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Unintended consequences of the offshore crackdown

March 08, 2010

International tax lawyer Phil Hodgen files a report from his recent trip to Asia that should give us pause to consider how we deal with taxes of our offshore taxpayers:

Here’s what I’m seeing from my meetings:

§ U.S. expatriates who ran afoul of the IRS’s FBAR Crusade are grumpy. (Seriously, who can blame them? A normal person, living a normal life outside the U.S., owing in some cases a trivial amount of tax, and for that the IRS wants to throw massive penalties at them?)

§ U.S. expatriates who are not (yet) fully compliant in reporting the existence of offshore bank accounts have no interest in coming forward due to the uncertainty as to how they’ll be penalized, and the current harsh penalty regime. Anecdotal or a trendline indicating how the IRS has trained a whole set of otherwise law-abiding people to deliberately lie on their tax returns?

§ An increasing willingness to give up U.S. citizenship. One of my reasons for coming to Asia this time was to meet with people who are launching the expatriation process. Anecdotal or a trendline? And if it is a trendline, what is causing productive, high achieving people to cut all ties with the United States?

§ Bankers are hesitant to set up and administer trusts which have U.S. beneficiaries. Anything touching the United States has highly complex accounting and paperwork requirements. Anecdotal or trendline indicating that the cost of doing business in/with the United States is getting too high?

The penalty regime for offshore tax reporting shoots jaywalkers to deter real criminals. When missing a reporting deadline by one day triggers an automatic $10,000 penalty, the incentives are for a late filer to not file at all in hopes the IRS doesn't notice. When you shoot jaywalkers to deter fraudsters, the jaywalkers might as well become fraudsters. With people abandoning U.S. citizenship in rapidly increasing numbers, it's time to re-evaluate the penalty system.