Taxman chases overseas
Americans and their
bankers By Muhammad Cohen
HONG KONG - The United States government
believes that Americans abroad avoid billions of
dollars in taxes and it's trying to collect.
America's Internal Revenue Service (IRS) -
apparently misnamed since it's going after
citizens' external revenue - has imposed a raft of
new reporting rules on US expatriates and aims to
enlist foreign financial institutions in its
effort to narrow the US deficit.
The IRS
estimates that will collect more than US$165
billion in additional taxes from Americans
overseas over the next decade through the new
Foreign Account Tax Compliance Act (FATCA) and
enforcement of the Foreign Bank Account Reporting
(FBAR) requirement. Critics question both the
IRS's focus and its math.
"The perspective
from the IRS is that they are uncovering wealthy
tax evaders when in reality
they are destroying average, hardworking people's
lives, many who have simply made errors of
oversight," American Citizens Abroad (ACA)
executive director Marylouise Serrato says.
Uncle Sam will spend billions on new
compliance and enforcement procedures, including
hiring 600 new overseas examiners, and force banks
across the globe to share records with the US
government.
"If the foreign banking
community states that compliance will cost them
many billions, there must be a heavy cost and
administrative burden on the IRS side as well,"
ACA director Jackie Bugnion says. "FATCA is
described by many as an administrative monster
which creates such an enormous haystack that no
needle will be found."
Aside from the
potential time and money to find a fraction of the
$800 billion given to the wealthiest 2% of
Americans through extension of their George W Bush
era tax cuts, numerous US citizens and money
managers believe the new requirements are an
invasion of privacy, the financial equivalent of
full body scanners used in airports, according to
one adviser based in China who requested
anonymity.
Come clean - or
else Before the government hunts for
undeclared overseas holdings, Americans have one
last chance to "come clean" - , in the words of
IRS Commissioner Doug Shulman - under its
voluntary disclosure plan, which features fines
and penalties including partial confiscation of
hidden assets. Americans have long been required
to reveal overseas bank accounts, with taxes due
on interest payments and other investment income
from any source. But there were previously no
penalties for failing to file the FBAR form, so
many expats and accountants ignored it.
"What disturbs me most about the scare
tactics that the IRS appears to be using now, with
its new voluntary disclosure program, is that the
people who can afford it the least are being
penalized more than anyone else," US accountant
Laurence Lipsher, author of Larry's 2011 Tax
Guide for US Expats and Green Card Holders in User
Friendly English, says.
ACA has
compiled case histories on the high price of
voluntary disclosure. Under a more lenient
voluntary disclosure regime that expired last
year, one citizen revealed his US$300,000 life
savings in a foreign bank. Taxes and penalties due
on interest amounted to US$150, but the citizen
was fined US$60,000, 20% of the highest amount in
the unreported account. "This is extremely abusive
on the part of the IRS," ACA's Bugnion contends.
Fear factor The IRS would not
comment on this case or answer other questions for
this article. In an interview with Fox Business
News, IRS Commissioner Shulman warned, "A big part
of our voluntary disclosure program is that, you
come in, need to tell us what financial
institutions you've been working with, what law
firms, what other advisors you have helped to
facilitate your tax evasion. Through that process,
we're getting a lot of leads, and so you should
expect us in the future to be pursuing other
financial institutions, other intermediaries, as
well as lots of other taxpayers."
"Why do
we have a tax bureaucracy that provokes fear?"
asks Lipsher, who has challenged Shulman to a
debate on FATCA. "What has happened to our country
when it is now easier to work with the State
Administration of Taxation in China than it is
with the IRS?"
As with most US economic
and fiscal evils, look behind the curtain and
you'll find Phil Gramm. The former US senator from
Texas was the godfather of deregulation that lay
behind the Enron-led corporate crisis of the early
2000s and the 2007 collapse of global financial
markets. He resigned from the senate in 2002 and
reemerged in public during the 2008 presidential
campaign as an economic adviser to John McCain.
Frequently cited as a key architect of the 2008
economic crisis, Gramm denied there was any
problem at all. "[T]his is a mental recession," he
said in a July 2008 interview, "We have sort of
become a nation of whiners, you just hear this
constant whining ..."
Gramm preached
free-market economics, tax cuts, and small
government, though as a University of Texas
economics professor and elected official, he had
little direct experience of the private sector.
His wife, Wendy, by contrast, spun in the
revolving door between government appointments and
corporate boards.
The senator (and
spouse) from Enron In an example of the
power couple in action, Phil Gramm spearheaded
legislation enabling the deregulation of energy
trading. Wendy, meanwhile, chairing the agency
that regulated futures markets, allowed the
trading of energy futures, then joined the board
of directors at Enron - the company that benefited
most from her decision, collecting some $2 million
for her services. As a final touch, to underscore
the couple's personal integrity and honesty, she
professed complete ignorance of Enron's financial
troubles (although a member of the audit
committee) but stopped accepting Enron stock
options and insisted on cash payments from 1999
on.
After resigning his senate seat in
2002, Phil Gramm became a vice chairman of Swiss
bank UBS, which coincidentally owned Enron's
post-bankruptcy energy trading business. Like
other banks, UBS was a massive beneficiary of
Gramm's deregulatory efforts. It's unclear
precisely what Gramm does with UBS, though it
seems logical that he and UBS talk about US
strategy and compliance with US regulations. Be
that as it may, in 2008, UBS faced charges of
helping some 50,000 wealthy Americans to evade
taxes. Court cases revealed UBS officers helped
Americans living in the US set up overseas
accounts and offshore corporations to mask their
ownership.
"Everyone in Switzerland - and
I live in Switzerland - was extremely critical of
the UBS for setting up such stupid illegal
structures to help US citizens in the United
States hide assets from the US government," ACA's
Bugnion says. UBS settled with the US government
by paying $780 million and revealing 4,500 top tax
cheats, and US pressure on the Swiss government
effectively broke its banking secrecy laws.
Paper avalanche UBS was helping
US citizens in America evade taxes, but the
remedial focus on overseas banking and investment
accounts hits US expats. Virtually every American
living overseas needs a foreign bank account -
especially given post-9/11 fees on foreign
transactions through US banks.
While
destinations such as Singapore are lining up to
become the new Switzerland for so-called wealth
management services, US law taking effect from
this year will require all banks and other
financial institutions with US customers or
investments to provide the US government with
financial information on US citizens, including
overseas credit card transactions.
"What
is most astounding is that the overseas banking
community anticipates that their compliance will
cost them tens of billions of dollars to put the
reporting system in place and then billions more
every year to ensure filing compliance - way out
of proportion with the estimates thrown out by the
IRS of revenue from FATCA," Bugnion says.
"I cannot possibly see the IRS being able
to handle the avalanche of paperwork it is about
to start receiving," Lipsher, also the author of
The Tax Analects of Li Fei Lao, a survey of
tax laws across Asia for foreigners, says. "It
cannot handle what it has now."
Former
broadcast news producer Muhammad Cohen told
America’s story to the world as a US diplomat and
is author of Hong
Kong On Air, a novel set during the 1997
handover about television news, love, betrayal,
financial crisis, and cheap lingerie. Follow Muhammad
Cohen’s blog for more on the media and Asia,
his adopted home.
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, a novel set during the 1997
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