Month: March 2014
Is the new government focus on U.S. citizens living outside the U.S. misguided or a glimpse at the new future?
Senators on the Permanent Subcommittee on Investigations have recently focused extensively on U.S. nationals living outside the U.S. who have Swiss accounts. The full report can be read REPORT: Offshore Tax Evasion:The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts (February 26, 2014)
There are millions of U.S. citizens living in all parts of the world, many of whom I have identified as “Accidental Americans.” See the detailed tax article Accidental Americans” – Rush to Renounce U.S. Citizenship to Avoid the Ugly U.S. Tax Web” International Tax Journal,CCH Wolters Kluwer, Nov./Dec. 2012, Vol. 38 Issue 6, p45; Martin, P.
During the past century U.S. Citizens living permanently or nearly permanently outside the U.S. have been “de facto” non-residents for U.S. income tax purposes. Not because the law provided they were not residents, but simply because there was little awareness of the unique system of U.S. citizenship based taxation (or those cases where individuals purposefully chose not to comply with U.S. tax laws). The U.S. Supreme Court in Cook vs. Tait found it Constitutional nearly 100 years ago. See . “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,” by Patrick W. Martin and Professor Reuven Avi-Yonah, 2013.
This “de facto” non-residency for U.S. citizens is rapidly changing for several reasons:
First, the UBS scandal of U.S. citizens with undeclared accounts broke in 2008 and 2009.
Second the legal struggle between the U.S. Justice Department and the Swiss government and Swiss financial institutions during these past years.
Third, the adoption of FATCA by the Congress and President Obama in 2010.
Fourth, the current day technology which makes collecting, sending, sorting and identifying taxpayers and their assets through the worldwide financial sector now feasible.
Fifth, the implementation of FATCA by the U.S. in 2014 and the 20 plus FATCA Intergovernmental Agreements entered into with various countries.
Sixth, the OECD plan for a worldwide multilateral FATCA like system to be implemented shortly.
Seventh, the high profile IRS offshore voluntarily disclosure programs in 2009, 2011 and the current program launched in 2012.
Eighth, the on-going deferred prosecution agreements that have been entered into with more than 100 Swiss banks and the U.S. Justice Department.
Ninth, on-going criminal indictments by the U.S. Justice department of various taxpayers, foreign bankers, foreign lawyers and other so-called enablers for tax evasion, filing fraudulent documents and aiding and abetting the same.
Tenth, the Senate bi-partisan hearings that have and keep focusing and pushing these issues publicly at multiple levels.
Eleventh, the internet and current methods of communications and international media that have brought worldwide awareness to all of the above. This awareness has arrived to many of the corners of the world about these efforts and the concept of U.S. citizenship based worldwide taxation.
A large portion of the Senate committee report is dedicated to U.S. citizens who live outside the U.S. and are not compliant with U.S. tax laws. The following chart from the report highlights this focus as to the approximately 6,000 U.S. citizen accounts at Credit Suisse who were/do not live in the U.S:
For further observations on this topic, see an earlier post – Key Take Aways from Senate Investigations re: Foreign Banks and “Offshore Tax Evasion”: U.S. Citizens Residing Overseas have Become a Focus of the Government.; Posted on March 4, 2014
IRS Releases New IRS Form W8-BEN. * U.S. citizens and LPRs beware of completing such form at the request of a third party.
Hot off the press!
The long awaited revised IRS Form W8-BEN has been released (March 2014). The major changes to IRS Forms W8, particularly W-8BEN-E (which is still in draft form), have been driven by the changes in the law under FATCA.
Importantly, no U.S. citizen can legally sign and certify they are NOT a “U.S. person” under U.S. federal tax law. Hence, they cannot sign and complete IRS Form W-8BEN.
The form, as is true with all IRS forms, is signed under penalty of perjury. For a discussion of tax crimes of filing false documents see What could be the focal point of IRS Criminal Investigations of Former U.S. Citizens and Lawful Permanent Residents?.
Some key highlights of information on new IRS Form W-8BEN is set out below:
Importantly, lawful permanent residents (“LPRs”) have a much more complicated analysis to undertake to determine whether they ARE or are NOT a “U.S. person.”
One of the key considerations of this determination is whether the individual lives in the U.S. or is living outside the U.S. in a country which has a U.S. income tax treaty with the U.S. See Oops…Did I “Expatriate” and Never Know It: Lawful Permanent Residents Beware! International Tax Journal, CCH Wolters Kluwer, Jan.-Feb. 2014, Vol. 40 Issue 1, p9.
