Tax day is a costly annual annoyance for most, but for some of the wealthiest people in the United States, this year’s April 18 tax deadline might not mean much. That’s because according to a new report, the richest sliver of our population has managed to avoid billions in tax obligations by hiding their money offshore.
What’s more, it could get easier for the mega-rich to hide their taxable income, thanks to efforts by the Supreme Court and the Biden administration.
A recent study from academic and Internal Revenue Service (IRS) researchers found that wealthy Americans have stashed nearly $2 trillion in foreign tax havens, with much of that fortune linked to a handful of the country’s richest households.
That data arrived weeks after the U.S. Supreme Court hobbled regulators’ efforts to combat international tax evasion schemes by limiting fines for people who fail to disclose foreign bank accounts. The study also follows a U.S. Senate report warning of a glaring loophole in a law designed to combat the use of tax havens — a law that Republican legislators have long been trying to repeal outright. Compounding matters, earlier this year, the Biden administration gave foreign banks a reprieve on tax reporting.
Together, the moves paint a picture of a tax day and many more to come where ordinary Americans will pay what they owe, while the rich can get off scot-free.
The new study, published last month by the National Bureau of Economic Research, found that U.S. households held “just below $2 trillion” in 2018 in financial accounts in places like Switzerland, Luxembourg, and the Cayman Islands that are generally considered tax havens because they have low effective tax rates.
Not surprisingly, a disproportionately high percentage of assets held in offshore tax havens are owned by the top 0.01 percent of U.S. earners.
“We find a strong concentration of offshore assets at the very top of the income distribution: Around 30 percent of all foreign assets belong to the top 0.01 percent, with a particularly high share for assets held through partnerships and assets held in tax havens,” the researchers write.
They additionally note that “more than 60 percent of the individuals in the top 0.01 percent of the income distribution own foreign accounts, the vast majority in tax havens.”
The study is based on account information reported to the IRS by foreign financial institutions under the Foreign Account Tax Compliance Act (FATCA), a law passed in 2010 to help the government crack down on offshore tax evasion.
Republicans, led by Sen. Rand Paul (R-Ky.), have introduced several bills to repeal the law, which requires foreign banks and financial institutions to disclose accounts and assets held by U.S. customers.
Major multinational banks have repeatedly enabled tax evasion schemes by the ultrawealthy. A two-year investigation into Credit Suisse by the Senate Finance Committee recently revealed that employees of the crime-ridden and collapsed Swiss bank knowingly helped a U.S. businessman conceal $220 million from U.S. authorities, even after the company pledged to comply with all requirements of FATCA as part of its 2014 plea agreement with the Justice Department.
Last fall, the Senate Finance Committee released a report noting that loopholes and limited enforcement resources “have significantly hindered” the effectiveness of FATCA. “As a result, wealthy taxpayers continue to use schemes involving offshore entities and secret bank accounts to successfully hide billions in income from the IRS,” lawmakers wrote.
For much of FATCA’s history, its enforcement mechanism has not been utilized. Banks that fail to comply with the law are supposed to be hit with a 30 percent withholding tax on their U.S. investment income. For years, the IRS waived this requirement, before it finally went into effect in 2020.
The clampdown didn’t last long. Earlier this year, the Biden administration gave a new three-year grace period to some foreign banks that fail to disclose the tax identification numbers of existing U.S. account holders.
Due to significant historical underfunding at the IRS, it is impossible to know whether or not the total amount of money collected thanks to FATCA has met the original $8.7 billion projection when the bill was passed, because measuring the amount raised by voluntary compliance is difficult.
Opponents of FATCA — like the Center for Freedom and Prosperity, a Koch-linked think tank — have used this lack of information to argue in favor of the law’s repeal, buttressing the Biden administration’s decisions to water down enforcement.
A potential lifeline for tax enforcement emerged last summer, when Congress passed the Inflation Reduction Act, which granted a $80 billion budget increase to the IRS over ten years.
However, a recent Supreme Court ruling will likely further complicate efforts to reduce tax evasion by the ultra-wealthy.
Last month, justices voted 5-4 to limit penalties the government can issue against U.S. citizens for failing to file reports detailing their foreign bank accounts to the IRS.
In doing so, the justices sided with powerful corporate lobbying groups, including the U.S. Chamber of Commerce, the National Federation of Independent Business, the American Farm Bureau Federation, and the Restaurant Law Center.