Month: January 2014
How much “Myth” versus “Reality” is in the Treasury’s claim – Myth vs. FATCA: The Truth About Treasury’s Effort To Combat Offshore Tax Evasion? Is it a Myth? ?- ? [Myth No. 3: Some claim that Americans living abroad will give up their U.S. citizenship because of liabilities and burdens created by FATCA.] ?
It is worth reading “Myth vs. FATCA” by Robert Stack, Deputy Assistant Secretary (International Tax Affairs) at Treasury; to obtain a better understanding of the U.S. Treasury’s views of how it will impact Americans living outside the U.S. “Myth No. 3” is particularly relevant here: Myth No. 3: Some claim that Americans living abroad will give up their U.S. citizenship because of liabilities and burdens created by FATCA.
The argument made by Mr. Stack is that it is a myth that FATCA imposes no new obligations on U.S. citizens living abroad. This is indeed correct in a technical sense of how the tax law works; Title 26 applies to U.S. citizens who have spent most all of their lives in a country other than the U.S. This has been the law since the time of the U.S. Civil War in the 1800s. However, what is not mentioned, is that there are a host of international tax penalties that will apply to these individuals, even if no income taxes are owing. These information reporting requirements in the law are typically not understood among most U.S. tax professionals (U.S. tax lawyers, CPAs and enrolled agents) let alone the layperson taxpayer.
For instance, the “FBAR law” from the Bank Secrecy Act has been around since 1970, yet virtually no one in the private sector or the government had much of any understanding of that law until the last few years. Plus, Congress adopted various information reporting requirements in the 1980s, the 1990s and now during the last decade that are still not well understood.
The civil penalties for each failure by the U.S. citizen living abroad for these information reporting requirements is consistently US$10,000 per violation. If an individual inadvertently failed to file 3 information returns over a period of 5 years (e.g., regarding their accounts or companies in their home country of residence, e.g., they could be facing US$150,000 of civil penalties – 3x5xUS$10,000!). For a more detailed discussion of these penalties see pages 8 and 9 – http://www.procopio.com/userfiles/file/assets/files1/docs-1738595-v2-accidental-americans-and-the-push-to-renounce-us-citizenship-2448.pdf
Mr. Stack goes on to say “U.S. taxpayers, including U.S. citizens living abroad, are required to comply with U.S. tax laws. Individuals that have used offshore accounts to evade tax obligations may rightly fear that FATCA will identify their illicit activities. Yet a decision to renounce U.S. citizenship would not relieve these individuals of prior U.S. tax obligations, and might well create additional U.S. tax obligations for certain citizens and long-term residents who give up citizenship or residency.”
This statement assumes that U.S. citizens residing overseas have somehow been using their normal individual, business or other investment accounts in their home country of residence to “evade tax obligations”! This is where there is a big disconnect in the understanding (or lack of understanding) of the U.S. Treasury Department and IRS of those millions of U.S. citizens who reside overseas. Undoubtedly, there are some U.S. citizens residing overseas who are taking steps to evade tax and not comply with the law. However, this author’s experience is that far far far more of the U.S. citizens residing overseas, simply do not have a complete understanding of a very complex U.S. tax law and bank secrecy reporting.
The “Myths” identified by the Treasury Department are set out below and can be read in their entirety at (Are they really “Myths”?)-
Myth vs. FATCA: The Truth About Treasury’s Effort To Combat Offshore Tax Evasion,
Myth No. 1: Some claim it’s overly costly and burdensome due to complex
regulations and difficult to meet reporting requirements.
Myth No. 2: Some claim that U.S. citizens living overseas will become
outcasts in the international financial world.
Myth No. 3: Some claim that Americans living abroad will give up their U.S.
citizenship because of liabilities and burdens created by FATCA.
Myth No. 4: Some claim that countries are opposed to FATCA, in part because
the legislation could force foreign banks to violate laws in their own
Myth No. 5: Some claim that FATCA will generate a backlash from foreign
governments who view this as an overreach of U.S. law.
