Tax authorities are exchanging more and more information every day, including many “offshore” jurisdictions. U.S. citizens and tax residents who have accidentally or intentionally failed to report income, bank accounts, corporations, trusts or other assets outside the U.S. are increasingly at risk of being detected, penalized and in some cases even incarcerated. When given the opportunity, we prefer to help our clients proactively arrange their affairs to avoid tax and legal exposure. We never recommend that our clients simply go on with their lives pretending they don’t have any foreign accounts, assets or income, or having the illusion that living abroad is an excuse not to report and pay taxes in the U.S.
For those who are not in compliance and are ready to come clean, we can establish attorney-client privilege and help them understand and resolve their non-compliance with minimal taxation, penalties and criminal exposure. On the contrary, any non-attorney, including CPAs and bankers, can be compelled to testify against the taxpayer and all their files and email correspondence can be subpoenaed, as well as phone conversations recorded by banks and copies of emails kept by internet service providers.
Can I just expatriate and “walk away”?
A perceived solution we are often asked to evaluate is expatriation, which is when a person either “turns in” a green card or renounces citizenship. While this strategy may avoid some future compliance, resolving past non-compliance is actually a prerequisite for termination of tax residency and additional “exit” taxes are levied on persons meeting a certain profile. Nevertheless, under the right circumstances a well-planned expatriation can result in huge tax savings.
What are my options?
There are several ways to resolve tax non-compliance prior to being detected, but a quantitative and qualitative analysis must be performed to gauge which options are available and beneficial for a particular taxpayer. Taxes and interest must be paid under any scenario, but the penalties can vary tremendously depending on various factors. Possible penalty outcomes can range from zero if the taxpayer meets the legal standard of “Reasonable Cause” for not reporting, to a reduced penalty if the IRS determines the non-compliance does not meet the legal standard of “Willfulness”, to an increased penalty if the IRS determines that the taxpayer was “Willful”, to even greater penalties plus possible jail time and deportation if the taxpayer’s Willfulness is such that the IRS refers the case for criminal prosecution.
For many taxpayers, the four options mentioned in the initiative in 2014 to provide preventive benefits in exchange for being detected by the IRS regularization. Those taxpayers hiding assets abroad who do not take action may suffer much higher fines and criminal charges. It is important to note that the IRS has not yet announced the date until when you can participate in this program, it can increase fines, disqualify certain people for the program or remove it completely at any time.
Will it go away by itself?
We will never recommend simply moving on with life and pretending as if no offshore accounts or income ever existed. However, thanks to the protection afforded by the attorney-client privilege, we can advise clients as to what the economic penalties and jail time would be if the taxpayer is caught without any of their confidential information being used against them. By contrast, any non-attorney, including CPAs and bankers, can be compelled to testify against the taxpayer and all their files and email correspondence can be subpoenaed, as well as phone conversations recorded by banks and copies of emails kept by internet service providers.
Fiscal Globalization Arrived
Multinational families with U.S. investments or a member who is or might become a U.S. tax resident, and who have not received current legal advice regarding their wealth from an experienced and independent and practicing U.S. international tax attorney, should act quickly to ensure that their wealth is properly structured for maximum tax efficiency and legal advantage. Anyone unsure whether they have fulfilled all their tax and information reporting obligations should seek the privileged advice of a tax attorney as soon as possible to determine the safest and most economical way of resolving their non-compliance prior to detection.
Get the Help You Deserve
Regardless of your situation, it’s time to plan for your 2016 tax returns or at least request any available extensions. If you don’t have a good tax advisor that understands the complexities of international tax law, contact us ASAP to see how our multidisciplinary team of attorneys and accountants can help.