Bankers' lawsuit jeopardizes U.S. tax dodger crackdown: lawyers

WASHINGTON/NEW YORK Tue Nov 12, 2013 5:42pm EST

WASHINGTON/NEW YORK (Reuters) - A court challenge by Texas and Florida bankers threatens to undermine a broad U.S. government crackdown on offshore tax avoidance and jeopardize a web of carefully crafted international agreements, tax lawyers said on Tuesday.

The Texas Bankers Association and the Florida Bankers Association, both industry groups, have filed a lawsuit attempting to block a new U.S. Treasury Department rule governing accounts held by foreigners in U.S. banks.

The rule, written last year and set to take effect in March 2014, will require U.S. banks to disclose information to the Internal Revenue Service about any account held by a non-resident alien that earns at least $10 of interest per year.

Failure to comply would cost a bank $100 per violation, while information provided by banks to the IRS under the rule would be made available to about 70 foreign governments.

It was written to give those governments more incentive to comply with another law, the Foreign Account Tax Compliance Act (FATCA), that requires non-U.S. banks to tell the IRS about offshore accounts held by Americans worth $50,000 or more.

Approved by Congress in 2010, FATCA is driving the rapid worldwide expansion of a network of bilateral tax information-sharing agreements, negotiated by the U.S. Treasury and its overseas counterparts amid heightened global concern about tax dodging. FATCA is set to take effect in July 2014.

Many of these agreements depend, at least in part, on reciprocal information sharing of the sort made possible by FATCA and the 2012 Treasury rule that supplements it.

The Texas and Florida bankers' claims face an uphill challenge in court on procedural grounds, lawyers said. But if they are upheld and the 2012 rule voided, it would damage U.S. credibility and "irreparably harm its reputation in the international community as a reliable partner in tax cooperation," federal lawyers said in U.S. District Court for the District of Columbia filings.

John Harrington, a former Treasury tax official who is now with law firm Dentons LLP, said a loss by the Justice Department in the case would hobble Treasury's implementation of FATCA.

"This is significant," he said. "It affects their abilities to negotiate these FATCA agreements."

SWISS MISS

Offshore tax avoidance by U.S. individuals deprives the U.S. government of as much as $50 billion a year in revenue at a time when it ran a deficit of $680 billion in 2013, academics have estimated.

In 2009, Swiss financial giant UBS, the world's largest wealth manager by assets, paid a fine of $780 million to the United States to avoid criminal charges over the use by Americans of secret Swiss bank accounts to avoid taxes.

Months later, Congress drafted FATCA, which was signed into law in 2010 by President Barack Obama. As Treasury and the IRS moved to implement the law, many non-U.S. banks and other financial institutions and their home government resisted. Some demanded reciprocal information sharing by the United States.

To accommodate these requests and encourage foreign banks' compliance with FATCA, the Obama administration wrote the rules last year to require U.S. banks to report to the IRS on interest-earning U.S. accounts held by non-resident aliens.

The Texas and Florida groups sued the Treasury Department and the IRS in April over that rule, saying it was burdensome and would discourage foreign investment in the United States.

Alex Sanchez, president of the Florida Bankers Association, discounted the argument that the rule is needed to set up reciprocal deals on information sharing. "There is no reciprocity," Sanchez said. "What American has a bank account in Bolivia? What American has a bank account in Colombia?"

Many aliens fear their families will be vulnerable to kidnappings if the IRS releases information about their U.S. assets to their home governments, he said.

A spokesman for the Texas bankers' group said it did not immediately have any comment.

In earlier court filings, the bankers said some of the countries eligible to get the information from the IRS have unstable governments or lax law enforcement, raising privacy and data security concerns. In addition, they said, Treasury failed to properly assess the cost of the rules to businesses.

A Justice Department spokesman declined to comment. A Treasury Department did not respond to requests for comment.

LACK OF STANDING

In Friday's court filing, Justice Department lawyers said the two banking groups lack legal standing to bring their lawsuit because, as trade associations, they are not themselves subject to the regulations and would have to identify one of their aggrieved members to pursue the claims.

Moreover, the Justice Department said the bankers' attempt to block the rules constitutes "judicial interference" with the federal government's power to tax. As for costs, the Justice Department said the rule would only require banks to report information they already collect.

Finally, the federal attorneys said the rule is needed because the United States' "willingness to reciprocate is a powerful incentive to convince foreign countries" to collect and report similar information under FATCA.

The United States has signed nine FATCA pacts, known as inter-governmental agreements (IGAs), with Japan, Germany, Spain, Norway, Switzerland, Ireland, Mexico, Demark and Britain. Dozens more are in negotiation. Many include information-sharing provisions.

The case is Florida Bankers Association and Texas Bankers Association v. United States Department of Treasury et al, U.S. District Court for the District of Columbia, No 13-cv-00529.

(Editing by Andrew Hay)