The separation of powers is often on full display when there are key Congressional hearings focused on the work (or lack thereof) undertaken by the key executive branch agencies responsible for tax enforcement:
1. Treasury/IRS, and
2. Justice Department.
There is an important reason why every day taxpayers should be interested in these hearings; particularly those who are considering renouncing United States Citizenship.
The actions and reactions of the IRS and Justice Department are often in response to Congressional hearings. This is very much the case with individual taxpayers with assets throughout the world.
A brief timeline of various hearings, and actions taken by the IRS and Justice Department (largely in response to such criticism) can be followed to demonstrate the influence of these hearings:
- Year 2006
U.S. Senate Permanent Subcommittee on Investigations, published their report on August 1, 2006, entitled Tax Haven Abuses: The Enablers, The Tools & Secrecy.
Little direct action was taken by the IRS or Justice Department in this year. It was the year 2008, where the direct hearings lead to more direct action taken.
- Year 2008
U.S. Senate Permanent Subcommittee on Investigations, headed by Chairman Carl Levin, published their report on July 16, 2008, entitled Tax Haven Banks and U.S. Tax Compliance –
November 2008, a U.S. federal grand jury indicted the Chairman and CEO of UBS Global Wealth Management and Business Banking.
- Year 2009
U.S. Senate Permanent Subcommittee on Investigations, headed by Chairman Carl Levin, published their report on March 4, 2009 Tax Haven Banks and U. S. Tax Compliance – Obtaining the Names of U.S. Clients with Swiss Accounts
UBS agrees in February 2009 to pay a US$780M fine to the U.S. government and enter into a deferred prosecution agreement on charges of conspiring to defraud the United States by impeding the Internal Revenue Service.
IRS Implements first Offshore Voluntary Disclosure Program (“OVDP”) on March 26, 2009
- Year 2010
Numerous taxpayers and several Swiss bankers were indicted and/or plead guilty to various tax crimes charges; mostly directly related to UBS. See, website of U.S. Department of Justice – Offshore Compliance Initiative.
Congress passes and the President signs into law, the Foreign Account Tax Compliance Act (“FATCA”) in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act.
- Year 2011
IRS Implements its second Offshore Voluntary Disclosure Initiative (“OVDI”) in 2011.
Numerous taxpayers and several Swiss financial advisors were indicted; and a HSBC Indian client was also indicted or plead guilty to various tax crimes charges; mostly directly related to UBS. See, website of U.S. Department of Justice – Offshore Compliance Initiative.
- Year 2012
IRS creates an open ended OVDP program in 2012 that continues; with modifications made in 2014.
Several taxpayers were indicted; including those implicating an Israeli bank for various tax crimes charges. . See, website of U.S. Department of Justice – Offshore Compliance Initiative.
The Treasury Department obtains commitments from various countries to sign various FATCA, intergovernmental Agreements (“IGAs”) for automatic exchange of financial information; France, Germany, Italy, Spain, United Kingdom, Denmark and Mexico.
- Year 2013
In January 2013, the U.S. Attorney’s Office in the Southern District of New York secured the guilty plea of Wegelin Bank, the oldest private bank in Switzerland and the first foreign bank to plead guilty to felony tax charges.
In August, 2013, the United States and Switzerland Issue Joint Statement Regarding Tax Evasion Investigations and ability of Swiss banks to enter into deferred prosecution agreements.
Several taxpayers were indicted and advisors; including multiple financial institutions outside of Switzerland for various tax crimes charges. See, website of U.S. Department of Justice – Offshore Compliance Initiative.
The Treasury Department obtains more commitments for signed FATCA IGAs with various countries for the automatic exchange of financial information;.
- Year 2014
U.S. Senate Permanent Subcommittee on Investigations, headed by Chairman Carl Levin, published their report on February 26, 2014 Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts
IRS announces on June 18, 2014, IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance
The Treasury Department obtains numerous commitments for signed FATCA IGAs with various countries for the automatic exchange of financial information. See, HUGE NEWS – China has “Reached an Agreement in Substance” for a FATCA Intergovernmental Agreement (IGA) – its Affect on USCs and LPRs Living in China and Hong Kong
Will the IRS treat a USC or LPR residing outside the U.S. who purposefully refuses to file U.S. income tax returns and information returns the same as “tax protesters”?
What is a “tax protester”? What is the significance for USCs and LPRs residing overseas?
What if the U.S. tax and its applicability to USCs and LPRs living overseas, specifically including the tax on expatriation seems unfair, unjust, overreaching, burdensome, etc.? Is that a legal basis for defying the law’s application and reach?
