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More and More Expats Are Deciding to Expatriate From the United States…For Good

IJ Zemelman

 

More US Citizens and Green Card Holders have escaped the veil of US taxation and reporting obligations by officially expatriating from the United States in the first half of 2013 than any previous year in US history. Total so far in 2013: 1,809.

This year more than any previous year in documented US history, US Citizens and Green Card Holders are demonstrating their unhappiness with the United States, its practice of taxing worldwide income, and - perhaps even more burdensome - the the recent barrage of charges filed against US Persons with undeclared assets and US bank officials working in the banks at which they were held.

 

Until 2013, the year with the highest number of citizenship and permanent residency renunciations was 2011 with a total of 1,781 expatriations documented. By June, 2013, a total of 1,809 US Citizens and Green Card Holders severed ties with the United States permanently.

 

A great number of expatriations are currently taking place due to an increased pursuit by the United States to discover undeclared assets being held overseas. As a result of increased FATCA measures, many foreign banks are refusing to offer services to US Persons. The prospect of not being able to hold foreign financial accounts as a US Citizen or Green Card Holder suggests there will be problems obtaining a mortgage, taking advantage of lucrative offshore investments, or even conveniently handling financial affairs at one’s preferred banking location overseas – which is already becoming a problem for US Expats living abroad.

 

Some US Expats with offshore residency and employment have been able to expatriate paying little or none of the exit tax mandated by the United States Government.

For many US Expats living and working overseas, the process of expatriation (covered later) has been more burdensome than the actual cost. While the United States demands an exit tax before authorizing renunciation of US Citizenship, the cost has been relatively low (and in some cases nil) for American Expats earning less in foreign income than the maximum deductible allowance of the FEIE (Foreign Earned Income Exclusion). Even those who wind up being liable for a moderate to hefty exit tax are finding the cost well worth it when the risk of missing out on future financial management opportunities is thoroughly evaluated.

 

The United States began actively pursuing those involved in international tax evasion in 2001 after the 9/11 and has become increasingly aggressive in the years that followed.

It took 8 years of planning and investigation for the United States Government to finally realize results, and the first indication that it would not back down occurred in 2009 when Swiss Bank, UBS, agreed to a settlement of $780M for having helped US Citizens and Green Card Holders hide millions of dollars worth of financial assets overseas. In 2010, FATCA (Foreign Accounts Tax Compliance Act) was enacted and since then, indictments have not only been served on over 80 US Taxpayers but also on Swiss bank officials who were guilty of aiding and abetting US Taxpayers in money laundering.

 

The primary Swiss bank affected by such indictments was none other than the longest standing bank in Switzerland, Wegelin & Co, which was forced to close its doors for good after numerous officials had pleaded guilty to criminal charges that involved helping US Citizens and Green Card Holders hide over $1B from the IRS.

 

As we recently reported on our blog from a story originally published on Bloomberg, a Swiss attorney was also recently charged with aiding and abetting criminal tax evasion. Not only did he plead guilty to charges imposed by the United States, he agreed to help the DOJ (Department of Justice) in their continued pursuit of undeclared assets by providing names of those who had helped and offering insight to the different methods used by foreign institutions to hide money and assets from the United States and create a virtually untraceable paper trail.

 

Recent FATCA initiatives have yielded more than $6B in revenue and it’s estimated that at least another $5B will soon be collected in past due taxes and financial penalties that have been or will be assessed on offenders.

Recent and relentless US enforcement of old and new international taxation and reporting laws enacted by Congress in combination with amnesty programs that have been offered by the IRS since 2009 have resulted in the United States collecting over $6B with at least another $5B on the way.

 

While both of these factors have contributed to the money that’s been realized, the primary source of revenue so far has been the overwhelming response to the OVDIs and Streamlined Compliance Filing Procedures. As a matter of fact, a report issued by the US Government Accountability Office in March of this year estimated that the top 10 per cent of taxpayers who entered the program were assessed an average account balance of around $4M.

 

As for the figures that are projected, one can only speculate that it’s in anticipation of the fruit of current investigations and pursuits – especially considering the fact that out of the millions of US Citizens and Green Card Holders with foreign financial accounts only 825K FBARs were filed for 2012. For those who refuse to comply with penalties assessed by the IRS and the US Treasury Department, the DOJ is prepared to issue even more indictments so that non-compliant taxpayers and institution officials assisting them will be facing time in federal penitentiaries.

 

The possibility of millions of US Citizens and Green Card Holders around the world being affected by this wave of FATCA enforcement is so high that Taxes for Expats is making preparations to meet the anticipated demand for a global necessity which has been growing steadily and rapidly in recent years – primarily the desire of US Expats to get caught up on past due tax returns in exchange for lighter penalties and a much better chance of avoiding prison.

 

Expatriation may not be the best solution for some – especially if back taxes and/or unreported assets abroad are concerns.

While a vast number of expatriations are taking place, there are many more US Expats who don’t currently find the end of renouncing US Citizenship worth the means – or the end itself for that matter. After having expatriated, individuals who once felt at home in the United States find themselves on a blacklist that can make it difficult to even enter the country.

