Aug 19, 2013
According to a recent WSJ article on American Expats: http://online.wsj.com/…014772169287210.html more American expats are considering renouncing US citizenship.
For CURRENT details, see our master article on taxes at: IRS Tax Issues for Americans Living and Working Abroad in Mexico – Master Article
“… . In 2004, Congress imposed severe penalties—up to $100,000 or 50% of the account, whichever is greater, per year—on U.S. taxpayers who choose not to tell the IRS about foreign financial accounts totaling $10,000 or more.
Critics point out that this penalty is for not filing a form, not for evading taxes. Bryan Skarlatos, a New York partner with law firm Kostelanetz & Fink who has handled hundreds of offshore accounts cases, says the total includes more than a dozen in which the tax and interest owed on offshore accounts was less than $20,000. Yet the IRS assessed penalties of more than $1 million, he says. The IRS declined to comment. “
FATCA and the Exit Tax Problems with Renouncing US Citizenship
“… In 2010, Congress passed the Foreign Account Tax Compliance Act, known as Fatca, which requires further disclosures by U.S. taxpayers with offshore accounts. The law also requires foreign financial institutions to report information to the IRS about U.S. account holders or face steep costs for not doing so.
Important Fatca provisions have been postponed until July 1, 2014, but the law has a long reach. For example, it could require a foreign-based trust to report information to the IRS about a beneficiary who holds a green card, even if that person gets no money from the trust and doesn’t know it exists, says Dean Berry, a partner with law firm Cadwalader, Wickersham & Taft.
Accidental tax cheats may be able to avoid large penalties. The IRS has a limited-amnesty program that offers protection from criminal prosecution, typically in exchange for stiff penalties.
Taxpayers deemed less culpable—for instance, because they inherited money in a foreign account they didn’t touch—can face lesser penalties. But the exceptions are often narrowly defined.
There are other options. People who have already entered the IRS’s limited-amnesty program sometimes choose to opt out. That leaves them vulnerable to a regular IRS audit, though the penalties are often lower.
But there are risks: Outside the program, there is less protection from prosecution and penalties can be higher, although experts say both outcomes are rare.
Advisers often recommend that taxpayers whose violations were unintentional and haven’t entered the limited-amnesty program should consider making “quiet disclosures” instead. That means catching up with back returns as well as filing them in the future.”
“…The IRS hasn’t officially sanctioned such (quiet disclosure) filings, and going this route may not offer protection against prosecution. But experts say the IRS seldom challenges quiet disclosures. In practice, says Mr. Skarlatos, the IRS almost never looks back more than six to eight years.
Taxpayers need to be able to show their violations weren’t willful, however.
Experts say the evidence could include never having filed a U.S. return if you live abroad, having the undisclosed account in the country where you live, rather than a tax haven, or not having lived in the U.S. for many years. It also helps to have little to no income earned in the U.S. and not to hold the undisclosed account within a trust or foundation.”
“Expatriation can have stiff costs of its own. People who renounce often have to certify they have complied with U.S. tax laws for the past five years. That means expatriation is a bad strategy for cleaning up past problems. “
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Expatriation can also bring severe estate-tax consequences. The U.S. heirs of people who paid an exit tax often owe a 40% tax on assets they inherit from the expatriate, whether the assets are in the U.S. or not. Unlike with typical estates, there usually isn’t a $5.25 million exemption.
In addition, law requires that the names of people who surrender their citizenship be published by the government, which some consider embarrassing.
At the same time, there are important exceptions to the exit tax. For example, people who have been dual citizens from birth can be exempt. For more information, see the instructions to IRS Form 8854. “
It is worth noting that the key provisions of FATCA supposedly will not kick-in until July, 2014: http://americansabroad.org/issues/fatca/acas-position-fatca/ ? On July 12, 2013, the US Treasury Department said that due to overwhelming questions and comments from countries around the world, (effectively postponing agreements with other countries), Treasury has extended the start of the withholding and account due diligence requirements of the Foreign Account Tax Compliance Act, or FATCA, for 6 months, until July 1, 2014, to allow the Treasury Department more time to complete agreements with foreign jurisdictions. Treasury Delays FATCA Withholding Requirement – Accounting Today.
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If you liked this article, you might also check out our growing body of articles on tax issues for expats in Mexico:
~ Capital Gains Taxes on Mexican Properties
~ Income Tax Liabilities in Mexico
~ Fideicomisos and FATCA: US – Mexico Agreement on FATCA Reporting Requirements
~ IRS Reporting Requirements for Mexico: Fideicomisos / Mexican Land trusts
~ FBAR’s and Fideicomisos: To File or Not to File, That is the Question ,
~ US Income Tax Filing Information for Ex-Pats
~ Tax Issues for Americans and Other Expats Living in Mexico
~ Updated 2011 IRS Requirements: Foreign Account Tax Compliance Act (FATCA)
~ Summaries of US Tax Laws Affecting Citzens Living Abroad
~ Comparing Tax Rates and Tax Policies for US Earned Income and Mexican Earned Income
~ FBAR’s and Fideicomisos: To File or Not to File, That is the Question
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For USA Citizens considering renouncing their citizenship, realize that it is not easy. There are key steps that happen when you renounce your USA citizenship. Note that renunciation almost always costs you far more $$ in US taxes than just maintaining your US citizenship, and working in Mexico on an appropriate visa.
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Additional information on FATCA requirements for filing Form 8938 can be found at:
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Disclaimer: This information is not meant as legal advice. It is for educational and informational purposes only. Government policies vary between States and offices, and Mexican Government officials have broad discretion in how they individually enforce policies, so, your personal experiences may vary. See a professional for advice on important issues.
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© Steven M. Fry
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