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Stop me if you’ve heard this one: Controversial legislation that imposes expensive and intrusive mandates on U.S. citizens and businesses, signed by President Obama in 2010, is bogged down by website difficulties and delayed provisions, leading opponents to call for the misbegotten law’s repeal.
If you were thinking “Obamacare,” guess again: that’s also a fair description of the trajectory of the Foreign Account Tax Compliance Act (FATCA), which has emerged as a hot button issue for many American citizens living and working overseas. And as FATCA faces mounting implementation difficulties, it’s becoming clear that the much reviled tax law is simply not ready for prime time.
FATCA was ostensibly enacted to target foreign tax evasion by requiring foreign financial institutions to share information on U.S. account holders. But the reality is that the law is fraught with unintended consequences, causing accounting nightmares for U.S. citizens around the world and leading to numerous foreign financial institutions declining to do business with American customers.
One result has been a dramatic increase in U.S. passport holders renouncing their citizenship: by the third quarter of this year, a record-high 2,369 U.S. citizens or long-term residents had surrendered their citizenship or green cards.
But it’s not only individual citizens objecting to FATCA’s burdensome demands. Financial institutions are also struggling with a lack of clarity and guidance surrounding the law’s implementation, thanks to technological troubles, long waits for regulations and guidance, and ongoing delays.
Website Woes Raise Concerns
The Internal Revenue Service (IRS), which is responsible for the law’s implementation and enforcement, has faced serious technological difficulties in launching the FATCA online registration portal, where foreign financial institutions are required to register and report information on their account holders. The IRS estimates that between 200,000 and 400,000 financial institutions will register.
The initial Foreign Financial Institution Registration System (FRS) was developed and near deployment in 2012 at a cost of $8.6 million—then summarily terminated in November 2012 due to regulatory changes and policy issues arising amid the law’s implementation, the Wall Street Journal reports.
A modified and expanded registration site launched in August. The new release entailed an additional cost of $8 million, according to a September report from the IRS Treasury Inspector General for Tax Administration (TIGTA). The TIGTA report suggests the new FRS is improved, but still faces potential problems. The TIGTA audit found that the redesigned FRS suffers from “poor management controls,” including inadequate planning, potential security flaws, and cost overruns, which “puts the system at risk of not functioning as intended once it is moved into production.”
The portal’s questionable security safeguards are particularly troubling, given that the site will be used to share sensitive information on account holders. James Jatras, a Washington, D.C., attorney who spearheads a movement to repeal the tax law notes that financial institutions and their clients should be concerned about how their data will be protected and used.
“There is nothing about the security protection of the data in the regulations,” Jatras tells Thomson Reuters in an assessment of how FATCA’s implementation woes are affecting stakeholders. “FATCA data is not treated as private and the data will be passed on to the intelligence agencies. If I was the [National Security Agency], I would love to get information on American accounts elsewhere, and what other account information looks like.”
While the FATCA technological challenges haven’t been a debacle on the scale of the botched launch of the Healthcare.gov site this fall, it’s worth wondering why the IRS should have such difficulty in launching a well-performing website with three years’ lead time.
Hurry Up and Wait: More FATCA Delays
The numerous delays to the law’s implementation raise additional questions about the law’s soundness. Initially slated to take effect in January 2013, the start date has been pushed back repeatedly—it’s now set for July 1, 2014.
But even that date could be a moving target. The IRS Information Reporting Program Advisory Committee (IRPAC), an advisory council to the agency composed of tax professionals, just this month proposed delaying FATCA implementation to January 2015, a view shared by various banking and financial organizations.
Some say the repeated delays are fostering additional uncertainty about the law.
“The law is very broad, with many moving parts. It is evolving as Treasury (rightly or wrongly) changes its implementation by using [intergovernmental agreements (IGAs),” tax analyst Jeremy Scott writes at Forbes. “If IRPAC and the financial industry want Treasury to wait for all the significant guidance to be finalized before the withholding regime is put into force, FATCA will be waiting a very long time to become law.”
Scott concludes that financial services providers will never be satisfied with FATCA, and argues the Treasury Department should let the law take full effect without delays. However, an equally strong case can be made that the endless delays and revisions are evidence that the law was poorly conceived and likely to suffer shoddy implementation.
Meanwhile, the Treasury Department is forging ahead in constructing the vast web of IGAs needed to smooth information-sharing and enforcement. In recent weeks, the British isle of Jersey, the Cayman Islands and the Mediterranean island nation of Malta have inked FATCA pacts with the U.S. government.
The Competence Gap
The challenges in bringing the law online are further evidence that, as in the Obamacare roll-out, the federal government’s performance continues to be marred by a “competence gap,” in which bloat, overreach and shoddy planning result in an inability to perform even the most basic functions. And that’s lending a sliver of hope to those who would like to drive a stake through the heart of the ill-conceived tax law.
“In short, FATCA must be repealed as soon as possible as it does little to target tax evaders, which is its primary objective,” Nigel Greene, founder and CEO of the deVere Group financial advisory firm, wrote for American Banker in January 2013, in an assessment of the law’s weaknesses that remains relevant 12 months later. “It would make investors question investing in the U.S. Additionally, it would turn American companies abroad into financial pariahs.... But there’s no denying that the implementation of FATCA is stalling. And that must give us hope.”