About a decade ago, the IRS started communicating with taxpayers by email. While the IRS never contacts taxpayers by email about their personal tax situation, they offer a variety of IRS e-news subscriptions. These include news releases, tax law updates, information for tax professionals, etc.
Most of the messages the IRS sends are mind-numbing. Just a few days ago, I received an announcement that the IRS was seeking “Public Comment on Recommendations for 2017-2018 Priority Guidance Plan.” Dull though that may be, it’s better than this one: “Rev. Proc. 2017-33, 26 CFR 1.168(k)-1: Additional first year depreciation. (Also Part 1, § 179).”
Occasionally, though, the IRS sends a message that gets my attention. Such is the case with the agency’s annual “Dirty Dozen Tax Scams.”
As the IRS artfully describes it,
“the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or hire someone to help with their taxes. Don’t fall prey.”
Two years ago, identity theft and phone scams were at the top of the list. But for 2017, the top tax scam is “IRS Committed to Stopping Offshore Tax Cheating.”
According to the IRS: Against the State: An ... Best Price: $9.94 Buy New $9.95 (as of 02:10 EST - Details)
“Over the years, numerous individuals have been identified as evading US taxes by hiding income in offshore banks, brokerage accounts, or nominee entities and then using debit cards, credit cards, or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities, or insurance plans for the same purpose.”
The announcement boasts that since 2009, the IRS has collected nearly $10 billion in back taxes, interest, and penalties from US taxpayers with unreported offshore accounts.
Now, I’ll concede that a significant number of Americans don’t report or pay tax on their non-US investments. But for the vast majority of them, the omission isn’t deliberate. They are among the millions of citizens who live permanently outside the US and pay income tax in another country. In some cases, their only connection to the US is an accident of birth. They were born in the US or were born in another country to US citizen parents. Thus, whether they know it or not, they are US citizens.
They simply don’t know that unlike any other major country, the US requires its citizens, whether they live in Milwaukee or on Mars, to pay income tax on their worldwide income. And to file detailed annual reports on their non-US financial accounts.
For an example of how “offshore tax cheating,” as the IRS puts it, actually happens, we need to look no further than the example of Jeffrey Pomerantz, a US-Canadian dual citizen. In March, the Department of Justice announced that it was suing Pomerantz, who now lives in Canada, for $860,300.
Over the course of an IRS audit of Pomerantz, the agency discovered that he had failed to file Treasury Form TDF 90-22.1 (now renamed FinCen Report 114) to report his “foreign accounts” for 2007-2009. Two of the “foreign accounts” Pomerantz failed to file were in Canada. So they weren’t “foreign” to him.
Keep in mind that Pomerantz attempted to comply with US tax law. He dutifully submitted annual tax returns to the IRS, even though he lived in Canada. Also keep in mind that the DOJ isn’t attempting to collect a single dollar in evaded tax from Pomerantz. All of the $860,300 the DOJ alleges that Pomerantz owes represents civil penalties and interest charges imposed for failure to file Form TDF 90-22.1. How to Be Invisible: P... Best Price: $9.39 Buy New $12.50 (as of 02:35 EST - Details)
So what exactly is an offshore account, according to the IRS? It includes the obvious, such as a bank account outside the US over which you have signatory or “other” authority. It also includes some less obvious categories of investments. One of those other investments belonged to someone I’ll call Carol.
Carol emigrated from the US to Canada with her husband in 1969. Now a Canadian citizen, she’s lived there for 47 years. She’s also the mother of a disabled son, Roy, who is the beneficiary of a Registered Disability Savings Plan (RDSP). Under Canadian law, income earned in the plan isn’t taxed until it’s paid out to the beneficiary. Carol and her husband have contributed to this plan for many years. The Canadian government also contributes up to C$3,500 annually to Roy’s RDSP.
Of course, the entire time that Carol and her husband have lived in Canada, they’ve paid taxes there, which are considerably higher than taxes in the US. Yet, she still has to file US taxes. And get this: The IRS considers the matching grants to Roy’s RDSP to be taxable income. The parents are even supposed to file a form declaring the RDSP as a “foreign trust.” The penalty for not filing the form is $10,000 or 35% of the value of the assets conveyed to the “foreign trust,” whichever is greater. And that penalty applies for every year the RDSP has existed.
Does the failure of Carol and her husband to report the Canadian government’s contributions to Roy’s RDSP sound like “offshore tax cheating” to you? It does to the IRS. Indeed, in 2008, former IRS commissioner Douglas Shuman testified at a Senate hearing that US taxpayers were evading “billions” of taxes on offshore income every year. The final report from those hearings, entitled Tax Haven Banks and US Tax Compliance, estimated the annual loss to the US Treasury from offshore tax evasion to be a whopping $100 billion.
Naturally, I was curious about how this loss was calculated. So I did a bit of research, using the footnotes in the Senate report. It turns out that in 2000, a former congressional researcher named Jack Blum filed an affidavit to support an IRS summons for records from MasterCard and American Express. The affidavit claimed US taxpayers were evading $70 billion in taxes offshore each year.
Mr. Blum never explained how he arrived at this number, but, reporters started using that number in news articles. As higher estimates came out, these same “journalists” starting using them. After all, in the news biz, “bigger is Incognito Toolkit: Too... Best Price: $5.00 Buy New $5.00 (as of 01:55 EST - Details) better.”
I remained curious, though, about the origin of this number. Finally, a couple years ago, I got my answer.
One of my colleagues learned that the guy who came up with the original $70 billion – Jack Blum – would be speaking at an upcoming conference. At my request, he asked Blum to give an on-the-record explanation of how he came up with his estimate. After dodging the question, Blum finally admitted, “I guessed.”
So there you have it. The foundation of the US Treasury’s war on offshore tax avoidance – and the #1 “tax scam,” according to the IRS – is based on a guess!
If you’ve ever thought the statistics trotted out by offshore critics had a shred of truth to them, I hope I’ve convinced you otherwise.
And ask yourself this: what else is the IRS (and indeed the rest of the US government) lying to you about?
Reprinted with permission from Nestmann.com.