Expat Americans living and working abroad: You are on the IRS radar
Nowhere to Hide
There are millions of United States citizens who live and work outside the US. These non-resident citizens are still subject to IRS reporting requirements, i.e., they must still file tax returns and the Report of Foreign Bank and Financial Accounts (the “FBAR”), and they are subject to payment of taxes on all income, including income earned abroad. The US, virtually alone among nations, imposes an extra-territorial tax regime, meaning that US citizens, even if they live and work overseas, must pay taxes on income earned offshore. The American expat may be entitled to credits for living abroad, and may be able to deduct taxes paid to a foreign government. Living and working abroad do not mitigate one’s US tax obligations.
An American expat might surmise that living abroad, he or she is far removed from the IRS. The expat may be tempted to hide foreign income, and not disclose an account in a foreign country, thinking that the the IRS would never learn about income in a foreign country, and a local account at a non-US bank. However, that would be a serious risk. How might the IRS learn about a foreign account, so far away and seemingly off the American radar?
First, via the Qualified Intermediary (QI) Program, in effect since 2001. Under the Qualified Intermediary Program, foreign banks are obligated to share information with the IRS. Moreover, under IRS Announcement 2008-98, the foreign banks must now actively investigate and report to the IRS whether US persons (or entities controlled by US persons) are the owners of the account. Many thousands of foreign banks are enrolled in the QI program. Not fulfilling their QI obligations would result in a lack of access to correspondent banks in the US, effectively severing such banks from international financial transactions. The IRS also routinely audits random foreign accounts at QI banks. And QI banks must also submit to external auditors, who might also discover and report non-compliant accounts.
Second, via “John Doe” summons issued by the US Department of Justice, approved by a US court and then served upon a foreign bank, requesting information about US account holders. In 2002, courts approved John Doe summonses issued against credit card service companies, and the IRS learned the identities of US persons accessing unreported foreign funds via credit and debit cards. In 2009, a federal court in Miami approved a John Doe summons against UBS, seeking account records of US persons with supposedly “secret” Swiss bank accounts. In settling the litigation that ensued, UBS agreed to turn over 10,000 names of Americans with accounts at UBS. Aside from the erosion of Swiss banking secrecy, which itself is a monumental development, equally significant is that John Doe summonses work, and will be used against other banks and financial service providers, in other foreign countries.
Third, via the “Hague Convention on the Service Abroad of Judicial and Extra Judicial Documents in Civil and Commercial Matters”, pursuant to which a summons, inquiry, demand for information or documents, from the IRS to an American expat, can be delivered and served upon that expat in the country where he resides. It has recently been reported that the IRS has used the Hague Convention in issuing administrative subpoenas upon wealthy Americans in Britain and Switzerland.
Fourth, via Tax Information Exchange (TIE) Agreements, which obligate the foreign country to assist in both criminal and civil tax investigations. Most countries have already signed a TIE with the US, including tax havens such as Liechtenstein and Switzerland. Countries which have not yet signed a TIE are anticipating being asked by the US to sign one. Not signing one would, as noted above, ostracize the defiant country from the international banking system.
Fifth, via a Mutual Legal Assistance Treaty (MLAT), which requires each participating country to disclose information – including bank account data – to the U.S. government in connection with an investigation of a serious crime, including tax fraud. Treaty loopholes, such as what constitutes “tax fraud” under the laws of the foreign treaty country, have been effectively closed by the successful U.S. attack on UBS and Swiss banking secrecy. The MLATs specify that local secrecy laws may not form a basis for refusing to provide the requested information.
Sixth, if the account is at a bank within the European Union, or a bank outside the EU that routes via Europe, then the account might already be under the watch of the CIA pursuant to the “Brussels Agreement”, also known as the “Swift Agreement”. That agreement gives the CIA direct access, upon demand, to bank accounts held in the EU. While perhaps this sounds very “Big Brother” and akin to conspiracy theory, such monitoring does exist and was developed after the terrorist attacks on 9/11. The purpose of the Agreement is to investigate terrorism finance, yet there is no limitation to the extent of banking information to be shared, including with the IRS.
Finally, even assuming that none of the above are actual threats to a non-compliant expat account (an assumption that would indeed be a huge leap of faith), the account is vulnerable to discovery if the expat ever wishes to access or use the foreign funds in any way connected to the US. Should the expat wish to move back to the US, accessing the account would raise red flags. If the expat wishes to buy real property in the US, or even invest in US securities, the source of funds would be revealed. A wire transfer from the foreign account to a US bank would likely trigger a Suspicious Activities Report (SAR) from the recipient bank to the IRS.
It should be pointed out that none of these threats to a foreign account is directed specifically against American expats living abroad. Indeed, the same threats apply to US residents with non-compliant foreign bank accounts. It’s not the location of the taxpayer which gives rise to the threat; it’s the foreign account itself. Thus, whether the account holder is an American living and working overseas, or an American living in the US with an account offshore, both persons should be concerned about the likelihood of the IRS discovering the account and prosecuting the account holder for not disclosing the account and paying taxes on foreign income.
