Agreements Designed to Provide IRS Billions in Unreported Revenue
The two agreements are in support of the Foreign Account Tax Compliance Act (FATCA). FATCA, which went into effect in March 2010, requires that individuals include their holdings in accounts held by foreign banking institutions when they file income tax returns with the Internal Revenue Service (IRS).The Internal Revenue Code has historically required that citizens of the United States or those who otherwise earn income in the United States report income from all sources to the IRS. However, many individuals have chosen to hide earnings in accounts based in other countries such as the Cayman Islands and Costa Rica because of the favorable tax laws of those nations.
Experts believe the Department of Treasury loses over $100 billion each year in taxes that individuals should pay on unreported foreign income.
FATCA seeks to address this practice by allowing the United States to sign intergovernmental agreements (IGAs) with other countries in which those countries would provide bank account details to the IRS. If individuals choose not to provide their foreign bank account information to the IRS, the United States is instead simply working out deals with the governments of those countries to provide bank account details on all of those individuals with account balances above a certain threshold that have addresses tied to the United States.
With the signing of the agreements with the Cayman Islands and Costa Rica, the United States now has IGAs with 12 nations, including the United Kingdom, Switzerland, Germany, Spain, France, and Italy.
The need for a law like FATCA became readily apparent in 2009 when the Swiss banking institution UBS announced it would pay a $780 million fine to the United States. The fine came because of an investigation by the Federal Bureau of Investigation into over 50,000 United States-based customers with UBS bank accounts, an investigation that found that individuals with UBS had helped those customers to hide their funds from the IRS.
Banks Based in United States Again Reciprocal Sharing of Information
Despite the victory the Department of Treasury and the IRS are taking with the signing of these agreements, FATCA is not without its controversy.FATCA allows the United States to enter into a reciprocal sharing agreement with other nations. A reciprocal agreement means that while the other nation is willing to share bank account information with the United States, the United States must in return share bank account information with that foreign nation.
All of the IGAs signed to date have been reciprocal agreements. This fact is one that banking institutions have not ignored.
In April 2013, banker associations in Texas and Florida filed a lawsuit against the Department of Treasury in an attempt to block them from sending bank account information of those in the United States to foreign governments. The filing cited among other concerns the violation of privacy of residents of the United States.
The case is under review by the United States District Court of the District of Columbia.
Thank you to Tax Law Home for the above article.
