fact, FinCEN, the CIA, FBI, SEC, DEA and all other federal law enforcement agencies are bound by the U.S. Constitution. Senator Rand Paul and Congressman Mark Meadows discuss these issues at a hearing designed to communicate the unintended consequences of FATCA to Congress. Available at https://oversight.house.gov/hearing/reviewing-unintended-consequences-foreign-account-tax-compliance-act/.

[4] Taxpayer Advocate Annual Report to Congress (2014). Citing to 31 U.S.C. §§ 5314, 5321; 31 C.F.R. §§ 1010.350, 1010.306(c); FinCEN-Form 114, Report of Foreign Bank and Financial Accounts (FBAR), http://www.fincen.gov/forms/bsa_forms/.

[5] Part III will include an impact statement through my lens, of some of the lesser discussed issues.

[6] Internal Revenue Service, “Offshore Voluntary Compliance Efforts Top $10 Billion; More Than 100,000 Taxpayers Come Back into Compliance,” October 21st,2016 available at https://www.irs.gov/uac/newsroom/offshore-voluntary-compliance-efforts-top-10-billion-more-than-100000-taxpayers-come-back-into-complianceIn fact, the 10BB likely results from the UBS-driven initiatives that resulted from normal investigatory techniques such as whistleblowing, prisoners’ dilemma, Congressional hearings, and John Doe summons enforcement.

[7] GAO-13-318, Offshore Tax Evasion: IRS Has Collected Billions of Dollars, but May Be Missing Continued Evasion.

[8] Id at 4, P. 85.

[9] Id at 4, P. 86.

[10]Id,

[11] See FN4 and accompanying text above.

[12] The government should be able to more precisely re-estimate future income tax revenue generated from FATCA. The re-estimate should not include anti money laundering related penalties associated with FBAR, because that is not tax revenue from U.S. persons evading tax though the use of an FFI.

[13] Ibid at 11. The hearing, in part, is prompted by an IRS request for an additional funding for broadening and implementing FATCA.

[14] I’m not alone in believing this. Dennis Kleinfeld, a prominent tax attorney in southern Florida, wrote an article for NewsMax (a well-respected conservative media outlet) which came to a closely-related conclusion. The article is available at https://www.newsmax.com/finance/deniskleinfeld/republicans-fatca-gop-trump/2017/06/04/id/794044/. Dennis states that the greatest concern is the complete loss of financial privacy, by treating everyone holding a financial account anywhere in the world as a U.S. tax evader , requiring all U.S. persons to report to the U.S. government even the smallest financial details, or be subject to civil and criminal penalties.

[15] U.S. Department of the Treasury, A Report to Congress in Accordance with §361(B) of the Uniting and Strengthening American by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, 6 (Apr. 26th, 2002). The estimate of required FBAR filings was based in part on the number of credit and debit cards held by U.S. citizens and residents to access funds in offshore accounts. See Taxpayer Advocate Annual Report to Congress (2014).

[16] Cite to 2003 Treasury Report – sending FBAR to IRS. I do not disagree that the IRS is a better enforcement body generally than

[17] Ibid. at 4.