Part II: “Neither Confirm nor Deny the Existence of the TECs Database”: IRS Using the TECs Database to Track Taxpayers Movements – and Assets

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Part II:  This is a follow-up to the federal government’s database known as “TECS” (Treasury Enforcement Communication System)that is now operated by the Department of Homeland Security (“DHS”).   The IRS uses it to track travel, trips, movement and even asset movements (e.g., wire transfers) by U.S. citizen taxpayers; including those residing outside the U.S.IRS Offshore Training TECs database

See, “Neither Confirm nor Deny the Existence of the TECs data”: IRS Using the TECs Database to Track Taxpayers Movements –, posted Dec. 13, 2014.

This previous post described how the U.S. federal government uses the TECS to locate assets and travel patterns of U.S. citizens; specifically outside the U.S.  The IRS trains their employees to (1) Not discuss TECS with taxpayers; (2) Neither confirm nor deny existence of TECS; (3) Keep in separate “Confidential” envelope; and (4) Stamp documents as “OFFICIAL USE ONLY”

The image in this post reflects a page from IRS training materials for their employees; e.g., revenue agents (those individuals who audit taxpayers and determine tax deficiencies and the like), revenue officers (those individuals who work on collecting taxes owed or alleged to be owed) and chief counsel attorneys (those individuals who litigate tax cases against taxpayers); among other IRS employees.

Frankly, there is not a lot of detailed law about how and when the IRS can use TECS or other tracking techniques of individuals and their assets.  There are no tax cases (at least none that I am aware of) where the Courts have tried to impose limits on the use and Criminal Tax Manual Taxpayer Information Disclosuremethods of the federal government in collecting this type of TECS information.  Indeed, there are specific provisions granting broad use of taxpayer information when the government alleges there is a “terrorist incident, threat, or activity” as that term is defined in  IRC Section § 6103.

On the other hand, there are important laws about how the IRS cannot generally disclose taxpayer information.  For instance, see the same code section IRC Section § 6103 for wrongful disclosures of taxpayers’ information.  That statute makes it a violation (even a criminal violation in certain willful circumstances) to disclose taxpayer information in “most” (or at least many) circumstances.  The statute is comprehensive and there is a lot of case law interpreting various provisions.  A good overview of the statute can be found in the Criminal Tax Manual for the Department of Justice, Tax Division – Chapter 42.00

A recent case (United States v. Garrity, 2016 U.S. Dist. LEXIS 66372 (D. Conn. 2016), discussed in Jack Townsend’s blog, was one where the IRS had disclosed the name of a deceased taxpayer Paul G. Garrity, Sr. regarding his foreign (non-U.S.) accounts.  The disclosure included IRS investigation techniques that were disclosed as part of a FOIA request, which ultimately made it to the public.   This was found to be disclosure of return information as defined by  IRC Section § 6103.  However, the Court there found that there was no violation of the statute by the IRS, as the taxpayer was deceased by the time the claim was brought by the estate.  The government made a Title 31 FBAR penalty assessment of over US$1M including interest and penalties that is still pending.

It seems to me that the use of the TECS database by the IRS and Section 6103 are a bit like two heads of a coin.  It all deals with taxpayer information and what rights, if any do taxpayers have to protect their personal and financial information – especially where it can (purposefully or inadvertently – e.g., through a data breach/hacking) be released to the public.

There are many unanswered questions as there has been little to no litigation regarding how and when the TECS database can and should be used.

Does the government have any limits on its use?

This ultimately becomes more of a policy discussion about how and to what extent can/should the federal government have and use and collect personal financial and travel information of individuals (particularly for tax purposes)?

As FATCA data collection has now allowed exchanges of millions of records, these questions in my view take on even greater importance.  See 21 Dec 2015 post, Foreign Government Receives a “FATCA Christmas Gift” from IRS: 1 Gigabyte of U.S. Financial Information.

See a prior related post, 19 Jan 2014 – Should IRS use Department of Homeland Security to Track Taxpayers Overseas Re: Civil (not Criminal) Tax Matters? The IRS works with Department of Homeland Security with TECs Database to Track Movement of Taxpayers

Trendlines Show United States Citizens Renouncing at Historical Levels

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Graphs and charts are a nice way to show key pieces of information quickly.  The charts I create showing the numbers of U.S. citizens (“USCs”) who have renounced their citizenship help me better understand and track the detailed data behind the graphs.

