Taxing Hidden Wealth: The Consequences of U.S. Enforcement Initiatives on Evasive Foreign Accounts Niels Johannesen 1 Patrick Langetieg 2 Daniel Reck 3 Max Risch 4 Joel Slemrod 5 1 University of Copenhagen 2 Internal Revenue Service 3 London School of Economics 4 University of Michigan 5 University of Michigan Disclaimer: The views and opinions presented in this paper reflect those of the authors. They do not necessarily reflect the views or the official position of the Internal Revenue Service. Taxing Hidden Wealth 1
Introduction Use of offshore accounts to evade taxes is a serious problem: • Households hold an estimated $6,000 billion of financial • assets in tax havens (Zucman, 2013) • Offshore assets are largely untaxed and concentrated among the very wealthiest (Alstadsæter, Johannesen and Zucman, 2017) • Recent years: prolific policy activity, but little evidence on the compliance effects of these policies • Are we winning the battle against offshore tax evasion? Taxing Hidden Wealth 2
U.S. enforcement initiatives 2008-2009 The U.S. has been a global leader in the battle against offshore tax evasion in the past decade: • Ad hoc legal action against foreign banks, starting in Switzerland. ( often preceded by whistleblowers ; first case against UBS starts July 2008 ) Information exchange treaties with tax havens • ( new wave of treaties starts 2008 ) • Offshore Voluntary Disclosure Program (OVDP) ( first program starts March 2009 ) • Foreign Accounts Tax Compliance Act (FATCA) ( first draft bill in October 2009 ) Many other governments have taken similar policy measures. Taxing Hidden Wealth 3
Timeline of 2008-2009 Enforcement Initiatives • Information exchange treaties with Malta, Liechtenstein, Luxembourg, Monaco also signed in late 2008 - 2009. Taxing Hidden Wealth 4
This Project We use U.S. administrative data to examine the impact of the • enforcement initiatives on tax compliance Steps of the main empirical analysis: • What was the effect of U.S. enforcement initiatives on • disclosures of evasive foreign accounts? Did taxpayers who disclosed new foreign accounts report • more capital income? Main finding: significant compliance responses, especially outside • of the official Offshore Voluntary Disclosure Program. Taxing Hidden Wealth 5
Background: Related literature • Compliance effects: Recent enforcement efforts caused a decline in incorporations of Panama shell corporations (Omartian, 2016) First customer leak from tax haven bank caused a drop in the value of offshore banks and a drop in their deposits (Johannesen and Stolper, 2017) Amnesties may increase offshore tax evasion (Langenmayr, 2015) Taxing Hidden Wealth 6
Background: Related literature Unintended consequences of enforcement efforts • Information exchange treaties with tax havens caused relocation of deposits across havens (Johannesen and Zucman, 2014) EU Savings Directive caused relocation of deposits (Johannesen, 2014) and increase in incorporations in Panama (Omartian, 2014) Taxing Hidden Wealth 7
Data We use 3 primary sources of administrative data: 1. Report of Foreign Bank and Financial Accounts (FBAR) Information on: location of account and account holder, value of account, timing of filing. 2. Offshore Voluntary Disclosure Program (OVD) Observe whether someone participated in an amnesty and in which year. 3. Income information from tax return (1040) Linked with above data: various sources of income, date and liability implications of amended filings. Taxing Hidden Wealth 8
Conceptual Framework Treatment Full compliance Pays taxes • No change • Files FBAR Tax compliance File FBAR • Pays taxes No FBAR • No change File FBAR Pay taxes Non-compliance Pays no taxes • • No FBAR No FBAR Pay taxes No change (relocate wealth?) Taxing Hidden Wealth 9
Conceptual Framework Treatment Full compliance Pays taxes • No change • Files FBAR Tax compliance File FBAR • Pays taxes No FBAR • No change Enter OVDP “Quiet disclosures”: File FBAR • Amended return Pay taxes • No OVDP Non-compliance No amended return • Pays no taxes • No OVDP • • No FBAR No FBAR Pay taxes No change (relocate wealth?) Taxing Hidden Wealth 10
