Rethinking the United States’s Approach to Fighting Tax Evasion
Rethinking the United States’s Approach to Fighting Tax Evasion
The United States must reconsider its approach to fighting tax evasion. While globalization and technological advancements have improved the accessibility and seamlessness of foreign investment, they have also offered more opportunities for tax fraud.[1] Nations historically fought the ageless problem of tax evasion through information exchange upon request,[2] but countries across the globe have recently adopted automatic exchange of information (AEOI) approaches to further combat such fraud.[3] AEOI-based efforts to improve tax compliance and international tax cooperation include the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS).[4] The U.S., which currently relies on FATCA to combat tax evasion, should join the CRS.
In response to failures in the Internal Revenue Service’s (IRS) approach to detect offshore accounts that contain U.S. investments or received U.S.-source income,[5] Congress passed the FATCA in 2010 with an intention to stop tax evasion by U.S. citizens, tax residents, and entities.[6] The act mandates that foreign financial institutions (FFI) and certain other non-financial foreign entities report “on the foreign assets held by their U.S. account holders” to the IRS or face a withholding of certain payments.[7] To detect tax incompliance, the IRS will compare a person’s tax returns with data gathered through FATCA. To comply with FATCA, governments outside of the U.S. “can either permit their FFIs to enter into agreements with the IRS to provide the required information or they can themselves enter into one of two alternative Model Intergovernmental Agreements (IGAs) with the United States.”[8] One version of the IGA requires FFI to report account information directly to the IRS while the other directs FFIs to send account information to their local government, which will then transmit the information to the IRS. FFIs located in countries that have not signed an IGA can participate in FATCA’s AEOI through sharing information directly with the IRS. FFIs which opt to not participate in FATCA face a 30 percent withholding tax on US-source payments.[9]
These efforts to improve tax compliance inspired the Organization for Economic Co-operation and Development (OECD) to create the CRS in 2014.[10] The CRS, an international AEOI standard, requires countries to collect information from their financial institutions and automatically exchange the information with other countries on an annual basis.[11] Financial institutions in jurisdictions where CRS applies will report to local tax authorities account information of individuals who are tax residents of another CRS participating jurisdiction. In addition, the local tax authority will send the information to tax authorities in CRS participating jurisdictions.[12] For example, a financial institution in Canada will send account information of England residents to Canadian tax officials, who will then transfer the data to the English government. More than one hundred jurisdictions have joined the CRS. The U.S. however, is the only G20, which is a forum that consists of nations with major economics as well as the European Union and African Union, who have opted to not participate.[13]
FATCA and CRS share similar purposes as both seek to improve tax compliance.[14] But the two AEOI approaches have meaningful differences, including in penalties imposed on FFIs who refuse to participate in the reporting and the systems’ scopes. FATCA relies on a withholding tax to persuade countries and FFIs to share financial information with the U.S. On the other hand, the CRS does not impose a penalty for refusal to participate. In addition, the systems’ definitions of reportable persons differ. The CRS determines whether an account is a reportable person by looking at someone’s tax residence, often “derived from a person’s permanent residence.”[15] On the other hand, FATCA focuses on tax residence and citizenship,[16] which includes those who do not reside in the US.[17] As a result, financial institutions cannot rely on the same infrastructure to comply with FATCA and CRS. Financial institutions are forced to build systems that allow them to identify reportable accountholders, and then gather and report the data each standard requires. Further, FATCA’s information exchange is less reciprocal than CRS’s bilateral exchange of information. Although some countries have signed IGAs with the U.S. that specifically call for reciprocal exchanges, not all are.[18] As a result, while the U.S. can receive financial information about U.S. taxpayers with financial accounts abroad, the U.S. does not always share with other countries data on foreign citizens’ financial accounts in America. Because of this lack of full reciprocity, “the US has been indicated as being one of the safest locations to which to re-allocate wealth and related income”[19] and “[i]n some views, the failure of the United States to share information under FATCA makes it one of the major secrecy jurisdictions in the world.”[20]
To achieve an efficient AEOI system and most efficiently fight tax evasion, global cooperation and consistency are imperative.[21] The U.S should abandon FATCA and join CRS in order to form one unified global standard in combating tax evasion. Adopting the CRS as the sole global standard for fostering international tax compliance will take advantage of infrastructure that many countries and financial institutions already have in place. One unified AEOI system should lower compliance costs of financial institutions in fighting tax evasion as they no longer need to maintain and upkeep the necessary infrastructure to comply with two different AEOI systems. Also, joining CRS should repair the U.S.’s image as an attractive location for tax evasion.
To strengthen its ability to prevent tax evasion, the CRS should adopt more robust standards that are features of FATCA. Implementing a withholding penalty similar to the one present in FATCA would encourage more countries and financial institutions to join international efforts to combat tax evasion. Such a penalty puts more pressure on jurisdictions and financial institutions to join the CRS. It is finally time the U.S. begins to demonstrate through its actions the seriousness of tax evasion and formally join the global fight against it.
Automatic Exchange of Information and the Common Report Standard, Inland Revenue Dep’t, https://www.ird.govt.nz/international-tax/exchange-of-information/crs/aeoi-and-crs (last visited Oct. 20, 2025).
Dhammika Dharmapala, Cross-border Tax Evasion Under a Unilateral FATCA Regime, 141 J. of Pub. Econ. 29, 30 (2016).
Elisa Casi et al., A Call to Action: From Evolution to Revolution on the Common Reporting Standard, 64 Brit. Tax Rev. 166, 166–67 (2019).
Id. at 167.
Jane Song, The End of Secret Swiss Accounts?: The Impact of the U.S. Foreign Account Tax Compliance Act (FATCA) on Switzerland’s Status as a Haven for Offshore Accounts, 35 Nw. J. of Int’l L. & Bus. 687, 696 (2015).
Summary of Key FATCA Provisions, IRS, https://www.irs.gov/businesses/corporations/summary-of-key-fatca-provisions (last visited Oct. 20, 2025).
Foreign Account Tax Compliance Act (FATCA), IRS, https://www.irs.gov/businesses/corpor ations/foreign-account-tax-compliance-act-fatca (last visited Oct. 20, 2025).
FATCA Goes Into Effect with Broad International Support, U.S. Dep’t of Treasury, (July 1, 2014), https://home.treasury.gov/news/press-releases/jl2551.
FATCA Information for U.S. Financial Institutions and Entities, IRS, https://www.irs.gov/businesses/corporations/fatca-information-for-united-states-entities (last visited Oct. 20, 2025).
OECD, Standard For Automatic Exchange of Financial Account Information in Tax Matters 3, (2nd ed. 2017), https://www.oecd.org/content/dam/oecd/en/publications/reports/2017/03/sta ndard-for-automatic-exchange-of-financial-account-information-in-tax-matters-second-edition_g1g73eb6/9789264267992-en.pdf.
Id.
Automatic Exchange of Information (AEOI), ING, https://www.ing.com/About-us/Complia nce/Automatic-Exchange-of-Information-AEOI.htm (last visited Oct. 20, 2025).
See Rachel E. Brinson, Is the United States Becoming the “New Switzerland”?: Why the United States’ Failure to Adopt the OECD’s Common Reporting Standard is Helping it Become a Tax Haven, 23 N.C. Banking Inst. 231, 237 (2019).
OECD, supra note 10.
Id.
Id.
Id.
Dharmapala, supra note 2, at 30.
Casi et al., supra note 3, at 182–83.
Jane Gravelle and Donald Marples, Cong. Rsch. Serv., IF12166, The Foreign Account Tax Compliance Act (FATCA) (2022).
Casi et al., supra note 3, at 173.
