Americans have long been required to report foreign income and foreign financial holdings. The Bank Secrecy Act was enacted by Congress decades ago. It requires U.S. taxpayers to report foreign bank, brokerage, investment, hedge fund and investment accounts. Reporting must be done annually if at any point in the prior year the aggregate value of those offshore holdings exceed $10,000. Reporting is done a Report of Foreign Bank and Financial Accounts, better known as an FBAR.
Beginning next year, the new FATCA law will require foreign banks and financial institutions to begin reviewing their accounts and reporting those with ties to the United States. It is estimated that millions of Americans are not in compliance with the FBAR reporting rules.
Readers of this blog know that most folks who don’t file are simply unaware of the reporting requirements. There are millions of dual nationals and green card holders living in the United States. There are millions more Americans living overseas. Most of these folks are required to file FBARs but millions do not.
Under an amendment to the immigration bill submitted by powerful U.S. Senators Jack Reed of Rhode Island and Charles Schumer of New York, Americans who “expatriate” to avoid taxes could be denied re-entry into the United States by the Department of Homeland Security.
Never mind the dubious Constitutionality of such legislation, concentrating that much power in the hands of Homeland Security, or any federal bureaucracy, is dangerous.
If enacted, the amendment do the following:
* Automatically exclude any expatriate that triggers the expatriate exit tax.
* Create a mechanism to allow the covered expatriate to petition the U.S. Department of Homeland Security (DHS) for a determination that tax avoidance was not one of their principle purposes for expatriation.
* Allow DHS to determine whether the expatriate can establish through clear and convincing evidence that tax avoidance was not one of their principle purposes for expatriation.
While the government has the responsibility to insure that everyone pays their fair share of taxes, punishing people who leave the country and wish to return sends the wrong message and sets a dangerous precedent. Previously there have been attempts to allow the State Department to suspend passports to those with tax arrearages of over $50,000. Read the bills together and you get a sense that some folks in Washington want to not allow those Americans who owe taxes to leave the country or if they have left, not be allowed to return.
We believe the best way to insure compliance is to better educate taxpayers. The penalties for not filing an FBAR are so onerous that many are afraid to come into compliance, even though the IRS is currently offering an amnesty program. Others simply don’t understand the complex reporting requirements.
The government has an obligation to better educate folks before punishing the millions who remain out of compliance. Both the General Accounting Office and the IRS’ own National Taxpayer Advocate have criticized the administration for not better publicizing the offshore reporting rules.
There will always be taxpayers that try to outsmart the government and evade taxes. Unfortunately, for millions of honest Americans, the risk is that you could get caught up in the government’s dragnet. Worse, you might not be allowed to return to the United States.
If you have a foreign account and have not filed FBARs, consider hiring a tax lawyer trained in the foreign reporting rules. As noted above there is an amnesty program for those who have not reported. For those who can prove their failure to file an FBAR was an innocent mistake, better options may be available. Do nothing, however, and you may face penalties of $100,000 per year or 50% of your highest account balances. With the IRS looking back 8 years, the cost of noncompliance could be enormous.
We don’t think suspending passports or allowing bureaucrats to arbitrarily determine whether someone can return to the U.S. is a good idea but we do acknowledge that ignoring the problem is not an answer either. If you haven’t filed FBARs for even one past year, give us a call. (Note: the deadline to file FBARs for 2012 expires on June 28th, 2013.)
Have an unreported account or questions about FATCA or FBARs? We can help. For more information, contact attorney Bethany Kroes at or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in complete confidence.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS tax related services available worldwide.
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Written by Brian Mahany, Esq.