The Internal Revenue Service is about to get an unprecedented look at bank accounts and investments U.S. citizens hold abroad, through a law that is making it harder to hide assets from the tax collector.
On July 1, the U.S. government will start imposing 30 percent taxes on many overseas payments to financial institutions that don’t share information with the IRS.
That new burden has frustrated overseas banks and U.S. expatriates. It’s also created a new standard of global bank-to-government information sharing designed to throw light on often difficult-to-trace accounts.
No one knows yet how successful the law will be in combating tax evasion. Still, it allows the U.S. to scoop up data from more than 77,000 financial institutions and 80 governments about its citizens’ overseas financial activities.
“I don’t think anything on this scale has ever been tried before,” said John Harrington, a former international tax counsel at the Treasury Department who is now a partner at Dentons in Washington. “The idea that it would go off without a hitch is sort of hard to imagine.”
What led to the 2010 Foreign Account Tax Compliance Act, or Fatca, was the inability of federal tax authorities to obtain clear information about financial accounts that U.S. citizens have outside the country. That’s especially important for the U.S., because unlike many other countries, it taxes citizens on their worldwide income regardless of where they actually live.
“If you had an account outside of the U.S., you were pretty much on your honor to disclose that information,” said Denise Hintzke, the global tax leader for Deloitte Tax LLP’s Fatca practice.
In establishing the law, Congress and President Barack Obama in effect threatened to cut off banks and other companies from easy access to the U.S. market if they didn’t pass along such information. The U.S. was able to leverage its status as a financial center to demand action from governments and banks in other countries.