Today’s blog post discusses the overall and international tax gaps, takes a look at the offshore world and how enforcement of the tax laws is faring (hint – not so good). It summarizes some important testimony given on May 11, 2021 by the Honorable J. Russell George, Treasury Inspector General for Tax Administration before the Committee on Finance, Subcommittee on Taxation and IRS Oversight in US Senate. (HEARING BEFORE THE COMMITTEE ON FINANCE SUBCOMMITTEE ON TAXATION AND IRS OVERSIGHT UNITED STATES SENATE “Closing the Tax Gap: Lost Revenue from Non-Compliance and the Role of Offshore Tax Evasion”).
The testimony I found most enlightening involved discussion of the “international” tax gap and lack of enforcement of the “Foreign Account Tax Compliance Act” (the infamous “FATCA”). Here is some background:
International Tax Gap
The “international” tax gap is a significant component of the overall tax gap. What is the “international” tax gap? First, let’s understand the total “tax gap.” This is the difference between the amount of tax that taxpayers should pay and the amount that is paid voluntarily and on time. When an international connection of some sort hinders the Internal Revenue Service (IRS) in its enforcement of the tax laws, the difference in amounts between the taxes collected and the taxes that should have been collected (predominantly from individual as opposed to corporate taxpayers) is referred to as the “international” tax gap.
Neither IRS-estimates, nor non-IRS estimates of the international tax gap are reliable. This is hardly surprising since actions typically involve illegal tax evasion in cross-border activities. Taxes lost due to unreported foreign financial accounts is an example of an activity contributing to the international tax gap.
Senator Sheldon Whitehouse of Rhode Island, the Subcommittee’s chairperson, told NY Times DealBook: “The tax gap is a massive problem, especially the part driven by ultrarich individuals and corporations stashing income overseas,” That gap “could be as much as a trillion dollars …That’s trillion with a ‘T.’” Former IRS Commissioner Charles Rossotti has stated that the tax gap for 2019 was US$574 billion. I know that politicians are wont to use hyperbole, but that’s a Thumping (with a capital “T”) difference! Current IRS Commissioner Charles Rettig, however, believes it would not be outlandish that the number could be a trillion or more when one considers unreported crypto, foreign income and abuses of pass-throughs.
There seems to be quite a bit of confusion on this tax gap number. I am seeing it listed as US$1.4 trillion. This number comes from a plan formulated by former IRS Commissioner Rossotti and several colleagues to shrink the tax gap by 19% over 10 years. Their plan would raise an estimated $1.4 trillion over ten years in what would otherwise be uncollected tax revenue. So, one could say if nothing is done, the tax gap will reach US$1.4 trillion in 10 years’ time. You can read more on this ambitious and very sensible plan here and here .
And for those with an interest, the IRS has a brand new web page titled “Impacting the Tax Gap” here.
It’s hard to fathom a trillion dollars – but here is some help from USA Today: “For starters, you can think of it as a million million. For $1 million you could buy a very nice one bedroom apartment in San Francisco. With $1 trillion, you could buy a very nice apartment for everybody in the city (San Francisco’s population is close to a million)” Here’s another one: “Go back a billion seconds and you’d be in 1987. Go back a trillion seconds and you’d be around 30,000 B.C. ”
FATCA: Toothless and Useless to Date?
In this critical time when the United States is facing significant budget deficits that are increasing every moment as the result of COVID-19 pandemic, increasing tax revenues is high on the political agenda. Raising revenue by narrowing the tax gap is of course, part of the solution, and to this end we are seeing proposals to increase the enforcement capabilities of the IRS. FATCA, enacted 11 years ago, was aimed at helping to narrow and somewhat plug the international tax gap.
The testimony this month of the Honorable J. Russell George, Treasury Inspector General for Tax Administration before the Committee on Finance, Subcommittee on Taxation and IRS Oversight, painted a rather pained picture of FATCA enforcement. To date, FATCA is not living up to the hype that it would help solve the international tax gap. The IRS is not doing enough to rein in tax noncompliance overseas and its efforts to enforce FATCA are apparently failing miserably. The failure is due in large part because the Department of the Treasury and the IRS have been delaying the requirement that foreign financial institutions (FFI) obtain SSNs from US clients opening and maintaining overseas financial accounts. Without the SSNs the IRS cannot match information reported on the taxpayer’s return with information provided by the foreign financial institution to the IRS. Without this matching capability, FATCA is a toothless serpent. According to the Treasury Inspector General mandating provision of the SSNs is “low-hanging fruit”.
What is the reason for this delay? No answer is given in the testimony, but the answer may, in part, be due to the fact that it is very difficult for some US citizens to provide SSNs to their FFIs. Some US citizens simply do not have a SSN and are facing extreme difficulty obtaining it from abroad. While many of these individuals may have been born in the USA, they typically left the USA as infants or young children and never obtained an SSN. This is most troublesome for individuals born in the US prior to 1990 who left at a young age to live in a foreign country. Prior to 1990 US states did not routinely issue SSNs along with the US birth certificate. Getting a SSN from abroad is a nightmare especially if the first-time applicant is over the age of 12. It requires an in-person visit to the Social Security Administration, which is managed through the Federal Benefits Units (FBUs) at US Embassies and Consulates. FBUs are not in place in every US Embassy or Consulate and so, travel is often required by the applicant. (Good luck with that and with COVID-19 restrictions on Consulate and Embassy services!).
Surely though, this cannot be the complete answer! I would like to understand the reasons for the delay in mandating provision of the SSNs, but have not found it. If anyone has further information, please share it with me by email firstname.lastname@example.org
Have a Listen / Read Some Testimony
You can hear the excellent and forthright testimony of the Treasury Inspector General discussing this issue for a few minutes here at 1:51:16
The written Testimony of Mr. George is here: TIGTA Testimony SFC Tax Gap and IRS Oversight FINAL 05-09-2021 and the relevant portion is copied verbatim below (underscoring mine):
Improving International Tax Compliance
The IRS has not developed a reliable estimate of the international tax gap. The Tax Gap is estimated using statistics from the IRS’s National Research Program data that does not measure international noncompliance. Non-IRS estimates of the international tax gap vary widely (from $40 billion to $123 billion annually). In 2008, the then-Commissioner of Internal Revenue indicated that the IRS had not measured the international tax gap using other methodologies and did not have an estimate for the number. Complexity and change in the international tax environment require that the IRS collaborate with tax administrations of foreign countries to enforce compliance. International agreements and tax law changes are important, but the Department of the Treasury and the IRS should follow through to ensure that these efforts achieve their intended results.
For example, TIGTA reported in 2018 that after eight years and spending at least $380 million on IRS systems and efforts to establish international agreements across the globe, the IRS had taken virtually no compliance actions to meaningfully enforce the Foreign Account Tax Compliance Act (FATCA). FATCA was designed to establish reporting requirements for U.S. citizens with foreign accounts, with significant penalties if foreign accounts were not reported. It was estimated that revenue from FATCA would be $8.7 billion from FYs 2010 to 2020. While initial enforcement-related complications involved data reliability issues, more recent problems are related to the fact that the Department of the Treasury and the IRS have delayed the requirement for Foreign Financial Intermediaries (FFI) to require that United States citizens provide Social Security Numbers when establishing accounts and the FFIs to provide that information to the United States so that the IRS can match compliance information it has with information that the FFIs have.
Posted May 20, 2021
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