FBAR and Title 31
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.
“Neither Confirm nor Deny the Existence of the TECs data”: IRS Using the TECs Database to Track Taxpayers Movements –
There have been a series of previous posts that discussed the IRS and other government agencies ability to track taxpayers and their assets outside the U.S.
See for instance, the following posts: 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
Interestingly, the release of IRS internal training manuals and materials (which were obtained through a Freedom of Information Act – FOIA – request) and includes the Power Point slide in this post, describes the TECs database and how it can be used by IRS agents regarding foreign assets and individuals as follows:
The Treasury Enforcement Communications System (TECS) is a database maintained by the Department of Homeland Security (DHS), and it is used extensively by the law enforcement community. TECS contains historical travel information such as records of commercial airline flights, border crossings, and specific dates that individuals have traveled to and from the United States.
All this information could provide you with potential leads to pursue.
For example, the discovery of where the taxpayer may hold assets or accounts or where the taxpayer conducts business. It may also assist in determining taxpayer’s residency and the credibility of taxpayer testimony. TECS may have gaps in the information captured, caution is advised. For example, it might contain incomplete information about border crossings, private plane and private boat information. It does not contain enough stand alone data to determine residency. It should be used together with other sources of information.
In addition, the IRS training materials demonstrates the secrecy of the TECs database and what steps the IRS tells their agents to take regarding the TECs database. The following excerpt directly from the IRS “Matrix Application Training International Individual Compliance: Basic Structures Part II: Pre-Audit, Investigative Techniques & Statutes”
• IRM 5.1.18.14.10 – Covers using TECS Historical Travel Information
First and foremost, do not discuss the existence of TECS with the taxpayers. We must neither confirm nor deny the existence of TECS data.
USCs and LPRs Who Are Having Their Non-U.S. Accounts Closed: Is it hype or is it real?
Is it hype or is it real?
It’s difficult to know with certainty how accurate are the various claims that U.S. citizens overseas are having their accounts closed by foreign financial institutions. If it has happened to you, of course you will know it. See for instance the following reports, just to name a few:
Association of Americans Resident Overseas: Americans Abroad are Denied Access to Banking and Investment Opportunities
Time Magazine: Swiss Banks Tell American Expats to Empty Their Accounts
The Huffington Post (Aug 2014) – Expatriate Tax Sense or Broad-Brush Overreach: The U.S. Foreign Account Tax Compliance Act (FATCA)
The New York Times (April 2013) Overseas Finances Can Trip Up Americans Abroad
and
American Citizens Abroad which compiles various news accounts of accounts being closed.
Anecdotally, I have certainly seen it in my practice, in places such as Hong Kong, London, Geneva and Zurich, but I can’t say I have seen it as a widespread practice. Indeed, for those individuals with large investment accounts (e.g., greater than US$1M, the banks seem to accommodate, or at least require them to move their assets to their U.S. affiliate or branch). I suspect those with smaller accounts of less than US$100,000, are seeing a broader brush stroke closing these accounts.
For good practical advice about maintaining or opening foreign accounts, I recommend you read:
I can say that what I have seen in practice is a widespread plan by individuals to close foreign financial accounts and relocate the assets to a U.S. financial institution. This is not the decision of the financial institution, but rather the individual. The reason is not FATCA, per se, but a desire to reduce the compliance costs of filing and reporting on these foreign accounts. See, Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.
Multiple tiers of reporting of foreign assets is now required and it can cost a small fortune to have a good international tax adviser who is aware of these reporting requirements. See, USCs and LPRs residing outside the U.S. – and IRS Form 8938 [Specified Foreign Financial Assets]
For those with significant assets and numerous accounts, the professional fees and costs of reporting accurately these accounts can become exorbitant (especially when the risks of potentially devastating civil penalties are weighed into the mix). See, Why the Zwerner FBAR Case is Probably a Pyrrhic Victory for the Government – for USCs and LPRs Living Outside the U.S. (Part II)
At the end of the day, the practical affect I have seen (anecdotally) is a widespread desire to close foreign accounts and move them to the U.S.; not because of FATCA, but because of the costs and compliance and risk (more than just perceived – considering the IRS now regularly threatens large multiple year 50% willfulness penalties for those who did not file an FBAR) of being penalized by the IRS.
I find this ironic, since there is no legal restriction for a USC to hold foreign accounts and indeed a USC or LPR residing outside the U.S., will generally find it easier from a lifestyle and personal financial management perspective to have an account in their home country. The affect, however, is that U.S. financial institutions are receiving these assets and investments.
I will post a survey this week to ask individuals if they have had their non-U.S. bank accounts closed.
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