In this vein, I have added trend-lines to two of the graphs that reflect the total annual and quarterly numbers of individuals who have renounced over the last few years.

The trend-lines are the blue dotted lines in each chart.  The first chart reflects annual renunciations over a longer period of time, which is compressed much more along the “x axis” – i.e., the horizontal axis.  The trend of USCs who are renouncing looks quite dramatic in this chart; a giant ski slope heading upwards fast.  Trendline Included - USC Annual Renunciations - 2000 through 2015

The next chart includes many more data points along the “x axis” spread out over a shorter period of time, which is also reflected by the dotted blue trend-line.  Accordingly, the trend-line appears to be a more gradual increase of USC renunciations.

Trendline Included - USC Qtr Renunciations - 2008 through 2016 1st qtr

Nevertheless, both show the trend over time as increasing substantially over time.

As has been explained in prior posts, those U.S. citizens who are considering renouncing U.S. citizenship should not take the decision lightly unless they want to be a “covered expatriate” with various adverse U.S. tax and legal consequences.

See, for instance the following prior blogs, Revisiting the consequences of becoming a “covered expatriate” for failing to comply with Section 877(a)(2)(C).

U.S. Citizens Overseas who Wish to Renounce without a Social Security Number will Necessarily be a “Covered Expatriate”

The “Hidden Tax” of Expatriation – Section 2801 and its “Forever Taint.”


1st Qtr 2016 Renunciations – New Normal

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The number of U.S. citizens who are reported to have renounced U.S. citizenship was 1,158 for the 1st quarter of 2016.  Qtrs 2008 through 1st 2016 - re USC RenunciationsI keep and track all names of USCs who are reported by the U.S. Treasury in the Federal Register. The data tracking reflects a significant increase in quarterly renunciations since 2008.  That is the general trend.  There is no direct quarter to quarter trend, as my graph above reflects (where 1,158 is the latest number of USC renunciations).

For some historical references, see, New Record of U.S. Citizens Renouncing – The New Normal, 11 Feb, 2015.

There are several strategic decisions that most all U.S. citizens need to consider prior to renouncing citizenship.  See, for instance – Part II: C’est la vie Ms. Lucienne D’Hotelle! Tax Timing Problems for Former U.S. Citizens is Nothing New – the IRS and the Courts Have Decided Similar Issues in the Past (Pre IRC Section 877A(g)(4)) Part II: C’est la vie Ms. Lucienne D’Hotelle! Tax Timing Problems for Former U.S. Citizens is Nothing New – the IRS and the Courts Have Decided Similar Issues in the Past (Pre IRC Section 877A(g)(4))

Can the U.S. Federal Government Bar Entry into the U.S. to a U.S. Citizen without a U.S. Passport?

Global Entry, SENTRI and NEXUS after Renouncing – the “Trusted Traveler Programs” – SAFE TRAVELS!

The “Dirty Secret” of U.S. FATCA IGAs

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The world is starting to wake up to better understand how the U.S. Treasury negotiated so-called “bilateral” FATCA Intergovernmental Agreements (“IGAs”) with some 113  countries around the world. Europe Map The list of all countries can be found here at the Treasury website –  Foreign Account Tax Compliance Act (FATCA)

Not all of these countries have actually signed the IGAs.  Many of them have what the U.S. Treasury calls an “agreement in substance.”

How does this impact USCs and LPRs residing outside the U.S.?  Many ways.

First, extensive information is being collected by foreign financial institutions (FFIs – non-U.S. financial institutions) throughout the world to identify “U.S. Persons” and “Substantial U.S. Owners.”  The IGAs use the term “Specified U.S. Person”  with respect to what are defined as “U.S. Reportable Accounts.”  See as an example, the Treasury FATCA IGA with Colombia, which is largely identical in form to almost all other IGAs.

Second, many FFIs have adopted a policy to no longer accept or retain U.S. accounts, due to the cost of compliance associated with U.S. citizens and lawful permanent residents.  Also, many FFIs simply want to avoid the risk of being penalized heavily by the U.S. federal Asia Map - including Russiagovernment for having U.S. taxpayers and being charged with some type of wrongdoing; namely aiding and abetting U.S. taxpayers to evade U.S. tax obligations.  See, Jack Townsend’s thoughtful website Federal Tax Crimes that reviews in detail the various cases with foreign banks, with a particular focus on Swiss banks, U.S. DOJ Program for Swiss Banks .

