Penalties

W-8s for U.S. Citizens Abroad: Filing False Information with Non-U.S. Banks

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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 irs-form-w-8ben-2006-older-version-with-certification-languageCompliance 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 –

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 irs-form-1001-old-1998-versionextensively 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 –

Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)

Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)

Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding

Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding

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.W-8BEN - 2016 version..PNG

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. w-8ben-certification-portion-2016-version

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

Will U.S. Tax Law Regarding “Covered Expatriates” get Modified with Recent Government Push in International?

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It is rare to have the President of the United States hold press conferences specifically dealing with international tax policy and tax enforcement.  Nevertheless, this is what happened last week when President Obama announced his administration’s recent efforts in the field of international tax, anti-corruption and financial transparency.

His remarks can be watched here:  President Obama’s Efforts on Financial Transparency and Anti-Corruption: What You Need to Know

Also, the White House is putting forward a series of initiatives in this area:

Fact Sheet: Obama Administration Announces Steps to Strengthen Financial Transparency, and Combat Money Laundering, Corruption, and Tax Evasion

To date, none of the specific initiatives address current “tax expatriation law” under IRC Sections 877, 877A, et. seq.

The Life Insurance “Gotcha Tax” – IRS Assesses Excise Tax on Normal Life & Other Insurance Policies

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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 Uncle Sam Wants You(“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.IRS Form 720 Excise Tax Return - Part I of II

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.IRS Form 720 Excise Tax Return - Part II of II

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”.

 

IRS Creates “International Practice Units” for their IRS Revenue Agents in International Tax Matters

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The U.S. international tax law has become increasingly complex.  I am confident when I say that very few individuals in the world (including IRS revenue agents) understand the complexities of Title 26 and Title 31 as they apply to IRS Form 1040 p1international matters such as gifts of foreign property, gifts involving U.S. intangible property, gifts to or inheritances from foreign estates with U.S citizens (USCs) or Lawful Permanent Residents (LPRs) beneficiaries, foreign partnerships with USCs, transfers of property to foreign trusts by USCs or LPRs residing outside the U.S., transfers of property to foreign corporations, etc.

Most USCs and LPRs who live in the U.S. certainly know and understand the basics of IRS Form 1040.

However, the type and scope of international transactions contemplated by the law can be significant and are rarely understood in any depth, even by many tax professionals.  I have seen cases during my career of sophisticated individuals ranging from Nobel prize winners to U.S. Ambassadors, who had not a clue about the application of U.S. federal tax law to their lives.   See, the Nov. 2, 2015 post, Why Most U.S. Citizens Residing Overseas Haven’t a Clue about the Labyrinth of U.S. Taxation and Bank and Financial Reporting of Worldwide Income and Assets

The lack of knowledge of these complex laws within the IRS, and the LB&I (Large Business and International group) which specializes in international matters has led to IRS “International Practice Units”.  These are designed to allow IRS revenue agents who are not necessarily specialists in the international tax area to review transactions and be prepared to assess taxes and penalties against USCs and LPRs in the international context.  The preamble says in part ” . . . Practice Units provide IRS staff with explanations of general international tax concepts as well as information about a specific type of transaction.  . . ”

There are currently 63 different IRS “International Practice Units” all with dates from the last 12 months.  Several of them focus heavily on information return filings which carry stiff penalties, even if no U.S. income taxes are owing.  For  instance see, Monetary Penalties for Failure to Timely File a Substantially Complete Form 5471 –Category 4 & 5 IRS Form 5471 - page 1Filers.

Another interesting IRS International Practice Unit is titled – Basic Offshore Structures Used to Conceal U.S. Person’s Beneficial Ownership of Foreign Financial Accounts and Other Assets.

These IRS materials give a good perspective from where the IRS views the world; including the introduction to this particular IRS International Practice Unit where it states: “This Practice Unit focuses on a U.S. Person’s proactive steps to “conceal” their ownership of foreign financial    accounts, entities and other assets for the purposes of tax avoidance or evasion, even though, there may be some situations where there are legitimate personal or business purposes for establishing such arrangements. This unit falls under the outbound face of the matrix and thus, will focus on U.S Persons living in the United States . . . Most U.S. taxpayers using an offshore entity or structure of entities to hold foreign accounts are simply hiding the accounts from the Internal Revenue Service and other creditors . . .”   [emphasis added]

This is a breathtaking statement from the IRS internal training manuals that “Most U.S. taxpayers using an offshore entity or structure of entities to hold foreign accounts are simply hiding the accounts from the Internal Revenue Service and IRS Form 3520-A p 1other creditors . . .”?

The vast majority of the USCs or LPRs who I see who renounce or abandon their citizenship or LPR status, are living outside the United States and in most cases have spent almost all (if not all) of their lives outside the U.S.

Does the IRS mean that a family living in Switzerland that have dual national family members are “. . . .simply hiding the accounts from the Internal Revenue Service . . . ” if they are using, for instance, a Liechtenstein Stiftung to hold their family assets as part of an estate plan recommended to them by their Swiss legal and tax advisers?

