Saturday, August 17, 2013

Overseas Americans: Time to Say 'Bye' to Uncle Sam? / Chased by the U.S. Government (IRS/Taxes) Thousands Are Severing Ties With America. Here's What You Need to Know

In the first half of 2013, 1,809 people renounced their American citizenship or permanent-resident status, according to a tally by Andrew Mitchel, a tax lawyer who tracks U.S. data. At that pace, the 2013 total would double the previous high of 1,781 renunciations in 2011.
Daniel Kuettel, a Colorado native who lives near Zurich, says he gave up his U.S. citizenship in October because he feared he wouldn't be able to get a mortgage now that some Swiss banks are cutting ties with American clients.
"It was a really difficult decision. I had to think about what was best for me and my family, to reduce the risk," says Mr. Kuettel, a 41-year-old software developer. He says his income was below the limit the U.S. allows overseas taxpayers to exempt and he owed no U.S. taxes.
The increase in renunciations is one sign that ordinary Americans who have lived and worked abroad for years, as well as green-card holders in the U.S. and overseas, believe they are at growing risk because of the intensifying government pursuit of undeclared foreign assets.
The crackdown started in the wake of the 2001 terrorist attacks, and it gathered force after Swiss banking giant UBS AGUBSN.VX +0.94% agreed in 2009 to pay $780 million to settle charges it had helped U.S. taxpayers hide assets.
Since then, more than 80 U.S. taxpayers have been criminally charged, and Switzerland's oldest bank, Wegelin & Co., closed down after pleading guilty to helping U.S. taxpayers hide more than $1.2 billion abroad.
On Friday, a prominent Swiss lawyer pleaded guilty in U.S. court to helping U.S. taxpayers hide millions of dollars abroad.
U.S. officials are enforcing rules established by Congress—some widely ignored for years, and others added more recently—that threaten stiff penalties and even prison for failure to comply. The crackdown has brought more than $6 billion in taxes and penalties into U.S. coffers, and experts say another $5 billion is in the pipeline. A representative for the IRS declined to comment.
Much of the money comes from well-heeled taxpayers. The top 10% of taxpayers who went through one of the Internal Revenue Service's limited-amnesty programs had account balances over $4 million, the U.S. Government Accountability Office estimated in a March report. The programs are one way for taxpayers who have missed past filings to come into compliance.
But many U.S. taxpayers who aren't wealthy also are finding it harder to attend to routine financial matters abroad, because some foreign institutions don't want to face the cost of complying with U.S. requirements.
Amid the crackdown, some face stiff U.S. tax bills and crippling fines over undeclared assets. Paying lawyers and accountants to help meet the various reporting and filing requirements routinely costs at least $1,000 a year, and often much more, experts say.
Other people say they are considering whether to renounce but are reluctant to take such a drastic step. Renouncing can cause additional complications, including another steep bill because of an exit tax the U.S. imposes on those who meet certain income or asset thresholds.
Although the U.S. State Department doesn't keep official statistics, it estimates that 7.2 million U.S. citizens live abroad. And the U.S. Department of Homeland Security estimates there were 13.3 million green-card holders living here as of Jan. 1, 2012.
Despite the campaign against undeclared accounts, U.S. taxpayers filed only 825,000 foreign-account reports last year—meaning that millions of people likely aren't complying with the law.
"It's clear that compliance is dismal, and also why the IRS is being aggressive in its enforcement efforts," says Jeffrey Neiman, a former federal prosecutor now practicing law in Ft. Lauderdale, Fla.
So many people could be affected by the crackdown that mass-market tax preparer H&R Block has expanded services for taxpayers with international ties. In May, the company launched a tax-preparation service via the Internet that is targeted at expatriates and highlights the firm's ability to help taxpayers with unfiled prior-year returns.
U.S. laws and rules provide few options for people who are in a showdown with Uncle Sam. Here is some of what U.S. taxpayers need to know:
Understand what is different about the U.S. Unlike almost all other countries, the U.S. taxes citizens and permanent residents on all income, wherever it is earned in the world. So a U.S. taxpayer living in India could owe U.S. levies on income from a British investment.
The U.S. tax code does allow taxpayers living overseas an exemption for wages earned abroad of up to about $100,000, plus a housing allowance, but taxpayers must file a return to claim the benefits.
Tax treaties might help U.S. citizens or green-card holders who live abroad avoid double taxation, but there can be gaps, experts say. For example, treaties typically don't provide an offset for foreign sales or value-added taxes. And if the tax rate is lower abroad than in the U.S., the U.S. taxpayer could owe the difference to Uncle Sam.
The U.S. also has an expansive definition of who is a citizen. It includes people born on U.S. soil as well as people born to U.S. citizens living abroad.
Kevin Packman, a partner with law firm Holland & Knight in Miami, has a Canadian client who was born in the U.S. to Canadian parents but moved to Canada as an infant. "She had no idea she was a U.S. citizen until she was nearly 50," he says. Experts say there are many similar "accidental citizens."
Know what has changed. While U.S. taxes on world-wide income have existed for decades, experts say laws regarding such income were seldom enforced.
That changed after the attacks of Sept. 11, 2001, in part because of concerns about terrorism. In 2004, Congress imposed severe penalties—up to $100,000 or 50% of the account, whichever is greater, per year—on U.S. taxpayers who choose not to tell the IRS about foreign financial accounts totaling $10,000 or more.