 

The first step to take before you’re able to begin the process of expatriation is to prove that you’ve been current on your tax and reporting obligations for the past 5 years. This is the very reason why it’s impossible to expatriate to avoid cleaning up the wreckage of your past with the IRS. If you’ve been compliant with all tax and reporting obligations for the required amount of time, that mandate is only the beginning!

 

If you own any property, the IRS will assume you sold it for FMV (Fair Market Value) on the day your exit tax is assessed. If your income from those ‘sales’ exceeds $688K (the current net gains exclusion) you could be liable for taxes based on a rate as high as 39.6 per cent – taxes that you would need to satisfy before your renunciation was official.

 

If you have a net worth of over $2M or your average income tax liability was at least $155K for a period of 5 years or more, you will also be subject to the net gains rate of taxation being applied to your exit tax.

 

If you have future heirs to whom you plan on passing your estate, they will be subject to an additional 40% rate of taxation at the time of passing ownership. Since you had expatriated, your estate will not qualify as part of your heirs’ $5.25M life gift and estate exemption.

 

Finally, there is that potentially embarrassing legacy you’ll leave behind once your name is on a permanent public list of American Citizens and Residents who had renounced their US Citizenship.

 

Yes, the IRS taxes worldwide income, but US Expats earning less than $97,600/year are able to deduct their entire income from US taxation with the FEIE if they file a US expat tax return and claim the exclusion.

Even though many foreign banks are turning away US Clientele, there are still millions of US Expats who have maintained their foreign bank accounts without disruption. Additionally, the majority of US Expats are not earning enough to be burdened by US taxation – at least financially; the only aggravation is the act of filing a US expat tax return in order to claim all of the available deductions that greatly minimizes or completely eliminates tax liability.

 

For 2013, the FEIE (Foreign Earned Income Exclusion) amount is up to $97,600 for individuals and twice that much for married couples filing jointly. There is also a housing allowance, travel deductions, available deductions for other unreimbursed US Expat expenses, and the FTC (Foreign Tax Credit) – which allows American Expats to deduct foreign taxes on income not claimed in the FEIE.

 

In addition to the allowances offered to US Expats by the IRS, there are active tax treaties which further minimize tax liability. Even though there are some gaps in certain countries that cause some American Expats to be subject to dual taxation, most are in a situation in which the tax treaty in their host country works in their favor.

 

If you are among the vast majority of American Expats who would be better off catching up on your tax and reporting obligations than facing the process of expatriation the amnesty programs that can help you reduce your penalties are still available.

The IRS is still offering the 2012 OVDP (Offshore Voluntary Disclosure Program) and the more recently added Streamlined Compliance Filing Procedures. US Expats who have simply not filed a tax return in recent years for one reason or another may have some past due tax liability, but many – after claiming the deductions in the amounts designated for corresponding tax years – will find that they are only subject to a failure to file fee. This is a fee that may be reduced or even eliminated by pleading your case to the IRS representative assigned to you.

 

For those who owe back taxes there are a number of payment options made available if a full payment is not a viable option. Even though interest will accrue on such accounts until the balance is paid in full, it still helps to incorporate repayment of one’s tax debt into a manageable, long term budget.

 

Whatever your reasons for not having filed a US expat tax return in one or more recent years, it’s important for you to know that there are a lot of suggestions floating around online that may not be in your best interest (such as ‘quiet disclosures’). Furthermore, there are many differences between the 2012 OVDP and the Streamlined Procedures and we encourage you to speak with seasoned international tax professional at Taxes for Expats to identify the best route for your individual case.

 

If you are current on your tax liabilities and the future risk of not being able to take advantage of foreign banking opportunities is worth the process, cost, and consequences of expatriation there ARE things you can do to ‘soften the blow.’

For US Green Card Holders: US Persons who have residency through a Green Card are only required to pay an exit tax if they spent a total of 8 years out of the previous 15 living in the United States. Generally speaking, if you have an active Green Card and US residency you are considered to be living in the country – whether or not you were physically in another. Having said that…There are many tax treaties which stipulate that a US Person technically had residency in their host country even if a residence was maintained in the United States.

 

It may be worth your while to crunch the numbers on the time spent in the US versus a foreign country and scan the details of the treaty or treaties of the countries in which you lived to see if you fall under the 8 year time requirement.

 

For US Citizens: Although your heirs are almost guaranteed to be charged a 40% tax rate on future ‘gifts,’ there is no statute that allows the IRS to retroactively tax gifts. If you have an estate worth more than $2M and family or friends that you trust, you can parcel out your estate as gifts so that you’re virtually destitute by the time your exit tax is calculated. The recipients of your ‘gifts’ would be able to include the value of what they received in their $5.25M lifetime exemption and your assets could be transferred back to you once you’ve completely expatriated.

 

Accidental Citizens: The term ‘accidental citizen’ has been assigned to those who were either born in the US but never lived in the country or was born outside of the US to 2 American Citizens. If a person with ‘accidental citizenship’ has never set foot on American soil, earned American income, or had any other ties with the United States, he/she is generally able to expatriate without a requirement to pay an exit tax.

 

For more information on expatriation, refer to Form 8854 and Form 8854 Instructions.

 

Zemelman

I.J. Zemelman, EA is the founder of Taxes for Expats
She may be reached at: +1-646-397-2887
Email: questions@taxesforexpats.com
Web site: www.taxesforexpats.com