The Foreign Account Tax Compliance Act (FATCA) imposed a worldwide financial disclosure information regime on every financial institution in the world.
FATCA was passed into law in 2010 on the unsubstantiated claim that each year the U.S. loses an estimated $100 billion in tax revenue due to offshore tax abuse.
When enacted, FATCA was projected to raise some $870 million annually leaving a $99 billion shortfall.
The revenue raised by FATCA wasn't intended to close the tax gap. Instead, its focus was on getting foreign financial institutions to disclose their U.S. account holders.
The revenue received by the U.S. comprises little by way of tax but mostly from the extraordinarily high penalties imposed for failing to file the correct information disclosures.
Compared to the total budget of the United States, the money collected from the total of tax and penalties are reasonably characterized as statistically insignificant.
There are several major problems with FATCA which are widely discussed and debated.
The U.S. Treasury is having significant difficulties in administering an astonishingly complex tax code, hampered by an out of date computer system, undertrained personal, overburdened by responsibilities which include both FATCA and Obamacare, and all while being underfunded.
The proposed border adjustment tax system as part of the proposed tax reform would add exponentially to these problems.
The financial institutions, both in the United States and those around the world, are suffering staggering overhead compliance costs in the billions of dollars with no end in sight.
A new massive and expensive industry have arisen to provide all the FATCA necessary compliance services. The difficulties experienced are exacerbated since effectively none of the compliance expenditures generate any income and become a hindrance to getting customers. For a financial institution, it’s a financial and administrative horror show.
As expected, the FATCA service providers and tax bureaucracies are among its most enthusiastic supporters.
Because of FATCA, U.S. persons are unwelcome as customers not only with financial institutions but other businesses. With some 8 million Americans living abroad, this has resulted into their being trapped in a traumatic situation.
The greatest concern is the complete loss of financial privacy.
FATCA treats everyone holding a financial account anywhere in the world as a U.S. tax evader unless the account holder can prove otherwise.
Think of it this way: For anyone owning a financial account, the Fourth Amendment doesn't exist.
The government no longer needs probable cause or any cause to require the account holder to give to the government every year even the smallest financial details. Under FATCA, privacy is dead.
Failure to inform the government can subject the account holder — and the financial institution — to potential civil or even criminal penalties even if no tax is involved. FATCA is about the government obtaining private financial information on everybody. Tax is merely an afterthought.
While the Internal Revenue continues to cope with the burdens of administering FATCA as best it can, the fate of the law is being questioned by the Congressional Subcommittee on Government Operations.
On April 26, the Subcommittee held a hearing “Reviewing the Unintended Consequences of the Foreign Account Tax Compliance Act” to examine the effects of FATCA on the U.S. and international economy, and potential legislative remedies.
Senator Rand Paul, R-KY, appeared as a witness. He had sued with five expatriates claiming that FATCA constitutes an unconstitutional breach of privacy and an illegal treaty. To give emphasis to his position, Senator Paul has held up the Senate giving consent to any tax treaties.
The Treasury claims that the FATCA Intergovernmental Agreements (IGAs) are not treaties requiring Senate approval. Senator Rand Paul says that they are treaties.
In April, U.S. Rep. Mark Meadows, R-NC, and Sen. Rand Paul, R-KY, proposed House Resolution 2054 and Senate Bill 869, respectively. These bills are directed to repealing FATCA.
The Republican Party Platform in the 2016 federal election put forward the position that the Republicans are for repealing FATCA because of its breach of privacy and unconstitutionality.
The Republican-controlled Congress has yet to act. If nothing else, they are consistent.
If the Republicans decide to fulfill their campaign promises, then it likely will be contained in the coming tax-reform legislation.
But don’t hold your breath.
Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher.
© 2021 Newsmax Finance. All rights reserved.