Honest US citizens are being turned into prey by the IRS, the victims a hunt for tax evaders. It is the natural, if lamentable, product of the urge to power our Founders warned us against.
More than two centuries ago, George Washington stated:
Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.
Over the years, General Washington’s prescience has been demonstrated as government usurped and abused power. The myth that government serves the people should be shattered by now. Increasingly, government behaves as the master, not as the intended servant.
Oppression abounds, but nowhere is the raw abuse of power and coercion more possible and evident than in the Internal Revenue Service. They are the most dangerous member of the government gang. Now they have another tool to bully and expropriate wealth from innocents — US citizens living abroad.
Early in his presidency, Barack Obama pledged to add 800 new IRS agents to punish tax evaders with overseas accounts. In an effort, presumably designed to curtail and punish tax evasion on the part of wealthy Americans, legislation aimed at criminals now threatens the income and savings of the law-abiding.
The Bank Secrecy Act became law in 1970 and implemented the Foreign Bank Accounts Report (FBAR) to monitor money laundering. The FBAR law required that US persons owning or having signing authority over foreign bank accounts report this information to the US Treasury Department. It was not much enforced for the obvious reason that a criminal does not willingly divulge incriminating information. During the first three decades of FBAR, there was widespread ignorance and disregard for the law.
In 2003, the Treasury Department handed over enforcement to the IRS. In 2004 non-willful non-compliance increased to a $10,000 fine per account per annum. Willful non-compliance allows criminal charges, a prison sentence, and fines of $100,000 or 50% of bank account’s contents, whichever is more (see Shepherd, p. 10).
The IRS has implemented two Voluntary Disclosure Programs I (2009) and II (2011), in which they waive criminal charges provided that all back taxes and penalties have been paid, along with an FBAR penalty of 20% (in 2009) or 25% (in 2011) of the account’s highest balance over the last six years. The penalty is lower (12.5%) for balances under $75,000. Persons who were unknowingly US citizens face a 5% penalty (see FAQ 52).
In 2010, Congress passed FATCA (Foreign Account Tax Compliance Act) which forces foreign banks to report on American clients, even if doing so would violate the banking and privacy laws of their country. Implementation of FACTA will be coerced by withholding 30% of US income from banks not in compliance.
The arrogance and brutality of the legislation is apparent. The penalties are severe and disproportionate. Economic blackmail of foreign banks is disgraceful. All of these actions will have repercussions, probably not intended.
US Citizens Abroad
US citizens living abroad must open a foreign bank account because commerce is done in the local currency. All who do are potentially in violation of the FBAR law. Most were unaware of the FBAR requirements; but now that the IRS has rattled its FBAR saber, taxpayers abroad are in a quandary.
Wealthier citizens spend thousands of dollars on accountants and tax lawyers to try to put themselves into compliance with the least financial damage. The average citizen not in compliance has limited options. His choices include:
- Do Nothing The IRS doesn’t know about you, so continuing to keep a low profile and ignore the law might be the best route. This option may become impossible once FACTA comes into force.
- File FBAR Forms IRS FAQ 17 of the 2011 Voluntary Disclosure Program states that filers who have complied with all taxes and filing requirements except FBAR should not enter the program but simply file the delinquent forms by August 31, 2011 with a letter of explanation. They promise that no penalties will apply to such persons. But given the severe threats of punishment issued to anyone failing to comply, many wonder whether the IRS will accept the excuse of ignorance of the FBAR requirement.
- Enter 2011 Voluntary Disclosure Program: Some US citizens who entered the 2009 Voluntary Disclosure Program and were otherwise in compliance with US tax laws, found that the IRS intended to apply to them the full 20% penalty (see, e.g., hereand here).
- Renounce Citizenship Many US citizens living overseas have lives fully integrated into their new country. They comply with the local tax laws and often possess dual citizenship. Compliance with US tax laws and FBAR are a nuisance and liability that they may be able to live without.
Renunciation of citizenship is not riskless. Such a decision will set citizens free from future liability, but may subject them to IRS penalties for prior non-compliance. In addition, for covered expatriates, those having two million in assets or $145,000 in average annual tax liability over the last five years, an exit tax is also required.
To appreciate the uncertainty and duress faced by US citizens living abroad, a couple of hypothetical situations are useful. International tax lawyer Phil Hodgen partly inspired the following hypothetical cases:
Hypothetical Case 1: Jim lives in a foreign country and has dutifully filed a US income tax return each year, but was unaware of FBAR filing retirements. Jim operates eight accounts: four retirement accounts (which he reported on his annual tax returns), two trading accounts, a checking account and a high interest savings account. The highest balance in these accounts is $1,000,000 over the last six years. His current balance is $800,000 after the market dip.