The author has consistency argued, that from a tax policy perspective, U.S. citizenship based taxation of worldwide income for those who live outside the U.S. needs to be repealed as it is unique in the world, dates to the 19th Century Civil War and is inappropriate for the global world we live in. See, “Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,” by Patrick W. Martin and Professor Reuven Avi-Yonah, 2013.
“Tax protesters” and their frivolous arguments generally assert, somehow the U.S. federal tax laws are against the U.S. Constitution; i.e., unconstitutional. The U.S. Supreme Court has already ruled that U.S. citizenship based taxation is indeed Constitutional when it upheld as Constitutional the concept of citizenship based taxation in 1924 in Cook v. Tait. In that case, the U.S. citizen resided permanently and was domiciled in Mexico City with his Mexican citizen wife. See, Supreme Court’s Decision in Cook vs. Tait and Notification Requirement of Section 7701(a)(50)
These Constitutional arguments are not looked well upon by any branch of the U.S. federal government. The IRS and Tax Division of the Department of Justice regularly prosecute these cases. The Courts regularly uphold the government’s position; and the Congress has passed increasingly harsh penalties, including as late as in 2007 (See IRC section 6702 – Frivolous Tax Submissions).
The term “tax protester” became somewhat taboo after Congress passed a law designed at protecting taxpayer’s rights. The current, more politically correct terminology comes from the National Tax Defier Initiative, also known as the “TAXDEF Initiative” which was launched by the Tax Division of the DOJ.
In short, the Courts, specifically including the U.S. Supreme Court have consistently rejected a range of arguments that the tax law is unconstitutional. Those individuals who advance such arguments, which have consistently been upheld as frivolous legal arguments, are commonly referred to as “tax defiers” or “tax protesters.”
A classic quote from the 7th Circuit is apropos – Coleman v. Commissioner, 791 F.2d 68, 69 (7th Cir. 1986) –
- Some people believe with great fervor preposterous things that just happen to coincide with their self-interest. “Tax protesters” have convinced themselves that wages are not income, that only gold is money, that the Sixteenth Amendment is unconstitutional, and so on. These beliefs all lead—so tax protesters think—to the elimination of their obligation to pay taxes.
Hoards of taxpayers have been found liable for civil penalties, civil fraud penalties and criminal liability (in the most egregious of cases – with prison sentences) over the years as they have asserted a range of arguments found to be frivolous.
Will the IRS or the Tax Division of the DOJ take a similar position against UCS or LPRs who have resided overseas who argue the U.S. tax law should not apply to them? See an earlier post, Tracking U.S. Citizens and LPRs in and Out of the Country – Tracking Taxpayers (Entry/Exit System)
Who in the government will test the limits of enforcement overseas? Will the long-arm of the U.S. federal government, and its enforcement, grow even longer? Will information collected by the IRS via FATCA enable the government to compile and pursue such cases? See, U.S. Enforcement/Collection of Taxes Overseas against USCs and LPRs – Legal Limitations
Read Wikipedia for a colorful overview of – Tax protester history in the United States
As the Foreign Account Tax Compliance Act (“FATCA”) has gone into effect (1 January 2014), there are an increasing number of consequences to United States citizens (USCs) and lawful permanent residents (LPRs) residing overseas.
There are many intended consequences of the FATCA law, such as the following:
- Identifying non-U.S. financial, investment and company assets of USCs and LPRs;
- Identifying the foreign financial institution (“FFI”) where such assets are located;
- Identifying non-financial foreign entities (“NFFE”) owned by the USC or LPR;
- Generally bringing transparency to the assets, accounts and information of worldwide assets of USCs and LPRs.
Ironically, I see a number of unintended consequences of FATCA; meaning consequences that were never contemplated by the U.S. Congress or the President when the laws were passed. Nor were they intended consequences of the U.S. Treasury Department as the FATCA Intergovernmental Agreements (“IGA) were negotiated throughout the world with various countries. See, Complete List of IGA Countries to Date (Very Few Notable Absences)
This and other follow on posts will discuss these unintended consequences.
One of the most significant unintended consequence, is that the U.S. federal government (the IRS, the Treasury Department, or Congress) never initially even contemplated USCs and LPRs living overseas. In other words, the group targeted were U.S. resident individuals who were evading taxes through foreign financial institutions. I say this, based upon extensive conversations I have had with ex-government officials and some government officials who were involved in the original policy discussions.
The focus then was on U.S. resident taxpayers; even though the U.S. imposes U.S. income taxes on the worldwide income of USCs living anywhere in the world. See, “Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,” by Patrick W. Martin and Professor Reuven Avi-Yonah, 2013.
