Tax Analysts Blog

Litigating FATCA: Rand Paul and Financial Privacy

Posted on Sep 15, 2015

It’s not every day that a U.S. senator, let alone a presidential candidate, sues the government to suspend the enforcement of a federal tax law. Yet that is exactly what Sen. Rand Paul of Kentucky is doing. He is one of seven plaintiffs challenging the constitutionality of the Foreign Account Tax Compliance Act. The lawsuit, Crawford v. United States, is currently before the U.S. District Court for the Southern District of Ohio. For good measure, the plaintiffs are also challenging the legitimacy of the foreign bank account reporting regime, as administered by the government’s Financial Crimes Enforcement Network. Although Tax Notes has previously reported on the case, the details are too juicy not to discuss further.

We already know that Paul is no fan of taxpayer information exchange. Since joining the Senate, he has single-handedly prevented all pending U.S. tax treaties from being ratified. Tax treaties are popular with the business community because they significantly reduce withholding rates and promote cross-border investment. Paul’s opposition to ratification appears limited to article 26, which concerns exchange of taxpayer information between contracting states. Although I consider his treaty freeze misguided, I suppose he deserves credit for consistency.

Treaty-based information exchange isn’t very useful in efforts to detect offshore tax evasion. The transfer of information is upon request. That means the tax authorities in Country X must identify, with some specificity, the taxpayer about whom they are seeking information from Country Y. Those safeguards reduce opportunities for fishing expeditions by tax authorities. Note that the U.S.-Switzerland treaty did absolutely nothing to prevent the rampant tax evasion witnessed in the UBS affair. (Nor did the treaty dissuade the roughly 35 other Swiss banks that have signed non-prosecution agreements with the DOJ admitting they helped U.S. account holders evade taxes.)

If Paul finds tax treaties distasteful, he must be apoplectic about FATCA.

FATCA is like article 26 on steroids. It takes exchange of information to a whole new and unprecedented level. Under FATCA, the transfer of taxpayer information is accomplished programmatically. Foreign banks must share all the relevant account data they possess on U.S. account holders, or face onerous withholding measures. The IRS need not single out particular persons of interest or state the basis for its suspicion. The bank data automatically shows up on the IRS network, in bulk, courtesy of foreign banks or governments transmitting it to us. It’s a tax dodger’s worst nightmare. For this reason, many observers view FATCA as the beginning of the end of bank secrecy.

So what about this lawsuit? What legal theory supports Paul and the other litigants' argument for stopping FATCA and FBAR in their tracks?

The complaint extensively criticizes the four years and $8 billion spent by the global financial sector in making its internal computer systems FATCA-compliant. The Joint Committee on Taxation estimates that FATCA will generate only $8.7 billion in additional tax revenues over a 10-year period. Looking at these costs and benefits, serious questions can be asked about whether FATCA delivers adequate bang for the buck. That’s legitimate. But it’s an economic objection, not a legal one.

The complaint correctly notes that U.S. citizens living abroad have encountered difficulties opening or maintaining foreign bank accounts. Some foreign banks prefer to turn away prospective American clients rather than comply with FATCA. The law has also caused problems for individuals with dual citizenship, or couples in which only one spouse is a U.S. citizen. And the complaint reminds us that the aggrieved people are “overwhelmingly middle-class Americans, not high income individuals.”

These are perfectly valid observations. But so what? No doubt FATCA is hugely burdensome. That problem is widely recognized. If inconvenience were actionable, FATCA might be the worst tax law ever. But where is the constitutional infirmity?

Perhaps the best articulation of the plaintiffs’ legal argument is as follows:

FATCA eschews the privacy rights enshrined in the Bill of Rights in favor of efficiency and compliance by requiring institutions to report citizens’ account information to the IRS even when the IRS has no reason to suspect that a particular taxpayer is violating the tax law.

In other words, the argument is that FATCA violates individual fundamental privacy rights by requiring foreign banks to collect and share information about income. A similar claim is made against FBARs and FinCEN. The government insists that no such privacy right exists.

In Paul’s view, we have a constitutionally protected right to be free from third-party reporting on any foreign bank accounts. Then how does one explain the parallel reporting requirements that domestic banks are already subject to? How to justify Form 1099? Why should it matter whether the bank account in question is in Basel or Boston?

And why stop at bank reporting? What about wage reporting? Do employers violate financial privacy rights by reporting wage earnings to the IRS? Income is income; why should information about earned income, constitutionally speaking, be treated any differently from information about investment income?

