Regulation

US Scandals Reinforce Warning Signs of FATCA’s Dangers


By Denis Kleinfeld, Of Counsel, Fuerst Ittleman, United States (01/07/2013)

Scandal is rocking Washington, DC. The United States, in imposing the Foreign Accounts Tax Compliance Act (FATCA) on the global financial industry creates what can reasonably be said to be Orwellian ‘1984’ type dangers. FATCA comes into effect just as the Administration’s misuse of the IRS as a political weapon is being discovered by Congress.  This comes on the heels of controversy surrounding the Patient Protection and Affordable Care Act (commonly referred to as ‘Obamacare’) nationalising health information, and concurrently with the disclosures that the National Security Agency is spying on all Americans.  These all add to the environment of mistrust of the centralisation of political power in Washington, DC. 

 

It is widely recognised that a few of the top people in the Administration will have at their fingertips every last detail of everyone’s private financial information and relationships (via FATCA), all private health records, and all private psychological records (via Obamacare) and all electronic communication (via the NSA). Other countries in the EU and elsewhere are also concentrating on political power at the top. 

 

FATCA enables government to obtain the most intimate of individual financial information, financial relationships, and future financial plans.  This particular expansion of power is being exported out of the United States via intergovernmental agreements to other countries which then coordinate their exchange of information. These agreements do not need approval by Congress.  With the simple expedient of an agreement between two bureaucracies, the head of one country and his counterpart in another country will take on the ability to effectively have dominating power. 

 

FATCA was passed by the United States Congress as a revenue enhancement to pay for the Hiring Incentive to Restore Employment Act (HIRE) of 2010.  It was only the latest in an exceedingly long line of tax laws where the projections of tax receipts to be generated in the future offset (at least to the political minds) current governmental spending excesses.   

 

How FATCA was justified is a revealing story in itself.  Testifying in a hearing before a Senate Sub-Committee, Jack Blum made the bare assertion that he estimated that there is US$70 billion in tax revenue lost every year because evil offshore account holders evade tax. 

 

When the Senate Sub-Committee issued its report on the hearing, the first sentence of the Report boldly stated that the amount of lost tax revenue was US$100 billion.  Footnote one citing its source for the US$100 billion claim to a bunch of magazine articles.  A review of those articles shows that none of them have any recognisable analytics or methodology and are just anecdotal stories and opinions which were not much more than the products of active imagination. 

 

Who is this Jack Blum whose testimony carries such persuasive power with the Senate Sub-committee? In an article in Tax Notes (June 23, 2003) William Norman, a highly regarded international tax lawyer from Los Angeles, took umbrage with a January 20, 2003 article in Tax Notes entitled A Glimpse Inside Offshore Greed written by Jack Blum.  Mr Norman states: "The article presented the positions of Mr Jack Blum with nothing more than anecdotal evidence as support for Mr Blum's sweeping conclusions... Mr Blum is under contract with the Internal Revenue Service, he testifies before Senate Committees, and has provided an affidavit in support of at least one IRS search warrant."  

 

Mr Norman goes on to observe that, "Obviously, tax evasion appeals to certain individuals who have tax liabilities to evade.  The rich pay most of the income taxes, and consequently a set of the rich may well evade most of the income taxes.  Nevertheless, I do not understand how, as Mr Blum claims, the perpetration of tax crimes by the rich 'threatens' equality of law and equal justice. 'Middle America' and the 'common man' cheat on their taxes as well...Even certain 'Middle Americans' also claim bogus itemised deductions as, for example, charitable contributions.  The 'rich' do not have a monopoly on greed. Tax evaders can be found in all economic classes except the poor. The poor (not all, by any means) are involved in welfare fraud.  Of course tax evasion by anyone should not be tolerated, but the rhetoric of class warfare used by Mr Blum is not helpful. " 

 

At a recent Offshore Alert conference on money-laundering, Jack Blum was a speaker along with Jeffrey Owens (formerly of the OECD). In the Q&A after their respective talks Mr Blum was pressed as to how he came up with the US$70 billion amount. After dodging the question the first time around, when asked a second time, he stated, "I guessed." 

