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In a previous blog, I reported that a record number of people renounced their U.S. citizenship last year, possibly as a result of the FBAR disclosure requirements and the IRS’ efforts to decrease tax evasion. I cautioned those readers considering renouncing their U.S. citizenship that fleeing the country may be more costly than simply paying back taxes or disclosing their foreign account(s) due to the Exit Tax.
Now, according to the deputy director of the IRS Criminal Investigation (CI) division’s internal operations, Jeffery Cooper, the IRS CI is inquiring into the reasons why citizens, and resident green card holders, are choosing to relinquish their U.S. citizenship. Jaime Arora, IRS Criminal Investigation Division Looking Into U.S. Citizenship Renunciations, 2014 TNT 41-8 (3/3/14).
While Jaime Arora’s article “is nonspecific about what the IRS is looking for and the consequences might be if they found something,” we know renunciation of U.S. citizenship will not absolve that person of his or her U.S. tax liability. Jack Townsend, IRS CI is Looking at Renunciations of Citizenship Just in Case, Federal Tax Crimes (3/1/2014). So, the IRS can follow a person who renounced their U.S. citizenship abroad to collect any unpaid taxes— for example due to an undisclosed foreign account held while that person was a U.S. citizen.
The Department of Justice can also criminally prosecute that person for any tax crimes committed while he or she was a U.S. citizen. For each tax year that a taxpayer is convicted for income tax evasion, a five-year jail term is possible. Considering the five-year criminal statute of limitations, a jail sentence of up to twenty-five years is possible along with a fine of up to $250,000 and costs of prosecution. Moreover, the Department of Justice can assert criminal charges for filing a false return and willfully failing to file an FBAR. A taxpayer that files false returns can spend up to 3 years in prison per count. Thus, up to 20 years in prison for 5 counts. A taxpayer who fails to file an FBAR for their offshore account may be subject to ten years in jail and a penalty of $500,000.
In addition, the “Reed Amendment,” bars former U.S. citizens who are suspected of renouncing citizenship solely to avoid paying taxes from re-entering the U.S.
You may be considering relinquishing your U.S. citizenship because of the IRS’ strict offshore account disclosure requirements or fear that a foreign bank will reveal your past tax crimes to the IRS as a result of FATCA. Be careful— your tax related problems could follow you abroad if you flee the country. Come see me, David Klasing, before you get on the plane!