The IRS estimates that will collect more than US$165 billion in additional taxes from Americans overseas over the next decade through the new Foreign Account Tax Compliance Act (FATCA) and enforcement of the Foreign Bank Account Reporting (FBAR) requirement. Critics question both the IRS's focus and its math.
"The perspective from the IRS is that they are uncovering wealthy tax evaders when in reality they are destroying average, hardworking people's lives, many who have simply made errors of oversight," American Citizens Abroad (ACA) executive director Marylouise Serrato says.
Uncle Sam will spend billions on new compliance and enforcement procedures, including hiring 600 new overseas examiners, and force banks across the globe to share records with the US government.
"If the foreign banking community states that compliance will cost them many billions, there must be a heavy cost and administrative burden on the IRS side as well," ACA director Jackie Bugnion says. "FATCA is described by many as an administrative monster which creates such an enormous haystack that no needle will be found."
Aside from the potential time and money to find a fraction of the $800 billion given to the wealthiest 2% of Americans through extension of their George W Bush era tax cuts, numerous US citizens and money managers believe the new requirements are an invasion of privacy, the financial equivalent of full body scanners used in airports, according to one adviser based in China who requested anonymity.
Come clean - or else
Before the government hunts for undeclared overseas holdings, Americans have one last chance to "come clean" - , in the words of IRS Commissioner Doug Shulman - under its voluntary disclosure plan, which features fines and penalties including partial confiscation of hidden assets. Americans have long been required to reveal overseas bank accounts, with taxes due on interest payments and other investment income from any source. But there were previously no penalties for failing to file the FBAR form, so many expats and accountants ignored it.
"What disturbs me most about the scare tactics that the IRS appears to be using now, with its new voluntary disclosure program, is that the people who can afford it the least are being penalized more than anyone else," US accountant Laurence Lipsher, author of Larry's 2011 Tax Guide for US Expats and Green Card Holders in User Friendly English, says.
ACA has compiled case histories on the high price of voluntary disclosure. Under a more lenient voluntary disclosure regime that expired last year, one citizen revealed his US$300,000 life savings in a foreign bank. Taxes and penalties due on interest amounted to US$150, but the citizen was fined US$60,000, 20% of the highest amount in the unreported account. "This is extremely abusive on the part of the IRS," ACA's Bugnion contends.
Fear factor
The IRS would not comment on this case or answer other questions for this article. In an interview with Fox Business News, IRS Commissioner Shulman warned, "A big part of our voluntary disclosure program is that, you come in, need to tell us what financial institutions you've been working with, what law firms, what other advisors you have helped to facilitate your tax evasion. Through that process, we're getting a lot of leads, and so you should expect us in the future to be pursuing other financial institutions, other intermediaries, as well as lots of other taxpayers."
"Why do we have a tax bureaucracy that provokes fear?" asks Lipsher, who has challenged Shulman to a debate on FATCA. "What has happened to our country when it is now easier to work with the State Administration of Taxation in China than it is with the IRS?"
As with most US economic and fiscal evils, look behind the curtain and you'll find Phil Gramm. The former US senator from Texas was the godfather of deregulation that lay behind the Enron-led corporate crisis of the early 2000s and the 2007 collapse of global financial markets. He resigned from the senate in 2002 and reemerged in public during the 2008 presidential campaign as an economic adviser to John McCain. Frequently cited as a key architect of the 2008 economic crisis, Gramm denied there was any problem at all. "[T]his is a mental recession," he said in a July 2008 interview, "We have sort of become a nation of whiners, you just hear this constant whining ..."
Gramm preached free-market economics, tax cuts, and small government, though as a University of Texas economics professor and elected official, he had little direct experience of the private sector. His wife, Wendy, by contrast, spun in the revolving door between government appointments and corporate boards.
The senator (and spouse) from Enron
In an example of the power couple in action, Phil Gramm spearheaded legislation enabling the deregulation of energy trading. Wendy, meanwhile, chairing the agency that regulated futures markets, allowed the trading of energy futures, then joined the board of directors at Enron - the company that benefited most from her decision, collecting some $2 million for her services. As a final touch, to underscore the couple's personal integrity and honesty, she professed complete ignorance of Enron's financial troubles (although a member of the audit committee) but stopped accepting Enron stock options and insisted on cash payments from 1999 on.
After resigning his senate seat in 2002, Phil Gramm became a vice chairman of Swiss bank UBS, which coincidentally owned Enron's post-bankruptcy energy trading business. Like other banks, UBS was a massive beneficiary of Gramm's deregulatory efforts. It's unclear precisely what Gramm does with UBS, though it seems logical that he and UBS talk about US strategy and compliance with US regulations. Be that as it may, in 2008, UBS faced charges of helping some 50,000 wealthy Americans to evade taxes. Court cases revealed UBS officers helped Americans living in the US set up overseas accounts and offshore corporations to mask their ownership.
"Everyone in Switzerland - and I live in Switzerland - was extremely critical of the UBS for setting up such stupid illegal structures to help US citizens in the United States hide assets from the US government," ACA's Bugnion says. UBS settled with the US government by paying $780 million and revealing 4,500 top tax cheats, and US pressure on the Swiss government effectively broke its banking secrecy laws.
Paper avalanche
UBS was helping US citizens in America evade taxes, but the remedial focus on overseas banking and investment accounts hits US expats. Virtually every American living overseas needs a foreign bank account - especially given post-9/11 fees on foreign transactions through US banks.
While destinations such as Singapore are lining up to become the new Switzerland for so-called wealth management services, US law taking effect from this year will require all banks and other financial institutions with US customers or investments to provide the US government with financial information on US citizens, including overseas credit card transactions.
"What is most astounding is that the overseas banking community anticipates that their compliance will cost them tens of billions of dollars to put the reporting system in place and then billions more every year to ensure filing compliance - way out of proportion with the estimates thrown out by the IRS of revenue from FATCA," Bugnion says.
"I cannot possibly see the IRS being able to handle the avalanche of paperwork it is about to start receiving," Lipsher, also the author of The Tax Analects of Li Fei Lao, a survey of tax laws across Asia for foreigners, says. "It cannot handle what it has now."
Former broadcast news producer Muhammad Cohen told America’s story to the world as a US diplomat and is author of Hong Kong On Air
, a novel set during the 1997 handover about television news, love, betrayal, financial crisis, and cheap lingerie. Follow Muhammad Cohen’s blog for more on the media and Asia, his adopted home.
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