 

I believe it is fair to say that the United States is not facing a cash flow problem because of evil offshore tax evaders.  Its state of insolvency is caused entirely because government spends excessive sums for primarily political purposes.  The result is that the United States has degenerated into a system of collectivisation of capital via coercive taxation.  Its over regulated economy is failing since economic growth comes about only from productivity and vast government spending does not create productivity. Only private industry can do that.  What government does is confiscate capital (that is, taxation) from the capital generators of private industry and uses it to create nothing but debt and expense. 

 

Since the expenditures far exceed revenues, borrowing on a nearly astronomical scale is needed to make up the debt.  That in turn necessitates interest on the debt being artificially suppressed by the Federal Reserve by engaging in massive ‘quantitative easing’ or as the European Central Bank put it, ‘infusing liquidity.’ Taxpayers viscerally know the true economic value of their dollars is mysteriously vanishing. What happened is that government has hijacked the ability of the people to maintain purchasing power.  

 

The reality is that government does not have the will to control its expenditures. Like every failed nation in history, the tax system is being used to preserve those at the pinnacle of the political power pyramid rather than support the creation of private capital and a free-market economy.  FATCA is a demonstration of this policy failure reality.   

 

To believe that FATCA is warranted, the international financial industry is expected to believe that hundreds of thousands of taxpayers, if not millions are crooks because they have foreign bank accounts or foreign investments. Can it be that millions of people all around the world who have international bank accounts or investments woke up one morning and said that they couldn’t live one more day without being a tax evader? 

 

If FATCA is warranted, then is the IRS capable of administering it? The latest Tax Advocate Annual Report to Congress makes clear that the IRS is victim of Congress by being underfunded, overburdened and undermanned.  It states: 

 

“In addition to facing budget cuts and the potential retirement of many experienced employees, the work performed by the IRS employees continually requires greater expertise as tax laws become more complex and far reaching. For example the Patient Protection and Affordable Care Act [Obamacare] contains an extensive array of tax law changes that will present many challenges.”

 

“The IRS will administer the law’s numerous tax provisions and estimates that at least 42 provisions will either add to or amend the tax code and at least eight will require the IRS to build new processes that do not exist within the current tax administration.” 

 

“Then there are the problems of dealing with identity fraud, limited resources for taxpayer assistance, inability to hire and even correcting computer applications to find out if IRS employees are tax-compliant.  The IRS is expecting a large number of retirements over the next several years, particularly with regard to the executive staff and nonexecutive managers.” 

 

The report finds that the IRS business units have not always been able to replace all the mission-critical employees they were losing. IRS recruiters believed that their efforts were not always directed at the most productive activities and locations. Further, “The IRS is not able to hire the most qualified employees capable of providing taxpayers the best possible quality service to meet their tax responsibilities.” The report explains how this happened. “[T]he IRS was unable to meet the level of budget reduction without substantially reducing its work force.” 

 

The IRS instituted an agency-wide hiring freeze in 2012 and accepted early retirements and buyouts, “which represents a significant challenge since many of these employees possessed unique skills and institutional knowledge that will be hard to replace.” 

 

Consider that before 2013, the IRS did not have to oversee either the Obamacare (with trying to hire and train 16,000 new IRS employees) nor FATCA (and trying to hire and train thousands more). Not to be overlooked is the fact that all the new personnel will be hired by political appointees who, because of the scandals, likely lack any tax knowledge or experience. 

 

Outgoing Commissioner of the IRS, Douglas Shulman, for example, was brought in as a management bureaucrat.  He is a management guy with no tax background.  When asked by the Senate Finance Committee investigating this latest scandal why he went to the White House 157 times, he said that he was there to take his kids to the annual Easter egg hunt.  

 

It is now revealed that many of the top management spots, such as Lois Lerner overseeing tax-exempt organisations, were loyal political party operatives who were hired as employees and thereby avoided being classified as a political appointee. Her job title became her sole source of tax credibility.  When appearing before Congress she claimed the Constitutional privilege of not testifying because she was concerned about her criminal exposure to prosecution for her IRS activities.  

 

All of this is nothing new and that is what is most shocking. It is not that scandal enveloped the IRS, but that it’s happened before.  Congress and the President let it happen all over again. Why Congress did not anticipate the possibility of the current tax scandals is bewildering. The tax scandal scenario, for example, played out in the media rather dramatically under President Clinton in 1997. 

