One of the biggest problems the Internal Revenue Service faces is making sure all people from the United States, including those living outside the country, accurately report all of their income when filing tax returns. However, since this is rarely done, problems can arise. Not only can the money be used for illicit purposes, but it also keeps the United States government from generating the revenue needed to support various programs. To help in the fight against this activity, the federal government passed the Foreign Account Tax Compliance Act in an effort to solve this growing problem.
Basics of FATCA
Known as FATCA, the Act requires all U.S. persons to report their non-U.S. financial accounts to the Financial Crimes Enforcement Network. In addition, all foreign financial institutions are required to search their records for any U.S. persons suspected of having financial assets in those institutions that have not been reported to the United States government. Enacted by Congress, it became effective March 18, 2010 as part of the Hiring Incentives to Restore Employment Act, a stimulus bill of which FATCA was the revenue-generating portion.
Upon implementation, FATCA was estimated to produce almost $9 billion in additional tax revenue over an 11-year period. While originally this was thought to be a substantial gain, critics of the Act have stated it will be only a small part of the nearly $40 billion in international tax evasion that occurs annually. Problems have also risen regarding the cost of implementing the Act in financial institutions. Compliance costs have been conservatively estimated to be $8 billion per year for financial institutions, which far exceeds the expected annual revenue generated.
Along with questions about its cost and implementation, many foreign nations have also raised concerns about FATCA. For example, Canada recently expressed its concerns about its citizens rights to privacy being violated, as well as having the belief that the country’s banks would be under more and more control from the Internal Revenue Service. Along with Canada, many other nations have threatened to no longer open accounts for Americans, which would create almost impossible conditions for those living and working abroad.
While the Act sounds good in theory, many political leaders in the U.S. and abroad question if the IRS is capable of handling the additional influx of tax filings that would result from FATCA. With many cuts in personnel in recent years, the IRS itself has expressed concerns about its readiness. However, the agency recently released a statement saying 2015 would be considered a transition year for FATCA, with the emphasis being on entity enforcement and administration, rather than focusing on individual investors.
While countries such as France, Germany, Italy and Spain have all agreed to implement FATCA in their financial institutions, other nations such as China have stated their banking laws prohibit them from complying with FATCA. Still other nations have reported tremendous numbers of U.S. citizens renouncing their citizenship in an effort to avoid compliance with the Act. While it is believed that most nations will ultimately agree to FATCA, there are still many questions left unanswered as to its overall effectiveness. As the U.S. government and IRS continue working toward a viable solution, FATCA will have a chance to prove its effectiveness at home and abroad.