A loophole in the Foreign Account Tax Compliance Act is leading to billions of dollars in tax evasion, according to a new report from the Senate Finance Committee.
The “shell bank” loophole lets offshore banks accept funds from the U.S. without reporting them to the Internal Revenue Service by allowing taxpayers to set up offshore shell companies that they can then register with the IRS as a financial institution that self-certifies reporting of offshore accounts to the agency, the report says.
That loophole allowed software entrepreneur Robert Brockman to evade taxes on more than $2 billion in income, according to the report.
Moreover, offshore tax haven jurisdictions have “hundreds of thousands of possible shell banks,” the report says, adding that 128,000 such companies are registered with the IRS as financial institutions in just in the eight countries where Brockman had links.
“With little effort, wealthy tax cheats like Robert Brockman are able to convert shell companies into shell banks, and self-certify they are reporting income held in offshore accounts to the IRS,” Senate Finance Committee Chair Ron Wyden, D-Oregon, said in a statement. “Foreign banks in Switzerland and the Cayman Islands are then exempt from complying with basic Fatca requirements to identify and report U.S. accounts.”
Wyden added that “hundreds of thousands” of tax haven-based shell companies have been granted IRS approval with little scrutiny, and accused the GOP of contributing to the problem.
“It doesn’t take a rocket scientist to see how this loophole leads to billions in tax evasion, particularly after Republicans’ decade-long campaign to gut the IRS,” he said in the statement.
Wyden also says that the $80 billion in additional funding for the IRS in the Inflation Reduction Act, signed into law earlier this month, should go toward dealing with the loophole.