Penalties
W-8s for U.S. Citizens Abroad: Filing False Information with Non-U.S. Banks
Individuals who do not specialize in U.S. federal tax law, often have little detailed understanding of the U.S. federal “Chapter 3” (long-standing law regarding withholding taxes on non-resident aliens and foreign corporations and foreign trusts) and “Chapter 4” (the relatively new withholding tax regime known as the “Foreign Account Tax Compliance Act”) rules.
Indeed, plenty of U.S. tax law professionals (CPAs, tax attorneys and enrolled agents) do not understand well the interplay between these two different withholding regimes –
- 26 U.S. Code Chapter 3 – WITHHOLDING OF TAX ON NONRESIDENT ALIENS AND FOREIGN CORPORATIONS
- 26 U.S. Code Chapter 4 – TAXES TO ENFORCE REPORTING ON CERTAIN FOREIGN ACCOUNTS
Plus, the IRS forms have been significantly modified over the years; with increasing factual representations that must be made by individuals who sign the forms under penalty of perjury. They are complex and not well understood. For instance, the older 2006 IRS Form W-8BEN for companies was one page in length and required relatively little information be provided.
The entire form is reproduced here; indicating how foreign taxpayer information was optional and generally there was no requirement to obtain a U.S. taxpayer identification number. It was governed exclusively by Chapter 3 and the regulations that had been extensively produced back in the early 2000s.
The forms were even easier before those regulations (see old IRS Form 1001). No taxpayer identification numbers were ever required and virtually no supporting information regarding reduced tax treaty rates on U.S. sources of income.
Life was simple back then – compared to today!
The one thing all of these forms have in common is that all information was provided and certified under penalty of perjury. Current day IRS Forms W-8s can typically be completed accurately by experts who understand the complex web of rules. Plus, multiple versions of W-8s exist today; most running some 8+ pages in length.
See the potpourri of current day W-8 forms –
Making certifications under penalty of perjury are more complex, the more and more factual information that is being certified. If I certify the dog I see in front of me is “white and black” that is not a complex certification, if I see the dog and see the “white and black”. If the dog also has some brown coloring, my certification would necessarily not be false.
However, if I have to certify as to the colors of each dog in a pack of 8 dogs (and each and every color that each dog is/was), that becomes a much more complicated certification.
That’s my analogy for the old IRS Forms W-8s and the current day IRS Forms W-8s.
Compare that form, of just 10 years ago, with what is required and must be certified to under current law. It can be daunting.
Now to the rub. Individuals who certify erroneously or falsely, can run a risk that the government asserts such signed certification was done intentionally. I have seen it happen in real cases; even though the individual layperson (particularly those who speak little to no English and live outside the U.S.) typically has little understanding of these rules. They typically sign the documents presented to them by the third party; usually the banks and other financial institutions.
The U.S. federal tax law has a specific crime, for making a false statement or signing a false tax return or other document – which is known as the perjury statute (IRC Section 7206(1)). This is a criminal statute, not civil. Some people are also under the misunderstanding that a false tax return needs to be filed. The statute is much broader and includes “. . . any statement . . . or other document . . . “.
(1) Declaration under penalties of perjury
Willfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter; or . . .
Therefore, if a U.S. citizen living overseas (or anywhere) signs IRS Form W-8BEN (or the bank’s substitute form, which requests the same basic information), that signature under penalty of perjury will necessarily be a false statement, as a matter of law. Why? By definition, the statute says a U.S. citizen is a “United States person” as that technical term is defined in IRC Section 7701(a)(30)(A). Accordingly, IRS Form W-8BEN, must only be signed by an individual who is NOT a “United States person”; who necessarily cannot be a United States citizen. To repeat, a United States citizen is included in the definition of a “United States person.” Plus, the form itself, as highlighted at the beginning of the form, warns against any U.S. citizen signing such form.