If this theory of financial privacy holds water it’s hard to justify any type of third-party income reporting -- which would be hugely problematic for our country's tax system. Take away reporting and you’re left with taxation on the honor system. Maybe that’s how Paul prefers it. Ironically, Paul’s basis for standing in this lawsuit is rather unique. Nowhere in the complaint is it alleged that he maintains a foreign bank account -- unlike the other six plaintiffs. Rather, he claims “irreparable harm” because he was unable to vote against any of the intergovernmental agreements that Treasury has signed with foreign governments. That may sound silly. But could Paul be on to something?

Remember: FATCA is not self-enforcing. It’s best viewed as a network of bilateral relationships, each requiring a formal IGA to give it effect. To date, the United States has signed about 115 IGAs. As a practical matter, no IGA means no enforcement mechanism for FATCA.

Unlike tax treaties, IGAs do not require ratification by the Senate Foreign Relations Committee. That means Paul is unable to place a procedural freeze on IGAs the same way he’s put a freeze on tax treaties. That pesky little detail has proved vital to the rise of FATCA and the global spread of similar information exchange mechanisms, such as the OECD’s common reporting standard, which can be thought of as FATCA for the rest of the known universe.

If the lawsuit survives the government’s motion for summary judgment -- which remains an open question -- one fascinating issue will be the odd-duck status of these IGAs. In many ways, they seem to resemble taxpayer information exchange agreements, which also don’t require Senate ratification on the grounds that they are manifestations of the executive branch’s ability to conduct foreign policy. In practice, however, TIEAs and IGAs aren’t so different from article 26 of your average tax treaty. Yet the latter requires ratification by the Senate while the former do not.

If nothing else, I’m hoping the complaint serves to clarify the unique status enjoyed by IGAs – instruments that didn’t exist until a few years ago.

Read Comments (8)

American OverseasSep 15, 2015

It is important to note that these IGAs (Inter-Governmental Agreements) were
NOT "negotiated" with countries! They were FORCED on countries with the threat
of a 30 percent withholding penalty should they not comply! This is a CRITICAL
point to make!

Tim SmythSep 15, 2015


As someone who has been an unofficial advisor to both the Paul litigation
related to FATCA and Vancouver, BC FATCA litigation there are a few comments I
would like to make. First the reporting under FATCA is much more broader and
invasive that traditional 1099 reporting. 1099 reporting does not for example
require account balances or interest less than $25 to reported. Additionally it
does not attempt to "look through" beneficial ownership(something very
difficult to do in the US domestic legal environment. So a bank in Basel is
actually subject to a much greater degree of reporting than a bank in Boston
under the FATCA legislation. Now perhaps a bank in Boston SHOULD be subject to
the same FATCA level reporting as a bank in Basel for both its domestic US and
foreign customers. However, did NOT give the IRS this authority under FATCA and
to date IRS/Treasury doesn't believe they have the authority to mandate this
under the code.

Second TIEA's themselves are somewhat suspect under US law. TIEA's were
originally authorized be Congress to be entered into with Caribbean
countries(technically Caribbean Basin Initiative) in return for US corporate
being able to deduct travel and convention expenses. While TIEA's were later
adopted by the OECD in the late 1990s it was not until quite recently that
Treasury entered into many of them outside of the traditional Caribbean
countries authorized by Congress.

Thirdly most foreign banks and their US accountholders are subject to double
reporting i.e. a Canadian bank must report under FATCA but also must bank
traditional Canadian T-Slip reports(akin to US 1099) to Revenue Canada.

Now does any of this make FATCA legal or illegal. At this point no one knows
including myself. As you note the IRS has long had very broad information
gathering powers. However, FATCA is a very new and untested extension of those.

For the record I am also of the belief that the account balance reporting
requirement(instead of 1099) is not 100% the fault of the IRS. I believe other
factors did partially did led to this outcome including non tax law enforcement
and Non US government. The fact that the account balance reporting for so
quickly picked up the EU and OECD despite the fact it is one of the worst
legally and intellectually thought out parts of FATCA is very telling. Having
said that on another note perhaps this is good time to take the IRS out of
doing anything but tax administration(i.e. anti money laundering, white collar
financial criminal LE etc.)

Laura WilsonSep 15, 2015

1. The USG needs to discern the difference between US residents off-shoring
funds for tax evasion purposes and US deemed citizens living abroad with LOCAL
bank accounts. They are NOT off-shore to them, they are not tax cheats.

