Over the past two weeks, we've been talking shop with Ryan Losi, a Virginia based US CPA who specializes in international tax planning. In today's conclusion, we talk about some of the most common mistakes Americans make when heading overseas, as well some thoughts on where the increased regulation and enforcement might ultimately take us.
IM: What are some big mistakes that American expats make from a tax or asset reporting perspective when heading overseas?
RL: One of the biggest mistakes I get all the time is an expat making the assumption that their tax situation is not going to get extremely complex by heading overseas. Going from just being in one state in the US to living, working and potentially having assets in multiple currencies and in multiple jurisdictions that might tax those assets and the income derived from those assets differently – yes, it gets pretty complex.
Not only that, but regulations and the enforcement of those regulations are getting increasingly more aggressive.
For example, FBAR filings have been around for a long time, but enforcement was heightened in 2002 (when the IRS was given the authority to actually enforce compliance). One of the things that the current administration, as well as the Treasury and IRS have wanted to do (the FBAR forms were a nature of Treasury – not the IRS) is tie in the reporting of foreign assets into the 1040 or the individual tax return.
They finally succeeded in March 2011 with the passing of FATCA, the Foreign Account Tax Compliance Act. Now individual taxpayers not only have to report foreign financial assets to Treasury on the FBAR forms, but since last year there's also a form that gets filed with the 1040 to report certain foreign financial assets.
Whereas the FBAR covered certain foreign financial accounts – for the most part it covered cash, cash equivalents, liquid accounts, brokerage accounts, and things of that nature – the FATCA filing is more expansive. It's going to include liquid and certain illiquid assets. The thresholds are different than the FBAR however – $50,000 for single and $100,000 for married filing joint. If your foreign financial assets exceed those thresholds, that will trigger the reporting requirement.
The US assets do not need to be reported because those are obviously held in the US – the IRS could actually determine what those are, but now you have to report these foreign assets.
This adds a level of complexity to the situation. For some assets, a fair market value may not be readily ascertainable, especially if it's an illiquid asset such as a note or a minority interest in a closely held foreign business.
There is still a lot of ambiguity to be hammered out, but the message being sent by both Treasury and the Internal Revenue Service (as well as our lawmakers in Congress) is that they want to know not only where the income is coming from on these foreign assets, but also now where those actual assets are located.
I'm not sure where this is all headed, but they definitely want to have a better grasp on the movement of money, movement of assets, and the income that's generated off those assets and who has ownership over them.
IM: Last question. In the past few years, the IRS and Treasury have taken it upon themselves to now try and force other financial institutions to give them the details of American account holders, even when the transfer of information would violate local privacy laws.
As a result, quite a few financial institutions are just dropping their American clients, making it difficult for Americans to head overseas in the first place.
Is this a trend that's likely to continue?
RL: Well, it's only been less than a decade that the enforcement of foreign asset and income has really even been a focal point for the revenue service, so I think there's more to come of this.
One can look at the third OVDI (Offshore Voluntary Disclosure Initiative) announced January 9.
Currently, IRS commissioner Douglas Shulman believes, as do a lot of people in Congress, that one of the ways to help take care of our budgetary issues is to go after the taxpayers who have unreported foreign assets generating various types of income – whether it's dividend, interest, royalties, capital gains, rental income, etc.
The facts actually kind of support that, too, because the last two OVDI programs (one was in 2009 and the last one was in 2011 and ended in October of last year) generated a lot of revenues for them. The 2009 version generated $4.4 billion thus far and 2011 is still underway.
33,000 people came through this, but there are even more that did “quiet filings” – they didn't go through the programs but just submitted their tax returns for a decade and paid the tax and penalties with it without necessarily raising their hands.
The administration and the enforcement agency really believe there are a lot of eligible assets abroad, and they're going to continue to aggressively pursue them and dedicate resources to bring them into the US tax system. That's why I think there's more to come.
Just for example, Switzerland recently had to disclose to the US a list of bank employees who served American clients suspected of dodging taxes. The thing is, they disclosed all this electronic data, but it's encrypted. They did not give the US the means to unencrypt the data. Right now they're in the midst of trying to negotiate how they're going to settle this. Upon settlement of what the disclosure is going to be and how we're going to address this, then they will provide the encryption keys.
You're going to continue to see more of that. I think the US will go after other countries, and it's going to be something where they see a pretty good return on their investment, at least in the short term.
IM: Well, on that somber note, this concludes our interview. Ryan, thank you for spending some time with us.
RL: My pleasure.