In practice, the U.S. federal government has known for many years that it can be nearly impossible to collect a tax liability against USCs who live and have their assets outside of the U.S. Specifically, the Treasury Department noted back in 1998 that . . .
- Other factors also operate to limit both compliance measurement and improvement. Because the United States asserts taxing jurisdiction over those with little or no connection to the United States other than citizenship or status as a lawful permanent resident, in many cases overseas U.S. taxpayers are difficult to trace or contact. Moreover, even when valid tax assessments can be made against overseas taxpayers, IRS has limited enforcement recourse if the taxpayer’s assets are physically located outside of the United States.
See pages 13-15 of the Treasury report which can be found at the post, Sometimes Old is as Good as New – 1998 Treasury Department Report on Citizens and LPRs
Also, the original offshore voluntary disclosure initiative in 2009 never even contemplated any particular treatment for USCs or LPRs residing overseas. I submit, the USC and LPR living overseas was not even on the “radar” of the IRS at the time the first program was created. It was not until 2011, that a new category was created that imposed a 5% penalty for persons residing overseas, but who also had only US$10,000 of U.S. sourse income.
As time has gone on, the IRS has realized that numerous USCs and LPRs indeed live somewhere other than the U.S. (millions of them) and yet again modified the 2014 OVDP to provide for a “0%” penalty in certain circumstances for these individuals.
Now even the Senate has started to focus on USCs living overseas. The Senate Permanent Subcommittee on Investigations focused extensively on Swiss accounts opened by USCs living overseas. The full report can be read REPORT: Offshore Tax Evasion:The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts (February 26, 2014) –
In those reports, the Senate Permanent Subcommittee on Investigations focused extensively on USC owned Swiss accounts opened by USCs living outside the U.S. See, Key Take Aways from Senate Investigations re: Foreign Banks and “Offshore Tax Evasion”: U.S. Citizens Residing Overseas have Become a Focus of the Government.;
Ausbürgerung – יורד – Expatriación – – المغتربين – Expatrié – Ausgebürgerter – 外籍 – Espatri
Each of these terms can have a significantly different meaning, depending upon each country, different histories and distinct cultural experiences. The meaning of “expatriate” in the U.S. itself has now become a loaded word, meaning different things to different people.
Only recently has the term “expatriate” conjured up tax consequences, largely due to U.S. tax law and the attention it has gotten over the last 5-6 years around the world. The term “expatriate” or “expatriation” appeared sparingly in the U.S. tax law (less than a dozen times), until modifications made in 2008, which introduced no less than 46 news uses of the term “expatriate” or “expatriation” in Section 877A.
Different countries throughout history have had their own experiences with so-called “expatriates.” I will write a series of posts that touch upon the meaning of such terms throughout different societies, including in different points of time and history.
Ausbürgerung – יורד – Expatriación – – المغتربين – Expatrié – Ausgebürgerter – 外籍 – Espatri
Is the new government focus on U.S. citizens living outside the U.S. misguided or a glimpse at the new future?
Senators on the Permanent Subcommittee on Investigations have recently focused extensively on U.S. nationals living outside the U.S. who have Swiss accounts. The full report can be read REPORT: Offshore Tax Evasion:The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts (February 26, 2014)
There are millions of U.S. citizens living in all parts of the world, many of whom I have identified as “Accidental Americans.” See the detailed tax article Accidental Americans” – Rush to Renounce U.S. Citizenship to Avoid the Ugly U.S. Tax Web” International Tax Journal,CCH Wolters Kluwer, Nov./Dec. 2012, Vol. 38 Issue 6, p45; Martin, P.
During the past century U.S. Citizens living permanently or nearly permanently outside the U.S. have been “de facto” non-residents for U.S. income tax purposes. Not because the law provided they were not residents, but simply because there was little awareness of the unique system of U.S. citizenship based taxation (or those cases where individuals purposefully chose not to comply with U.S. tax laws). The U.S. Supreme Court in Cook vs. Tait found it Constitutional nearly 100 years ago. See . “Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,” by Patrick W. Martin and Professor Reuven Avi-Yonah, 2013.
This “de facto” non-residency for U.S. citizens is rapidly changing for several reasons:
First, the UBS scandal of U.S. citizens with undeclared accounts broke in 2008 and 2009.
Second the legal struggle between the U.S. Justice Department and the Swiss government and Swiss financial institutions during these past years.
Third, the adoption of FATCA by the Congress and President Obama in 2010.
Fourth, the current day technology which makes collecting, sending, sorting and identifying taxpayers and their assets through the worldwide financial sector now feasible.
Fifth, the implementation of FATCA by the U.S. in 2014 and the 20 plus FATCA Intergovernmental Agreements entered into with various countries.
