By the time lawmakers and taxpayers have figured out whether the Foreign Account Tax Compliance Act was worth the trouble, it might be too late to undo any damage, National Taxpayer Advocate Nina Olson said October 7.
"However much I've tried to figure out what on earth [FATCA] means, and the consequences of it, I have no idea," Olson told a luncheon audience at the Securities Industry and Financial Markets Association FATCA Policy Symposium in Washington.
"This is a piece of legislation that is so big and so far-reaching, and [has] so many different moving pieces, and is rolling out in an incremental fashion . . . that you really won't be able to know what its consequences are, intended or otherwise," Olson said. "I don't think we'll know that for years. And by that point we'll actually be a little too late to go, 'Oops, my bad, we shouldn't have done this,' and then try to unwind it."
One of the Taxpayer Advocate Service's jobs is to help determine whether legislation related to tax administration is achieving its intended results, or whether unintended consequences may have overwhelmed Congress's original intent, Olson said. "There's this perceived problem that this whole piece of legislation is trying to correct," she said.
The raw numbers so far tell a confusing tale, Olson said. In 2011, 170,000 taxpayers filed Form 8938, "Statement of Specified Foreign Financial Assets"; 187,000 filed Form 8938 in 2012, she said. Forty-one percent of 2011 filers also filed a foreign bank account report, she added. However, in 2012 only 21 percent of Form 8938 filers had a foreign address, Olson noted.
"I really don't know what people's assumptions were when they enacted this requirement," Olson said. "Did we expect to get 7 million? Did we expect to get 10 million? Did we expect to get 500,000? Is this a good result? Is this a bad result?" Just one-half of 1 percent of Form 8938 filers had a balance due account after getting notices, compared with 4 percent for the general taxpayer population, she noted.
"I keep asking in all of these questions -- are we burdening the compliant taxpayer?" Olson said. "And the people that we're really trying to uncover are not participating in this process, and so they're not feeling any burden whatsoever, because they're not paying the extra cost."
Olson also questioned the penalty regime underlying FATCA. The law provides for a $10,000 penalty for failing to disclose a foreign bank account, and up to $50,000 for failing to disclose after IRS notification, she said. For someone with a $51,000 unreported foreign bank account, that could be a $60,000 penalty.
IRS policy states that penalties should be objectively proportioned to the offense, Olson said. "Putting a $60,000 penalty on someone for failing to report a $51,000 account does not seem to me like a penalty that is proportioned objectively to the offense," she said.
Olson observed that a similar disproportionality emerged in recent IRS offshore voluntary disclosure initiatives, when the highest proportionate fines fell on the smallest accounts. In 2009 the median unreported balance for the smallest accounts was $44,000, she said. The lowest-balance account holders paid an FBAR penalty almost six times the actual tax due, she said. Yet the top 10 percent, with a median unreported balance of $7 million, paid a penalty roughly half the amount of tax owed, she said.
"Again, that comes back to that proportionality issue," Olson said. "So you're really looking at this and thinking, why are we doing this to folks? Why are we tormenting them in this way?"
Olson noted the difficulties the IRS will face, under its pinched budget circumstances, with the 30 percent withholding requirement for recalcitrant account holders and for electing or nonparticipating foreign financial institutions.
The same information reporting and matching challenges the IRS faces with tens of millions of individual income tax payers risks either snagging some legitimate taxpayers whose paperwork may not be flawless, or sending out fraudulent refunds to undeserving recipients, Olson said.
There is good news for some, Olson said. After foreign banks expressed reluctance to open accounts for some U.S. taxpayers overseas, some enterprising businesses began offering insurance to protect against incomplete FATCA disclosures, she said.
"So here we now have created a whole new industry for a risk we have manufactured ourselves," Olson said.