Jim doesn’t know what to do. After great worry, he enters the Voluntary Disclosure Program. The IRS assesses Jim a $250,000 FBAR penalty. In order to pay the penalty, Jim must withdraw funds from his retirement accounts forcing an additional tax liability of $100,000 on the income. Jim is no longer able to retire because his $800,000 has been reduced to $450,000, solely as a result of IRS capriciousness.
Hypothetical case 2: Nancy is a teacher and mother of three, married to a citizen of the foreign country where she has lived for fifteen years. She dutifully filed her taxes in the US, but never knew about FBAR. A friend entered the Voluntary Disclosure Program and was assessed $14,000. She contemplates the renunciation of American citizen, because her foreign husband owns a successful business and Nancy is a signer on business accounts. She fears exposing her husband’s business to the IRS and also fears that upon her death, the IRS will seek its pound of flesh from her estate. She renounces citizenship, though it breaks her heart.
Abuse Of the Law
FBAR was initially a harmless and little known embarrassment for the United States. It began as an ineffective attempt to stop money laundering. Like so many other laws (RICO, Homeland Security, etc.), it began with what some believed noble purposes, only to morph into a tyranny imposed upon law-abiding citizens. It is now a tool capable of arbitrary and oppressive expropriation of the wealth of millions of US citizens living abroad.
An insolvent government is a dangerous government. It is akin to a wounded and cornered animal. When conditions become really difficult, it is likely to do anything to survive. Arbitrariness in the interpretation of any law is dangerous to freedom, but especially so when government’s primary concern is survival rather than justice.
There are many reasons to be critical of FBAR. The following two will illustrate:
- Excessive fines: Ayn Rand said “The severity of the punishment must match the gravity of the crime.” This basic principle of human rights, enshrined in the Eighth Amendment, forbids excessive fines. It is immoral for the IRS to intimidate innocent citizens. Any law so uncertain that it could result in a loss of 50% of your wealth, depending upon the whims of the IRS, is not a law. It is government-sanctioned extortion.
- Guilt Presumed: The Fourth Amendment protects (or was supposed to) citizens against arbitrary fishing expeditions by government. Probable cause is required. The FBAR requirements circumvent this Fourth Amendment right, in effect saying: “You will volunteer to open the door to your house and let us look inside. If you don’t, we will fine and/or imprison you.” The IRS demands bank information based on a presumption of guilt even though holding funds in a foreign bank account is no crime.
The term unintended consequences, a convenient euphemism for stupid policy or law, is appropriate. Some of the foreseeable outcomes are the following:
- An avalanche of US persons will renounce their citizenship. In July 2010, the State Department implemented a $450 fee for making a renunciation before a consular officer, presumably to exact additional income and possibly (highly unlikely) deter some from making the decision.
- Foreign banks and investors may decide doing business with the US is not worth the trouble of compliance with FACTA, particularly as the US economy collapses and the global economy shifts to the East.
- US Citizens abroad already find it challenging to open bank accounts both in US and in their countries of residence. This annoyance makes it more difficult for American companies and their employees to engage in foreign missions, business and trade.
- US citizens are already shunned from positions in foreign companies which do not want their banking details revealed to the United States Treasury Department.
The Bank Secrecy Act, passed in 1970, is an example of law designed for one purpose being expanded to be used against innocent citizens. Regardless of its good intentions, it is now a tyranny used to extort wealth from otherwise legal, law-abiding US citizens living abroad.
It represents a classic case of how government usurps freedom. What level of morality must government have to think they are entitled to shake-down hard-working citizens?
Monty Pelerin has never lived abroad or had a foreign bank account. He has friends who do and hopes that exposing this State plunder will cause it to cease in this and other parts of our lives.
NB: The preceding article appeared first at the American Thinker on April 5, 2011, then at Monty Pelerin’s World. Monty Pelerin is a retired economist who writes under a pen name. In March, I approached Monty asking if he would publish under his pen name an article on FBAR. He agreed and then we co-wrote the article and he kindly gave me no credit because I feared the long arm of the IRS. Then, Monty submitted it to the American Thinker. Now that I am out in the open with my IRS concerns, I’ve decided I can reproduce it here. So I want to thank Monty for his extraordinary help when nearly no one in the mainstream media or even conservative blogs were talking about this injustice which the IRS has afflicted upon millions of Americans. Petros
@geeez, confederate Imagine, the maximum amount of fake money that you can take on an international flight is US $10,000 without filling out a report. I’ve done the report once. The customs officer took the form and rip it up because I didn’t dot an i or cross a t, or some other darned thing. Then I just made my flight. When gold hits over $10,000 an ounce, you’ll have to conceal it in the form of jewelry to get real money out of the US. Someone here once wrote of how people used to liquidate their wealth in South Africa and buy diamonds and carried them out of the country when they left. The advantage of diamonds is that they don’t show up on a metal detector.
