According to a Department of Justice press release, a former U.S. citizen recently pleaded guilty to filing a false tax return and agreed to pay a penalty of more than $500 million dollars. This story should serve as a lesson to those Americans who choose to expatriate that such an emigration strategy can result in serious tax consequences if your affairs are not carefully planned. If you have recently renounced your U.S. citizenship or have otherwise failed to become a U.S. tax resident, you should consider speaking with an experienced international tax lawyer to ensure that your current and future earnings are being appropriately treated from a U.S. tax perspective.
Defendant Evaded U.S. Exit Taxes After Renouncing His Citizenship
This story is an update from a prior blog posting that we brought you last year. If you recall from that story, a federal indictment alleged that Oleg Tinkov, the founder and former majority shareholder of a virtual bank, filed a false U.S. tax return in 2013. Prior to the initial public offering of Tinkov’s bank, he was a U.S. citizen and was required to pay taxes in the U.S. on his worldwide income. Immediately after his bank was listed on the London Stock Exchange, the value of his ownership (both directly and indirectly) in his bank shares was valued at over $1 billion.
Three days after the Initial Public Offering, Tinkov renounced his U.S. citizenship as part of a structuring plan involving the British Virgin Islands. Under U.S. tax law, renouncing your citizenship generally creates a realization event whereby the former U.S. citizen is taxed as if they had sold their assets for fair market value via an “exit tax”. Thus, the IRS and Department of Justice argue that Tinkov should have included the income derived from the fictional sale of his bank shares, which would have included an extremely large gain, considering the post-IPO valuation.
Authorities allege that Tinkov did file a 2013 individual income tax return in the U.S. and reported income of just over $200,000. The filing also included an Initial and Annual Expatriation Statement that indicated that his net worth was only $300,000. Obviously, the IRS and Department of Justice are of the opinion that Tinkov should have taken into account the full value of his bank shares. As a part of his guilty plea, Tinkov faces up to three years in prison for each count of filing a false tax return. Additionally, Tinkov faces a period of supervised release upon the end of any physical incarceration. As a part of his plea agreement, the defendant agreed to pay over $500 million, representing the tax loss that he caused, a civil fraud penalty, interest, and other back taxes. He still faces an additional fine of $250,000 at sentencing.
Consulting With an International Tax Attorney Before Renouncing Your Citizenship
Although a $500 million tax liability is uncommon upon exiting the U.S. tax system, the “exit tax” mechanism employed by the U.S. tax law can result in a substantial tax being due upon renouncing U.S. citizenship or otherwise failing to be a U.S. tax resident. If you have recently renounced your U.S. citizenship or are considering doing so, it is in your best interest to contact an experienced international tax lawyer to discuss options to mitigate a potential exit tax cost and to help better understand your tax obligations in the future.
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More Questions and Answers About International Tax
- What are the Mixed Sourcing rules?
- A Citizenship Renunciation FAQ
- What Actions of Foreign Persons Affect U.S. Tax Attributes?
- Foreign corporations taxed on their U.S. source income
- Possible for a Domestic Trust to Become a Foreign Trust?
- What is The Stop Tax Haven Abuse Act?
- Are there any exceptions to the mark-to-market regime?
- Can an expatriate elect to defer tax?
- Taxes on gifts and bequests to Americans from expatriates
- Generally, what are the tax consequences of expatriation?
- How foreign tax credit affects domestic or foreign losses
- Social security/Medicare taxes for self-employed abroad
- Taxes for business income earned by nonresidents
- How is Dividend Income Sourced?
- Nationality and Residency for Federal Tax Purposes
- Taxes on non-business income earned by nonresidents
- Is there a limit on availability of foreign tax credit?
- Make dual contributions for social security taxes?
- When are taxpayers obligated to taxes on foreign income
- Foreign Income and Information Reporting Filing Requirement
- Basic Rules for Sourcing Income
- What are the Basics of the Foreign Tax Credit?
- What are the basics of U.S. International Taxation?
- What are the Basic Sourcing Rules for Interest Income?
- Nexus Over Foreign Persons and Activities for U.S. Tax
- What is a controlled foreign corporation (CFC)?
- What is expatriation and how is this accomplished?
- What is the Branch Profits Tax?
- What is the exit tax?
- Nonresident filing, withholding, and reporting requirements
- What other Source Rules Focus on the Payee’s Residence?
- Tax treaties role between the U.S. and its trade partners
- Common income issues in international tax treaties
- What Sourcing Rules Turn on an Asset’s Location?
- Tax incentives for U.S. citizens living abroad
- International Tax Q and A
- The main purpose and effect of the foreign tax credit
- Is the Foreign Tax Credit a Refundable credit?
- Difference between a foreign tax credit and a deduction
- How to claim foreign tax credit on property income taxes
- Must an individual claim the foreign tax credit?
- Why is foreign tax credit allowed?
- Statute of limitations longer when tax paid and tax accrued
- IRS re-determination of tax liability
- Difference between a Foreign and Domestic Trust?
- Foreign Trusts Subject to Outbound U.S. Taxation Rules?
- Benefit to a deferral of tax for an outbound transaction?
- What is Deferral in the Context of Outbound Transactions?
- What is involved in planning for an outbound transaction?
- What Are the Primary Concerns of Outbound U.S. Taxation?
- Basics of U.S. international taxation of a business
- Are U.S. Partners in a Foreign Partnership Taxed?
- Are U.S. Corporations Taxed on Foreign Sourced Income?
- Can Government Tax Shareholders of a Foreign Corporation?
- What is a Controlled Foreign Corporation (CFC)?
- Constructive Ownership Rules for Foreign Corporation
- US Shareholders Taxed on Distributive Share of CFC Income
- What are the Two Main Categories of Subpart F Income?
- Investing in Controlled Foreign Corporation
- Subpart F Income Requires Separate Computations
- What is the Foreign Tax Credit (FTC)?
- What is the “Deemed Paid” Foreign Tax Credit?
- Basic Tax Rules for Passive Foreign Investment Companies
Estate Planning and Tax Preperation FAQs
- International Estate and Gift Planning for Non-Citizens
- What is estate planning?
- Estate and gift tax purpose and how are two related?
- Who is subject to estate and gift taxation?
- Property and property transfers included in gross estate?
- Employment benefits with regard to the gross estate
- Are pre-death transfers included in the gross estate?
- What joint interests are included in the gross estate?
- Is life insurance includable in a decedent’s gross estate?
- What types of transfers are subject to estate tax
- Effect of disclaimer or renunciation of property
- Are U.S. estate taxes assessed against a foreign estate?
- Receiving gift or bequest from foreign individual
- Foreign trust distributions for tax purposes
- Methods to determine whether a trust is foreign or domestic
- Tax and reporting considerations of a foreign grantor trust
- Foreign non-grantor trust with US beneficiary