Critics point out that this penalty is for not filing a form, not for evading taxes. Bryan Skarlatos, a New York partner with law firm Kostelanetz & Fink who has handled hundreds of offshore accounts cases, says the total includes more than a dozen in which the tax and interest owed on offshore accounts was less than $20,000. Yet the IRS assessed penalties of more than $1 million, he says. The IRS declined to comment.
U.S. officials ramped up their campaign after the 2009 settlement with UBS. As part of the deal, the Swiss bank turned over the names of more than 4,000 U.S. taxpayers with secret accounts. Other banks have since made payments to the U.S. and named names.
In 2010, Congress passed the Foreign Account Tax Compliance Act, known as Fatca, which requires further disclosures by U.S. taxpayers with offshore accounts. The law also requires foreign financial institutions to report information to the IRS about U.S. account holders or face steep costs for not doing so.
Important Fatca provisions have been postponed until July 1, 2014, but the law has a long reach. For example, it could require a foreign-based trust to report information to the IRS about a beneficiary who holds a green card, even if that person gets no money from the trust and doesn't know it exists, says Dean Berry, a partner with law firm Cadwalader, Wickersham & Taft.
Accidental tax cheats may be able to avoid large penalties. The IRS has a limited-amnesty program that offers protection from criminal prosecution, typically in exchange for stiff penalties.
Taxpayers deemed less culpable—for instance, because they inherited money in a foreign account they didn't touch—can face lesser penalties. But the exceptions are often narrowly defined.
There are other options. People who have already entered the IRS's limited-amnesty program sometimes choose to opt out. That leaves them vulnerable to a regular IRS audit, though the penalties are often lower.
But there are risks: Outside the program, there is less protection from prosecution and penalties can be higher, although experts say both outcomes are rare.
Advisers often recommend that taxpayers whose violations were unintentional and haven't entered the limited-amnesty program should consider making "quiet disclosures" instead. That means catching up with back returns as well as filing them in the future.
The IRS hasn't officially sanctioned such filings, and going this route may not offer protection against prosecution. But experts say the IRS seldom challenges quiet disclosures. In practice, says Mr. Skarlatos, the IRS almost never looks back more than six to eight years.
Taxpayers need to be able to show their violations weren't willful, however. Experts say the evidence could include never having filed a U.S. return if you live abroad, having the undisclosed account in the country where you live, rather than a tax haven, or not having lived in the U.S. for many years. It also helps to have little to no income earned in the U.S. and not to hold the undisclosed account within a trust or foundation.
Expatriation can have stiff costs of its own. People who renounce often have to certify they have complied with U.S. tax laws for the past five years. That means expatriation is a bad strategy for cleaning up past problems.
In addition, U.S. citizens and some green-card holders who formally expatriate are treated as though they sold their property on the day before they renounce. There are few exceptions, says Stow Lovejoy, another lawyer with Kostelanetz & Fink in New York.
Such people owe an exit tax if their net worth is $2 million or more or their average annual income tax for the past five years is greater than $155,000. The exit tax is due on net gains, above an exclusion of $668,000. Deferred income in IRAs and some other tax-deferred accounts becomes taxable at ordinary rates, up to 39.6%, according to Mr. Lovejoy.
Expatriation can also bring severe estate-tax consequences. The U.S. heirs of people who paid an exit tax often owe a 40% tax on assets they inherit from the expatriate, whether the assets are in the U.S. or not. Unlike with typical estates, there usually isn't a $5.25 million exemption.
In addition, law requires that the names of people who surrender their citizenship be published by the government, which some consider embarrassing.
At the same time, there are important exceptions to the exit tax. For example, people who have been dual citizens from birth can be exempt. For more information, see the instructions to IRS Form 8854.
Green-card holders might have other options. People with permanent-resident status who turn in their green cards are subject to the exit tax if they have held the card in at least eight of the previous 15 years. As with citizens who renounce, their names are also required to be published.
However, under complex treaty provisions the U.S. has with some countries, years when a green-card holder lives abroad might not be included in the eight-year tally. So careful planning can help some holders stay under this threshold.
Cushion the blow of U.S. taxes and disclosure with planning. Although the U.S. rules are strict, there is room to maneuver.
Cadwalader's Mr. Berry points out that a wealthy person who plans to expatriate might be able to use the U.S. gift-tax exemption of $5.25 million per individual to shift assets into a trust in order to reduce total assets enough to avoid the exit tax.
If trust assets are used to purchase a life-insurance policy, then U.S. heirs could inherit cash from the expatriate who isn't subject to the special inheritance tax, he adds.
In some cases, a wealthy family may choose to have one family member expatriate and hold assets for the benefit of the rest of the family. Using a "foreign grantor trust," the non-U.S. person could hold assets and make taxfree gifts to other family members who are U.S. citizens or green-card holders. However, the non-U.S. person is often required to have authority to revoke the trust and keep the assets, giving that person enormous power.
Comments 