Given these numerous threats to offshore account secrecy, what should the expat (or indeed, the US resident) do to remedy a non-compliant foreign account? First, the account holder should bring the account into compliance. This includes the proper disclosure, i.e., “checking the box” as to ownership of a foreign account on IRS form 1040, Schedule B, as well as annual submission of the FBAR form mentioned above (Treasury Department Form TD F 90-22.1). It also means, of course, reporting and paying tax on all foreign income, including earnings, as well as interest and gains in or to the foreign account. However, it must be noted that simply, and suddenly, declaring a foreign account might give rise to the question of whether the account existed in prior years, in which case one would be alerting the IRS to past non-compliance. Thus, one must also address the question of whether or not to make a voluntary disclosure to the IRS. A voluntary disclosure would lead to paying past taxes, significant penalties and interest, but would likely avoid prosecution for criminal tax fraud, and would make amends for past non-compliance and allow for future compliance. The account holder might also consider a legal strategy involving transfer of the undeclared account in return for a foreign annuity and establishment of an offshore trust, which would accomplish asset protection, tax benefits and future tax compliance, but would not rectify past non-compliance and thus the voluntary disclosure option should again be considered.
Foreign banking tax compliance is crucial irrespective of where one lives, within the US or overseas. Non-compliant foreign bank accounts should be brought into compliance. The possibilities of discovery of the account, as seen above, are many. Expat Americans living and working abroad are as much on the radar as Americans living and working and banking at home.
What if you never travel back to USA again? Better yet, what if you give up US citizenship before earning income abroad and thus quit reporting it to IRS?
I think that the article is well-written, however I am strongly against it. There are more possibilities to win the lottery or become a best-seller author than being caught abroad if you are a US citizen.There are so many Americans with dual citizenship (one of the two nationalities is the American) who haven’t been paying taxes to the US for years – which is great and fair because they don’t live in the US, don’t work in the US and are not being paid by an American employer. AND they renew their AMERICAN PASSPORT all the time! Why is that? Because you don’t really have to pay income tax twice. IT IS ILLEGAL. IT’S IRS MANIPULATION!
That makes your article sound rather silly….
As to your second point and in regards to the UBS “issue”, that was a big PR event in favor of the excellence (or the stupidity) of the Obama administration. Yes, it was front page in all US newspapers and all liberals were happy! Or just fool….Days later, I was reading in an European newspaper that the Swiss banking secrecy is actually a law and all decisions or announcements made by banks to remove it or just circulate names to extremely arrogant governments, won’t happen: It has to be voted first in the parliament and therefore change the law.
Have you heard anything lately about those 10,000 names? I am sure you haven’t. Me neither. Do you know why? Because it never happened, the Swiss banking secrecy is still valid and is anti-constitutional to pass over names of account holders to any GOVERMENT.
Did the Obama administration say anything about it?
No, because they are hopeless….
And it is rather funny, the same day when the big PR event happened, I attended a UBS party in the US. What their employees were saying was very interesting: if that happens (removal of the Swiss banking secrecy) the UBS clients would rather pay the fine than the tax….
I LIKE IT!
Bottom line:
Governments are useless entities that produce nothing. The only way to make money is to tax or overtax their citizens. That’s why any small or big secret about money somewhere hidden is actually a good thing. It’s the only punishment from citizens to their leaders.
for your info:
From: eu-digest@europehouse.com
Date: Thu, 8 Jul 2010 06:57:40 -0400
Subject: [europehouse] EU capitulating on “anti-terror” finance information deal with US
The European parliament was poised Thursday to approve a bank data sharing scheme that the United States says is crucial to fight terrorism after securing safeguards to protect the privacy of Europeans.
The United States will again have access to the banking information from August 1 after European MPs, as expected, approve a new deal that was signed by Brussels and Washington last week. European lawmakers’ main concern was that personal information, including data from electronic bank payments, would be used by US authorities, held for too long and handed on to other governments (or to the private sector).
This agreement is a capitulation by the EU to US demands. The US argument of increased security risks if this agreement is not signed is a complete farce. Security experts claim the whole US security system is riddled with problems. These problems are far more dangerous than the lack of having EU citizen’s Privacy data. There also is no reciprocity clause in this new proposed agreement, whereby the EU could get similar data about US citizens. These kinds of agreements which directly affect EU citizens in reality require either a referendum in the EU or approval by each EU members parliament. The EU parliament should reject it regardless of what they have been told by Mr. Joe Bidden. This proposed agreement which is being sneaked into the EU parliament during its summer recess is not only a capitulation to US demands, but also a flagrant infringement on EU sovereign citizens privacy rights. It should be rejected.
EU-Digest
If one has dual citizenship and has accounts in both countries, does this change anything? Also, in any case would taxes ordinarily be paid to one or the other country for interest/dividends on bank accounts — especially where there is a reciprocal agreement between the two countries?? Or, do some actually pay taxes to both nations?
This is really helpful information. Excellent article! Thank you!