Swept up in a tide of populist fury after the near collapse of the financial sector in 2008, many Americans were only too happy to see Congress pass new enforcement legislation to go after wealthy Americans who were hiding assets in overseas accounts. The new law, known as FATCA (the Foreign Account Tax Compliance Act) was passed in 2010, and gave the IRS a broad new mandate to enforce foreign account reporting requirements, as well as the powers needed to accomplish that goal. As it turns out, however, one byproduct of that new zeal for preventing the wealthy from hiding their assets has been unintentional harm inflicted on middle income Americans.
How that happened should serve as a lesson for lawmakers whenever they attempt to craft one-size-fits-all legislative solutions such as FATCA. The goal, after all, was to respond to revelations that banking giants such as the Union Bank of Switzerland were actively working with U.S. account holders to conceal those customers’ assets from the American government. According to reports, the bank assisted seventeen thousand wealthy Americans as those customers sought to hide roughly $20 billion in assets. When FATCA was passed, the intent was to provide the IRS with the powers it needed to force other foreign banking institutions to assist the U.S. in its efforts to discover other large hidden accounts and recover any taxes that might be owed.
By itself, the passage of FATCA seemed a logical solution to an obvious problem. After all, the requirement to file a Report of Foreign Bank and Financial Accounts, more commonly known as the FBAR, has been in place since 1970. The fact that so many foreign account holders either didn’t understand the requirement or simply chose to ignore it was probably something that deserved to be addressed with new legislation.
Moreover, the financial benefits to the country have been significant. Since 2010, more than fifty thousand people have voluntarily come forward and settled their outstanding tax obligations. That has resulted in billions of dollars of recovered tax money that would have otherwise remained secreted away in offshore accounts. Those results are the most obvious examples of the type of positive benefits FACTA has yielded.
At the same time, however, there have been some unforeseen casualties. Thought the law was originally crafted to go after large account holders, it turns out that it has impacted many Americans whose account holdings are far less impressive. In fact, a large number of those who have been impacted most severely are people who can only be considered middle class. They include retirees and others with limited resources.
To make matters worse, one IRS ombudsman has noted that the average small account holder has been forced to pay almost six times the amount of their owed back taxes. Wealthier account holders – the very people this new aggressive strategy was supposedly intended to target – have paid on average only three times what they actually owed.
That disparity in a program that now seems to have a disproportionately less harmful impact on the very group it was designed to punish strikes many people as grossly unfair. It’s little wonder that many are hoping that Congress will correct this inequity when it next addresses this issue.