  • Excellent article. We are spending more and more money to collect the income tax. Taxpayers spent a ridiculous amount of time preparing tax return (mine was 82 pages). We alienating foreign banks and their US customers abroad. We are creating bad will abroad with our tax code, that is so different from every other country. On top of all that, the NSA spying and our foreign interventions, we are becoming an Evil Empire indeed.

    We would be so much better off with a consumption tax.
    11 Recommendations

  • An exit tax, millions of people who scoff at the law, random enforcement that nets only peanuts - and we thought the Soviet Union ended more than 20 years ago.
    5 Recommendations
    • Its not really an exit tax, its taxing gains that weren't taxed. If you sold the assets, you'd pay tax on the gain. I
      Recommend
      • Gains sometimes made by a foreign spouse on foreign soil and already taxes where they live. Exit tax only applies to those with over 2 million in assets though and I don't think the majority of expats fall into that category at all. At any rate. Renouncing is the only way to keep your mortgage and local checking account with a foreign spouse in many cases. Sorry but, living in Canada my local checking account is not "off shoring"

        Since 82 percent of expats would never end up owing any taxes to the U.S. this is a witch hunt on paperwork. And it's sweeping up many foreign nationals just because they are married to an American abroad. It's nuts. The U.S. needs to change this and go to residency based taxation like every other modern nation in the world. At the very least they could distinguish between those living in the U.S. and actually "Off shoring" and those legitimately living outside the U.S. for decades. After a period of five years and if you have NO U.S. holdings at all then you shouldn't be required to file anything for the rest of your life. It's just crazy.

        And this is going to cost the U.S. FAR more than it will gain. Other countries are already very angry over it since it costs them so much but,they will not get real reciprocity since they don't tax on citizenship. This house of cards will fall but, not until it has done a lot of damage. There were better ways to do things but, of course no one read what this really was before it was passed hidden in the "Hire" act.
        1 Recommendation

  • This is terrible policy... another example of a bloated government harming citizens.

    The IRS is attempting to turn every bank in the world into unpaid tax collectors for the IRS. Of course, the banks determined that the costs exceed the benefits and are rejecting Americans from international finance.

    Whatever small amount of taxes the IRS collects will be more than offset by the hassle and burden placed on honest Americans aboard.

    IMO if the IRS wants international banks to send them information then those banks should invoice the IRS for their time and money to collect that information.
    8 Recommendations
    • Brett, it's not just that they are turning away Americans for new accounts. In some cases they are not renewing long held mortgages abroad with a foreign spouse or closing local checking accounts that people need to have to be able to live. That's who is renouncing. Those who have to choose between their foreign spouses and children abroad who don't deserve to be swept up into this OR keeping their citizenship but, they can no longer have both. And that is just wrong.
      3 Recommendations

  • "The increase in renunciations is one sign that ordinary Americans who have lived and worked abroad for years, as well as green-card holders in the U.S. and overseas, believe they are at growing risk because of the intensifying government pursuit of undeclared foreign assets."

    Oversees banks are preventing Americans from opening accounts. They will be liable if they do not disclose all financial dealings with Americans. Now that the NSA can data mine (infiltrate) your emails, phone records, text messages, online financial records, etc....under the guise of terrorism, they will have accomplished exactly what they have intended all along, a mechanism to hunt down revenue.