Now to the “dirty little secret” of FATCA IGAs.  They are not bilateral in the sense that U.S. banks do not need to provide the same detailed information on their non-U.S. clients (e.g., UK, French, Canadian, Mexican, Chinese, Dutch, Spanish, Colombian, Brazilian, residents, etc.) as do FFIs regarding “U.S. accounts.”  This is no real secret, since a simple reading of the FATCA IGAs will get you to this conclusion by simply understanding the difference between what is defined as a “U.S. Reportable Account” (which is extraordinarily broad) compared to “Country X Reportable Account.”  The latter definition, e.g., a Colombian Reportable Account, only obligates U.S. banks to send information of individual residents on U.S. source income under chapter 3 and certain accounts of Colombian entities.  South America Map

Hence, all non-U.S. source income to a Colombia resident individual is not subject to reporting by the U.S. financial institution.  She could have a portfolio of US$150M in non-U.S. mutual funds, ADRs traded on the NYSE and have no reporting of all of her income going back to the Colombian government.  Also, stock sales of U.S. corporations (e.g., Apple, Ford or Microsoft) is not treated as “U.S. source income” defined under chapter 3.  Plus, a Colombian resident who has an offshore corporation (e.g., a BVI company) that owns the investments, NO reporting is required of the U.S. financial institution; even if the entire US$150M portfolio were invested in U.S. stocks, U.S. treasuries, and other American made financial investments.

Contrast that with what is defined as a “U.S. Reportable Account” that would include a U.S. Person that is a “Controlling Person” of a “Non-U.S. Entity.”  Take the same example in reverse; a Colombian bank must identify all of its clients with Non-U.S. Entities (undertake an expensive due diligence process) to then identify whether such entities (e.g., a BVI company) has a “Specified U.S. Person”.   Plus, it does not matter if the income is from Colombian sources or non-Colombian sources.  Income is income and must be reported by the FFI.

Accordingly, Banks around the world in at least 113 countries  (e.g., UK, French, Mexican, Chinese, Dutch, Spanish, Colombian, Brazilian, Cayman, Singapore, Guatemala, Hong Kong, etc.) are required to drill down and collect detailed information on beneficial owners of basically all companies, trusts and other legal entities.  This work is required, so as to identify who are “U.S. persons” to identify “substantial U.S. owners” as that term is defined in the FATCA regulations.  The IGAs call these essentially “U.S. Reportable Accounts.” In the case of FFIs, U.S. taxpayers cannot hide behind offshore opaque legal entities (e.g., which would generally be illegal for USCs to form and hold assets in a foreign corporation and not report the assets, activities and earnings of the foreign corporation, which would generally be a CFC or possibly a PFIC).  Central America MapSee prior post:  March 30, 2015, The Problem with PFICs! “Avoid PFICs Like the Plague”

The FATCA IGAs, require these FFIs to provide extensive information on all income on these “U.S. Reportable Account” to the IRS, either directly or indirectly through their own governments.

In contrast, individuals resident in any foreign country (e.g., UK, French, Mexican, Chinese, Dutch, Spanish, Colombian, Brazilian, Belgium, Guatemala, Luxembourg, etc.) can generally hold their ownership interests of U.S. investment assets in U.S. banks and financial institutions through opaque legal structures and hide behind the entity without worrying that a U.S. financial institution has any duty to identify and disclose who are the beneficial owners to the tax authorities of those residents.  See Colombian individual scenario above with a BVI company.




New Proposed Treasury Regulations Will Not Affect USCs But Will Affect some LPRs

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United States Citizens (“USCs”) and lawful permanent residents (“LPRs”) who live largely outside the U.S. must generally be aware of U.S. federal tax laws and how they apply to them.  USCs and LPRs “expats” (living outside the U.S.) are of course constantly being required to understand U.S. tax law and comply with its provisions.

Recently, the U.S. Treasury proposed new regulations requiring certain foreign owned single member U.S. limited liability companies and grantor trusts to report information.

