Topic: Foreign Accounts
With the deadlines for banking regulation fast approaching under FATCA, Americans overseas are fearful they could be arrested for not meeting Foreign Account reporting requirements should they turn up stateside. Peter Dunn, co-founder of the Isaac Brock Society (IBS), describes “[FATCA] as a fishing expedition to catch those who have failed to report taxes and foreign bank accounts.”
Dunn and five other Canadians created the Isaac Brock Society (IBS) last year. The principle motivation is to challenge the United States stance on taxing worldwide income. Dunn assert, “Besides Eritrea the United States is the only country in the world which has citizenship-based taxation.” The alternative of course, is a territorial based taxing scheme, whereby only income earned in the taxing jurisdiction is taxed. The IBS further declares, “FATCA is an attempt by the United States to blackmail Foreign Financial Institutions (FFIs) into handing over their clients’ confidential information, if they happen to have U.S. citizenship or some other association with the U.S. for tax purposes.”
As has been noted on this blog, the penalty for not complying with FATCA’s requirements is a 30 percent withholding on U.S. source income. Meaning noncompliant Foreign Financial Institutions, (FFIs) only get 70 percent on transactions. To prevent this result, FFIs will likely begin disclosing U.S. persons account information. Through such disclosures, ExPats are fearful their failure to file FBARs will catch up to them and as we know once the government learns of willful failure to file the necessary FBARs, the Voluntary Offshore Disclosure Program is off the table and along with it any guarantees of avoiding criminal prosecution. This predicament has left Dunn to wonder if he will be arrested if/when he returns to the United States. The IRS has recently made public statements to the effect that airport checks can result in a traveler being detained and questioned at the airport as to tax matters. Moreover, it is not beyond imagining that travelers could be searched for large amounts of cash being smuggled into the country from offshore bank accounts.
To fight this result Dunn, like an increasing number of American’s gave up his U.S. citizenship because he believes that FATCA makes an American passport a burden. Dunn noted, “I relinquished my U.S. citizenship because I will not allow this aggressive overreach to affect my Canadian-only wife.” An IRS report shows that 1,788 people gave up their citizenship in 2011, which is a record number to date. However, this is likely an underestimate because many have not yet had their name published on the IRS list. For those wishing to renounce citizenship for tax savings there are certainly several drawbacks, principally the exit tax. U.S. citizens that expatriate are treated as if they sold all of their property the day before renouncing citizenship, even if they will continue to own it and pay property or other taxes. Negative estate tax ramifications are also a consequence if the expatriate that renounces citizenship attempts to leave property at his or her death to a U.S. heir.
If you find yourself having sleepless nights or suffering mental discord over the prospect of being prosecuted for failing to file the necessary FBARs it is important to seek the counsel of an experienced Tax Attorney.