@Blaze and JustMe
You have to understand the context of that article by Allison Christians. She original refers to something known as Subpart F. Subpart F is part of the tax code similar to PFIC’s but applies to corporations instead. It is basically to discourage companies from making too much passive income in “low tax” countries. However, if the passive income “actually” comes from the particular “tax haven” country lets say from leasing property ACTUALLY located in lets say the Cayman Islands there is an “in country” exemption. By the logic she was using there is additionally a good case for doing an “in country” exemption to PFIC.
@Petros: There will be money to be made once they implement capital controls. If they try to seize the gold then smuggling could be very lucrative. Imagine how much gold a rich Yank would pay to get into Toronto to exchange his PHYS shares for physical gold.
@ConfederateH, I actually don’t know how you could exchange PHYS for physical gold if you are an American, without the IRS finding out about it.
If you could obtain physical gold and smuggle across a border, that may be more worthwhile. The key term here is $10,000. Most transactions that are less than 10K can fly below the radar. But when an oz gold is worth $10K, then it will be much more difficult to move more than the most trivial of sums without (1) reporting to your chief enemy about it (never a good idea); (2) risk committing a felony with civil forfeiture of the money.
@ConfederateH, actually, I just thought of it. You insist on delivery of trust unit certificates of your shares in PHYS. You carry them across the border in your car or on an airplane. They are paper, so that they will not trigger the metal detector. If you do not report this it could be a felony. But you could do the back and forth between the border with a safety deposit box in Canada with a small number of certificates–less than 10K for each trip. You take them personally to Eric Sprott and he delivers the gold. Of course, you would sufficient shares to do it–I think it was over $100K worth, or something like that.
@ConfederateH: That article on the Italian man and his daughter caught “smuggling” 2 KG of gold: We’ve already lost our freedom. We are boiled frogs. That grieves me greatly.
I’ve often meditated about how I could get my gold to Grand Cayman. But this shows that authorities will literally charge you with smuggling for carrying money.
Petros, taking small amounts over the border works…. if you live as close to the border as most Canadians do. My family is generally from the southwest so the PHYS certificates would probably be best, though AFAIK the minimum is a 100oz bar and that is more than any of them would want.
Here in Switzerland I have considered getting a safe deposit box across the border in Austria or Germany. There are scenarios where I could see the EU playing hardball with Switzerland and capital and border controls going up very quickly. It happened a few years ago when Germany was playing hardball over Switzerland providing financial privacy to the German tax slaves. They started inspecting all the Swiss cars and caused massive tailbacks. As it is the Germans often search German cars on the Swiss border just for smuggled wealth. One of the reasons for the massive Spanish property boom in the late 1990’s was all the Germans taking their untaxed D-marks to buy real estate in Spain before the onset of the Euro. The Germans had set up strict tax evasion rules to force all the untaxed D-marks to become taxed before the Germans would be allowed to change them into Euro’s. So there was a flood of D-marks buying land for cash in Spain. It just shows you how those idiots who make a living stealing other peoples money for the government always screw everything up.
Since the subject has turned to Capital Controls, I have a little bit of history that might be of interest. It speaks to common currencies and when governments try to unravel them.
How To Kill A Currency
I am not convinced yet that FATCA is about Capital Controls, although it could be the unintended consequence, I will give you that. I tend to think, little that I know, this a Global Total Personal Financial Transparency Gambit which would lead to the ability to tax assets in addition to income. But then I really know nothing to be venturing an opinion. Now, by creating this BIG TAX DATA exchange, the effect may well be controls of Capital in an indirect manner, but not overt per se. I stand to be corrected! 🙂
@ConfederateH and what you are describing to Petros, transfers < $10K, I think is termed ‘structuring’ and as such illegal in the US.
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Found this blog with information about US tax and FBARs as applied to the situation of those deemed US taxable persons living in Mexico. “
‘FBAR’s and Fideicomisos: To File or Not to File, That is the Question (The Article)’ http://yucalandia.wordpress.com/living-in-yucatan-mexico/fbars-and-fideicomisos-to-file-or-not-to-file-that-is-the-question/
Usual disclaimer, am not endorsing the information, and have no specialized knowledge, just trying to broaden the connections here, to include recognition of the large population of duals and those deemed US persons living in Mexico. I note that one of the comments is from someone asking for information in the Canadian context.