The preamble to the proposed regulations (which are titled – Treatment of Certain Domestic Entities Disregarded as Separate From Their Owners as Corporations for Purposes of Section 6038A) note that:IRS Form 5472

  • Some disregarded entities are not obligated to file a return or obtain an employer identification number (“EIN”). In the absence of a return filing obligation (and associated record maintenance requirements) or the identification of a responsible party as required in applying for an EIN, it is difficult for the United States to carry out the obligations it has undertaken in its tax treaties, tax information exchange agreements and similar international agreements to provide other jurisdictions with relevant information on U.S. entities with owners that are tax resident in the partner jurisdiction or otherwise have a tax nexus with respect to the partner jurisdiction. . . . a disregarded entity is not subject to a separate income or information return filing requirement. Its owner is treated as owning directly the entity’s assets and liabilities, and the information available with respect to the disregarded entity depends on the owner’s own return filings, if any are required. US Passport

For those LPRs residing outside the U.S. who are not U.S. taxpayers by virtue of an applicable income tax treaty (i.e., by application of the treaty tie-breaker rules, typically Article 4), it appears these newly proposed regulations could be applicable to their single member LLCs or grantor trusts.  USCs will not be effected, since the proposed regulations impose this reporting requirement when there is “(2) One foreign person [who] has direct or indirect sole ownership of the entity.”  A USC cannot be a “foreign person”; which is not a defined term in the current statute or regulation.  A “United States person” is a defined term and so is a “nonresident alien”; but not a “foreign person.”

Curiously, the Treasury is using IRC Section 6038A as the authority to issue such regulations.  That statute only references “a corporation” which is a technically defined term under IRC Section 7701(a)(3), (a)(4) and (a)(30)(C).  Section 6038A makes no reference to a”disregarded entity” a “grantor trust” or any other company or entity that are not “corporations.”  Therefore, it is difficult to imagine how the Treasury has the statutory authority to issue this proposed regulation without legislative authority?

Will U.S. Tax Law Regarding “Covered Expatriates” get Modified with Recent Government Push in International?

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It is rare to have the President of the United States hold press conferences specifically dealing with international tax policy and tax enforcement.  Nevertheless, this is what happened last week when President Obama announced his administration’s recent efforts in the field of international tax, anti-corruption and financial transparency.

His remarks can be watched here:  President Obama’s Efforts on Financial Transparency and Anti-Corruption: What You Need to Know

Also, the White House is putting forward a series of initiatives in this area:

Fact Sheet: Obama Administration Announces Steps to Strengthen Financial Transparency, and Combat Money Laundering, Corruption, and Tax Evasion

To date, none of the specific initiatives address current “tax expatriation law” under IRC Sections 877, 877A, et. seq.

Part I: PFIC Minutiae – Why the Devil is in the Details

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Previous posts have briefly discussed passive foreign investment companies (PFICs”).  See,  – “PFICs” – What is a PFIC – and their PFIC Form 8621Complications for USCs and LPRs Living Outside the U.S. (28 March 2014)


 The Problem with PFICs! “Avoid PFICs Like the Plague”  (30 March 2015).

This discussion will be the first part of a series of key points that will delve into some of the important details.

To begin with, it is important to note the following “new” requirements, if you have an investment that falls into the category of a “PFIC.”


  • The regulations require the “. . . United States person must file a separate IRS Form 8621 for each PFIC . . .” investment.  See, Treas. Reg. §1.1298–1T(e) –(e) Separate annual report for each PFIC—(1) General rule. If a United States person is required under section 1298(f) and these regulations to file Form 8621 (or successor form) with respect to more than one PFIC, the United States person must file a separate Form 8621 (or successor form) for each PFIC.

** This means that if the individual has a portfolio of 14 different mutual funds that are PFICs, the taxpayer has to prepare 14 different IRS Forms 8621.

Various financial institutions are just now starting to advise their clients who are U.S. citizens (commonly residing outside the U.S.) of these complex reporting rules.  See for instance, Fidelity’s website; Passive Foreign Investment Company, Fidelity is helping investors comply with U.S. PFIC tax rules

Fidelity knows there is concern among investors about the U.S. Passive Foreign Investment Company (PFIC) rules. These rules could significantly affect “U.S. persons” who hold Canadian mutual funds, so we are providing you with information about these complex rules. . .