Myth No. 6: Some claim that FATCA will unfairly expose FFIs to heavy
penalties before they have the necessary mechanisms in place to comply.
Myth No. 7: Some claim that FATCA aims to use foreign banks as an extension
of the IRS.
Senate Finance Report on International Competitiveness Identifies Possible “Expatriation” Reforms for U.S. Citizens Residing Overseas. Will U.S. citizens who live outside the U.S. find any relief soon?
IV. NON-RESIDENT U.S. CITIZENS
1. Provide an election to citizens who are long-term nonresident citizens to be taxed as nonresident aliens if they meet certain conditions (Schneider, “The End of Taxation Without End: A New Tax Regime for U.S. Expatriates,” 2013; similar to the law in Canada)
a. Require a minimum period of residence abroad
b. Impose an exit tax on electing taxpayers where deemed to sell all assets at the time of election
This concept was proposed by By Patrick W. Martin and Professor Reuven Avi-Yonah . “Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,” September 2013.
For complete summary see – http://www.finance.senate.gov/issue/?id=0587e4b4-9f98-4a70-85b0-0033c4f14883
This document is the fifth in a series of papers compiling tax reform options that Finance Committee members may wish to consider as they work towards reforming our nation’s tax system. This compilation is a joint product of the majority and minority staffs of the Finance Committee with input from Committee members’ staffs.
Is the Senate Finance “Punting” on reforming international tax rules for U.S. citizens living overseas?
Summary of Staff Discussion Draft: International Business Tax Reform
Chairman Max Baucus
U.S. Senate Committee on Finance
“The staff discussion draft does not address the international tax rules addressing individuals, whether for U.S. citizens living overseas or foreign nationals moving to the United States. The Chairman’s staff is considering reforms to simplify the rules in this area while appropriately taxing such individuals. Comments are requested regarding the scope and mechanics of reforms in this area.”
One of the greatest traps for the unwarry is how Section 877(a)(2)(C) can cause even the most economically modest person to become a “covered expatriate” with the adverse tax and reporting requirements that follow.
One of the greatest traps for the unwary is how Section 877(a)(2)(C) can cause even the most economically modest person to become a “covered expatriate” with the adverse tax and reporting requirements that follow.
All individuals should have a clear understanding about how this specific code section can affect their personal taxes and the future taxes of any future gifts or bequests/inheritances to U.S. beneficiaries. All U.S. citizen or U.S. resident children, grandchildren and friends and family of the “expatriate” who fall into this “Section 877(a)(2)(C) trap” will likely be subject to the 40% tax on “covered gifts” or “covered bequests.” This can come as a real surprise years after the “renouncing” citizenship or “abandoning” lawful permanent residence status.
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
The Department of Homeland Security (DHS) uses the TECS database, which was originally managed and created by the Treasury Department as the Treasury Enforcement Communications System. This database allows the U.S. federal government to track the movement of people, funds and various transactions. It is now being used by the IRS to feed taxpayer data to the TECS as described in the IRS Internal Revenue Manual –
- The Treasury Enforcement and Communication System (TECS) is used extensively by the law enforcement community. This subsection discusses the information available on TECS. Items discussed include:
- description and purpose of TECS
- responsibilities for TECS
- information available from TEC
- Treasury Enforcement and Communication System (TECS) is a computerized information system designed to identify individuals and businesses suspected of, or involved in, violation of Federal law. Treasury Enforcement and Communication System is also a communications system permitting message transmittal between Treasury law enforcement offices and other Federal, national, state, and local law enforcement agencies. The TECS provides access to the FBI’s National Crime Information Center (NCIC) and the National Law Enforcement Telecommunication Systems (NLETS) with the capability of communicating directly with state and local enforcement agencies. The NLETS provides direct access to state motor vehicle departments.