Sixth, the OECD plan for a worldwide multilateral FATCA like system to be implemented shortly.
Seventh, the high profile IRS offshore voluntarily disclosure programs in 2009, 2011 and the current program launched in 2012.
Eighth, the on-going deferred prosecution agreements that have been entered into with more than 100 Swiss banks and the U.S. Justice Department.
Ninth, on-going criminal indictments by the U.S. Justice department of various taxpayers, foreign bankers, foreign lawyers and other so-called enablers for tax evasion, filing fraudulent documents and aiding and abetting the same.
Tenth, the Senate bi-partisan hearings that have and keep focusing and pushing these issues publicly at multiple levels.
Eleventh, the internet and current methods of communications and international media that have brought worldwide awareness to all of the above. This awareness has arrived to many of the corners of the world about these efforts and the concept of U.S. citizenship based worldwide taxation.
A large portion of the Senate committee report is dedicated to U.S. citizens who live outside the U.S. and are not compliant with U.S. tax laws. The following chart from the report highlights this focus as to the approximately 6,000 U.S. citizen accounts at Credit Suisse who were/do not live in the U.S:
For further observations on this topic, see an earlier post – Key Take Aways from Senate Investigations re: Foreign Banks and “Offshore Tax Evasion”: U.S. Citizens Residing Overseas have Become a Focus of the Government.; Posted on March 4, 2014
Key Take Aways from Senate Investigations re: Foreign Banks and “Offshore Tax Evasion”: U.S. Citizens Residing Overseas have Become a Focus of the Government.
Instead of the government finding U.S. citizens living outside of the United States, as a low priority, the Senate Permanent Subcommittee on Investigations focused extensively on Swiss accounts opened by these individuals. The full report can be read REPORT: Offshore Tax Evasion:The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts (February 26, 2014)
Some key excerpts of that report are as follows (at page 4):
. . . focused primarily on Swiss accounts held by U.S. residents, ignoring the over 6,000 accounts opened by U.S. nationals living outside of the United States. . . . It was not until 2012, that the bank expanded the Exit Projects to include a review of the thousands of Swiss accounts opened by U.S. nationals living outside of the United States.. . .
Instead of concluding that the complex U.S. laws are leading to non-compliance by U.S. citizens residing outside the U.S. (per the Taxpayer’s Advocate Report), it seems to conclude to the contrary and the report highlights the virtues of the OVD program in non-compliance as generally willful with millions of U.S. citizens living outside the U.S. who are not in compliance, per the following statement (at page 22):
“The OVDP continues to provide valuable information for the United States in its efforts
to combat offshore tax abuse, although it is far from clear that effective use is being made of the
information generated. For taxpayers, it continues to offer a useful alternative to report
undeclared offshore accounts that, potentially, number in the millions. According to the Taxpayer Advocate, “While 7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements, the IRS received only 807,040 FBAR submissions in 2012,” signaling “significant information reporting noncompliance.”69 2013 Annual Report to Congress — Volume One, Taxpayer Advocate Service, “OFFSHORE VOLUNTARY DISCLOSURE: The IRS Offshore Voluntary Disclosure Program Disproportionately Burdens Those Who Made Honest Mistakes,” at 229.
This report seems to get off track by not distinguishing between normal U.S. citizens who are living out their lives in their country of residence, as opposed to U.S. nationals who are intentionally attempting to evade taxes, filing false documents, not filing returns, or otherwise intentionally violating U.S. law. All of these 7.6 million U.S. nationals living around the world are being lumped together by the government with U.S. resident citizens, irrespective of the facts of each individual and family.
The U.S. Foreign Account Tax Compliance Act seeks to co-opt foreign banks as long-arm enforcement agencies of the IRS.
How much “Myth” versus “Reality” is in the Treasury’s claim – Myth vs. FATCA: The Truth About Treasury’s Effort To Combat Offshore Tax Evasion? Is it a Myth? ?- ? [Myth No. 3: Some claim that Americans living abroad will give up their U.S. citizenship because of liabilities and burdens created by FATCA.] ?
It is worth reading “Myth vs. FATCA” by Robert Stack, Deputy Assistant Secretary (International Tax Affairs) at Treasury; to obtain a better understanding of the U.S. Treasury’s views of how it will impact Americans living outside the U.S. “Myth No. 3” is particularly relevant here: Myth No. 3: Some claim that Americans living abroad will give up their U.S. citizenship because of liabilities and burdens created by FATCA.
