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Worldwide Tax Daily Quotes Mark Matthews on FATCA: Swatting Flies With Atom Bombs
Caplin & Drysdale

Worldwide Tax Daily Quotes Mark Matthews on FATCA: Swatting Flies With Atom Bombs

Date: 4/2/2015

Worldwide Tax Daily quoted Mark E. Matthews concerning the offshore tax evasion problem and the staggering costs of the U.S. Foreign Account Tax Compliance Act (FATCA). For the complete article, please visit Worldwide Tax Daily's website (subscription required).

Excerpt taken from the article "FATCA: Swatting Flies With Atom Bombs" by Amanda Athanasiou for Worldwide Tax Daily.

With FATCA, "the U.S. forced the world to the table in classic, American, our-way-or-the-highway style -- it was perceived as a stunningly arrogant play," said Mark Matthews of Caplin & Drysdale Chtd. "But it could have taken years to accomplish the same level of tax information sharing via traditional international consensus-building approaches," said Matthews, a former IRS deputy commissioner for services and enforcement.

While most of the cost of FATCA is being borne abroad, "the tax-deductible costs of the program to U.S. banks alone may exceed the revenue return," Matthews added.

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Estimating the 'Pot of Gold'

But based on the numbers from the IRS's offshore voluntary disclosure program thus far, Matthews said, both of those projections may be too high. "FATCA will definitely increase foreign reporting of foreign assets, but I think people are seriously overestimating the pot of gold," Matthews said. "I spent most of my time on the government side, and I still feel that way."

OVDP and its predecessors have yielded over 45,000 voluntary disclosures and approximately $6.5 billion in collections, according to a June 2014 IRS fact sheet. But much of that revenue comprises penalties and interest, and OVDP participants were filing as many as six to eight years of back tax returns, Matthews said. "It would be a generous estimate to say Swiss-based tax evasion is generating about a half a billion dollars a year in revenue as measured roughly by the results of the offshore program to date," he said. And that's after five or six years of the U.S. government "pounding the Swiss banks as hard as humanly possible," he

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Still, "compliance hasn't skyrocketed the way you would expect it to if the offshore tax problem was as large as it's been portrayed," Matthews said. Of the FBARs filed in recent years, "probably 90 plus percent were filed by domestic filers," he said. That leaves a significant gap between FBAR numbers and the State Department's 2013 estimate that 6.8 million U.S. citizens live abroad.

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Matthews, who called OVDP the most successful tax evasion enforcement program in history, agreed that "a lot of these people are not the Al Capones that the IRS is making them out to be." If FATCA does generate a windfall of money, "I'm not sure that's because it's catching mostly criminals," he said.

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The Cost of Ending Bank Secrecy

FATCA has "turned on its head how popular it is to be an American," Matthews said. "When clients who have lived abroad for years come in, concerned about whether they have an obligation under FATCA, they sometimes react to the suggestion that their kids might be American the way one might react to a horrible medical diagnosis," he said.

"How is FATCA going to work in a non-English-speaking, developing country where a bank clerk makes $30 per month trying to digest 500 pages in English to determine whether entities are 10 percent or more owned by U.S. people?" Matthews asked. "I personally think it's ludicrous."

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Misallocation of Effort

According to the IRS's tax gap map   for 2006, underreporting of individual business income was much larger in scale than was the underreporting, underpayment, or nonfiling of any other category for which data was included in the study, at $122 billion. That suggests that FATCA's focus on offshore accounts is a "misallocation of effort," Matthews said.

"If you look at tax compliance as a dike and there are little holes in it and you're trying to patch those holes, the gusher is small business taxpayers," Matthews said. But there's never been a hearing on small business tax evasion, he said, adding that for political reasons, small business owners are unlikely to become a target.

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