Ranked #1 in the World
By Laurence E. Lipsher, 1965 Thunderbird graduate
Opening the mailbox is a different experience for British and U.S. expatriates in Hong Kong. When letters arrive from HM Revenue & Customs for British managers, they think nothing of it. But when letters arrive from the Internal Revenue Service for U.S. managers working abroad, the normal response is panic. Their palms go sweaty and their hearts pound when they see the return address.
As a U.S. accountant and tax specialist who has lived and worked in China for more than 20 years, I have watched the contrasting scenes unfold many times. U.S. expatriates live in a culture of fear. And the environment is getting worse.
Consider the new tax treaty between the United States and Switzerland, which requires Swiss banks to divulge personal data about U.S. expatriates who open foreign accounts. Article 13 of the Swiss constitution would seem to prevent such invasions. “Everyone has the right to privacy in their private and family life and in their home and in relation to their mail and … personal data,” the Swiss constitution states. But this has not stopped the IRS from seeking information on more than 4,400 U.S. expatriates during the first months of enforcement.
The campaign against offshore taxpayers is probably the only war the United States has won in the past generation. Basically, the Swiss abrogated their constitution because of the strength of the IRS. I only wish the United States could be as successful in Afghanistan.
The IRS uses several new weapons in this war against U.S. expatriates. In addition to the Foreign Bank Account Regulations (FBAR), the IRS now wields the Foreign Accounts Tax Compliance Act (FATCA), signed by President Obama on March 18, 2010.
Before these measures, we had the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005. Despite the reassuring name, taxes increased for many of my Hong Kong clients when this law took effect. That was the time when many U.S. expatriates all over the world realized they were under attack.
Then came FBAR, a voluntary compliance program the IRS ran from March to October 2009. About 15,000 U.S. expatriates “came clean” during this window and paid back taxes without criminal prosecution. Another 3,000 joined the program later.
Of these 18,000 cases, the IRS only has processed about 2,000 through February 2011. The backlog provides an indication of IRS capabilities as it ramps up its expatriate campaign with FATCA.
This latest weapon in the IRS arsenal imposes a 30 percent withholding tax on the income of foreign banks or investment houses that fail to identify U.S. accounts, their owners, their social security numbers and their assets. Similar penalties apply to corporations that do not supply the name, address and tax identification number of any individual with at least 10 percent company ownership.
FATCA also imposes penalties as high as $50,000 on U.S. taxpayers who fail to report offshore accounts or assets worth $50,000 or more. This potentially represents a 100 percent penalty. The law also imposes a retroactive $10,000 minimum penalty for foreign trust information that U.S. expatriates fail to report. And it doubles the statute of limitations for omissions from three to six years.
The law essentially turns all foreign banks into IRS enforcement agents and creates additional counter-incentives for multinational companies to hire U.S. citizens abroad.
The European Banking Federation submitted a 26-page FATCA critique on Nov. 12, 2010, citing a complete lack of preliminary guidance from the IRS, and the European Commission followed up last week with its own scathing letter. The IRS response, issued April 11, 2011, has left many FATCA critics unsatisfied.
Meanwhile, the U.S. Department of Justice has opened a criminal investigation of Swiss regional banks. And Caplin & Drysdale reports that the IRS is looking into Hong Kong banks.
These investigations will run concurrently with the Offshore Voluntary Disclosure Initiative, a new voluntary disclosure program announced Feb. 8, 2011, to help delinquent overseas taxpayers avoid criminal prosecution if they come forward before Aug. 31, 2011.
None of this portends good things for those of us in the expatriate community. The IRS has become increasingly active and invasive in the lives of U.S. citizens who live and work overseas. Tax laws have multiplied, forms and procedures have become more complex, and scrutiny has intensified. The trip to the mailbox will not get easier any time soon.
Laurence E. Lipsher is a 1965 graduate of Thunderbird School of Global Management. He is a U.S. Certified Public Accountant who has lived in China since 1990 and who specializes in tax matters of China and eight neighboring jurisdictions. He is a tax expert and author of The Tax Analects of Li Fei Lao and Larry’s 2011 Tax Guide for U.S. Expats and Green Card Holders. This article is based on presentation he gave April 13, 2011, at The Foreign Correspondents’ Club in Hong Kong. Watch the full presentation below.
| IRS Targets U.S. Expatriates: Laurence E. Lipsher talks April 13, 2011, at the Foreign Correspondents’ Club in Hong Kong. View the video on YouTube (36:09). |
September 10th, 2011 at 2:53 pm
Rip it up — if it comes. Avoid the USA!
September 21st, 2011 at 9:06 am
The IRS has stated that many expats who renounced their citizenship or terminated their long term residency, simply did not know how to fill out the form. So according to the IRS, “If an individual who loses US citizenship or terminates long term resident status after June 3, 2004 files the revised form 8854 by June 15, 2005, the individual will be treated as having met his or her reporting obligations on the date on which the taxpayer provided the requisite notice to the Department of State or the Department of Homeland Security.”
It is best to read the entire tax Publication 519, US Tax Guide for Aliens to understand all requirements for expats.
Americans Who Expatriated on or Before June 3, 2004
The expatriation tax provisions (prior to the AJCA amendments) apply to all US citizens who have renounced their citizenship and also for long-term residents who have decided to end their residency to avoid paying future taxes. There are two tests that may allow the expatriate to apply to the IRS and claim they did not expatriate to avoid taxes:
1. If the average income for the last five tax years prior to expatriation was more than $124,000.
2. The US citizen’s net worth on the date of expatriation was $622,000 or more.
To qualify for this exemption, the expatriate must file within one year of renouncing their citizenship. US citizens who renounce their citizenship and long term residents who terminated their US residency for tax purposes must file a form 8854. For more information on these tax provisions look for Publication 519, US Tax Guide for Aliens.
Expats Must File Form 8854
CLICK HERE to email Joe Mastriano, CPA for help!
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