The Unintended Consequences of Cracking Down on Tax Dodgers Abroad

A regulation makes banks report foreign accounts to the IRS, but some are finding loopholes in the law aimed at closing loopholes.
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The Internal Revenue Service building in New York. (Shannon Stapleton/Reuters)

Last week, Germany announced it would sign an American tax treaty that essentially makes German banks agents of the Internal Revenue Service.

The agreement is called the Foreign Account Tax Compliance Act (FATCA). And it's the U.S. government's latest attempt to make aiding American tax dodgers so laborious and potentially expensive for foreign banks that banks will either willingly pass tax evaders' information on to the IRS or drop these customers entirely. The measure effectively forces banks to register foreign account holdings or face steep fines.

"The U.S. government no longer has the ability to dictate tax policy to the rest of the world."

Some experts say that Germany's approval of FATCA spells a tipping point for other countries around the world to give in to U.S. pressure to turn over financial data on American expatriates and green card holders.

It isn't surprising that Germany signed on: FATCA's goals jibe with that government's aggressive and legally questionable strategy of pursuing its own tax cheats, which in the past has seen authorities purchase stolen bank data on Germans with bank accounts in Switzerland and elsewhere.

It also isn't surprising that almost a dozen other countries including Singapore have come together on FATCA. Nations are seeking to generate revenue in an era of austerity, and FATCA is a convenient way to do so, especially for the U.S., since overseas Americans lack any meaningful political representation or lobbying muscle in Washington.

FATCA's sad reality -- according to experts in both Europe and the U.S. -- is that it will not have a notable effect on wealthy Americans who stow money in complicated offshore vehicles. Experts say that tax schemes of the sort that became a political liability to Mitt Romney during his run for president remain largely untouched by FATCA rules.

FATCA and FBAR (Report of Foreign Bank and Financial Accounts) comprise a set of rules that are disproportionately hurting middle class U.S. citizens and green card holders who happen to reside abroad or maintain accounts outside the US.

One New York-based lawyer expressed exasperation over how foreign banks in FATCA signatory countries are freezing accounts linked to Americans.

"I know of one client whose parents live outside the US," he said. "They are in their 90s, and have a bank account in their home country. They added their son as a signatory because if they become incapacitated, they want him to have access to money to pay their bills. But their account has now been frozen because he's American. The bank wants the son to provide the last five years of his tax returns before it will unfreeze the account. He has had to hire a lawyer to sue the bank to let his parents access their own money."

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Banks domiciled in FATCA signatory countries will have to apply for "global intermediary identification numbers" on a U.S. government website this summer.

And apply they will: for if they do not actively participate in the program, and are found to be holding money for U.S. citizens with accounts containing over $50,000 in assets, the U.S. says it will find out, label the banks "recalcitrant," and impose a 30 percent fine on the aggregate volume of said bank's US-based transactions and/or U.S. clients.

According to Keith Lawson, chair of a tax advisory group at the Organization for Economic Cooperation and Development (OECD), the United States is giving countries two models from which to choose.

In one version, foreign banks would send data on to their home governments, which would then pass this information on to the IRS. The UK, Germany, France, Italy, and Spain have preliminarily joined this program.

The second option would see foreign banks transfer the data directly to the IRS, bypassing their own governments. Switzerland and Japan have signed on to this variant.

Switzerland negotiated a proviso to its deal, so that Swiss officials could participate in FATCA without technically violating the nation's famous banking secrecy laws. Under their agreement, American clients of Swiss banks can direct their banks not to give their data to the IRS. Swiss banks will comply; but at some point when prompted by the IRS, they will then release lists of "non-disclosures" by American account holders at Swiss banks.

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Michael Scaturro is a reporter based in Berlin.

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