Wednesday, June 15, 2011

IRS to expats and foreign account holders : "Freeze! This is a stick up!"

Recently, the IRS has announced a new voluntary disclosure program targeting foreign account holders. This piece of crap is called The 2011 Offshore Voluntary Disclosure Initiative (OVDI) which expires August 31, 2011. This is the second program of this type in recent years. This disclosure program was "designed to bring money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes." How generous of the IRS to take time out of their busy schedule to "help" US citizens. :-D

Here is the low down on OVDI: By August 31st, US citizens who hold foreign accounts are being allowed to disclose them, paying penalties that are lower than if the IRS had caught them "red-handed". The "new lower penalties" include of course payment off all back taxes, interest for up to 8 years, and standard delinquent fines. Also as a gesture that the IRS is attempting to help you, they will take ONLY an additional penalty of 25% of the highest annual balance you had for any one year between 2003-2010.

OVDI also is targeting Americans who live outside of the US with foreign income in which taxes have not been filed in the US. The US is one out of only 2 other countries who requires its citizens who work outside of the country, to pay taxes in the country they are a citizen of, yet do not live in!

When I bring this topic up, usually some anti-wealth, moderate socialist tries to fight me tooth and nail. Generally they say things like, "This is a good thing as it will scare these greedy fat cats into paying their fair share! These are rich people who are just trying to avoid paying taxes anyway, so really the punishment is too generous!" Here is the fallacy of this argument:

For instance, let's say you are some Joe "six pack" American from ANYTOWN, USA. Joe is not a fat cat, he is a truck driver who makes $35,000 a year. About 7 years ago Joe's grandmother died. Joe's Grandmother was born in and lived in Italy, where she had a bank account. After her death, Joe was lucky enough to inherit grandma's Italian bank account. An account which contained $55,000 of money grandma earned, saved, and paid taxes on throughout her life. Joe being the simple guy he is, knows he has this account, but doesn't really know how to access this account, so he let's it sit. The bank the account is in is a very stable bank in Italy and gains very little interest.

Joe hears the IRS is making some changes and is about to go after foreign account holders. Then he hears about OVDI and figures "well, gee, let me declare this account before I run the risk of going to jail." So using this new "generous" disclosure program, with back taxes paid, 25% penalty paid on the highest annual balance, interest for the 7 years, and standard delinquent fines, Grandma's dying gift to her grandson Joe, is completely gone!

What else I find disgusting is a story I had read in The Financial Times about an American expat by the name of Cindy living in Germany. Cindy had heard about the disclosure program being offered before the IRS was going to hunt full-force for American's with foreign income and accounts. Mind you Cindy has lived in Germany for 30 years.

After disclosing her information voluntarily to the IRS, Cindy was informed that because her foreign income was under $91,500 a year, she did not actually owe any taxes. However, since she did not file a tax return for all these years, even though she did not owe any taxes AND has not lived in the US for 30 years, she must pay a LARGE penalty. Cindy was so frustrated over this, she turned in her US citizenship.... And I can't say I blame her based on principle.

Clearly both our Joe "six pack" and "expat" Cindy are not rich fat cats. Nor were they trying to "evade" taxes.

The 2011 Offshore Voluntary Disclosure Initiative is really just the calm before the storm......

Last year, The Foreign Account Tax Compliance Act (FATCA) was passed. This little gem is a new tax law that will require overseas institutions (such as financial institutions, investment entities, and many other organizations that operate on a global basis) to report their American clients to the IRS.

I know most people are thinking "Yeah, don't hold your breath. You can't enforce American laws in other countries where they have no jurisdiction..." In most cases, this would be correct. However, the US government will force institutions to comply by withholding 30% of any US source income including gross sale proceeds. This law will take effect in 2013.

Many foreign institutions are fighting this new law tooth and nail. Hell, Canada is already asking for an exemption to this new law. Chinese institutions have simply responded by saying, "don't talk to us, go talk to government...." :-D And who can blame them? Searching their records for addresses, citizenship documents, etc proving citizenship of any account holders with more than $50,000 is very expensive. In Germany alone, if all German banks were to comply, it is expected that the costs to implement FATCA will reach €10 billion! Plus, in many countries the implementation of FATCA would conflict with current privacy laws.

Wow, that sounds like a real no brain-er... Let's put on our logic hat for a second and ask: Why would ANY institution spend a large amount of money to do something that will not just make them lose money but clients too? Why would any institution spend a large amount of money to be in violation of local laws but compliant in laws of a country that they do not have a large presence in?

The consequences of these actions would be dire, not just to these institutions but to America itself. The reason why is that many of these overseas institutions will pull out of the US market in order to avoid the 30% withholding for non-compliance. To further combat the withholding, these banks will probably stop offering US dollar accounts. This is because all US dollars that go into a bank, even a foreign one, must originate from a US bank somewhere down the line... Which means that the 30% withholding could still be applied. Could you imagine what kind of consequences would arise from foreign banks in mass dumping their US dollars?!

Plus, think of the actions of the US clients... First thing any US client of an overseas bank or investment entity would do is move on over to a foreign bank that offers only foreign investments. The next thing these US clients would do is dump all American investments to avoid this law. Sorry but US investors may be patriotic but not when it come to their money. People will protect their assets at all cost even if it risk doing damage to the US economy by opting out of American investments. People are concerned with what is theirs first, these are the facts of life.

As a person who spends a great deal of time out of the US on what has become a consistent basis, I ask the question, why would a government alienate the very people that help keep the economy afloat the most? Americans who make money outside of the US, generally put that foreign money into the US economy because that is the land that we have a home at!

If the US economy is a person struggling to keep its head above water, alienating foreign institutions and US citizens with foreign assets, will become the water that drowns it.