The following overview of the FATCA/FBAR situation was sent to me by someone who wishes to remain anonymous. It does a good job of explaining what the fuss is all about. I have made some minor edits.
Recently the IRS has come out with claims of success, but I am encouraging you to look further into those claims. I have an alternate narrative that frankly is not being reported anywhere that I have found in the US media.
It involves the large number of small offenders that are being disproportionately impacted by a program not designed for them.
“IRS Amnesty ship goes fishing for Whales to feed village. Catches lots of Minnows, but few Whales. Processes Minnows like Whales anyway. Claims oil extracted made for a successful fishing trip. Lantern oil in villages is replenished. It was a good and ‘just’ expedition. The press cheer. Now on to other news.”
Now the brief narrative.
In 2009, the IRS embarked upon one of the most aggressive tax evasion hunts in US history with the target being foreign offshore bank accounts where it assumed wealthy Americans are hiding billions of untaxed dollars from IRS prying eyes using elaborate tax evasion schemes and secrecy laws to protect their money. The US had huge deficits, needed more revenues, and there were billions that were deemed as rightfully belonging to US Treasury, hidden away and unreachable. The IRS and Justice Department (JD) partnered up in a two prong attack to pry open these secrets accounts and get access to some of those badly needed revenues.
One prong of the attack was the JD’s prosecution of Swiss bank UBS, based upon recently obtained whistle blower information. UBS had been soliciting rich Americans into some deliberately designed tax evasion banking services. This generated a lot of press attention related to the rich hiding money offshore.
The other prong was a new Voluntary disclosure (VD) program which offered an amnesty from criminal prosecution for those who came forward before their names were revealed from those UBS prosecution efforts. The VD amnesty was piggy backing on the publicity being generated by the JD’s UBS prosecution, and it worked, or so it seemed at the time.
While there were some pretty hefty penalties (20%) levied against high aggregate amounts in foreign accounts and assets for an actively egregious UBS tax evader (“whale”), it seems like a pretty good deal. Come clean, become compliant, pay up, and obtain the “get out of jail free” card.
In 2011, the IRS did another VD, on the back of more revelations of pending litigation against 10 additional Swiss banks, and HSBC in India. The penalty was raised to 25%. More came in until the second VD ended on September 9, 2011. The IRS has since been touting the success of the two VD programs, totalling $2.7 billion in revenue collected and 30,000 new disclosures.
The press responded and rolled out headlines about “tax cheats” and “tax dodgers” coming clean. But is that really the story?
Overlooked, or never revealed in the various VD programs success narrative, is the extensive unintended consequences these programs are having on thousands of average middle class immigrants and expats around the world. In the successes trumpeted there were also many significant negative impacts, not reported, which are placing undo emotional distress, financial hardship, and pain on average middle class people who were not the target group of the program in the first place. Their story is lost in the after glow of IRS success.
What do we really know about the profile of the so called tax offenders coming forward now? Was it mostly drawn from the target group, the rich hiding funds in secret accounts for tax evasion as characterized in the media (“whales”), or was it a more mundane by-catch (“minnows”) drawn from an ocean of millions of expats and immigrants who had benign compliance failures due to general lack of knowledge of certain obscure reporting requirements?
Were the new revenues reported truly new untaxed dollars, or was it a disproportionately high level of penalty dollars arising out of “failure to file” penalties? Those “failure to file” penalties related to an obscure administrative form, called a Foreign Bank Account Report (FBAR) that heretofore had little law enforcement utility. While it had been around since the ’70s, it was not widely regarded or generally known about. The filing requirement was not even complied with in the tax practitioner community in any statistically significant manner. However, it was on the back of this one form that the IRS asserted its ability to level some pretty draconian penalties in what it called a “uniform manner,” with no agent discretion allowed to mitigate penalties for the non egregious failures of “minnows. ”
Now, here we are with widely reported stories of “minnow” distress in foreign media and specialized tax blogs in the US, and yet in the America media there is not a peep about how negatively these programs are affecting those “minnows” that are trying to do the right thing and become compliant.
They have been, or are in the process of being, squeezed very hard with penalties totally disproportionate to their so called crimes or tax failures. They were not the egregious UBS type tax evaders, but they are being punished as if they were. They are being ground into fertilizer in the IRS Whale processing plant, is how I characterize it. Theirs is the story untold.