US IRS Hones Long Process of Tightening Noose for Tax Evaders

By Denny Gulino

WASHINGTON (MNI) – It’s just IRS Form 8938. No reason to panic, at
least not yet as the IRS delicately and gently sweet-talks Germany,
Italy, Spain and the UK to catch their American visitors in the act of
hiding their income.

“Extraterritoriality” is not a favorite word in foreign capitals,
as the United States extends its regulatory reach around the globe. But
with notable success in Switzerland in breaking the code of anonymity,
the IRS has been honing its diplomatic skills and now counts several
European states signing on to new reporting rules.

Ever since Congress dumped the international hot potato in the
agency’s lap in 2010, including the Foreign Account Tax Compliance Act
inside a jobs bill, tax accountants have been wondering how the IRS
would pull it off.

Wednesday the IRS felt confident enough of its progress to go
public, placing almost 400 pages of proposed final rules in the Federal
Register and starting the clock toward enforcement.

IRS and Treasury Department officials held a conference call with
reporters after getting their promise to protect their anonymity and not
even to use direct quotes, just “general sentiments,” in the words of a
public affairs person.

The officials wanted to assure Congress that they have in no way
backed off in developing the new rules. At the same time the IRS didn’t
want to scare off any foreign governments from cooperating, although
some, like China, have made it clear they won’t be signing on any time
soon to the Web page to be set up to get data on Americans overseas.

In fact, most financial institutions overseas don’t want to either,
but the U.S. government has made it as easy as possible for them to
tattle on their customers to their own governments, which then relay the
data to Washington.

If they don’t, the United States threatens to keep 30% of any of
the institutions’ — not the taxpayers’ — income payments until they do
comply. For uncooperative institutions, that threat means that their
entire U.S. customer list and their U.S. portfolio holdings could be
suddenly off limits.

The rules may strike much closer to home, however. Accounting and
law firms are poring through the newly published proposed regulations to
see if U.S. pension funds still have to certify which beneficiaries are
Americans, which are not.

Business and banking groups initially erupted in bitter criticism,
saying the new rules would kill finance industry jobs, cost them
customers and force trillions of dollars of investment overseas. Since
then there have been so many similar perceived threats voiced as
hundreds of Dodd-Frank rules get closer to enactment, that the industry
screams of anguish have lost a lot of their potency.

The “general sentiment” of one government official on the
conference call, however, was optimistic that everything is settling
down and one by one, foreign governments will agree to collect the
names, the addresses, the account numbers and their balances of any
Americans and send them to Washington.

Generally sentimizing, the official said everyone has moved far
away from the fear that the U.S. agencies would be knocking on doors in
Tuscany or the south of France, asking to see passports and bank books
and trading accounts. That, after all, would not be cost effective
anyway.

Instead, information that foreign banks as well as U.S. banks and
funds and portfolio managers already gather in the course of business
will be adequate for the IRS purposes. And if there are quibbles about
whether it’s legal to violate the confidences of their customers, that
information can be laundered through the local banking authorities — as
long as their governments pass it through to the IRS.

Deadlines are being extended and enforcement will be phased in
until it’s all in place in 2017, they said. That 30% withholding,
though, could start as early as 2014 for the uncooperative institutions.
But chances are, the IRS will not be launching any regulatory cruise
missiles until negotiations are exhausted so as not to spook future
cooperators.

A printed fact sheet distributed by Treasury mentions “months of
intensive discussions with foreign governments” have already taken
place. France, Germany, Italy Spain and the United Kingdom have
consequently expressed “mutual intent to pursue a
government-to-government framework for implementing FATCA — an
important step toward addressing legal impediments to financial
institutions’ ability to comply with the regulations.”

“Treasury officials continue to engage in discussions with foreign
governments,” the fact sheet went one, “about the effective and
efficient implementation.”

How much additional tax revenue will the new rules allow the IRS to
collect? No one really knows, apparently. The government officials
refused to endorse the figure bandied about Capitol Hill when the votes
were being lined up. Then it was $10 billion over 10 years.

FATCA, the acronym only one “t” short of “fatcat,” is just one of
many U.S. government efforts to bring U.S. income tax revenue home. A
temporary offer of amnesty for offshore tax evaders got more than 12,000
of them to voluntarily disclose their income, Treasury announced last
year.

Most famous in the annals of offshore sleuthing is the 2009
settlement with Swiss bank UBS that brought 4,500 secret accounts to the
surface and prompted $780 million in penalties for the bank.

The IRS now has offices overseas tracking lost revenue, moving far
beyond Switzerland and Lichtenstein. However Americans appear to be
hiding assets in perhaps 150 countries. Swiss media have reported Credit
Suisse, Julius Baer and Basler Kantonalbank are facing a U.S. deadline
to turn over data on Americans and the Swiss Finance Ministry has said
it will withhold the encryption key until negotiations are completed in
cases where the account holder has broken both U.S. and Swiss law.

Meanwhile, the IRS campaigns across the border are blasting forward
and whether the November elections will blunt their intensity remains to
be seen.

Candidate Mitt Romney’s tax disclosures revealed his IRA used
tax havens in the Cayman Islands legally structured by his former firm
Bain Capital to be what is known as unrelated business income positioned
within an entity that evidently blocks a higher tax rate. As a result he
is paying $6.2 million in taxes on $45 million in income for last year
and 2010. There were about $7 million in charitable contributions.

Senate Finance Committee Chair Max Baucus and former ranking
Republican Charles Grassley want to make that tax reduction route
illegal.

Romney has said he pays “all the taxes that are legally required
and not a dollar more.” The tax code provision that allows offshore
low-rate tax structures were intended to be used by institutions such as
pension funds, their sponsors have said.

In a broader context, should Congress ever embark on comprehensive
tax reform, it may will tackle the central distinguishing characteristic
of U.S. expatriate taxation, that it applies everywhere to every
citizen. There are exemptions, among them up to $92,900 for taxpayers
living out of the country almost all of a year, and credits for foreign
taxes paid.

Critics says the U.S. tax regime tends to criminalize the
expatriate by making reporting requirements so difficult and so
all-embracing. However on Capitol Hill there has never been exhibited a
lot of sympathy for people who vote a lot less often than their domestic
brethren. Now that annual budget deficits are in the trillion dollar
range, even if legislative miracles were to happen and fundamental tax
reform enacted some day, that’s not likely to change.

IRS form 8938 is in draft mode and can be easily viewed on the
Internet. It’s just two pages and not complicated. Simply list all your
accounts with account numbers and date it was opened, the currency in
which the assets are denominated, the names of financial institutions
where the accounts are held along with mailing address, the exact value
of the account if over $200,000, any interest in any foreign entities
and, of course, the list of any payments of interest, dividends,
royalties and “other income.” Don’t forget the stamp.

** Market News International Washington Bureau: 202-371-2121 **

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