Accordingly, if a U.S. citizen were to sign IRS Form W-8BEN which I have seen banks erroneously request of their clients, they run the risk that the U.S. federal government will argue that such signatures and filing of false information with the bank was intentional and therefore criminal under IRC Section 7206(1). See a prior post, What could be the focal point of IRS Criminal Investigations of Former U.S. Citizens and Lawful Permanent Residents?
Indeed, criminal cases are not simple, and I am not aware of any single criminal case that hinged exclusively on a false IRS Form W-8BEN. However, I have seen cases, where the government has alleged the U.S. born individual must have signed the form intentionally, knowing the information was false. It’s a question of proof and of course U.S. citizens wherever they reside, should take care to never sign an IRS Form W-8BEN as an individual certifying they are not a “United States person”; even if they think they are not a U.S. person
For further background information on this topic, see a prior post: FATCA Driven – New IRS Forms W-8BEN versus W-8BEN-E versus W-9 (etc. etc.) for USCs and LPRs Overseas – It’s All About Information and More Information
The Life Insurance “Gotcha Tax” – IRS Assesses Excise Tax on Normal Life & Other Insurance Policies
The information featured on this blog is designed to orient U.S. citizens (“USCs”) and U.S. lawful permanent residents, i.e., “green card” holders (“LPRs”) to important U.S. federal tax consequences to them. It’s primary focus relates to those USCs or LPRs who are contemplating renouncing their citizenship or abandoning their permanent residency status.
There are many complex federal tax rules that are often overlooked in the international area. One of those is the excise tax that is payable by the USC or LPR individual, not the non-U.S. insurance company, when premiums are paid to an insurance company. The IRS takes the position that the ” . . . the Service will generally seek payment of the excise tax from the U.S. person making the premium payment . . .” See, IRS Foreign Insurance Excise Tax- Audit Technique Guide.
This is a 1% excise tax on the premiums paid for each life insurance, sickness or accident insurance or contracts. See, IRC Section 4371. If you reside in London and buy life insurance with a UK life insurance carrier (or Paris with a French insurance company, Toronto with a Canadian insurance company, etc.) in your home country, you are probably not thinking that you need to pay Uncle Sam a tax on what you perceive as a “run of the mill” insurance coverage.
Indeed your life insurance company in your country of residence will not be advising that as a USC or LPR, you should be paying Uncle Sam.
If the insurance contract is a casualty policy, the excise tax is 400% greater than the 1% tax on life insurance premiums; i.e., a 4% excise tax. The payment of the tax is made on IRS Form 720, Federal Excise Tax Return.
In my experience, I never find that any individuals who are USCs and LPRs living around the world are aware of this obscure tax. When the tax is not paid the IRS has unlimited time to assess tax and penalties, including late payment penalties, late filing penalties and negligence penalties. Plus, interest that accrues on the unpaid tax and penalties can grow the amounts owing over time. See, When the U.S. Tax Law has no Statute of Limitations against the IRS; i.e., for the U.S. citizen and LPR residing outside the U.S., posted March 24, 2014.
The excise tax amount may not seem too significant. However, if it is not timely paid, there will be late payment and late filing penalties (e.g., for failure to file the excise tax return). This 1% or 4% excise tax is on the gross premium payment. This tax amount can certainly add up when insurance premiums are paid annually and over many decades.
Finally, be aware that the IRS is focusing on this excise tax on insurance contracts, at least within its OVDP program where IRS revenue agents are asserting that 25%, 27.5% or 50% of the value of the entire asset (e.g., the cash surrender value of the insurance policy) is subject to the “in lieu of penalty”.
U.S citizens (USCs) and Lawful Permanent Residents (LPRs): Caution When Making Gifts. US Tax Court Recently Ruled a 1972 Gift by Sumner Redstone Still Open to IRS Challenge
The statute of limitations is one of the most important considerations for any individual when considering what tax consequences the Internal Revenue Service (“IRS”) might argue they have for years past. This can occur many years into the future as explained further below.
