Month: April 2014
William Edward Burghardt “W. E. B.” Du Bois was an individual of great accomplishment born in 1868. He was the first African American to earn a doctorate at Harvard. He was a co-founder of the National Association for the Advancement of Colored People (NAACP) in 1909, which has had a profound affect on U.S. policies and worked hard to eliminate racism in the U.S.
The U.S. federal government persecuted Mr. DuBois. “The U.S. Department of Justice ordered DuBois and others to register as agents of a “foreign principal.” DuBois refused and was immediately indicted under the Foreign Agents Registration Act. Sufficient evidence was lacking, therefore DuBois was acquitted.” See A Biographical Sketch of W.E.B. DuBois
The NAACP describes the incident as follows on their website – “In 1950-1951 Du Bois was tried and acquitted as an agent of a foreign power in one of the most ludicrous actions ever taken by the American government.”
Mr. Du Bois was a prolific writer and played a most historic role in the U.S., particularly during the first half of the 20st Century.
He wrote The Souls of Black Folk among many other works.
The U.S. government apparently confiscated his U.S. passport in 1951 and Du Bois was unable to travel to Africa. In 1963, the U.S. government refused to renew his U.S. passport and he became a naturalized citizen of Ghana. Did he relinquish his U.S. citizenship by application of U.S. law? Some reports and biographies claim he lost his U.S. citizenship by swearing an oath of allegiance to a foreign country.
Interestingly, the first tax provision imposed on “expatriation” (i.e., individuals who ceased to be U.S. citizens) was adopted by The Foreign Investors Tax Act of 1966 (“FITA”), shortly after the time Mr. Du Bois took allegiance to a foreign country. The concept of former LPRs as expatriates with tax provisions was not included in the statute until the 1995 amendments.
The 1966 FITA tax law on expatriation created a watershed concept, which has largely only had great affect during the last two decades, and particularly since the 2008 “HEART” Amendments.
USCs and LPRs who reside exclusively outside the U.S. are nevertheless subject to reporting in the U.S. of their bank and financial accounts within their country of residence (or any other accounts in another country outside the U.S.). For instance, a USC residing in France with accounts in London and Geneva is subject to these reporting requirements, in addition to her accounts in France.
A LPR residing in Sao Paulo, Brazil with accounts in Brazil and Uruguay are also subject to these reporting requirements for the Brazilian and Uruguayan accounts.
The law is obligatory. See, FOREIGN BANK ACCOUNT REPORTS – 2011 REGULATIONS EXTEND RULES TO MANY UNAWARE PERSONS, published in the International Tax Journal.
Specifically, Title 31, Section 5314 imposes the reporting requirement. The Title 31 regulations used an entirely different law, Title 26 – the Internal Revenue Code, and its definition of who is a “resident” contained in Internal Revenue Code Section 7701(b). Some have questioned the legal authority of the Treasury Department’s ability to utilize provisions of one federal statute and incorporate it into a completely different federal statute, without having statutory authority to do so.
1. Statute of Limitations. There is a statute of limitations whether or not an FBAR was filed. Hence if a USC neglected to file an FBAR for the year 2006, for instance, the time period for the government to assess penalties has lapsed. See, When does the Statute of Limitations Run Against the U.S. Government Regarding FBAR Filings?
2. Duplicate Reporting. FBARs are often duplicate with tax provision reporting – specifically, IRS Form 8938. See,USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms and USCs and LPRs residing outside the U.S. – and IRS Form 8938
3. No Statute of Limitations. Although the law that creates FBARs does have a statute of limitations, there is no time limit against the IRS to assess income taxes and tax penalties when the taxpayer does not file tax information returns, such as IRS Form 8938.
4. FBAR Penalty is Elective. The imposition of the FBAR penalty is not mandatory under the statute, which provides the government the power to may [not shall] assess a penalty. The relevant statutory provision is that “The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.” 31 U.S.C. Section 5321(a)(5)(B)
5. Collection Mechanism by Government is Limited. The collection of the FBAR penalty is not as easily collected under the law, as is a tax claim. A Title 26 tax lien and levy claim against the taxpayer’s property cannot be used to collect an FBAR penalty. Instead, the government has rights of set-off and will typically be required to bring a judicial action in Court to enforce the penalty assessment. See, U.S. vs. Williams, where the government sued to collect the 50% FBAR willfulness penalty.
6. All FBARs must now be filed electronically. The filing of the FBAR form is not with the IRS, but rather with FinCEN. It must now be filed electronically on Form 114, Report of Foreign Bank and Financial Accounts through the BSA E-Filing System website. The electronic form supersedes TD F 90-22.1 (the FBAR form that was used in prior years).
For a good overview of additional aspects of the law, see, Jack Townsend’s federal tax crimes blog and the guest blog written by Robert Horowitz – Guest Blog: Litigating the FBAR Penalty in District Courts and Court of Federal Claims (3/31/14)
By definition, anyone who does not live in the United States will have assets in their home country. Their value and amount may not be significant, but ownership of assets of various kinds is of course routine for all persons.