    Look for the unintended consequences as their Statist hand presses individual freedom and liberty creating a scenario where one is no longer their own property but the States property. There will eventually be civil unrest, unless these confiscation policies can be stopped. Once the State runs out of private cash to pay for their largess, they will confiscate our assets, just like Europe, it's coming.
    6 Recommendations
    • Charles, this is why my Canadian spouse objects to FATCA and to having his account numbers, all transactions and all balances turned over to the U.S. Carl Levin has already said that a lot of this isn't taxes but, data gathered. He also said this information can be shared with other agencies inside the U.S. What right does the U.S. have to a foreign persons detailed banking data? They aren't just talking about someone suspected of a crime like being a drug lord. It is EVERYONE. So they want all this banking data on average persons some of whom are not even American. These people pay their taxes to the countries they reside in and are a citizen of. This isn't about taxes. My spouse does not trust U.S. agencies with that kind of information and feels they have no right to collect it. The only way for him to avoid the U.S. getting that data is for me to renounce, divorce him, or take my name off of our checking account and mortgage leaving me a pauper. I make NONE of the income in this household. I'm not alone. Many foreign spouses are saying "NO!" That's a very big reason why people are renouncing. They aren't leaving us any choice. And it's creating enormous ill will all over the world towards this policy and the U.S. when there wasn't any before because it is completely unjust.
      1 Recommendation

  • One possible problem is the decoupling of the US banking system from the rest of the world. As more global banks reject US individuals who want to do business with them, this will almost certainly spill over into US business accounts. If foreign banks make it hard for US companies to open accounts, businesses who need to bank overseas may need to move out of the US.

    I don't know a lot about international tax law and global business but I'm guessing multinational companies can move their assets a lot faster and easier than US citizens. If that happens, this short term gain in individual tax receipts will look microscopic compared to the lost revenue from US based commerce moving overseas.

    I'm just a guy who lives on a mountain in Montana so I could be way off base. This just seems very dangerous to me.
    1 Recommendation

  • glad i read the article - i thought based on the headline that American citizens overseas had given up on Uncle Sam due to the lack of a foreign policy over the last 4 plus years
    3 Recommendations

  • This situation is hilarious.The rich want laws that have been in the books for decades about paying taxes not applied.They have been overlooked before and breaking the law is fine with them because it maked them money.What kind of lawabiding citizens these rich people are.The more we learn about american rich and that includes the man running for President for the Republican Party the more we learn they are all thieves.The Republican Party supposetly stands for "law and order" but obviously its member do not.What a farce this situation is.
    Recommend
    • You are wrong. Most expats are not "rich" The people who are renouncing are the ones who aren't rich as they cannot comply with this and keep their local checking accounts and mortgages where they live. I'm gong to renounce because I do not have a choice in the matter. My Canadian spouse makes all of our income here in Canada at his Canadian job. We make 54,000 dollars a year Canadian BEFORE Canadian taxes are paid which we faithfully pay to Canada where we live. We would owe no taxes to the U.S. and we are FAR from rich. On top of the average income we live on in a high tax country we have a son with very expensive disabilities. I cannot justify to my Canadian spouse spending upwards of 2000 dollars a year for FBAR forms to the U.S. And I sure cannot justify why he should allow his bank to turn over his account balances, all transactions and all account numbers to a country he is not a citizen of just because he is married to me! Further, I have my name on a small savings account with my Canadian child. So the U.S. wants all his information too.

      Sorry, but you missed the entire point of what this is doing to most expats lives. 82 percent of us would never owe a dime in taxes to the U.S. due to current tax treaties already in place. The U.S. needs to go to residency based taxation like the rest of the free, civilized world. To say that I should pay tax or file forms for the rest of my life and so should my spouse and child who are not even American even when I don't live there is ludicrous. That's why most countries don't do things this way.

      Most expats are out of the U.S. due to family reasons. Many are out of the U.S. for a job abroad. Most are in high tax countries where they are already paying taxes to the countries they live in. You know where they use services like health care, roads, schools, libraries. They don't use those same services in the U.S. since they do not live there. And the majority by far are not "RICH" That is a myth told in the U.S. without any facts to back it up.

      What FATCA is doing to average low and middle income families abroad, their foreign families and children is disgraceful and ought to be painted for just what it is.

      Fifty percent nearly of U.S. citizens living inside YOUR country don't pay taxes. How about going after those living there who aren't "paying their fair share" Instead of this witch hunt on foreign families with one American in them.

      I'd like my spouse to be able to keep our local checking account and our mortgage and banks are turning any account with a "U.S. person' on it away now. So it's either my spouse and child here and our every day bank account and mortgage or my citizenship of birth. Guess who is going to win? This has caused so much pain and angst for so many innocent people and they do NOT deserve to be painted in with drug lords and off shore criminals most of whom live IN the United States. For the record the U.S. is one of the worlds largest tax havens.

      If you really want the actual numbers on who is rich and who isn't living abroad American Citizens Abroad has some of that data for you and it sure doesn't square up with the lie told inside the U.S. that expats are rich overseas tax cheats living on an island sipping champagne at ALL. Maybe the U.S. would be better off to stop allowing dual citizenship because it's going to be out of reach for low and middle income people from now on anyway.
      1 Recommendation

0 comments:

Post a Comment