U.S. tax authorities are taking the unusual step of warning foreign financial institutions that fraud artists posing as IRS agents are trying to steal account information.
These scams, which have targeted banks in multiple countries, mark another unintended consequence of a sweeping U.S. tax crackdown.
And that’s the problem with “sweeping” laws.
Their impact is inevitably more far-reaching than lawmakers imagine.
They snare the unwitting, and inflict often heavy collateral damage.
The U.S. Foreign Account Tax Compliance Act (FATCA), which came into force in July, is aimed at finding unreported income by taking a peek at virtually every account held by U.S. citizens, anywhere in the world.
It’s like dragging a massive net along the ocean floor to catch a handful of shrimp.
Depending on the country, foreign financial institutions will now have to collect account information and remit it either directly to the U.S. Internal Revenue Service or to local tax authorities.
In Canada’s case, the Canada Revenue Agency will gather this information and then share it with the IRS, under an agreement reached between the two countries earlier this year.
Fraud isn’t the law’s only unintended consequence. FATCA has also spawned a booming business for cross-border accountants in Canada, which is home to hundreds of thousands of U.S. citizens. Most Americans living here owe no U.S. taxes because Canadian taxes are generally higher. Many, however, have never filed or stopped filing years ago, and now risk being exposed by FATCA’s net.
The threat is forcing many Americans out of the shadows and into the offices of accountants licensed to do U.S. taxes. With demand brisk and supply of experts limited, some individuals report being charged as much as $4,000 a year to do relatively straightforward U.S. taxes – filings that would typically cost less than $1,000 in the United States. An individual who hasn’t filed for years can easily face tens of thousands of dollars in accounting fees to come clean, even if they owe no U.S. taxes.
Given that roughly 7 million Americans live outside the United States, FATCA is an accountant’s dream.
FATCA is also proving to be extremely costly to most financial institutions. In a recent speech, the head of a U.S. umbrella organization for banks, brokers and asset managers said his industry is facing compliance costs that could eclipse the IRS’s $11-billion (U.S.) annual budget.
“It would not surprise me if the total cost of FATCA will be in the tens of billions,” Ken Bentsen, president of the Securities Industry and Financial Markets Association, said.
It is estimated that offshore tax evasion by individuals is costing the U.S. Treasury as much $70-billion a year. But the government acknowledges that FATCA will bring in less than $1-billion a year over the next decade – a tiny fraction of what banks and individuals are spending to stay onside.
Canada’s five largest banks alone have spent $750-million (Canadian) on initial compliance costs, including training staff and updating technology, according to Dow Jones.
For some small Canadian credit unions, FATCA is a potential market opportunity. Vancouver-based Vancity, for example, makes a point of noting on its website that it “only needs to collect FATCA information and report on member accounts held by non-Canadian residents.”
Like many small credit unions, Vancity is registered as a “local client base” institution because it has no operations in the United States.
“By registering as a local client base institution, we believe we have significantly reduced the impact of FATCA on the majority of our members,” the credit union said.
Inadvertent or not, that makes Vancity an attractive banking option for dual U.S.-Canadian citizens living in Canada, who don’t want their account information automatically shared with the IRS.
If U.S. lawmakers had anticipated FATCA’s far-reaching global fallout, they might have thought twice before voting for it.
IRS imposter scams are just a small line-item on a massive and growing bill, now being paid by people and institutions around the world.
And the vast majority of them were never the problem.Report Typo/Error