Former USCs and LPRs can be in a particularly precarious position, as was recently demonstrated by a U.S. Tax Court case for a gift that was made decades ago in 1972. See, Redstone vs. Commissioner (TCM 2015-237). Although this U.S. Tax Court case involving Sumner Redstone had nothing to do with renunciation of citizenship, it shows how the IRS can reach back many years and even decades in assessing taxes it claims are owing. The newly (in year 2010) added IRC Section 6501(c)(8) makes this highly likely under current revised law.
Former USCs and any U.S. beneficiaries of theirs (e.g., U.S. resident children or grandchildren who might receive gifts or bequests from the former USCs) should be cognizant of the statute of limitations. See a prior post from 2014, When the U.S. Tax Law has no Statute of Limitations against the IRS; i.e., for the U.S. citizen and LPR residing outside the U.S.
As this prior post noted, there are at least three basic scenarios when there is no statute of limitations for federal tax matters are as follows:
1. The former USC or LPR does not file a U.S. income tax return, when they had a requirement to so file. IRC Section 6501(c)(3). See a post from 2014, When do I meet the gross income thresholds that require me to file a U.S. income tax return?
2. There is fraud on the part of the taxpayer (e.g., the taxpayer intentionally does not report income). IRC Sections 6501(c)(1), (c)(2).
3. The USC or LPR fails to report certain foreign transactions, including inadvertently neglecting to report. IRC Section 6501(c)(8). This rule was only recently adopted as part of the “HIRE Act” which also created FATCA. The types of transactions set above in the table provides a brief summary of when transactions can give rise to an “open” statute of limitations period. In other words, as many years and decades can pass (see Redstone 1972 gift transaction) before the IRS ever has to make a proposed assessment of taxes and penalties. These include numerous ownership or economic interests in foreign (non-U.S.) companies, partnerships, foreign trusts, foreign investment accounts, among others.
This is indeed one of those areas where the IRS can argue a “gotcha moment”; simply because the former USC or LPR was not aware of the extremely complex rules of reporting assets (normally in their own country of residence outside the U.S.). The consequences to these families can go on indefinitely, per post from September 2015, Finally – Proposed Regulations for “Covered Gifts” and “Covered Bequests” Issued by Treasury Last Week (Be Careful What You Ask For!)
For a more in depth review of the international (non-U.S.) transactions that give rise to this reporting, see IRS Forms 3520, 3520-A, 5471, 8865, 5472, 8938, 8858, 926 among others.
The Supreme Court Denies Certiorari for USC Taxpayer Who Claimed Foreign Earned Income Exclusion
The U.S. Supreme Court only rarely takes tax cases for certiorari review. It is common that no more than one federal tax case is reviewed by the U.S. Supreme Court during their entire annual term.
Accordingly, it was not surprising that the U.S. Supreme Court refused to hear a decision of a Hong Kong-based flight attendant who as a U.S. citizen took the foreign earned income exclusion (“FEIE”) pursuant to IRC Section 911 on all of her income. The Treasury Regulations §1.911-3(a) have a specific rule regarding source of income and provides: “Earned income is from sources within a foreign country if it is attributable to services performed by an individual in a foreign country or countries.”
The IRS assessed tax and a 20% “negligence” penalty against the Hong Kong based flight attendant Ms. Yen-Ling K. Rogers. Judge Cohen of the U.S. Tax Court wrote the 2013 opinion, Rogers vs. Commissioner, TC Memo. 2013-77 – U.S. Tax Court
See prior posts on the FEIE; The Foreign Earned Income Exclusion is Only Available If a U.S. Income Tax Return is Filed, April 21, 2014.
See also USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms, dated March 17, 2014 that discusses in some detail IRS Form 2555.
The Court of Appeals for the District Of Columbia upheld the Tax Court and the Supreme Court let stand the Court of Appeals decision.