The US needs to join the remainder of the world and tax in a moral just fashion
based on residency. Taxation based on citizenship cannot be defended on any

2. You keep speaking of information exchange. No nation should provide the US
with one modicum of data until there is a simultaneous exchange. To date the
US has NOTHING in place to provide reciprocal information.

If indeed the US does begin collecting data for exchange there must be a common
denominator for all participants. Other nations are only concerned about
their residents funds, not their citizens living in the US. To be fair the US
must ask the same. If any US bank fails to report an account they must be
penalized in equal fashion to the penalties imposed by the US.

The US has a choice: It can either play fair or be looked upon as an
extortionist bully. It can conform to international norms or remain an outlier
thus rendering its self imposed status as "exceptional" and "the guiding light"

Hopefully other nations will join together and stop this unmitigated abuse from
the US and protect their citizens.

Made My Own ChoiceSep 16, 2015

"The US has a choice: It can either play fair or be looked upon as an
extortionist bully."

This US has clearly made that choice already and has no intention of changing

edmund dantesSep 16, 2015

Just one more example of weaponizing the IRS, to gain data that will be used
against political opponents.

JonRoeSep 16, 2015

There is a critical difference between FATCA reporting and regular 1099 or W2
with 1099 or W2 reporting a bank or an employer reports taxable income to the
IRS. With FATCA, the bank reports details about their customers financial
assets including account balances and all transactions on the account.
FATCA reporting is very much the equivalent of banks sending a copy of their
customers' monthly account statements to the IRS. This would not fly
Unlike the 1099/W2, the information reported by FATCA is not relevant to
establishing the tax owed, it is more akin to the NSA getting the details of
your phone calls from your telco company.

FredSep 16, 2015

"As a practical matter, no IGA means no enforcement mechanism for FATCA. " Not
so, I believe: FATCA calls for an enforcement mechanism in the form of a 30%
withholding of certain funds transfered from the US to a foreign bank if that
bank does not comply with FATCA, i.e. report its US customers directly to the
IRS. Banks who refuse are shut out of the international banking system, they
can no longer transfer anything. Death sentence. Since this is very
threatening and burdensome, the US, as any bully would, has offered to sign
IGAs thru which countries can have banks give them the info, and then the
foreign government transfers the info to the US. This protects the banks for
the withholding threat. Any agreement signed with a gun to your head or a
threat of bankruptcy is not a sincere agreement. The US is indeed playing the
extortionist bully here. It's an offer one cannot refuse. No wonder every
country signed on. One could fantasize, however, on the notion that no country
would sign on; in that case the US would indeed be hardpressed to truly
withhold 30% of funds transfered elsewhere, because that would invite
retaliation. Also note that signing countries love the fact that this opens
the door to exchange of information, and they even get the (empty) promise of
US help in finding their own citizens' accounts in the US.

FlintstoneDec 13, 2015

I, like Albert Einstein, don't understand tax laws very well. But I understand
goofy and farfetched arguments. For example, a stranger I talked to in a bar,
came up with the following argument: "That Paul Rand is arguing over privacy is
ridiculous. Isn't it obvious that this FATCA law is a law made out of
lawlessness? For one thing it's unfair, draconian, goes against any concept of
"equal justice for all", and to top it of, it is ruining a whole framework of
international laws and treaties, because it is unilaterally breaking tax
treaties that were agreed on before, on what used to be a more level playing
field. If I were Paul Rand, I'd point out that FATCA takes money by unfair
means, which overall leaves the IGA signers in a worse economic condition
(because less money in banks means fewer loans and thus fewer jobs for IGA
signers). And then, as the final insult, FATCA has or will have the
(un)intended side effect of scaring all the "evil untaxed funds" into the fine
non-IGA signer countries, such as e.g. Russia, Iran, Iraq, Pakistan, China,
Afghanistan, Yemen, Syria, etc. All of those countries are not exactly
"friends of the US". Scaring that money into these and similar countries will
indeed have the effect of "helping their economies, creating jobs there, etc."
So, without further ado, FATCA can be considered as a scheme to provide
"material aid and comfort to the enemy", which is also known as treason. So,
Paul Rand should
sue the US congress, Senate, and Administration for treason, to give this a
little more bite! Don't you think?"
To this I said: "A great train of thought you got there, but I don't know
whether you'd be laughed into or out of court. Cheers!

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