Tax authorities are exchanging more and more information every day. Now more than ever 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, fined and in some cases even incarcerated and deported. When given the opportunity, we prefer to help our clients proactively arrange their affairs to reduce their tax exposure to the legal minimum. 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.
How much time do I have left?
First of all, once a taxpayer comes “under investigation” they no longer qualify for any of the amnesties. This can include a simple, randomly generated IRS letter inquiring about interest on a bank account, for example. Most taxpayers are much better off coming forward voluntarily under one of the four currently available amnesty programs, rather than facing the consequences after being detected. As such, the IRS can at any time modify their terms, change the criteria for who qualifies and who doesn’t, or even close them entirely thus closing the window for taxpayer to come clean and sleep at night for a relatively low cost. For example, the IRS might decide that only citizens qualify for the amnesty, and not legal residents or persons who are taxpayers due to the time they spend in the U.S. This change would be consistent current immigration policy and with the 2012 Supreme Court case ruling that tax evasion is a deportable offense.
Will it go away by itself?
We will never recommend simply moving on with life and pretending as if no offshore accounts, assets 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.
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Contact us at 305-444-7662 or e-mail Ed@AristaLaw.com to schedule a confidential meeting in person, over the phone or via videoconference to learn more about how our multidisciplinary team of attorneys and accountants can help.
More than 20 years helping American and multinational families reduce their tax burden, protect their businesses and assets from legal risks, and plan for the eventual transfer of their wealth.