With the goal of shedding light on what foreign financial reports can tell about offshore holdings and the effect of automatic third-party reporting on tax compliance, a recent working paper illustrates a “steep income gradient of the propensity to own offshore wealth.”
The Foreign Account Tax Compliance Act (FATCA) was passed during the Obama administration to curb tax evasion. “FATCA is part of a global crackdown on concealed offshore wealth,” said Daniel Reck of the University of Maryland—one of the paper’s authors—during a presentation at the IRS/Tax Policy Center (TPC) Joint Research Conference on Tax Administration June 22. “The intent of FATCA is to make it impossible for an American to hide wealth offshore … by implementing third-party information reporting.”
Foreign banks are obligated to report U.S. owned accounts to the IRS, which also extends to foreign financial income and assets. Under FATCA, taxpayers with over $50,000 in foreign assets must file a Form 8393, Statement of Specified Foreign Financial Assets. Foreign financial institutions (FFIs) and non-financial foreign entities are required to disclose information about foreign assets owned by U.S. account holders.
The researchers, a team of two IRS officials and four academics, sifted through data from Forms 8966, FATCA Report, and Schedule K-1s from tax years 2015-2018. The paper concludes that in 2018, nearly $4 trillion was held in foreign accounts by 1.5 million U.S. taxpayers. It details how exponentially more concentrated foreign asset ownership is at the top of the income distribution, “with more than 60% of the individuals in the top 0.01% owning a foreign account and around 30% of all assets in foreign accounts belonging to this group.” The top 0.01% owned 30% of all foreign assets.
About half of the total $4 trillion was held in jurisdictions deemed to be tax havens, “which implies a ratio of tax haven assets to [gross domestic product] of around 10%” that year, “notably higher” than previously estimated in 2007, the researchers found. Switzerland, Luxembourg, and the Cayman Islands were listed as examples of such tax havens.
The paper makes two notable observations contextualizing who controls foreign assets and the implications on transparency and tax compliance with regards to FATCA. “First, the FATCA reports identify partnerships, the preferred organizational form of investment funds, and other pass-through entities as the owners of more than 30% of the foreign assets, including many of the largest accounts in the data.”
“Second, for almost 40% of the foreign assets, the FATCA report does not contain information about the [taxpayer identification number (TIN)] or includes a TIN that does not yield an unambiguous match to an individual or an entity, in which case we cannot confidently link the assets to an individual.”
In leading a discussion on this paper and others in the “Hidden Assets, Hidden Networks” session of the IRS/TPC conference, U.S. Treasury’s Paul Organ said the research provides “exciting new data” and commended the team’s “careful, detailed linking” of foreign accounts to U.S. individuals, especially through the extra onion layers of partnerships.
Organ was particularly interested in what could be gleaned from the unmatched 40%. He suggested that certain aspects from Forms 8966 could potentially help, such as currency codes indicating which foreign accounts are held in U.S. dollars or local currencies. Organ questioned if the matching gaps occur on a report-by-report basis, or if it is more of an issue with reporting habits by FFIs. He added that there should be some consideration given to U.S. citizens living abroad, and that “probably a huge chunk” of the unmatched group could be placed into certain “buckets” using a predictive data model.
The working paper is titled “The Offshore World According to FATCA: New Evidence on the Foreign Wealth of U.S. Households” and was first published March 9, 2023.
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