Conceptual Framework • Are new FBARs Treatment disproportionately filed by Full compliance Pays taxes • No change people less likely to have a • Files FBAR legitimate reason to hold the account? Tax compliance File FBAR • Pays taxes No FBAR • No change Enter OVDP “Quiet disclosures”: File FBAR • Amend returns Pay taxes • No OVDP Non-compliance No amended returns • Pays no taxes • No OVDP • • No FBAR No FBAR Pay taxes No change (relocate wealth?) Taxing Hidden Wealth 11
Conceptual Framework • How do people decide to Treatment disclose quietly vs OVDP? Full compliance Pays taxes • No change Would OVDP disclosures • Files FBAR have especially high risk of detection? Tax compliance File FBAR • Pays taxes No FBAR • No change Enter OVDP “Quiet disclosures”: File FBAR • Amend returns Pay taxes • No OVDP Non-compliance No amended returns • Pays no taxes • No OVDP • • No FBAR No FBAR Pay taxes No change (relocate wealth?) Taxing Hidden Wealth 12
Conceptual Framework • Are new FBARs associated Treatment with increased capital Full compliance Pays taxes • No change income reporting? • Files FBAR Tax compliance File FBAR • Pays taxes No FBAR • No change Enter OVDP “Quiet disclosures”: File FBAR • Amend returns Pay taxes • No OVDP Non-compliance No amended returns • Pays no taxes • No OVDP • • No FBAR No FBAR Pay taxes No change (relocate wealth?) Taxing Hidden Wealth 13
Conceptual Framework • Are new FBARs associated Treatment with increased capital Full compliance Pays taxes • No change income reporting? • Files FBAR • …even for non-OVDP participants? Tax compliance File FBAR • Pays taxes No FBAR • No change Enter OVDP “Quiet disclosures”: File FBAR • Amend returns Pay taxes • No OVDP Non-compliance No amended returns • Pays no taxes • No OVDP • • No FBAR No FBAR Pay taxes No change (relocate wealth?) Taxing Hidden Wealth 14
Conceptual Framework • Are new FBARs associated Treatment with filing amended tax Full compliance Pays taxes • No change returns? • Files FBAR Tax compliance File FBAR • Pays taxes No FBAR • No change Enter OVDP “Quiet disclosures”: File FBAR • Amend returns Pay taxes • No OVDP Non-compliance No amended returns • Pays no taxes • No OVDP • • No FBAR No FBAR Pay taxes No change (relocate wealth?) Taxing Hidden Wealth 15
Results Part 1: Aggregate FBAR Analysis • Analyze the increase in the number of FBARs filed and number of offshore accounts disclosed occurring in 2009. • Use decompositions of this increase to argue that a large part of this effect likely derives from quiet disclosures of evasive accounts. Not 100%: anecdotal evidence and data suggests some • “FBAR-only” compliance responses. Taxing Hidden Wealth 16
Number of Account Disclosures by Year Taxing Hidden Wealth 17
Characteristics of FBAR filers and accounts in 2008, 2009 2008 2009 Total number of FBAR filers 236,331 100% 326,312 100% U.S. address 161,214 68% 233213 71% non-U.S. address 75,117 32% 93099 29% haven account 39,784 17% 63052 19% no haven account 196,547 83% 263260 81% amended return 7,022 3% 18081 6% no amended return 229,309 97% 308231 94% multiple accounts 157,786 67% 213815 66% single account 78,545 33% 112497 34% Total number of FBAR accounts 859,700 100% 988,020 100% Europe 406,723 47% 433,142 44% Asia 185,018 22% 258,503 26% North America 246,272 29% 272,485 28% Other 21,687 3% 23,890 2% <$10,000 279,548 33% 274,174 28% $10,000 - $100,000 391,612 46% 480,881 49% $100,000 - $1 million 150,407 17% 200,078 20% >$1 million 39,941 5% 41,033 4% Taxing Hidden Wealth 18
New Disclosers of Foreign Accounts Note: First-time FBAR filers with a foreign address are excluded. Taxing Hidden Wealth 19
Total Value of Accounts Disclosed Taxing Hidden Wealth 20
First-time FBAR filers, U.S. vs non-U.S. addresses Taxing Hidden Wealth 21
First-time FBAR filers, U.S. vs non-U.S. addresses, normalized Taxing Hidden Wealth 22
New U.S., non-OVDP, FBAR Filers: Havens vs Non-Havens Note: Havens includes OECD (2000) uncooperative tax havens plus Switzerland, Singapore, Hong Kong and Luxembourg Taxing Hidden Wealth 23
New U.S., non-OVDP, FBAR Filers: Havens vs Non-Havens, Normalized Note: Havens includes OECD (2000) uncooperative tax havens plus Switzerland, Singapore, Hong Kong and Luxembourg Taxing Hidden Wealth 24
New U.S. FBAR Filers: Change from 2008-2009 by Country Level Difference Note: Includes OVDP and non-OVDP disclosers. OECD (2000) uncooperative tax havens plus Switzerland, Singapore, Hong Kong and Luxembourg in red, all others in blue. Taxing Hidden Wealth 25
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