Tax laws take years to examine. Once they go into effect, there is generally a period of confusion before taxpayers fully understand the impact of the law. Take the recent Tax Cuts and Jobs Act (TCJA) as an example. The law passed a few years ago and was fully in effect for the 2018 tax filing season and yet the Internal Revenue Service (IRS) is still publishing guidelines to help taxpayers navigate this law.
We are starting to learn the impact of some pieces of legislation that became law years before the TCJA. One example involves a law passed in 2010 by President Barak Obama. The law was the Foreign Account Tax Compliance Act (FATCA). It requires foreign financial institutions report holdings owned by United States citizens. A failure to do so will result in penalties to the institution.
Lawmakers intended the law to help track down tax evasion. Tax evasion, often thought of as the use of offshore accounts to hide assets and avoid tax obligations within the United States, is estimated to cost the U.S. government billions in lost revenue every year. These large losses provide motivation for government agencies to track down offenders and hold them accountable.
A recent study reports the FATCA has reduced the use of foreign accounts to hide assets. However, researchers have also found evidence that some individuals are using new methods to hide their assets. One example: the use of fine arts.
According to the study, those who are looking to avoid tax obligations are purchasing fine art and then placing it in warehouses that are free from customs duties and inspections. The art is then traded without reporting the transaction to the IRS.
Although the IRS recognizes the presence of this form of evasion, it has yet to act. However, the fact that the IRS is aware of this and other methods serves as a reminder to come into compliance with applicable tax laws. A failure to do so can lead to criminal charges and potential imprisonment.