The Senate Intensifies Its Focus On Offshore Tax Evasion

Offshore tax evasion is weighing heavily on the minds of the Senate Budget Committee these days. Already, the committee has hosted two hearings on offshoring this year. The first, held in January, addressed corporate loopholes. The second, held April 10, addressed tax evasion by both corporations and high-net-worth individuals. In that latter discussion, Chair Sheldon Whitehouse, D-R.I., and ranking member Chuck Grassley, R-Iowa, laid out their differing views on how Congress can combat offshore tax evasion. Whitehouse is largely turning his attention toward the Foreign Account Tax Compliance Act. Grassley thinks the government should rely more heavily on whistleblowers. Both of those topics have recently been addressed in pending legislation and legislative hearings, but it’s unclear whether there is sufficiently strong political will to sustain either conversation.

Looking at FATCA

Whitehouse isn’t the only Democrat looking at FATCA. The most recent legislative call for enhanced FATCA enforcement comes from Sen. Elizabeth Warren, D-Mass., who folded a FATCA-related provision into her Ultra-Millionaire Tax Act.

The measure, introduced by Warren in the Senate and Rep. Pramila Jayapal, D-Wash., in the House, seeks to impose a 2 percent annual tax on the net assets of households and trusts that are worth between $50 million and $1 billion.

The lawmakers want to root out these assets by strengthening disclosure requirements, including FATCA. Section 3(b) of Warren’s bill specifically calls for a FATCA enforcement plan:

The Secretary of the Treasury (or the Secretary’s delegate) shall develop a comprehensive plan for managing efforts to leverage data collected under chapter 4 of the Internal Revenue Code of 1986 in agency compliance efforts. Such plan shall include an evaluation of the extent to which actions being undertaken as of the date of the enactment of this Act for the enforcement of the requirements of such chapter improve voluntary compliance and address noncompliance with such requirements.

Warren has long been an advocate of FATCA. In her 2020 presidential campaign, she praised FATCA as “a big step in the right direction” and vowed to expand on it if elected.

In August 2021 Warren, Whitehouse, and Sen. Bernie Sanders, I-V.T., asked then-IRS Commissioner Chuck Rettig how increased IRS funding might help the government better audit wealthy taxpayers with income hidden in offshore accounts.

Rettig said FATCA reports indicate that many offshore assets are held by partnerships and the wealthiest taxpayers, but the IRS cannot appropriately implement FATCA without increased IT funding.

While Whitehouse wants more FATCA enforcement, Grassley is more circumspect. During the April 10 hearing, he called FATCA an “overly broad sweep approach to offshore tax evasion,” pointing out that Americans abroad have encountered difficulties opening bank accounts because of the law.

And the government’s returns have been difficult to determine. Grassley cited a 2022 Treasury Inspector General for Tax Administration report which found that the IRS, during FATCA’s first 10 years, assessed $14 million in penalties but hasn’t been able to quantify any revenue raised under the law. This is not for lack of trying — the report noted that the IRS had spent $574 million on implementation and enforcement campaigns.

It appears that $574 million wasn’t enough. About a year before TIGTA’s report, Rettig said IT limitations were hobbling the agency’s efforts to parse FATCA-related information and follow up on it. At the time, he said the IRS often had to analyze FATCA reporting information through manual processes.

“Congress enacted FATCA in 2010, but we have yet to be appropriated any significant funding for its implementation,” he said. “This situation is compounded by the fact that when we do detect potential non-compliance or fraudulent behavior through manually generated FATCA reports, we seldom have sufficient funding to pursue the information and ensure proper compliance.”

As the question of FATCA enforcement hangs in the balance, another question lingers as well: Just how much money is being held offshore by U.S. taxpayers? It’s an incredibly complex figure to calculate, and some question whether an offshore bonanza even exists.

“The reality is there are no pots of gold that can be easily harvested off the beaches of far-flung tax havens,” Grassley said.

In a 2021 hearing held by the Senate Finance Subcommittee on Taxation and IRS Oversight, Barry Johnson, the IRS’s then-acting chief research and analytics officer, told lawmakers that U.S. citizens appeared to hold $2 trillion in offshore accounts located in tax havens. That figure was based on a preliminary analysis of 2017 FATCA reporting, and it is double what previous research had found. Overall, Johnson said, the analysis found that U.S. taxpayers were holding $3.7 trillion internationally.