I just met up with a buddy who has been attending Equal Employment Opportunity Commission meetings together with industry representatives. He attended a meeting, where the EEOC woman proudly opened up with the proclomation that the EEOC was now self-funding—that they are creating enough lawsuit victory punishments to pay their own way. She was met with some uncomfortable applause from a few attendants who hadn’t really yet taken in what she had been saying.
Next, he described how an industry US-gov safety dept for natural resources (similar to OSHA) has turned its focus away from correcting workplace accidents by way of lessons-learned, to now putting managers in jail and delivering bankrupting penalties to the companies with transgressions. He had an experience with off-the-record comments from a rep of the govt agency, where the agent could no longer look himself in the mirror in the mornings.
This seemed to be the trend of the the last 3 years, now showing up in other departments of gubbermint: focus upon punishment, and self-funding based upon the penalties. I see it as the pent-up evilness of those key Senators mentioned over and over again: Nelson, Lenin, Harry Reid, etc, who now have Barry and His Band of Merry Men willing to administrate the punishments thoughout the various willing agencies.
As the comments to ‘FBAR’s and Fideicomisos: To File or Not to File, That is the Question’ note, the issue isn’t (or shouldn’t be) FBARs but rather Forms 3520, reporting trusts. “Trusts for sale” of English land arguably need not be reported since their effect (for tax purposes and rights to income and the proceeds of sale) is identical to multiple titleholders (tenancy in common or joint tenancy). I know of no adverse consequences for US persons who did not file, but that is hardly definitive.
In my personal experience it was a Republican Administration under Ronald Reagan who virtually invented the “user fee” system under which non-appropriated funds became available for the convenience of political appointees.
Your political slagging doesn’t comport with reality: it is by and large the GOP who hate civil servants. Until when the party loses power, the political appointees manage to get career civil service jobs for themselves and their friends. At least that was the case in the Department where I worked, and I was in an absolutely nonpolitical job and function.
And as it happens I care not a whit about politics generally and haven’t lived in the USA in decades.
Here is a Private Letter Ruling saying that a 3520 was not required for Fideicomisos.
thanks @puntlich, and @ renounce.
I included the link only to try and add information to the IBS site about issues that duals and US ‘taxable persons’ in Mexico might be grappling with – as the country with the largest population of US persons ‘abroad’ (with Canada as second largest).
It seems that the official situation re Fideicomisos is still in flux, if you look at the discussions on the two links. I don’t know anything about them, just saw that the IRS is causing needless pain for dual Mexican-Americans, and US persons in Mexico – and so much is at stake if the IRS is either not consistent, refuses to rule one way or the other, or will apply the punitive requirements in a way that will be have retroactive negative effects.
As has been said here before, the IRS is the biggest obstacle to compliance, and compliance is not what they really want – it is generating confiscatory penalties as a revenue stream – in lieu of the US taxes that it is unable to assess – because none are owed. They have an inherent conflict of interest – the clearer and more straightforward they make it for people to understand what they have to do, and to do it, the less confusion and errors – and the smaller the penalty revenue reaped.
Interesting post about BSA and FBAR Access, at site Federal Tax Crimes: http://federaltaxcrimes.blogspot.ca/2012/08/irs-internal-procedure-document.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed:+blogspot/oGeEWy+%28Federal+Tax+Crimes%29
Wednesday, August 29, 2012
IRS Internal Procedure Document Discusses BSA Record (includingi FBAR) Access for Other Agencies (8/29/12)
Article with Panamanian focus: re
the perils of toxic accidental US citizenship : http://tropicaldaily.com/panama/us-goes-after-dual-citizens-bank-accounts/
‘U.S. Goes After Dual Citizens’ Bank Accounts’
“Article Summary: There are a lot of Panamanians who, for one
reason or another, have U.S. citizenship – many of these folks have
never lived in the U.S., have never earned a penny of U.S.-source
income, and have never even heard of an FBAR … yet literally by accident
of birth, they are now obligated under penalty of imprisonment to pay a
huge portion of their assets to another government.”