What could be the focal point of IRS Criminal Investigations of Former U.S. Citizens and Lawful Permanent Residents?
Below is a fairly detailed summary of the type of tax crimes that are commonly investigated by IRS Criminal Investigation (“CI”) agents.
As has already been noted, TaxAnalysts reporter Jaime Arora reported in the 3 March 2014, Worldwide Tax Daily certain comments made by Mr. Jeffrey Cooper, who is the deputy director of the IRS Criminal Investigation division’s international operations. It was reported that IRS CI is looking into why people are making the choice to shed their U.S. citizenship; whether it is related to any particular laws. Cooper was quoted at the Federal Bar Association’s Section on Taxation’s 38th Annual Tax Law Conference held on February 28, 2014.
TaxAnalysts journalist Arora quoted Cooper as identifying why people are making the choice and “If we find something, we do; if not, we just move on,” he said.
It is common policy for the IRS CI not to provide information on how they commence taxpayer investigations, including how they obtain U.S. citizenship renunciation referrals or documents. There could be a number of ways these investigations are commenced. It may be as simple as taking the list from the Quarterly Publication of Individuals, Who Have Chosen to Expatriate – Quarterly Publication of Individuals, Who Have Chosen To Expatriate, as Required by Section 6039G and start reviewing their tax return files (IRS Forms 1040, 8854, etc.) along with FBAR filings.
IRS CI tax investigations generally focus on false documents or false statements, evasion of taxation, aiding and abetting of the above along with other related tax and Bank secrecy (Title 31) crimes.
There are a host of reporting requirements and factual information that must be provided under Sections 877 and 877A, for all persons (including those with little to no assets), specifically including filing IRS Form 8854 which asks for a “boat load” of asset, income, liability and tax information. A former U.S. citizen or LPR always needs to be careful that the information provided is true, accurate and complete. See Part V of the form.
A summary of these crimes is set out below:
a. Tax Evasion (IRC Section 7201)
b. Filing a False Return or Other Document – Perjury (IRC Section 7206(1) )
(i) Aiding or assisting in the perpetration of a false or fraudulent document (26 U.S.C. § 7206(2))
(ii) Removal or concealment with intent to defraud, commonly related to untaxed liquor (26 U.S.C. § 7206(4))
(iii) Compromises and closing agreements involving fraud or concealment (26 U.S.C. § 7206(5))
c. Failure to File Return, Supply Information, or Pay Tax – (IRC § 7203 – Misdemeanor – up to 12 months imprisonment)
d. Fraudulent Returns, Statements, or Other Documents (IRC § 7207)
e. “Structuring” Transactions to Evade Cash Reporting (IRC § 6050I)
2. Tax Related Criminal Offenses under Titles 18 and 31 (Not Tax Law Specific)
a. Conspiracy (Section 371 of Title 18)
(i) Elements of the Offense
(ii) Penalties and Statute of Limitations
b. False Statements (Title 18 U.S.C. § 1001)
(i) Penalties and Statute of Limitations
d. Mail fraud
e. Principals and those Who Aid and Abet (Title 18)
f. Accessory After the Fact
Finally, it is worth noting that the government regularly collects information from internet resources, such as blogs and e-mails as they build a case for criminal prosecution. A former head of the Tax Division at the U.S. Department of Justice once told me that “e-mails and internet communications was God’s gift to prosecutors”.
Which countries do most Lawful Permanent Residents (“LPRs”) reside in – if they are not living in the U.S.?
This is a very important question for purposes of the “tax-expatriation” rules that can apply to LPRs who leave the U.S. and live predominantly in another country. This is particularly important if the individual lives in a country with a U.S. income tax treaty.
See the article – Oops…Did I “Expatriate” and Never Know It: Lawful Permanent Residents Beware! International Tax Journal, CCH Wolters Kluwer, Jan.-Feb. 2014, Vol. 40 Issue 1, p9.
For statistical information of LPRs and their country of origin, see, Rytina, Nancy; Estimates of the Legal Permanent Resident Population in 2012, Office of Immigration Statistics (July 2013). p 3.
Country of Birth
Mexico was the leading country of origin of the LPR population in 2012 (see Table 4). An estimated 3.3 million or 25 percent of LPRs came from Mexico. The next leading source countries were China (0.6 million) and the Philippines (0.6 million), followed by India (0.5 million) and the Dominican Republic (0.5 million). Forty-two percent of LPRs in 2012 were born in one of these five coun-tries. The 10 leading countries of origin, which also include Cuba, Vietnam, El Salvador, Canada, and the United Kingdom, repre-sented 55 percent of the LPR population.
