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Taxing Fat Cats Abroad

Posted on Feb. 26, 2024
Reuven S. Avi-Yonah
Reuven S. Avi-Yonah

Reuven S. Avi-Yonah ( is the Irwin I. Cohn Professor of Law at the University of Michigan Law School. He thanks Elise Bean and Patrick Martin for helpful comments.

In this installment of Reflections With Reuven Avi-Yonah, Avi-Yonah examines how the IRS is using intergovernmental agreements for the automatic exchange of information used to track down and tax accounts held by wealthy U.S. citizens living abroad.

On January 12 the IRS announced that it was able to collect $482 million from a new initiative focused on taxing millionaires:

The IRS has ramped up efforts to pursue high-income, high-wealth individuals who have either not filed their taxes or failed to pay recognized tax debt, with dozens of revenue officers focused on these high-end collection cases. These efforts are concentrated among taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt. In an initial success, the IRS collected $38 million from more than 175 high-income earners. The IRS last fall began contacting about 1,600 new taxpayers in this category that owe hundreds of millions of dollars in taxes. The IRS has assigned over 900 of these 1,600 cases to revenue officers, with over $482 million collected so far. This brings the total recovered from millionaires through these new initiatives to $520 million.1 [Emphasis in original.]

As noted by Andrew Lautz of the Bipartisan Policy Center, the Congressional Budget Office projected the increased funding from the Inflation Reduction Act would enable the IRS to bring in an additional $204 billion in revenue.2 “Five hundred million dollars in high-profile enforcement activity targeted at high-wealth individuals should be applauded, but it’s just a drop in the bucket,” he said.3

The focus of the IRS announcement is on domestic nonfilers. But there are other indications that the IRS is also targeting U.S. citizens and residents who are hiding funds in offshore accounts. Two recent cases involve such taxpayers.

In Farhy,4 during the 2003 through 2010 tax years, Alon Farhy, a U.S. person resident in Israel, owned 100 percent of two Belize corporations and did not report them on Form 5471 as required by section 6038(a). The Tax Court held his failure to file the information returns was willful and not due to reasonable cause, but that the IRS lacks statutory authority to assess penalties under section 6038(b)(1) or (2) against him.5 The case is being appealed to the D.C. Circuit.

In Bittner,6 Alexandru Bittner, a dual citizen of Romania and the United States, learned of his foreign bank account reporting obligations after he returned to the United States from Romania in 2011. He later submitted the required annual FBAR reports covering five years (2007 through 2011). The IRS deemed Bittner’s late-filed reports deficient because the reports did not address all accounts as to which Bittner had either signatory authority or a qualifying interest. Bittner filed corrected FBARs providing information for each of his accounts — 61 accounts in 2007, 51 in 2008, 53 in both 2009 and 2010, and 54 in 2011. The IRS neither contested the accuracy of Bittner’s new filings nor suggested that Bittner’s previous errors were willful. But because the IRS took the view that non-willful penalties apply to each account not accurately or timely reported, and because Bittner’s five late-filed annual reports collectively involved 272 accounts, the IRS calculated the penalty due at $2.72 million. Bittner challenged that penalty in court, arguing that the Bank Secrecy Act authorizes a maximum penalty for non-willful violations of $10,000 per report, not $10,000 per account. The Fifth Circuit upheld the government’s assessment, but the Supreme Court reversed and held that the FBAR’s $10,000 maximum penalty for the non-willful failure to file a compliant report accrues on a per-report, not a per-account, basis.7

The point of this column is not to discuss those cases, but rather to explore the underlying reality that the IRS was able to access the required information. In Farhy, the taxpayer did not reveal his ownership of the Belize corporations until he was caught. In Bittner, the taxpayer filed FBAR forms for only some of his Romanian accounts, but the IRS discovered others. Presumably, the IRS was able to discover this information by relying on intergovernmental agreements negotiated under the Foreign Account Tax Compliance Act.