- The responsibility for TECS lies both in Headquarters (HQ) and the field offices. The following subsections provide a brief description of these responsibilities.
- The Associate Director, Warrants and Forfeitures will be responsible for ensuring that all TECS entries meet authorized disclosure criteria.
- All fugitive entries will be made through HQ and all non-fugitive entries will be made through or authorized by the Associate Director, Warrants and Forfeitures.
- Headquarters is also responsible for conducting and coordinating periodic training for TECS operators, as well as providing operating instructions, including the TECS Operating Manual, at all locations, and additional instructions as needed.
- Each Resident Agent in Charge (RAC), Scheme Development Center (SDC), will be responsible for:
- designating TECS users and coordinating their training
- performing queries for field offices upon request, and reporting the results upon receipt of a TECS reply (either a HIT or a No Record) by telephone, transmission of the TECS hard-copy reply to the field office, or by attachment of the hard-copy reply to the primary investigation (PI) being evaluated
- The Special Agent in Charge (SAC) in each field office will be responsible for:
- designating a TECS Systems Control Officer (SCO) to assist other users and compliance functions in obtaining authorized data
- designating TECS users and coordinating their training
- disseminating written instructions to field office personnel regarding TECS query requests within the general guidelines as stated in this section
- providing HQ with a mailing list for their field office of direct distribution recipients of wanted circulars
- All information retrieved from TECS must be stamped OFFICIAL USE ONLY.
- The US Customs Financial Intelligence Branch (FIB) Financial Information Database provides information via TECS as follows:
- Form 4789, Currency Transaction Reports (CTR)
- Reports of Foreign Bank and Financial Accounts (FBAR), Treasury Form 90-22.1
- Form 8362, Currency Transaction Reports by Casinos (CTRC)
- Suspicious Activity Reports (SARs), Form TDF 90-22.47
See Also –
Why should the names of former U.S. citizens be published – especially if they have lived all of their lives in the U.S.?
Why should the names of former U.S. citizens be published – especially if they have lived all of their lives outside the U.S.? The law provides for publication (Section 6039G) and apparently there is no method by which they can be suppressed. Should Congress change this law?
Federal Benefits and Obligations – US Department of State – Will you lose your social security benefits? Will you lose access to medicare?
One very important consideration for all who are considering renouncing U.S. citizenship are the loss of U.S. federal government benefits. Will you lose your social security benefits? Will you lose access to medicare?
Federal Benefits and Obligations
Federal Benefits and Federal Agency Programs and Services for U.S. Citizens Abroad
Overseas Americans: Time to Say ‘Bye’ to Uncle Sam? – Wall Street Journal… What are the most important questions you must ask prior to renouncing U.S. citizenship or formally abandoning your lawful permanent residency?
by Laura Saunders Aug 17, 2013 – The U.S. tax code does allow taxpayers living overseas an exemption … It includes people born on U.S. soil as well as people born to U.S. citizens living abroad. … In 2010, Congress passed the Foreign Account Tax Compliance Act, … Important Fatca provisions have been postponed until July 1, 2014, but …
What are the most important questions you must ask prior to renouncing U.S. citizenship or formally abandoning your lawful permanent residency?
U.S. Citizens and Resident Aliens Abroad
If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.
When to File
If you are a U.S. citizen or resident alien residing overseas, or are in the military on duty outside the U.S., on the regular due date of your return, you are allowed an automatic 2-month extension to file your return and pay any amount due without requesting an extension. For a calendar year return, the automatic 2-month extension is to June 15.
If you are unable to file your return by the automatic 2-month extension date, you can request an additional extension to October 15 by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, before the automatic 2-month extension date. However, any tax due payments made after June 15 will be subject to both interest charges and failure to pay penalties.
2014 Taxpayer Advocate Report – Re: Expanded Reporting Obligations and IRS Form 8938 (FATCA – specified foreign financial assets)