Key Take Aways from Senate Investigations re: Foreign Banks and “Offshore Tax Evasion”: U.S. Citizens Residing Overseas have Become a Focus of the Government.
Instead of the government finding U.S. citizens living outside of the United States, as a low priority, the Senate Permanent Subcommittee on Investigations focused extensively on Swiss accounts opened by these individuals. The full report can be read REPORT: Offshore Tax Evasion:The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts (February 26, 2014)
Some key excerpts of that report are as follows (at page 4):
. . . focused primarily on Swiss accounts held by U.S. residents, ignoring the over 6,000 accounts opened by U.S. nationals living outside of the United States. . . . It was not until 2012, that the bank expanded the Exit Projects to include a review of the thousands of Swiss accounts opened by U.S. nationals living outside of the United States.. . .
Instead of concluding that the complex U.S. laws are leading to non-compliance by U.S. citizens residing outside the U.S. (per the Taxpayer’s Advocate Report), it seems to conclude to the contrary and the report highlights the virtues of the OVD program in non-compliance as generally willful with millions of U.S. citizens living outside the U.S. who are not in compliance, per the following statement (at page 22):
“The OVDP continues to provide valuable information for the United States in its efforts
to combat offshore tax abuse, although it is far from clear that effective use is being made of the
information generated. For taxpayers, it continues to offer a useful alternative to report
undeclared offshore accounts that, potentially, number in the millions. According to the Taxpayer Advocate, “While 7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements, the IRS received only 807,040 FBAR submissions in 2012,” signaling “significant information reporting noncompliance.”69 2013 Annual Report to Congress — Volume One, Taxpayer Advocate Service, “OFFSHORE VOLUNTARY DISCLOSURE: The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Made Honest Mistakes,” at 229.
This report seems to get off track by not distinguishing between normal U.S. citizens who are living out their lives in their country of residence, as opposed to U.S. nationals who are intentionally attempting to evade taxes, filing false documents, not filing returns, or otherwise intentionally violating U.S. law. All of these 7.6 million U.S. nationals living around the world are being lumped together by the government with U.S. resident citizens, irrespective of the facts of each individual and family.
This is a bit of a Bombshell – If the IRS Criminal Investigation (“CI”) is investigating U.S. citizens renouncing their citizenship?
See the blog spot of Jack Townsend –
It is reported the IRS CI is interested in the reasons that U.S. citizens renounce their citizenship. Jaime Arora, IRS Criminal Investigation Division Looking Into U.S. Citizenship Renunciations, 2014 TNT 41-8 (3/3/14). The article is nonspecific about what the IRS is looking for and the consequences might be if they found something.
Still, there are tax requirements for renouncing citizenship in certain cases. I won’t go into them now, but link to blogs on the subject here.
I can imagine that mishandling the various forms and representations required for renunciation, including the tax forms and representations, could be a crime under various federal statutes — tax and nontax — and, at last if something was done wrong related to taxes, conceivably the renunciation conduct could refresh statutes of limitations for tax crimes that might have otherwise expired.
Importantly, why someone renounces their U.S. citizenship under the current tax law (IRC Section 877A) is not relevant as to the tax consequences to the individual who renounced. This is very different from the law that was passed in 1996. These rules changed in 2004 and yet again in 2008 to create an objective set of taxation rules. For this reason, it would be very odd for the IRS CI to be investigating (at least recent expatriates) former U.S. citizens to determine why, i.e., the reasons, they renounced U.S. citizenship.
Should the U.S. government consider it a positive development that about 3,000 citizens renounced in 2013?
Some view this number to be a statistical blip; considering there are some 13.3 million lawful permanent residents (“LPRs”) many of whom are trying to become U.S. citizens. See, Rytina, Nancy; Estimates of the Legal Permanent Resident Population in 2012, Office of Immigration Statistics (July 2013).
The 200% increase in U.S. citizenship renunciations in 2013 compared to 2012 is still yet a fraction of those persons who are wishing to become U.S. citizens.
If all the 13.3 million LPRs plan on becoming U.S. citizens, this represents a mere 0.02% of those renouncing citizenship. Assume just 1/2 of the LPRs above are planning on becoming U.S. citizens, this still represents only 0.04% of those renouncing citizenship.
Bottom Line: There is a big line of people trying to become U.S. citizens versus a very small line of people trying to shed their U.S. citizenship.