The number of American expatriations is at a record high, reports an international tax attorney friend. The reality right now is that tens of thousands of Americans a year are moving abroad in search of better lives.
“A root cause,” my friend explains, “is how the U.S. government is treating its citizens these days.
“Just about every call I get now related to expatriation is from someone either battling the IRS or afraid of winding up in a battle with the IRS.
“Why? Because the tone of the Internal Revenue Service has reversed.
“Historically, if an average American failed to report his income accurately and completely, it was usually a civil or a financial issue. Increasingly, the IRS is turning those sections of the tax code enacted to go after drug dealers and mafia kingpins (think Al Capone) on ordinary citizens, all in the name of increasing revenues.
“These weapons of mass destruction, as I think of them (which the U.S. government in this case has no trouble finding), put regular people in jail for years for failing to file a form or to report income. They are being used not only to go after multi-millionaires and billionaires with huge accounts offshore, but everyday hard-working Americans, as well.
“Here are three examples from my experience. There are hundreds of similar cases being argued throughout the United States right now.
Example #1: Offshore Account
“I know a single father of three who makes about US$80,000 a year as a self-employed consultant. He moved some money offshore, to diversify and for asset protection. He never filed the necessary IRS forms, and he failed to report the account on his tax return.
“Unfortunately for him, the account was at UBS Switzerland. He was reported to the IRS, which decided to prosecute him.
“Here is the rub: He did not have any unreported or untaxed income…which is to say, the account did not earn any interest, and the guy would not have had to pay any additional U.S. tax had he reported it.
“That’s irrelevant now. In settlement negotiations, the man faced up to one year in jail and a fine of US$540,000.
“He has little money left and will never be able to pay the fine. What is the point of the prosecution? The IRS gets to issue a press release showing a conviction in this city. This press release will forget to mention that there is no tax loss in the case, but it may induce many others to come forward… thereby increasing revenues on the back of an everyday citizen who made a mistake.
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Example #2: Cash Transactions
“A retired U.S. citizen I know, living in California, age 60, is concerned about a major devaluation of the U.S. dollar. He decided a while ago that he wanted to purchase gold. He owns a condo with some equity and has a few hundred thousand dollars in retirement money.
“As a regular guy, he can’t afford to buy large amounts of gold bullion, so he purchased gold coins from a local dealer. He paid cash for these coins so the dealer would not have to wait for a check to clear before handing over the merchandise. He has never sold any of his coins, thus there is no tax issue.
“What did he do wrong? He took cash out of his account once or twice a week, always less than US$10,000 at a time, to make the gold purchases. To the IRS, this can qualify as “structuring,” which is a crime.
“The man’s bank sent two suspicious transaction reports to the IRS and closed his account. He had been a client of this bank for more than 30 years, yet the bank made no effort to warn him in advance of the reports they made to the IRS or to offer any assistance. They just turned him in.
“As a result, the man is looking at a fine of up to US$100,000 and possible criminal charges that could incarcerate him for up to five years. Add to this a minimum of US$100,000 in potential legal fees, and the reality for this guy is that he and his family could be wiped out. Again, this is all the result of an innocent mistake.
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Example #3 Of American Expatriations: Dual Citizen
“Another client is a 55-year-old engineer who has been working at the same job for 20 years. He is a dual citizen of the United States and the United Kingdom. When he moved to the States, he rented out his U.K. home. Ever since, he has deposited this rental income in a U.K. account.
“The man has filed tax returns in the U.K. reporting the rental property, but he did not report it, or the U.K. account, to the IRS. Had he reported the property and the related rental income all along, it would not have made any tax difference in the United States. In fact, reporting the rental could have reduced his U.S. tax, thanks to the depreciation he could have claimed.
“This man learned of the requirement to file an FBAR form and entered the IRS Voluntary Disclosure Program. As a result, this story has a happier ending than the others. This guy did not face criminal charges. He did, though, pay a fine of approximately US$22,000.
“Cases like these and the hundreds of others currently being argued have changed the way that tax attorneys deal with clients. While we once would say, ‘Come clean, be honest, and let’s get through this,’ now we advise, ‘Be afraid… be very afraid.’
“It is this culture of fear that is pushing many Americans to look around the world for places where they might live better, freer, and less fearfully.
“I’ll note that these changes are not the result of one political party or another. They represent a permanent change in perspective by the U.S. government in general, in how both parties view their citizens.
“Changes to the tax laws, and in the ways the laws are interpreted, began under George Bush II with the Patriot Act and continued under Barack Obama with the Bank Secrecy Act and the HIRE Act.
“Then Trump changed the tax rules for offshore U.S. controlled companies, and Biden has proposed changes that would increase taxes on U.S. expats.
“In the face of a troubled U.S. economy and out-of-control spending, the U.S. government desperately needs to expand its tax revenues, and the IRS has decided that it can raise more money with fear and violence than with honey.
“It’s a situation that qualifies as dire, and sensible Americans are looking to escape it as quickly as they can.”
Until next time,
Kathleen Peddicord
Founding Publisher, Overseas Opportunity Letter
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