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| TII EXCLUSIVE |
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Culture of fear grips U.S. expatriates as IRS grows more invasive
By Laurence E Lipsher
Apr 19, 2011 |
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Laurence E. Lipsher did his M.S (B.F.T) from Thunderbird Graduate School of Management. He is a Certified Public Accountant with certificates for three countries - United States, Hong Kong and People’s Republic of China. He has been living in China since 1990 and runs an accountancy firm - ‘Lipsher Accountancy Corporation’. His firm is one of the few non-Chinese CPA firms to be granted licence issued by the Ministry of Finance and Chinese Institute of CPA. Mr Lipsher specializes in taxation in Asia. He writes the bi-weekly Asian Tax Review for Tax Notes International.
In 2009, he wrote a highly entertaining book titled ‘ Tax Analects of Li Fao Lao’ which analyses taxation and other aspects of doing business in China, Hong Kong, Macao, Taiwan, Vietnam, Singapore and India. He blogs at www.lifeilao.com.
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OPENING the mailbox is a different experience for British and U.S. expatriates
in Hong Kong. When letters arrive from HM Revenue & Customs for British
managers, they think nothing of it. But when letters arrive from the Internal
Revenue Service for U.S. managers working abroad, the normal response is
panic. Their palms go sweaty and their hearts pound when they see the return
address.
As a U.S. accountant and tax specialist who has lived and worked in China for
more than 20 years, I have watched the contrasting scenes unfold many times.
U.S. expatriates live in a culture of fear. And the environment is getting
worse.
Consider the new tax treaty between the United States and Switzerland, which
requires Swiss banks to divulge personal data about U.S. expatriates who open
foreign accounts. Article 13 of the Swiss Constitution would seem to prevent
such invasions. “Everyone has the right to privacy in their private and
family life and in their home and in relation to their mail and … personal
data,” the Swiss constitution states. But this has not stopped the IRS
from seeking information on more than 4,400 U.S. expatriates during the first
months of enforcement.
The campaign against offshore taxpayers is probably the only war the United
States has won in the past generation. Basically, the Swiss abrogated their
constitution because of the strength of the IRS. I only wish the United States
could be as successful in Afghanistan.
The IRS uses several new weapons in this war against U.S. expatriates. In addition
to the Foreign Bank Account Regulations (FBAR), the IRS now wields the Foreign
Accounts Tax Compliance Act (FATCA), signed by President Obama on March 18,
2010.
Before these measures, we had the Tax Increase Prevention and Reconciliation
Act (TIPRA) of 2005. Despite the reassuring name, taxes increased for many
of my Hong Kong clients when this law took effect. That was the time when many
U.S. expatriates all over the world realized they were under attack.
Then came FBAR, a voluntary compliance program the IRS ran from March to October
2009. About 15,000 U.S. expatriates “came clean” during this window
and paid back taxes without criminal prosecution. Another 3,000 joined the
program later.
Of these 18,000 cases, the IRS only has processed about 2,000 through February
2011. The backlog provides an indication of IRS capabilities as it ramps up
its expatriate campaign with FATCA.
This latest weapon in the IRS arsenal imposes a 30 percent withholding tax
on the income of foreign banks or investment houses that fail to identify U.S.
accounts, their owners, their social security numbers and their assets. Similar
penalties apply to corporations that do not supply the name, address and tax
identification number of any individual with at least 10 percent company ownership.
FATCA also imposes penalties as high as $50,000 on U.S. taxpayers who fail
to report offshore accounts or assets worth $50,000 or more. This potentially
represents a 100 percent penalty. The law also imposes a retroactive $10,000
minimum penalty for foreign trust information that U.S. expatriates fail to
report. And it doubles the statute of limitations for omissions from three
to six years.
The law essentially turns all foreign banks into IRS enforcement agents and
creates additional counter-incentives for multinational companies to hire U.S.
citizens abroad.
The European Banking Federation submitted a 26-page FATCA critique on Nov.
12, 2010, citing a complete lack of preliminary guidance from the IRS, and
the European Commission followed up last week with its own scathing letter.
The IRS response, issued April 11, 2011, has left many FATCA critics unsatisfied.
Meanwhile, the U.S. Department of Justice has opened a criminal investigation
of Swiss regional banks. And Caplin & Drysdale reports that the IRS is
looking into Hong Kong banks.
These investigations will run concurrently with the Offshore Voluntary Disclosure
Initiative, a new voluntary disclosure program announced Feb. 8, 2011, to help
delinquent overseas taxpayers avoid criminal prosecution if they come forward
before Aug. 31, 2011.
None of this portends good things for those of us in the expatriate community.
The IRS has become increasingly active and invasive in the lives of U.S. citizens
who live and work overseas. Tax laws have multiplied, forms and procedures
have become more complex, and scrutiny has intensified. The trip to the mailbox
will not get easier any time soon.
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