Tax evasion through both legal and illegal means the U.S. Treasury loses billions of dollars in revenue each year. In an effort to curb tax evasion through illegal means such as hiding income in tax havens, the IRS relies on the Foreign Account Tax Compliance Act (FATCA). This act, through the cooperation of participating countries, has helped bring transparency to the financial transactions U.S. citizens conduct overseas. As a result, illegal tax evasion has been curbed significantly.
With the success in limiting illegal tax avoidance, the government is now looking to find methods to prevent legal tax evasion. Large multinational companies that have foreign operations use loopholes in the U.S. tax code to their benefit. Tax inversions often drastically reduce their tax liability in the U.S. Many keep their profits earned in countries with the lowest tax rates so that they can avoid paying the high corporate rate in the U.S.
If tax inversions remain unchallenged, companies will continue to use mergers as a legal method to pay less in taxes. If this trend grows, it may become a necessity for many companies to stay competitive. The government is now looking into the tax laws that allow inversions so that they can make changes to prevent them from becoming common practice.