Does the statement that this IRS International Practice Unit focuses on ” . . . U.S Persons living in the United States . . . ” give USCs and LPRs residing outside the U.S. relief from the IRS perspective of USCs simply hiding assets from the Internal Revenue Service?  Will IRS revenue agents be sophisticated enough to distinguish between these two different groups; U.S. resident versus non-resident USCs and LPRs?  Will the law be applied differently with respect to these resident versus non-resident U.S. taxpayers?

What role will these IRS “International Practice Units”  play in forming perceptions and molding ideas of IRS revenue agents who have had little to no life experience in international affairs, multi-national families, global finance and international business operations?

More observations to come from specific IRS “International Practice Units.

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

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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.  Statute of Limitations General Rules

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?Europe Map

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.

Revocation or Denial of U.S. Passport: More on new section 7345 (Title 26/IRC) and USCs with “Seriously Delinquent Tax Debt”

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New Section 7345 completely modifies how U.S. citizens (“USCs”) living and traveling around the world have to now consider very seriously actions taken by the Internal Revenue Service (“IRS”).  It is the IRS which now holds the power under this new law that requires the U.S. Department of State (“DOS”) to revoke or deny to issue a U.S. passport in the first place.

US Citizens Who Renounced - Chart Qtr 3 - 2015

New Section 7345(e) provides in relevant part as follows:  “upon receiving a certification described in section 7345 of the Internal Revenue Code of 1986 from the Secretary of the Treasury, the Secretary of State shall not issue a passport to any individual who has a seriously delinquent tax debt described in such section. . . ” [emphasis added].

This new law mandates (not at the discretion of the DOS) that various U.S. passports be denied at the direction of the IRS.  Once the IRS issues the certification of “seriously delinquent tax debt.”

All it takes, is for the IRS to claim tax or penalties are owing of at least US$50,000 through an assessment (plus start a lien or levy action).

Of course, US$50,000 sounds like a large sum for many modest USCs, until an individual understands that there are a host of international reporting requirements for taxpayers.  Specifically, the IRS can impose a US$10,000 penalty for each violation of failing to complete and file various IRS information forms; EVEN IF NO income IRS Form 8938 Specified Foreign Financial Assets - Highlighted Markertaxes are owing.  See IRS website – FAQs 5 and 8 regarding civil penalties (see also How is the offshore voluntary disclosure program really working? Not well for USCs and LPRs living overseas).

For a summary of these forms and filing requirements, see a prior post, Oct. 17, 2015, Part II: C’est la vie Ms. Lucienne D’Hotelle! Tax Timing Problems for Former U.S. Citizens is Nothing New – the IRS and the Courts Have Decided Similar Issues in the Past (Pre IRC Section 877A(g)(4))

Indeed, our office has seen and assisted numerous taxpayers around the world where the IRS has assessed tens of thousands, hundreds of thousands and in some cases in excess of US$1M (in proposed assessments) against an individual for failure to simply file information reporting forms.  See, for instance, a prior post on Nov. 2, 2015, Why Most U.S. Citizens Residing Overseas Haven’t a Clue about the Labyrinth of U.S. Taxation and Bank and Financial Reporting of Worldwide Income and Assets

Also, we have seen several IRS assessments of income tax (not just penalties) against individuals of hundreds of thousands of dollars which are not supported by the law.  For instance, it is not uncommon for the IRS to issue a “substitute for return” alleging income taxes owing.  See, How the IRS Can file a “Substitute for Return” for those USCs and LPRs Residing Overseas,  posted Nov. 8, 2015.  We have a number of those cases pending, where the IRS has taken erroneous information and made such assessments against USCs residing and working outside the U.S. for much if not most of their professional lives.US Passport

New Section 7345 requires that USCs, wherever they might reside, take great care in knowing about any actions the IRS might be taking against them; as to tax and penalty assessments, whether or not they are supported under the law.

One basic method of learning more about the activities of the IRS is to make a transcript request directly to the IRS regarding the status of a USC’s federal tax status according to IRS records.  See, IRM, Part 21. Customer Account Services . . . Section 3. Transcripts.

It is also possible for the USC to obtain additional tax information from the IRS through a Freedom of Information Act (“FOIA”) request.

The Supreme Court Denies Certiorari for USC Taxpayer Who Claimed Foreign Earned Income Exclusion

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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.*8938*

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

The Court found the following facts and made the following legal determinations:
“Yen-Ling K. Rogers (petitioner) was a U.S. citizen and a bona fide resident of Hong Kong. She worked as a flight attendant for United Airlines (United) on international flights based out of Hong Kong International Airport. . . Section 61(a) specifies that “[e]xcept as otherwise provided”, gross income includes “all income from whatever source derived”. Although most countries employ territorial tax systems, the United States employs a worldwide tax system–it taxes its citizens on their income regardless of its geographic source.  See  Crow v. Commissioner, 85 T.C. 376, 380 (1985) (“The United States was historically, and continues to be, virtually unique in taxing its citizens, wherever resident, on their worldwide income, solely by reason of their citizenship.”) . . .” [emphasis added]
The Tax Court went on to find that the working time of the flight attendant over international waters could not be apportioned to or treated as “foreign earned income” as defined by the statute.  Accordingly, it said:
 –
“Consistent with this regulation, this Court has held that a U.S. taxpayer is allowed the foreign earned income exclusion only with respect to wages earned while in or over foreign countries and not for wages earned in international airspace or in or over the  United States.”

 

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.