FATCA puts up a roadblock for U.S. persons residing abroad who hide their money in foreign corporations or who do not disclose foreign accounts, like Farhy and Bittner. Before FATCA, it was very unlikely that the IRS could catch them. After FATCA, the likelihood is much higher.8

Before the financial crisis of 2008-2009, there was no due diligence concept that imposed on states, and, by extension, on their financial institutions, an obligation not to harm other states by aiding and abetting tax evasion by other states’ residents. This was in part the result of a legal rule, the revenue rule, which stemmed from the declaration of Lord Mansfield in the 18th century that states do not aid other sovereign states to collect their taxes.9 In addition, from the enactment of the portfolio interest exemption by the United States in 1984 (section 871(h)) and the subsequent adoption of the savings directive by the EU in 2003 (2003/42/EC), it was the clear policy of both the United States and the EU to actively aid and abet tax evasion by each other’s residents by allowing the payment of interest to foreign individuals and legal entities without either a withholding tax or the collection of any information about the identity of the beneficial owner of the interest that could be shared with the residence jurisdiction under tax treaties.

This mutual race to the bottom found its proverbial rock to hit when the United States adopted the qualified intermediary regime in 2000, which affirmatively shielded the required information from the IRS. The fallout from the total lack of any due diligence obligation can be seen from UBS’s statement during the 2008 Senate hearing on the UBS scandal that it was perfectly acceptable for the company to rely on forms that indicated that the owner of an account was a tax haven corporation when the company itself set up that corporation for a U.S. resident and knew the resident’s identity.10

The UBS scandal and the financial crisis of 2008-2009 changed everything. Both the United States and the EU became aware that aiding and abetting tax evasion by each other’s residents could lead to Americans pretending to be Europeans and Europeans pretending to be Americans to evade their tax obligations. Neither the United States nor the EU had any withholding tax imposed on payments to foreigners, so a resident of either could pretend to be a resident of the other (that is, a foreigner) and evade withholding tax. In addition, the revenue pressure from the crisis and the subsequent political outrage at the banks that caused it led first to the enactment of FATCA in the United States, then to the negotiation of intergovernmental agreements between the United States and over 100 other countries, and finally to the development by the OECD of the common reporting standard (CRS) for automatic exchange of information under the Multilateral Convention on Administrative Assistance in Tax Matters. The CRS have been adopted by more than 120 jurisdictions (but not by the United States).

As a result of those developments, it can now be asserted that, first, the revenue rule is dead.11 The vast majority of countries have pledged themselves to help other countries collect taxes on their residents by engaging in the automatic exchange of information.

Second, there is an affirmative due diligence obligation on states not to harm other states by aiding and abetting tax evasion by those other states’ residents.

Third, derivatively stemming from the obligation of states, a due diligence obligation is imposed on financial institutions not to aid and abet tax evasion by residents of other states. This due diligence obligation is embodied by the rules imposed on financial institutions by FATCA, intergovernmental agreements, the CRS, and Directive 2011/EU.

One remaining question is whether the rules adopted under FATCA, CRS, and the directive are sufficient to accomplish this due diligence objective. I would argue that in the absence of an overarching standard of due diligence, these rules can be avoided (for example, in the case of FATCA, by relying on banks with no U.S. presence). In addition, reliance on specific rules can lead to violations of privacy because the mechanical application of the rules ignores the specific circumstances of the taxpayer and whether the taxpayer poses an actual risk of tax evasion.

The solution is to create a due diligence standard over and above the specific rules and to hold foreign financial institutions and the states that regulate them to that standard. Such a standard, like any due diligence standard, is based on the degree of risk in any situation. Only by openly adhering to such a due diligence standard can we achieve the goal of the CRS: that every resident of every country that imposes an income tax be forced to pay his or her tax obligations. Otherwise, we risk undermining confidence in the income tax system, which is most countries’ main line of defense against rising inequality.

