A recent report from the Treasury Inspector General for Tax Administration (TIGTA) raises fresh doubts about whether the Foreign Account Tax Compliance Act (FATCA) is worth the cost. The TIGTA report notes that “despite spending nearly $380 million, the Internal Revenue Service is still not prepared to enforce compliance” with the 2010 law.
Congress enacted FATCA to target tax evasion by so-called “fat cats” living abroad. This law requires foreign financial institutions (FFIs) to report information to the IRS on any clients who are “U.S. persons” (which includes not just citizens but also green-card holders and “accidental Americans”) with at least $50,000 in assets or face steep penalties. The prospect of potential fines or compliance costs that weigh especially heavily on smaller firms for the draconian data-reporting mandate caused many FFIs to simply to cut off services to Americans.
Additionally, taxpayers abroad can also be hit with fines of $10,000 per year for failure to file FATCA’s Form 8938 regarding overseas assets, yet one in five expats remain unaware of the requirement. The penalties are assessed regardless of the amount of taxes owed, leading to punitive penalties for failure to understand the law. Over the past several years, many Americans have renounced their citizenship because of the horror stories related to FATCA’s compliance burdens.
The TIGTA's report reveals that the IRS has spent $380 million implementing FATCA but there is “no ongoing compliance impact” and the IRS is not “taking appropriate enforcement action on FATCA compliance activities or measuring its performance.” Of that amount, $222 million was for information technology costs, but the program remains riddled with the same sorts of technological problems that beset the IRS in other areas of its taxpayer services.
Thanks to the TIGTA, we at least know FATCA’s administrative costs, but there has been no comprehensive review or basic cost-benefit analysis of the far-reaching program since its enactment. The TIGTA report also reveals that in FY 2016, the IRS assessed 75 failure-to-file penalties on individual taxpayers. The penalties totaled $1.18 million -- $15,733 per filer. Otherwise, it has been difficult to ascertain how much has been raised as a result to the law, including the total amount of fines collected compared to tax receipts. Back in 2010, the Joint Committee on Taxation estimated that FATCA would raise $8.7 billion in taxes by 2020. In contrast, its global compliance costs were estimated to be between $200 billion and $1 trillion.
The National Taxpayers Advocate stressed in its 2016 report to Congress that “the consequences of FATCA continue to fall on honest taxpayers”: i.e., on those who would likely be in compliance with the tax code even if FATCA was never enacted. Furthermore, the Taxpayer Advocate warned that the implementation of FATCA violated three critical taxpayer rights: the right to privacy, to a fair and just tax system, and to pay no more than the correct amount of tax.
The advocacy group American Citizens Abroad has advocated for the adoption of a “same-country exemption.” This remedy will remove the FATCA burden from citizens living full-time in the country in which their FFI exists, freeing their day-to-day use account from FATCA scrutiny, and minimizing the lockout Americans abroad have faced from neighborhood banks.
Legislation has been introduced by Rand Paul (R-KY) and Roger Wicker (R-MS) in the Senate and Mark Meadows (R-NC) in the House that would repeal FATCA altogether. Wicker commented, “For all of FATCA’s aims to improve tax compliance, this law is not worth the burdens it imposes. We have seen the negative implications on foreign investment and regulatory compliance costs.”
FATCA has extended the long-arm of the IRS overseas, imposing financial hardship on innocent individuals who were not the stated targets of the law as it was initially designed and packaged. As Congress considers Tax Reform 2.0, Members should reconsider this misguided program.