The argument made by Mr. Stack is that it is a myth that FATCA imposes no new obligations on U.S. citizens living abroad. This is indeed correct in a technical sense of how the tax law works; Title 26 applies to U.S. citizens who have spent most all of their lives in a country other than the U.S. This has been the law since the time of the U.S. Civil War in the 1800s. However, what is not mentioned, is that there are a host of international tax penalties that will apply to these individuals, even if no income taxes are owing. These information reporting requirements in the law are typically not understood among most U.S. tax professionals (U.S. tax lawyers, CPAs and enrolled agents) let alone the layperson taxpayer.
For instance, the “FBAR law” from the Bank Secrecy Act has been around since 1970, yet virtually no one in the private sector or the government had much of any understanding of that law until the last few years. Plus, Congress adopted various information reporting requirements in the 1980s, the 1990s and now during the last decade that are still not well understood.
The civil penalties for each failure by the U.S. citizen living abroad for these information reporting requirements is consistently US$10,000 per violation. If an individual inadvertently failed to file 3 information returns over a period of 5 years (e.g., regarding their accounts or companies in their home country of residence, e.g., they could be facing US$150,000 of civil penalties – 3x5xUS$10,000!). For a more detailed discussion of these penalties see pages 8 and 9 – http://www.procopio.com/userfiles/file/assets/files1/docs-1738595-v2-accidental-americans-and-the-push-to-renounce-us-citizenship-2448.pdf
Mr. Stack goes on to say “U.S. taxpayers, including U.S. citizens living abroad, are required to comply with U.S. tax laws. Individuals that have used offshore accounts to evade tax obligations may rightly fear that FATCA will identify their illicit activities. Yet a decision to renounce U.S. citizenship would not relieve these individuals of prior U.S. tax obligations, and might well create additional U.S. tax obligations for certain citizens and long-term residents who give up citizenship or residency.”
This statement assumes that U.S. citizens residing overseas have somehow been using their normal individual, business or other investment accounts in their home country of residence to “evade tax obligations”! This is where there is a big disconnect in the understanding (or lack of understanding) of the U.S. Treasury Department and IRS of those millions of U.S. citizens who reside overseas. Undoubtedly, there are some U.S. citizens residing overseas who are taking steps to evade tax and not comply with the law. However, this author’s experience is that far far far more of the U.S. citizens residing overseas, simply do not have a complete understanding of a very complex U.S. tax law and bank secrecy reporting.
The “Myths” identified by the Treasury Department are set out below and can be read in their entirety at (Are they really “Myths”?)-
Myth vs. FATCA: The Truth About Treasury’s Effort To Combat Offshore Tax Evasion,
Myth No. 1: Some claim it’s overly costly and burdensome due to complex
regulations and difficult to meet reporting requirements.
Myth No. 2: Some claim that U.S. citizens living overseas will become
outcasts in the international financial world.
Myth No. 3: Some claim that Americans living abroad will give up their U.S.
citizenship because of liabilities and burdens created by FATCA.
Myth No. 4: Some claim that countries are opposed to FATCA, in part because
the legislation could force foreign banks to violate laws in their own
Myth No. 5: Some claim that FATCA will generate a backlash from foreign
governments who view this as an overreach of U.S. law.
Myth No. 6: Some claim that FATCA will unfairly expose FFIs to heavy
penalties before they have the necessary mechanisms in place to comply.
Myth No. 7: Some claim that FATCA aims to use foreign banks as an extension
of the IRS.
Senate Finance Report on International Competitiveness Identifies Possible “Expatriation” Reforms for U.S. Citizens Residing Overseas. Will U.S. citizens who live outside the U.S. find any relief soon?
IV. NON-RESIDENT U.S. CITIZENS
1. Provide an election to citizens who are long-term nonresident citizens to be taxed as nonresident aliens if they meet certain conditions (Schneider, “The End of Taxation Without End: A New Tax Regime for U.S. Expatriates,” 2013; similar to the law in Canada)
a. Require a minimum period of residence abroad
b. Impose an exit tax on electing taxpayers where deemed to sell all assets at the time of election
This concept was proposed by By Patrick W. Martin and Professor Reuven Avi-Yonah . “Tax Simplification: The Need for Consistent Tax Treatment of All Individuals (Citizens, Lawful Permanent Residents and Non-Citizens Regardless of Immigration Status) Residing Overseas, Including the Repeal of U.S. Citizenship Based Taxation,” September 2013.
For complete summary see – http://www.finance.senate.gov/issue/?id=0587e4b4-9f98-4a70-85b0-0033c4f14883
This document is the fifth in a series of papers compiling tax reform options that Finance Committee members may wish to consider as they work towards reforming our nation’s tax system. This compilation is a joint product of the majority and minority staffs of the Finance Committee with input from Committee members’ staffs.