Prof. Allison Christians wrote: …….”First, lets define what a tax is. A tax is a compulsory extraction of resources undertaken by a government, for which failure to comply results in threat of penalty. A government can do this because it monopolizes the use of force. A tax can be fair or unfair, regressive, progressive, good, bad, or ugly. Not every forceful extraction of resources is a tax per se, but every tax is certainly a forceful extraction of resources. Governments can be (and are) lax, selective, even grossly unjust, in enforcing stated penalties, but so long as the threat exists, an extraction is a tax. No threat of penalty for nonpayment, no tax.”…….http://taxpol.blogspot.ca/2013/01/starbucks-20m-pledge-is-not-tax-but.html
So I’m wondering the converse; when is a penalty effectively a tax? Prof. Christians says “…Not every forceful extraction of resources is a tax per se…” I would really like to hear how she would characterize the FBAR and FATCA form reporting and penalty structures. They are ‘enforced’ with massive and disproportional force out of all proportion to the sums to be reported, the sums have already been taxed at source, or are not taxable per se (ex. FBAR ‘highest balance on any one day in the year – is an arbitrary and imaginary ‘value’ – not any usual basis to levy tax – though the penalty is based on a relationship/percentage of that value), and are not illegal. The accounts and assets in question may most often already have been taxed where they originated, and the US may not be able to assess any US tax owing on the balances – because the assets themselves are not necessarily ‘income’ or ‘earnings’. The BSA FBAR laws are not even part of the Internal Revenue Code.
But do the FBAR and FATCA Form 8938 (ex. http://americansabroad.org/issues/taxation/tax-warning-to-all-americans-update/ ) nevertheless function as an additional tax on those abroad – merely for having bank accounts and assets located outside the US? To me, they are being used to effectively impose a US tax as a workaround where the US is prevented from assessing one due to tax treaties, foreign tax credits and the FEIE. To me, the US is simply substituting FBAR and FATCA penalties in lieu of taxes they cannot legally assess.
FATCA form 8938 was designed to generated revenue. FBAR penalties are so disproportionate as to be confiscatory and unconstitutional. Both reporting obligations and draconian penalties are imposed independent of any actual US tax identified, assessed, or owed. Both can be imposed, and layered, in the total absence of any actual tax loss to the US.
Prof Christians, and et al: Why are FBARs and FATCA NOT a tax? Discuss.
Badger, aren’t they a little like the marriage penalty that the US imposes on expats married to foreigners who file income tax separately? It’s just a work around. The assumption is that spouses income is share and share alike and their being married to a foreigner is in essence a very clever tax dodge. So, having bank accounts outside the country, which the US can’t creep on and can only trust that you are reporting interest – if they are interest bearing accounts – requires them to employ extra measures. The marriage penalty is an extra measure to sop up some of your foreign spouse’s income. FBAR and FATCA are extra measures to ensure that you aren’t cheating them out of a couple of dollars worth of savings account interest every year.
Is it a tax though as much as it is a punishment though? It seems like they are punishing people for misdeed in advance of proving misdeed b/c it’s really evidence gathering with the bonus of fines if one makes a mistake filling out the forms (which someone noted in a comment somewhere are deliberately complicated).
Excellent point, badger. Are information forms a tax? I really don’t know. I do know that form penalties are an abomination and presume some sort of criminal tax offense even though no crime has been committed. It’s like someone sitting in a parked car getting a ticket because he might have committed a traffic infraction before getting there or he might commit a traffic infraction when he drives off. When someone submits an information form re: bank accounts, the US gov’t gets a bead on where to go to confiscate by future decree and when someone doesn’t submit an information form the US gov’t gets the potential to confiscate by penalty. Damned if you do, damned if you don’t, damned if you do it but don’t do it perfectly … and the damn gov’t gets a win every which way.
I Think that the Obamacare decision would add to the discussion. The Obamacare funding is enforced by analyzing hospital payment records and finding people who did not pay for their Health Insurance. Those that do not pay are penalized. The Supreme Court determined that this was not a penalty and was a tax, therefore it was constitutional. Scalia’s questioning was critical in the argument.
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More Unbelievable FBAR Penalties Cases!
A 1500% penalty rate on the taxes avoided/FBAR penalty, is imposed in a California case.
Is a 1500% penalty constitutionally permissible?
Of course the Defendant knowingly and voluntarily plead guilty, but should the IRS CID even be able to have the leverage to force someone to this type of penalty?
This blog is for the purpose of promoting he OVDP program. So, I wouldn’t reach any conclusions based on the blog post itself.
The facts suggest one more example of using Mr. FBAR against homelanders. Sooner or later the constitutionality of this is sure to be tested. I believe that the the U.S. Supreme Court has been requested to hear one of these cases.
Anyway, this is absolutely disgusting and underscores the point made in the last few days that FBAR really has become a revenue raising measure for the IRS. I call it:
“The FBAR Fundraiser”.
Thank God, the Canadian Government will not enforce FBAR penalties on Canadian residents.
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