Another question these developments raise is whether the United States should continue to tax U.S. citizens living permanently abroad, like Farhy and Bittner (before Bittner came back to the United States). Before FATCA, I argued that this rule, which goes back to the Civil War income tax, is obsolete and ought to be repealed. But this issue should be reconsidered under changing circumstances.12

First, because of FATCA, it is likely that the rule can now be effectively enforced in most cases, although I would still support an exemption for U.S. citizens living abroad who fall below the section 877A threshold for the exit tax ($2 million in net worth and an average of $124,000 in annual net income tax liability for the five tax years ending before the date of expatriation). Such an exemption would apply to U.S. citizens falling below the section 911 threshold and to most so-called accidental Americans born in the United States who left as children.

Second, an increasing number of U.S. citizens are moving abroad and benefiting from foreign non-dom regimes under which they do not owe income tax in their new country of residence on foreign-source income. For these U.S. citizens working remotely outside the United States, the result is no foreign tax liability, and if there were no citizenship-based tax, there would be no tax liability anywhere. One could enjoy the benefits of living in a well-run country like the United Kingdom or Portugal, countries that are not tax havens, as well as the benefits of having a U.S. passport, but without paying the taxes that make such benefits possible.

FATCA is the most recent example of “constructive unilateralism” in which the United States unilaterally adopts a rule that is then adopted by the rest of the world (with modifications).13 The cases described above demonstrate FATCA’s importance to collecting tax from wealthy tax evaders like Farhy and Bittner. And because of it, the United States should continue to adhere to citizenship-based taxation.

The income tax regime is based on this premise: that members of a political community — who get to vote in democratic elections that determine their future tax obligations — have the ability to pay. Citizenship-based taxation is fully consistent with this view, which underlays the 16th Amendment authorizing Congress to tax U.S. citizens “on incomes, from whatever source derived.”


1 IRS, “IRS Ramps Up New Initiatives Using Inflation Reduction Act Funding to Ensure Complex Partnerships, Large Corporations Pay Taxes Owed, Continues to Close Millionaire Tax Debt Cases,” IR-2024-9 (Jan. 12, 2024).

2 Jonathan Curry, “Observers Cheer IRS’s ‘Impressive’ Win on Millionaire Crackdown,” Tax Notes Federal, Jan. 22, 2024, p. 737.

3 Id.

4 Farhy v. Commissioner, 160 T.C. No. 6 (2023).

5 Id.

6 Bittner v. United States, 598 U.S. 85 (2023), rev’g 19 F.4th 734 (5th Cir. 2021).

7 Id.

8 The following is based on Reuven S. Avi-Yonah and Gianluca Mazzoni, “Due Diligence in International Tax Law” in Due Diligence in the International Legal Order (2021).

9 Holman v. Johnson, 98 Eng. Rep. 1120, 1121 (1775) (“no country ever takes notice of the revenue laws of another”).

10 U.S. Senate Permanent Subcommittee on Investigations, “Tax Haven Banks and U.S. Tax Compliance” (July 17, 2008). On this and related investigations, see Elise Bean, Financial Exposure: Carl Levin’s Senate Investigations Into Finance and Tax Abuse (2018).

11 See also the Pasquantino case, in which the U.S. Supreme Court upheld the RICO convictions of Americans who smuggled cigarettes to Canada in order to avoid Canadian excise taxes, distinguishing the revenue rule because the case did not involve direct aid to Canada in collecting its tax. Pasquantino v. United States, 544 U.S. 349 (2005).

12 See Avi-Yonah, “The Case Against Taxing Citizens,” Tax Notes Int’l, May 3, 2010, p. 389; but see Avi-Yonah, “Taxing Nomads: Reviving Citizenship-Based Taxation for the 21st Century,” University of Michigan Public Law Research Paper No. 22-035 (Aug. 4, 2022).

13 See Avi-Yonah, “Constructive Unilateralism: U.S. Leadership and International Taxation,” 42 Int’l Tax J. 17 (2016).


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