Month: February 2014

What are the consequences of becoming a “covered expatriate” for failing to comply with Section 877(a)(2)(C)?

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Many lay pIRS Form 8854ersons are stumped as they try to understand the tax consequences of Sections 877 and 877A.  The language in the drafting of the statutes is not so clear.  Be careful to understate the meaning and how the IRS interprets the law.

One of the greatest risks for anyone who wants to self-diagnose their path towards becoming a former U.S. citizen, is Section 877(a)(2)(C).  To be blunt, anyone who renounces their citizenship at the Embassy or Consulate will find that process relatively easy.  However, no one at the U.S. Department of State will provide tax advice or try to interpret the meaning of Section 877(a)(2)(C).  Indeed, the Foreign Affairs Manual used to read to the person taking the oath, simply provides the standard overview language of “special tax consequences” arising form the renunciation.

Even the most economically modest individual, with little assets or income, can fall into this trap for the unwary – Section 877(a)(2)(C).  The statute is spelled out below –

  • This section shall apply to any individual if—
  • (A) the average annual net income tax . . . is greater than $124,000,
  • (B) the net worth of the individual as of such date is $2,000,000 or more, or
  • (C) such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.
The provision is clear that anyone who does not satisfy it, will be a “covered expatriate” and hence subject to the taxation and reporting requirements under Sections 877 and 877A and 2801.
This is worth understanding well, before rushing off to take the oath at the U.S. Embassy or the U.S. Consulate.

Will the IRS and G20 Countries Disagree with the WSJ Opinion Piece of Last Year-

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OPINION EUROPE

How to Lose Friends, Citizens and Influence

The U.S. Foreign Account Tax Compliance Act seeks to co-opt foreign banks as long-arm enforcement agencies of the IRS.

This thoughtful article (found here) from an academic that previously appeared in the Wall Street Journal,  is worth re-thinking in light of the OECD and G20 Action Plan – Base Erosion Plan.

This is a good article on NPR – Why More Americans Are Renouncing U.S. Citizenship

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This is put both in the Media section and elevated to a specific post – as it is a thoughtful article.

This radio article notes that Americans who live overseas are renouncing their U.S. citizenship in record numbers.  The renunciation has been a sudden spike from a domino affect from the following:
1.  UBS aided tax evasion scheme that broke in 2009;
2.  Congressmen believed that tens of billions could be collected;
3.  FATCA was adopted in 2010 – to identify all American account holders throughout the world;
4.  Foreign banks cancelled accounts throughout Europe; and
5.  The U.S. is unusual in that it taxes its U.S. citizens wherever they are in the world.

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Will the IRS be assisting the Justice Department to prosecute U.S. citizens who have lived abroad most (if not all) of their lives?

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Will the IRS be assisting the Justice Department to prosecute U.S. citizens who have lived abroad most  (if not all) of their lives?

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The on-going focus of of the government, including the purported “Billions in Hidden Offshore Accounts” by the Permanent Subcommittee on Investigations, begs the questions, where are these billions of assets by U.S. taxpayers?

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Will this be the premiss used by the IRS and Justice Department to try to prosecute U.S. citizens residing overseas?

Law abiding U.S. citizens who have spent most (if not all) of their lives overseas are put in an untenable position visàvis the U.S. federal government regarding U.S. tax and tax filing obligations.

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See what the government has to say

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Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts

The Treasury Inspector General wrote the following in a 2009 report  (of which none of these numbers have seriously been questioned, supported or analyzed) – – titled

A Combination of Legislative Actions and Increased IRS Capability and Capacity Are Required to Reduce the Multi-Billion Dollar U.S. International Tax Gap

Synopsis

The IRS estimated that the entire tax gap for Tax Year 2001 was $345 billion.  However, the IRS has not developed an estimate for the international tax gap.  Non-IRS estimates of the international tax gap range from $40 billion to $123 billion.  While there might be overlap between the IRS tax gap estimate and the international tax gap, it is doubtful that the $345 billion estimate includes the entire international tax gap.

The primary reason for this conclusion is that identifying hidden income within international activity is very difficult and time–consuming.[4]  Furthermore, the IRS did not measure for the international tax gap component in the Individual National Research Project (NRP) estimate for the Tax Year 2001 tax gap.  Therefore, it is unlikely that hidden offshore income is comprehensively included in the IRS tax gap estimates.  In fact, the IRS’s Research, Analysis and Statistics (RAS) organization reasoned that because of cost, staffing, and technical limitations, an NRP type of direct measurement is unfeasible.  However, in an attempt to learn more, the IRS has other initiatives underway.

 

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How does the basic premiss that there are ‘Unpaid Taxes on Billions in Hidden Offshore Accounts'” hurt the average U.S. citizen taxpayer living overseas?

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The hearings of the Senate on “Offshore Tax Evasion” of the “Billions in Hidden Offshore Accounts” make for good headlines, but no one seems to ask the critical questions of the basic premiss.
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Will the hearings scheduled for February 26th, 2014, shed any light on this issue? 
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Here is what the government says:

Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts

Permanent Subcommittee on Investigations

February 26, 2014 09:30AM

Location: Dirksen Senate Office Building

Agenda

The Permanent Subcommittee on Investigations will hold a hearing, “Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts,” on Wednesday, February 26, 2014, at 9:30 a.m., in Room G-50 of the Dirksen Senate Office Building.

The hearing will continue the Subcommittee’s examination of tax haven bank facilitation of U.S. tax evasion, focusing on the status of efforts to hold Swiss banks and their U.S. clients accountable for unpaid taxes on billions of dollars in hidden assets. Witnesses will include representatives from a Swiss bank and the U.S. Department of Justice. A witness list will be available Monday, February 24, 2014.

Do some former U.S. citizens now consider this a “badge of honor” to have renounced their U.S. citizenship?

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A record number of U.S. citizenship renunciations in 2013, some 3,000, begs the question:  “Why are so many U.S. citizens renouncing?”

 

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