A year later, a group of economists from academia and the IRS released a working paper echoing some of Johnson’s testimony — in 2018 U.S. taxpayers kept nearly $4 trillion in foreign accounts, about half of that amount in tax havens. However, a relatively small number of accounts — just 14 percent — accounted for the tax haven holdings. They also found that over 60 percent of taxpayers in the top 0.01 percent income distribution — about 1.5 million U.S. taxpayers — maintained foreign accounts. Over half were held through a partnership, and the “vast majority” were held in tax havens like Luxembourg, Switzerland, and the Cayman Islands.

Those assets held in tax havens accounted for about 10 percent of GDP; it is a 3-percentage point increase compared to roughly a decade before in 2007. This difference could mean something, or it could not, the researchers said. It also could be because of differences in measurement approaches, or it could indicate that assets in havens actually grew.

The researchers shared several caveats about their findings, warning that they may underestimate or overestimate U.S. households’ true foreign financial assets. They may underestimate foreign holdings because some assets are not included in FATCA reports and some foreign financial institutions may not have identified all U.S. taxpayer accounts. On the other hand, they may overestimate the assets because some assets reported to the IRS are held by U.S. taxpayers who do not live stateside but live abroad. Those households are foreign households, not U.S. ones.

They are a key demographic that must be considered in any potential expansion or revision of FATCA. Much has been written in Tax Notes (and elsewhere) about the plight of accidental Americans or Americans living abroad who have minimal or no-U.S. ties but have struggled with FATCA’s information reporting requirements and other issues. It is a matter that has attracted bipartisan attention. Democrats and Republicans overseas both agree there is a problem, although they seek differing solutions. The group Republicans Overseas — an organization representing Republicans living abroad — thinks FATCA should be repealed. On the other hand, the group Democrats Abroad thinks FATCA should be refined. In a letter to the Senate Budget Committee, Democrats Abroad — the overseas wing of the Democratic Party — told the committee it should tread carefully and adopt a system based on income source and physical residency.

“While FATCA is a well-intentioned tool to reign in offshore tax evasion, Americans abroad have become collateral damage due to the underlying policy of citizenship-based taxation,” the letter said. “We are overwhelmingly ordinary individuals with underwhelming bank account balances, minnows caught in the net intended for the sharks.”

Push to Improve the Whistleblower Program

During the Senate hearing, Stephen Curtis of Cross Border Analytics Inc. called on lawmakers to beef up the IRS’s whistleblower program “as soon as possible.” Grassley and Sen. Ron Wyden, D-Ore., have been calling for improvements for years; the duo cosponsored the Whistleblower Program Improvement Act of 2023, which is pending in the Senate. Grassley sees the whistleblower program as a targeted, reasonable way to collect valuable information about tax evaders. For example, Bradley Birkenfeld — who received the largest-ever IRS whistleblower award in 2012 — blew the whistle on how Swiss bank UBS helped U.S. clients hide their assets in offshore bank accounts, triggering a cascading set of investigations and the creation of an IRS amnesty program.

Overall, encouraging whistleblowers has been good for the public fisc — according to Grassley and Wyden, the government has collected $6 billion through the whistleblower program and more through the IRS’s offshore voluntary disclosure program. The proposed legislation would do six key things, most designed to make it easier and faster for whistleblowers to collect their awards. They include lowering the standard of review applicable to whistleblower award appeals from “abuse of discretion” to “de novo.” Also, there would be a presumption of anonymity for whistleblowers in Tax Court.

“Efforts to disclose the whistleblower’s identity put the individual in jeopardy and deter the willingness of other whistleblowers to come forward. This provision clarifies that the Tax Court should favor granting a whistleblower’s request for anonymity unless there is a heightened societal interest in knowing the whistleblower’s identity,” Grassley said in a release.

The lawmakers note that IRS whistleblower awards aren’t being issued as quickly as they used to be. The proposed legislation would ensure that the IRS determines a whistleblower’s award within a year of collecting all applicable proceeds. If the service fails to do so within a year, interest would accrue on that amount.

But the whistleblower program isn’t just valuable for the data that participants are sharing about specific companies. It’s also a valuable source of information about tax avoidance trends, and the lawmakers want the government to start tracking those broad developments. Under the bill, the IRS Whistleblower Office, in its annual report to Congress, would have to disclose the top 10 tax avoidance schemes shared by whistleblowers.

From there, Congress can use that information to refine its anti-evasion measures, the lawmakers said. The question is whether renewed interest in offshore tax avoidance might help advance the legislation, which was first introduced in 2021 and reintroduced during this session of Congress.