Approximately seven million U.S. citizens live overseas. And while most of them don’t realize it, they’re subject to the same U.S. tax and reporting obligations as any other U.S. citizen.
In Part I of this article, I described how the U.S. government has embarked upon a massive effort to force non-resident U.S. citizens to comply with their U.S. tax obligations.
Nothing summarizes this effort more succinctly than a message I received yesterday from Panama. Apparently using a recently ratified tax information exchange agreement (TIEA) as their authority, dozens of IRS agents have fanned out across Panama looking for non-compliant U.S. taxpayers living or doing business there. At least some of them are carrying firearms. How would you feel if an SUV full of armed IRS agents pulled into your driveway in a foreign country?
Other initiatives the IRS is taking to force non-resident Americans into tax compliance include:
- Greater scrutiny over the U.S. activities of non-resident citizens. One woman I know of from Mexico didn’t realize she was also a U.S. citizen until she was nearly 50 years old. She learned of her U.S. status when she purchased a condo in southern California. At the closing, her attorney told her she needed to sign the closing documents as a U.S. citizen, not a non-resident alien. She thought nothing of it, and signed the contract. A few months later, she received a notice from the IRS at her new address informing her that they were investigating her for willful failure to file tax returns and possible criminal tax evasion.
- Enactment of more and stricter TIEAs. These agreements require signatory countries to exchange tax information upon request on named taxpayers. If the IRS knows you’re living or doing business in a country with a TIEA, it can probably obtain bank records, investment records, tax filings, and much more, from that country’s tax authority. If you live in that country, the IRS may even send armed agents to confront you there, as it is doing in Panama.
- Aggressive investigation of U.S. citizens with unreported offshore accounts. Beginning in 2008, the IRS began a crackdown on unreported offshore accounts. While its efforts initially targeted U.S. resident investors with accounts at offshore banks such as Swiss giant UBS AG, Americans living overseas were also affected. The reason: seeing how IRS was able to crush UBS, foreign banks began closing the accounts of hundreds of thousands of U.S. citizens, including those living in the country where they had an account.
- Foreign Account Tax Compliance Act (FATCA). This law, part of the HIRE Act that President Obama signed in 2010, forces offshore banks that maintain account relationships with U.S. citizens or permanent residents to provide the IRS with information equivalent to what a U.S. bank must provide. Beginning in 2014, offshore banks that fail to comply with this obligation will face a 30% withholding tax on payments originating in the United States. The only way for offshore banks to opt out of this requirement is to forbid U.S. persons from maintaining an account. Many offshore banks are doing exactly that, making it even more difficult for many non-resident citizens and green card holders to maintain offshore banking relationships.
- Non-renewal of passports. As I described here, the General Accountability Office has concluded that in just one year, the State Department issued passports to 224,000 citizens who owed nearly $6 billion in unpaid federal taxes. The GAO suggests that Congress may wish to “consider taking steps to enable [the] State [Department] to screen and prevent individuals who owe federal taxes from receiving passports.” And without a passport, of course, you have no way to travel internationally.
If you’re affected by this escalating IRS vendetta, the only permanent solution is to expatriate: to give up U.S. citizenship or permanent residence. But unfortunately, expatriation only eliminates your obligation to pay tax or file reporting forms in future years. It has no effect on your previous tax and reporting obligations.
The Mexican woman who purchased real estate in California is a perfect example. Even though she had no idea she was a U.S. citizen, if she expatriates, she still may face heavy penalties going back six or more years, as I described in Part I of this article.
Fortunately, it’s often possible to make your own “Escape from America” on relatively favorable terms, even if you have failed to comply fully with past tax and reporting obligations. This is a three-step process:
1. Hire an international tax professional to calculate and file the necessary tax returns and reporting forms. Depending on the circumstances, the professional may recommend that you enter into a “voluntary disclosure” with the IRS. While a special offshore voluntary disclosure program ended Sept. 9, 2011, you can still opt for the “regular” IRS disclosure program. Don’t start this process, however, without expert legal advice.
2. If you don’t already have a non-U.S. nationality and passport, obtain one as soon as possible. You may qualify for a second passport based on your ancestry or long-term residence in a country. But if you don’t, you can purchase “economic citizenship” from a very few select countries. The least expensive option is a passport from the Commonwealth of Dominica. Total costs for a single applicant start around $100,000.
3. Give up your U.S. citizenship and passport. This process of “expatriation” is a radical step, but it’s the only way a U.S. citizen can permanently end future tax and reporting obligations to the United States. You can learn more about this process in my newly-updated report, The Billionaire’s Loophole.
