How does the basic premiss that there are ‘Unpaid Taxes on Billions in Hidden Offshore Accounts'” hurt the average U.S. citizen taxpayer living overseas?

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The hearings of the Senate on “Offshore Tax Evasion” of the “Billions in Hidden Offshore Accounts” make for good headlines, but no one seems to ask the critical questions of the basic premiss.
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Will the hearings scheduled for February 26th, 2014, shed any light on this issue? 
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Here is what the government says:

Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts

Permanent Subcommittee on Investigations

February 26, 2014 09:30AM

Location: Dirksen Senate Office Building

Agenda

The Permanent Subcommittee on Investigations will hold a hearing, “Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts,” on Wednesday, February 26, 2014, at 9:30 a.m., in Room G-50 of the Dirksen Senate Office Building.

The hearing will continue the Subcommittee’s examination of tax haven bank facilitation of U.S. tax evasion, focusing on the status of efforts to hold Swiss banks and their U.S. clients accountable for unpaid taxes on billions of dollars in hidden assets. Witnesses will include representatives from a Swiss bank and the U.S. Department of Justice. A witness list will be available Monday, February 24, 2014.

Do some former U.S. citizens now consider this a “badge of honor” to have renounced their U.S. citizenship?

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A record number of U.S. citizenship renunciations in 2013, some 3,000, begs the question:  “Why are so many U.S. citizens renouncing?”

 

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Wow, the number of 2,999 U.S. citizens who renounced in the year 2013 shattered the prior record set in 2011 of 1,782 renunciations. Why so many renunciations?

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The U.S. Treasury Department released the number of U.S. citizens who renounced for 2013.  The Federal Registry reported some 631 U.S. citizens who renounced for the quarter; for a total of 2,999 former citizens for the entire year of 2013.

Click here for complete details of the registry

See also more information in this blog under the  “Government Resources” section for more details.

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Should the IRS modify its offshore voluntary disclosure program for U.S. citizens residing overseas? IRS is reconsidering the effectiveness of its offshore voluntary disclosure program. Should it be modified?

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Should the IRS modify its offshore voluntary disclosure program for U.S. citizens residing overseas?  IRS is reconsidering the effectiveness of its offshore voluntary disclosure program.  Should it be modified?

According to Tax Analyst’s “The IRS is reexamining its offshore voluntary disclosure program and considering making modifications to it, according to Michael Danilack, deputy commissioner (international), IRS Large Business and International Division.”

U.S. citizens who have lived most all of their lives overseas should not be subject to the same scrutiny and inflexibility that currently exists for U.S. taxpayers residing in the U.S.  Important differences exist, mostly because of the lack of U.S. citizens residing overseas to understand the complex U.S. tax law system applicable to them; in addition to the country’s tax laws and requirements in their country of residence.

The de-facto U.S. income tax residency regime is a residence based regime for several reasons.  First, the National Taxpayer Advocate estimates there are between 5-7 million U.S. citizens residing overseas.  Second, only a small portion of these taxpayers apparently even file U.S. income tax returns.  The IRS taxpayer statistics office showed that only 334,851 U.S. taxpayers filed a foreign earned income exclusions (for the year 2006, which is the latest year available from the IRS office of tax statistics).   How many of these taxpayers are not even U.S. citizens? The details of U.S. tax returns filed with foreign earned income exclusions can be read here.

Each country’s filings are set out below (notice only 6,112 returns were filed from Mexico, where the largest number of U.S. citizens reside in any particular country; with Canada as the second most populated with U.S. citizens):

    All geographic areas 334,851
North America, total 36,179
Canada 30,067
Greenland 0
Mexico 6,112
Latin/South America, total 13,911
Argentina 751
Brazil 2,696
Chile 902
Colombia 1,870
Costa Rica 1,662
Panama 1,032
Peru 419
Venezuela 705
Other Latin and South   American countries 3,876
Caribbean, total 7,323
Bahamas 1,089
Bermuda 1,758
Cayman Islands 970
Dominican Republic 1,093
Other Caribbean countries 2,414
Europe, total 99,732
Austria 1,361
Belgium 1,881
Czech Republic 1,091
Denmark 1,754
Finland 354
France 9,653
Germany 21,513
Greece 1,484
Hungary 604
Ireland 1,896
Italy 5,199
Luxembourg 219
Netherlands 3,263
Norway 1,215
Poland 735
Portugal 387
Russia 2,495
Spain 2,453
Sweden 1,399
Switzerland 7,093
Turkey 1,199
United Kingdom 28,409
Other European countries 4,078
Africa, total 9,697
Algeria * 241
Angola 398
Egypt 1,658
Kenya 992
Nigeria 906
South Africa 923
Other African countries 4,576
Asia, total 138,795
Afghanistan 5,912
China 12,430
Hong Kong 10,792
India 4,214
Indonesia 1,786
Iraq 18,325
Israel 8,986
Japan 23,529
Malaysia 1,160
Philippines 2,313
Saudi Arabia 5,109
Singapore 3,636
South Korea 6,668
Taiwan 6,588
Thailand 3,643
United Arab Emirates 7,423
Other Asian countries 16,284
Oceania, total 9,724
Australia 6,420
New Zealand 2,518
Other Oceania countries 787
All other countries 19,490

 

 

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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.] ?

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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,

By: Robert Stack
9/20/2013

http://www.treasury.gov/connect/blog/pages/myth-vs-fatca.aspx

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
countries.

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.

 

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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?

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See –

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. 

 

 

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