 

As reported by CNN in September of 1997, accusations of "Gestapo-like tactics employed by the tax agency" abounded. IRS historian Shelley Davis wrote about the IRS in her book Unbridled Power, which described IRS activities that are again true today. She described the IRS as “the best secret-keeping agency in our government to-day. They are better than the CIA, better than the FBI," CNN reported. 

 

What were some of the discoveries about the IRS that Davis relayed to the Senate Finance Committee?

 

"I discovered that the IRS does keep list of American citizens for no other reason than their political activities might have offended someone in the IRS; about how the IRS believes that anyone who offers even legitimate criticism of the tax collector is a tax protestor; about how the IRS shreds its paper trail, which means that there is no history, no evidence and, ultimately, no accountability." 

 

How this activity was directed from the White House was explained by David Burnham, author of A Law Unto Itself: The IRS and the Abuse of Power’. He told the investigating Committee in 1997 that audits motivated by politics can occur; however, there doesn't need to be direct pressure from the administration to get one started. 

 

CNN reported Burnham as saying, "It is not as simple as the White House calling the commissioner and saying, “Go get these guys,” because if there is a perception inside the IRS that the administration wants to protect itself from this kind of scrutiny, the IRS may very well do it on their own. It doesn't take direction from the White House; the IRS has the power on their own to do it — there's nothing to stop them from doing it." To me this means that there never is the ‘smoking gun’ direct link because governmental underlings understand what they are hired to do and carry out required actions without the need for direct written marching orders. 

 

Out of those hearings came new legislation in the form of the Internal Revenue Service Restructuring and Reform Act of 1998. Among other provisions, it created the Office of the Taxpayer Advocate and the Internal Revenue Service Oversight Board. Since the date of inception, the TA has been quite vocal about the problems within the IRS, but the IRS OB has never found any significant fault or abuse of power by the IRS. 

 

Shortly after the 1997 scandal, former Senate Finance Committee Chairman William Roth, Jr, R-Del, published a book in 1999 titled The Power to Destroy: How the IRS Became America where he explained the IRS' power to destroy the taxpayers, but how Congress is taking back control. Since then, the IRS's powers have been extended further and with FATCA now encompass every financial activity anywhere on earth.  The current crop of tax scandals shows that Congress still has no control.  Presumably, that is intentional. 

 

FATCA cannot really be about the US government ferreting out US taxpayers evading tax on offshore accounts.  Final government projections of FATCA showed tax collection projections to be US$800 million to US$1 billion a year. In the scheme of things, even US$5 billion is nothing more than a de minimis rounding error compared to the amount of cash lost to fraud in virtually every governmental program or wasted on ‘pork barrel’ politics.  The cost to set up and administer FATCA in the United States alone will certainly cost well over US$1 billion a year.  Billions of Dollars, Euros, Yen and other currencies will be spent by the Global Financial Industry in complying with FATCA, none of which will create economic productivity nor create increase tax revenues.  In fact, more capital will be drained out of each country’s economy, likely lowering tax revenue, and exacerbating the current world-wide financial crisis. 

 

The extreme level of reporting of private financial information under FATCA, the extreme level of reporting of medical health records and psychological records under Obamacare, and the extreme level of information by the NSA are not really in dispute  Detailed private information is the object of the exercise.  Supporters of these activities will claim that they are made necessary because the government needs to protect you.  The other point of view may be as expressed by William E. Simon, the former Secretary of the Treasury. 

 

As he said in his book, A Time For Truth (1978): “Realism, in fact, requires the capacity to see beyond the tip of one’s nose, to face intolerably unpleasant problems, and to take necessary steps to dominate future trends, not to be crushed passively beneath them… a tyranny always rationalised in terms of alleged benefits to a collectivist construct called the People, the American who chooses to fight for the sanctity of the individual has nothing for which to apologise.”

 

The current governmental scandals emanating from Washington, DC are not happening in a vacuum. Similarly, scandals of all kinds are seen in every country of the OECD and in other developing countries around the world. The solution to the global potential to catastrophic financial collapse, is not going to happen because as governments coordinate the exchange of their citizens’ financial information, medical and psychological information, and communication information. All that will do is centralise political control in even fewer hands.  The danger signs that are now being seen are reinforced by the rapid unfolding of governmental scandals in the United States.