Sweeping rules aimed at stopping tax evasion took effect on Tuesday, ushering in a new system that Obama administration officials say will leave tax cheats with fewer havens overseas.
The Foreign Account Tax Compliance Act, one of President Obama’s initiatives for fighting offshore tax evasion, is arriving after multiple delays, and roughly 18 months later than originally planned.
Ahead of Tuesday’s launch, Obama administration officials were hailing the law as a victory, saying it had become the “global standard” for how to deal with tax dodgers.
The U.S., with the help of the 30 percent tax, has reached agreements with more than 90 countries to obtain information about offshore accounts, a senior Treasury Department official said Monday — including China in recent weeks, and nations like Switzerland and the Cayman Islands, which have long been known for their bank secrecy laws.
The Treasury Department said more than 80,000 foreign financial institutions have said they’d open up about their U.S. accounts, letting them avoid the withholding penalty that would impede their access to the American market.
Hundreds of Russian banks, for instance, have reached an agreement with the U.S., even though the American government has suspended negotiations with Moscow.
“The international support for FATCA is without question,” Robert Stack, Treasury’s deputy assistant secretary for international tax affairs, said in a statement on Tuesday.
“We will continue to work with our international partners in our efforts to crack down on international tax evasion and create a fairer and more transparent global tax system.”
Democrats like Sen. Carl LevinCarl Levin'Nuclear option' for Supreme Court nominees will damage Senate McCain's Supreme Court strategy leads to nuclear Senate The Fed and a return to banking simplicity MORE (Mich.) who want the federal government to be more aggressive about offshore tax evasion cheered the law’s arrival on Tuesday.
But GOP opposition to the measure has only grown since 2010, and repeal is now an official part of the Republican Party platform.
And while Congress passed the crackdown in 2010 with little fanfare, banking and business interests have loudly complained about the burdens of implementing the law. Groups representing American citizens living abroad say expatriates will have a particularly difficult time under the rules.
Banking officials say the industry has struggled through hundreds upon hundreds of pages of regulations from the government, which, at times, contradict the agreements the administration has reached with other countries. Individual taxpayers would face a burden, too, wading through forms that could take more than 45 hours to complete, in some cases.
“There are enormous costs to this sort of dragnet approach to offshore compliance just for U.S. citizens,” one industry official said.
“People who have practiced in this area in the U.S. are having a hard time understanding and keeping up with the current rules. And then, consider that you’re applying this all over the world.”
Even with the number of agreements that the U.S. has reached to implement the law, experts also say there’s still questions about how effective it would be.
“I think the bottom line is you never know for sure,” said Bob Williams of the Urban-Brookings Tax Policy Center. “How do you ever know for sure that people are abiding by the law when you’re talking about things that have historically been secret?”
For instance, while the withholding penalty goes into effect on Tuesday, foreign banks don’t have to turn over information on Americans’ accounts until March 2015. The IRS has also said banks that make a good-faith effort to comply with the law in 2014 and 2015 won’t be punished.
“We won’t know how well the reporting process is going for several years,” said Denise Hintzke, who heads Deloitte's tax efforts on the law. But she added that, even now, there has been “a rise in financial transparency and information exchange throughout the globe.”
Williams said there’s no doubt the new law would bring back extra revenue to the U.S. government, given how secret some of the offshore accounts had been.
But he also predicted some of its effects could be tough to track, such as how many Americans with foreign accounts just decided to bank domestically.
“To the extent you can’t hide your accounts anymore, you might as well just go to the bank down the street,” Williams said. “People always chase returns, but there won’t be the same incentives to find anymore.”
John Koskinen, the IRS commissioner, has said implementing the offshore tax law would be a top priority, even as he has battled the agency’s Tea Party controversy and repeatedly said the IRS is hindered by a lean budget.
“Whatever else we are going to do, we are going to implement the non-discretionary legislative mandates we have been given: the Affordable Care Act [ACA] and FATCA,” Koskinen said in an April speech.
But Williams said the sort of glitches that came with the rollout of ObamaCare — a broader task that involved several government agencies — shouldn’t be expected with the tax evasion law.
“This is not like the ACA where you’re starting from ground zero,” Williams said.
The banking industry official added that the law’s biggest impact might come from the signal it sends to foreign governments about how seriously the Obama administration takes offshore tax evasion.
The law is going into effect six weeks after the Justice Department announced that the Swiss banking power Credit Suisse had pleaded guilty to helping Americans avoid their taxes.
“Today marks a big win for hard-working, honest Americans who are sick and tired of picking up the tab for tax dodgers hiding money offshore,” Levin said in a statement on Tuesday.