The U.S. Treasury Department has signed intergovernmental agreements with the Cayman Islands and Costa Rica in an effort to combat offshore tax evasion as part of the implementation of the Foreign Account Tax Compliance Act.
FATCA, which was included as part of the HIRE Act of 2010, requires foreign financial institutions, including hedge funds, to report on the holdings of U.S. taxpayers to the Internal Revenue Service, or else face stiff penalties. The law has provoked controversy both in the U.S. and abroad, with some foreign governments and banks complaining that the law violates banking confidentiality laws, and with U.S. expatriates and dual citizens finding themselves owing taxes to the U.S. government that they never had to pay before. The law has also apparently prompted a record number of people renouncing their U.S. citizenship this year. The State Department reported last month that the number of citizenship renunciations jumped from 742 in 2009 to over 1,854 this year so far.