Say your profession is hunting after treasure chests. You find one treasure chest, but it almost always only has a key to the next one. The next one, however, is almost always hundreds of miles away, behind jungles, mountains and swamps. Now, you victoriously make your way through all the barriers, only to find another treasure chest with only a key inside. At this point, you are probably quite discouraged and might look for another job.
The IRS is the discouraged treasure hunter here. The offshore accounts held by wealthy Americans in Caymans, Luxembourg or Switzerland are treasure chests. Having made a huge network of offshore accounts, American tax evaders successfully keep the IRS away from taxing their actual income and assets. Today, the IRS loses around $100 billion in annual tax revenue because chasing treasures through miles of legal jungles and swamps is often either too difficult or too expensive.
Now imagine that, as a treasure hunter, you had a magic ball that would tell you where the treasure chests are hidden, who hid them there and how much treasure there is. Because of swamps and jungles, you would still struggle to reach the treasure chest itself but at least you would know that there is some treasure there, not just a key. The magic ball is the Foreign Account Tax Compliance Act (FATCA) of 2010, a precious piece of legislation that requires foreign financial institutions (FFIs), like banks, to disclose information about the bank accounts held by U.S. persons and assets therein.
The IRS uses this information to find offshore accounts and see whether the assets were properly taxed. The magic ball looks like a solution to at least a part of the massive problem with tax evasion. However, the amount of hidden, unreported treasure has only increased in the past 10 years, and the IRS cannot even report how much revenue it recovered, despite spending $574 million on the enforcement of FATCA. Is fighting tax evasion a lost cause, then?
No. Rather, the FATCA is great on paper, inconsistent in practice. First, the IRS experienced drastic declines in funding. Since 2010, the audit rates are down 58%, the audit rates for millionaires are down by a striking 71%, and IRS staff is down from 50,400 to 35,000. There is not enough staff or technology to track networks of shell companies and charge individuals with tax evasion. Second, the FATCA is expensive for FFIs to enforce. For example, British FFIs currently spend $50 million to $90 million a year on FATCA, an American legislation.
Third, in 40% of FATCA reports, there is no Tax Identification Number (TIN), e.g. Social Security Number. Without the TIN, the IRS cannot link the information from the foreign account to a specific U.S. individual, making the detection of tax evasion impossible. Fourth, the U.S. FIs report little or no information about foreigners holding financial accounts in the U.S. In effect, this makes the U.S. a tax haven in itself, discouraging other countries from spending enormous funds on fixing the American tax evasion problem.
Fixing all the issues with the FATCA will take years of research and consistent bipartisan support of the beleaguered IRS. However, there is one new magic ball that can fix at least a few concerns: the global Common Reporting Standard (CRS), developed by the OECD and already enacted by over 100 jurisdictions around the world. CRS is FATCA with a global reach that seeks to obtain information about individuals and entities residing in CRS-signing jurisdictions, which is held outside where they actually live.
Most importantly, adopting CRS in place of FATCA would lead to global reciprocity, necessary to halt global tax evasion. Institutions all around the world will be able share information on foreign accounts with the respective jurisdictions. It would decrease the cost of compliance, since many FFIs need to follow both the rules of CRS and FATCA at the same time. Since both are expensive to comply with, eliminating one would lead to reporting efficiency and more uncovering of financial crimes. Encouraged by reciprocity and reduction in costs, the FFIs will report information on foreign accounts with more precision, possibly increasing the percentage of reports that list respective TINs.
The IRS will have an easier time locating assets and prosecuting tax evasion, depending on the future trends in its funding, availability of staff and technology. Further, adopting CRS would decrease financial crimes by foreigners in the U.S. because they will lose the ability to tax-defraud their respective jurisdictions through U.S. FIs, which constitutes a federal crime.
Treasure hunting is an arduous labor and every instrument that would make it easier is precious. Currently, the only instrument the IRS uses is the FATCA magic ball. But it is time to update to a newer, more efficient, less expensive tool: the CRS. Showing reciprocity and reducing costs for FFIs worldwide would treat the root of the problem: there remain places where an individual can hide money and flee taxes. In a globalizing world, governments must act globally, with reference to global solutions.
By adopting CRS, the IRS might finally come closer to actually recovering money from tax evasion crimes, increasing compliance and streamlining the U.S. tax revenue. Finally, a healthier budget is extremely important today, considering the plans of President-elect Donald Trump to further cut taxes and increase efficiency of the executive branch.
Andrey Starovoytov is a senior at Hunter College majoring in Political Science and minoring in Public Policy, while also being a student in Thomas Hunter Honors Program. Andrey currently works as a paralegal in a commercial litigation firm, with a focus on fraud, conversion, international discovery and foreign money judgment recognition. He has also interned in a civil litigation law firm with a focus on immigration and housing, as well as in NYC Economic Development Corporation’s Funding Agreements Department, working on financing of infrastructure projects, such as the soccer stadium in Willets Point. Andrey aspires to go to law school after a gap year and then work in international commercial law in the future.