I have put a number of posts regarding FBARs – foreign bank account reports. See, When does the Statute of Limitations Run Against the U.S. Government Regarding FBAR Filings? and USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms
In addition, IRS Form 8938 is the form where USCs and LPRs (those who are “resident aliens” by definition) must report so-called “specified foreign financial assets.”
These include shares, partnership interests, investment accounts, bank accounts, etc. This reporting requirement started in 2012 for the years 2011 and hence is relatively new.
In addition to the asset type, any income and gains from the sale of the asset must be reported. There are detailed items of information that must be reported on this form.
One of the practical problems taxpayers always have, is making sure their tax return and the information they reported on it and the plethora of forms (such as Form 8938) is “complete and accurate”. A return which is not, is always subject to potential attack by the IRS. See, What could be the focal point of IRS Criminal Investigations of Former U.S. Citizens and Lawful Permanent Residents?
Next, the civil penalties for failing to file IRS Form 8938 is US$10,000 for each violation that can increase to US$50,000 after notification by the IRS. It’s an area you do not want to make a mistake – which can be costly.
The Taxpayer Advocate Report provides a graphical showing of how many taxpayers filed both IRS Form 8938 and the FBAR. The point is that filing one form, does not relieve the USC or LPR from also filing the other form. If they both apply, they both must be filed under the law.
See, 2014 Taxpayer Advocate Report – Re: Expanded Reporting Obligations and IRS Form 8938 (FATCA – specified foreign financial assets)
The U.S. Civil War is the Origin of U.S. Citizenship Based Taxation on Worldwide Income for Persons Living Outside the U.S. ***Does it still make sense?
Many people are surprised to learn why (and when) the U.S. federal government first imposed U.S. citizenship based taxation on worldwide income. It was during the U.S. Civil War.
Professor Reuven Avi-Yonah explains in his article why Congress imposed the income tax in 1864 in the Civil War and cites to the Revenue Act of 1864 which imposed worldwide U.S. taxation on:
” . . . any citizen of the United States residing abroad”, regardless of whether the income arose “in the United States or elsewhere.” See, Revenue Act of June 30, 1864, ch. 173, sec. 116, 13 Stat. 223, 281; discussed on p. 3 – The Case Against Taxing U.S. Citizens, Avi-Yonah
The quote of a then Senator during the Civil War who worked on the committee that drafted the initial law in 1861, is illuminating as to its rationale:
We do not desire that our citizens who have incomes in this country…should go out of the country, reside in Paris or elsewhere, avoiding the risk of being drafted or contributing anything personally to the requirements of the country at this time, and get off with as low a tax as everybody else… If a man draws his income from our public debt, or from property here, and resides in Paris, skulking away from contributing his personal support to the Government in this day of its extremity, he ought to pay a higher income tax.
President Abraham Lincoln signed the 1864 tax law that imposed a tax of up to 10% (the highest tax rate at the time) for incomes greater than about US$230,000 in current U.S. dollars (US$10,000 dollars in 1864). The tax expired in 1873.
Does such a system of worldwide taxation on USCs and LPRs residing overseas continue to make sense during the 21st century?
This is, of course, a tax policy question to be left to those who make the laws.
In the meantime, U.S. citizens and LPRs residing outside the U.S. must generally be aware of how the U.S. tax law applies to them. See, USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms
Sir Winston Churchill – Famous People. Did he become a U.S. citizen at birth via “derivative citizenship”? Did he file U.S. income tax returns?
The U.S. tax law imposes federal tax on all worldwide income of any U.S. citizen no matter where they reside. Sir Winston Churchill, was the famous Englishman who was credited with helping defeat the Axis powers in World War II. He became Prime Minister during that War.
Sir Winston Churchill’s mother was born Jeannette Jerome in Brooklyn, New York. His mother later became known as Lady Randolph Churchill and would have been a U.S. citizen by virtue of her birth in the United States pursuant to the 14th Amendment (Section 1) of the U.S. Constitution. However, the 14th Amendment was adopted after her date of birth.
Every individual, such as Winston Churchill who was born to a parent who was a U.S. citizen must consider whether they too are also a U.S. citizen by the concept known as “derivative citizenship“; i.e., “derived” from a U.S. citizen parent. The U.S. Citizenship and Immigration Services (USCIS) has a “Nationality Chart 1, for Children Born Outside U.S.” to help determine if the individual was a U.S. citizen at birth.
Having “derivative citizenship” means the individual became a citizen at birth, even if no (i) Application for Certificate of Citizenship (Form N-600) or (ii) U.S. passport (Form DS-11: Application For A U.S. Passport) is ever applied for by the individual.
In addition, Winston Churchill was granted honorary citizenship of the United States during his lifetime. Was he already a U.S. citizen by virtue of his mother?
Did he ever file U.S. income tax returns? Did he die owing U.S. income taxes to Uncle Sam?
If he was a U.S. citizen, he would have also been subject to U.S. estate taxes on his worldwide estate. Did his executor ever file U.S. estate tax returns when there was only a US$60,000 exemption and a top estate tax rate of 77%?
At least, fortunately for Sir Winston Churchill, the law of FBARs was not created until 1970, some 5 years after his death in 1965.