Most e-mailed Article from New York Times: “Why I’m Giving Up My Passport”
New York Times: “Why I’m Giving Up My Passport”
A relatively small percentage of the U.S. citizen population is aware of the complex requirements of the U.S. tax law and detailed financial reporting that is imposed under current law against individuals who reside outside the U.S. These same laws apply to both those USCs who live in and outside of the U.S. See, for instance, “PFICs” – What is a PFIC – and their Complications for USCs and LPRs Living Outside the U.S.
The December 7th Op-Ed article in the New York Times by Jonathan Tepper is now the most e-mailed of all NYTimes articles, as of today, which indicates the general public may now start to better understand the scope of U.S. tax and account reporting laws that are unique in the world.
He does summarize well, how the law works in practice:
The United States is an outlier: Its extraterritorial tax laws apply to American citizens and companies no matter where they are. We are the only country (except, arguably, Eritrea) that taxes all of its citizens on worldwide income rather than where the income is earned. Expatriate Americans have to pay taxes once, wherever they live, and then file again in the United States.
The I.R.S. doesn’t tax the first $97,600 of foreign earnings, and usually doesn’t double-tax the same income. So most expatriates owe no money to the I.R.S. each year — and yet many of us have to pay thousands of dollars to accountants because the rules are so hard to follow.
The extraterritorial reach of the income tax dates from the Civil War, . . .
These legal requirements also impose detailed reporting on all financial accounts in the country of residence that meet a modest threshold of US$10,000 at any time during the year. See, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.
One of the consequences of the U.S. law, is that the Department of Justice argues (and has done so successfully at two different trial courts) that a USC does not need to actually know of the requirements of the FBAR law to still be liable for a civil willfulness penalty that can represent more than 300% of the value of all financial accounts of the individual. See, Why the Zwerner FBAR Case is Probably a Pyrrhic Victory for the Government – for USCs and LPRs Living Outside the U.S. (Part I)
Many legal analysts would like to think Zwerner is just an outlier result that will not happen to most USCs residing outside the U.S. At the same time, most legal experts never thought the facts of the case in Zwerner would compel the government to assess what represented more than 200% of his foreign accounts as a civil penalty (i.e., a penalty of US$3.6M on an account of $1.69M).
The information reporting requirements are extensive and the government has argued the individual does not need to have actual knowledge of the law. See, FBAR Penalties for USCs and LPRs Residing Overseas – Can the Taxpayer have no knowledge of the law and still be liable for the willfulness penalty? See government memorandum.
In the government brief, they argue “ . . . the United States need not prove that the taxpayer actually knew of the FBAR requirements he violated . . . ”
This puts a very low burden on the government when they pursue penalties that represent multiples of the amounts any individual has in their accounts.
Ironically, the facts of Boris Johnson, the mayor of London would indicate he has easily violated such laws (assuming he does not file his annual FBARs); by his statement that he will not pay the tax owing under U.S. federal tax laws. Surely, the U.S. government will be able to pursue him under the “willful blindness” theory they are using against other U.S. citizens who did not file FBARs. See, According to news press, London Mayor, dual citizen, refuses to pay United States income taxes
For those practitioners who are handling cases before the IRS and Department of Justice on a regular basis, we understand well how the threat of ominous FBAR penalties can be bandied about against individuals to try to get them to settle on terms favorable to the government. See Mr. Zwerner, who indeed paid more than 100% of his entire foreign account (some US$1.69M) in settlement of his case.
December 9, 2014 at 1:45 pm
Reblogged this on U.S. Persons Abroad – Members of a Unique Tax, Form and Penalty Club and commented:
https://twitter.com/USCitizenAbroad/status/541932814217007104
December 9, 2014 at 3:57 pm
Unfortunately you are missing the point when bringing up the Zwerner case. The IRS was looking to collect 4x willful FBAR penalties and had to settle in the end only for 2x. BUT more importantly for Mr. Zwerner and any other HOMELANDER when talking about Title 31 penalties the “offshore” account is and was only a minor portion of his overall wealth For B.J. and 7 million other expats who live and work abroad these “offshore” accounts represent in most cases 100% of the expats wealth and a penalty of 27.5% or 50% are nothing short of an asset confiscation and cannot be compared to the case of Mr. Zwerner.
December 9, 2014 at 4:19 pm
May I present for the readers a penalty facts summary in the case of Mr. Zwerner and a realistic worst case scenario for John Does.
stage 1 : a) government assessed 4 civil FBAR penalties equivalent to 50% of the highest account balance for each of tax year 2004, 2005, 2006 and 2007, aggregating $3,488,609.33 for an account that appeared to have had a high balance of $1,691,054 during the relevant time period.
b) Jury trial in the Federal District Court for the Southern District of Florida. Jury returned a verdict finding Mr. Zwerner “willful” and thus liable for 3 civil FBAR penalties equivalent to 50% of the high balance in his foreign financial account for each of the years 2004, 2005 and 2006 years as previously assessed by the government. The jury determined Mr. Zwerner was not “willful” as to the year 2007.
Final outcome : settlement post trial pending violation of the constitutional prohibition against excessive fines for 2 civil FBAR penalties for 2004 and 2005 in the amounts of $723,762 and $745,209 respectfully, interest thereon of $21,336.11 and $20,947.52 respectively, plus statutory penalties that have accrued under 31 U.S.C. § 3717(e)(2) on the FBAR penalty assessments for 2004 and 2005 of $128,016.64 and $125,685.11 respectively.
stage 2 : a) The IRS asserted 3- 75% civil income tax fraud penalties for tax years 2004, 2005 and 2006.
Final outcome : Following the audit, the income tax civil fraud penalty was abated in the U.S. Tax Court for 2006, by IRS Appeals for 2004 and 2005, and was not even asserted by the IRS for 2007.
In most cases the IRS just has a suspicion with regards to willfulness or willful blindness and want to assess the civil FBAR penalties for 2 or 3 years to force the taxpayer to litigate for a better result.
Keep in mind since no civil fraud could be sustained Mr. Zwerner was entitled to the mitigation guidelines for establishing the correct civil FBAR penalties but only because of the size of the account it did not matter.
In this highly publicized trial and case the DOJ Tax did only collect in the end 2 willful civil (hypothetically mitigated) FBAR penalties without civil tax fraud established.
The takeaway for all the taxpayers currently out there wondering what their realistic worst case scenario should look like …. it should be a max. of 2 willful civil FBAR penalties, of course always assuming not more egregious facts than in the case of Mr. Zwerner.