If you’ve skimmed the morning paper over the past few years, there is a good chance you’ve come across stories involving tax evasion, offshore bank account ownership, and wealthy individuals receiving jail sentences for partaking in such schemes. In recent times however, many U.S. citizens have come to face the harsh reality that being a member of the ultra-wealthy coterie is not the only way to get the IRS’s attention.
In addition to the Report of Foreign Bank and Financial Accounts (FBAR), a surge of international information sharing agreements such as the Foreign Account Tax Compliance Act (FATCA) have forced expats to reconsider their U.S. citizenship.
Increasing numbers of them are choosing to renounce the red, white and blue in favor of avoiding its burdensome tax obligations.
In 2008 there were 235 renunciants in total; in the first half of 2013 there have been over 1,810. While this number may seem insignificant when you consider that there are over 6 million American citizens living abroad, it demonstrates an increasing commitment by the IRS to crack down on undisclosed offshore assets, and an equally increasing commitment by citizens to dodge the hassle of disclosing them.
While some choose to renounce their citizenship, others may set up foreign grantor trusts, or actually pay off their missing taxes – some paying penalties of nearly 50% on the value of previously undeclared assets. While U.S. residents with overseas assets might employ a variety of methods to handle their taxes, the message from the government is now clearer than ever: become tax compliant, or face substantial civil penalties and the risk of criminal prosecution.
The IRS’s Offshore Voluntary Disclosure Program (OVDP) offers a path for U.S. tax residents to become compliant with their outstanding filing obligations while mitigating or minimizing the penalties associated with non-compliance. The OVDP offers taxpayers, in lieu of stiff penalties for each specific failure to disclose offshore assets, a one-year miscellaneous FBAR penalty. The penalty is calculable within a reasonable degree of certainty before entering into the program, which allows each taxpayer to gauge the total cost of resolving their offshore tax issues — however, this program can close at any time.
With 10 major international partners already in FATCA agreements with the U.S. and 7 more currently in negotiations, the IRS has significantly revamped their efforts to quash tax fraud and evasion. Timothy Canney, a lawyer with JDKatz who focuses in international tax planning, believes that these recent agreements by the government are a serious call to action for any U.S. tax residents who may not be compliant: “With more and more countries agreeing to turn over tax and financial information to implement FATCA’s disclosure goals, the IRS may end the OVDP program once the information really starts pouring in. The time for voluntarily coming forward is now.”
The United States happens to be the only country in the world other than the military dictatorship of Eritrea that taxes based on citizenship and not residency (Yes, you read that correctly). Despite the existence of these laws, Congress estimates that tax evasion by U.S. citizens results in annual losses of nearly $100 billion in tax revenue, a figure they hope to cut drastically over the next few years. While you might expect the U.S. government to be more forgiving with their tax penalties than their African counterpart, the punishment will undoubtedly be swift and certain for those who do not comply.
- Foreign Accounts: Why Come Forward? (joyoftaxlaw.com)
- Americans Giving Up Passports Jump Sixfold As Tougher Rules Loom (secretsofthefed.com)
- Number of Americans Renouncing Citizenship Surges (patdollard.com)
- Cayman, US agree on reporting of Americans’ assets (nzherald.co.nz)
JDKatz, P.C. is a full-service law firm focused on tax law, business and transactional law, estate planning and elder law. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys, or visit http://www.taxattorneymd.com.