The US has launched an aggressive campaign to narrow the international tax gap by targeting US taxpayers with assets abroad. With the enactment of the Foreign Account Tax Compliance Act (FATCA), catching US tax evaders is becoming a matter of “when,”not “if.”
The two fold approach is to increase the government’s resources to aggressively pursue tax evaders and offer a voluntary compliance program to encourage individuals to come forward before being caught.
The teeth behind this campaign are mainly in the form of civil and criminal penalties imposed for failure to file Foreign Bank Account Reports (FBARs). Civil penalties can include up to $100,000 or 50% of the highest account balance for each year of violation. Criminal penalties can reach $250,000 per year and five years in prison. Stiffer penalties are imposed if the government can prove willfulness. In a decision by the Fourth Circuit, J. Bryan Williams was found guilty of willfully failing to file his FBARs. He signed his tax return, which included an affirmation that he did not have a foreign bank account, which was used as the evidence against him. Many taxpayers do not read each line of their tax return and many tax software programs default to “no foreign bank accounts.” The US is entering into agreements with numerous countries and foreign financial institutions, requiring them to turn over information on US account holders.
FATCA may be the straw that breaks the camel’s back for some taxpayers. The US has a very different tax culture from most other countries. Not only do people in the US pay tax on their worldwide income (an inconceivable concept for most foreigners), they are expected to report all their foreign financial assets or face exceedingly high penalties. The actual tax burden is lessened by various features, such as the foreign tax credit, earned income exclusion, and tax treaties. The sour taste, however, comes from the perception that the extent of one’s assets is not the government’s business. Further, FATCA has resulted in foreign financial institutions refusing to offer investments to US taxpayers. This can cause an immense burden for an individual.
Imagine an expat coming to the US on assignment, not knowing how long he will stay. As soon as he becomes a “US person” (for legal tax purposes), he may be forced to close all foreign accounts and bring his money to the US. Depending on the nature of his investments, this could result in unnecessary losses.
Previously, expats on assignment in the US were eager to obtain a green card to become competitive in the US market without the restrictions of a particular work visa. Now expats must weigh these advantages with the negative tax consequences of becoming permanently tied to the US.
Workers that are tied to the US now face the challenging decision of whether to formally expatriate. In the first half of 2013, 1,809 individuals expatriated from the US. If this trend continues, it will be nearly double the amount of people who expatriated in 2011.
Expatriation may sound like a great idea, but the US won’t let you get out easily. The US imposes an exit tax on long-term green card holders (generally those holding their green card for 8 years) and US citizens. The tax is imposed on those that meet any of the following criteria:
- A total net worth of over $2,000,000;
- An average annual tax liability of $155,000 or more;
- The inability to certify that they have complied with all their US tax requirements.
The exit tax is capital gains tax imposed on the hypothetical sale of all of one’s assets.
A PRACTICAL EXAMPLE
The most notable expatriate affected by this law is Eduardo Saverin, co-founder of Facebook. Saverin, a naturalized US citizen, decided to bite the bullet and pay the exit tax prior to Facebook’s IPO. Because Facebook’s stock actually declined in value, Saverin may have paid more tax than if he had waited. As a young man, he will likely benefit in the long run from expatriation, as his income and wealth will inevitably increase. Those who are not young multi-millionaires may not be so lucky.
Published in the hard-copy of Work Style Magazine, Fall 2013