New US Tax Collection Strategies
The IRS is expanding the American Family
By: David S. Lesperance

The US is going global

Are you a Member of the American Family? If so Uncle Sam wants your taxes! New US Tax Collection Strategies may identify you as a US Citizen and a taxpayer with a whopping tax bill. There are several million people living around the world who may be unknowingly committing US tax evasion each year. The US government labels them as 'non-resident non-filers' and until now has been unable to collect taxes from (or even identify) these individuals. This situation has existed ever since the United States re-introduced its current income tax regime at the time of the First World War.

Times are, however, changing dramatically. The Internal Revenue Service (IRS) now has the means to find these individuals and collect outstanding taxes, interest, and penalties from assets located outside the US. Given the current political climate in Washington, where normal corporate tax avoidance planning is labeled “unpatriotic”, there is a renewed passion to expose these non-resident non-filers and apply the full force of US law against them.

Are you going to receive an unexpected US tax bill?

To answer this question we need to clarify several basic elements of US tax and citizenship law:

Fact 1: A US tax payer is anyone who is either a US citizen, OR a resident alien, OR is physically present in the US for a specified number of days.

Most noteworthy is the fact that a US citizen who does not currently reside in the US is still subject to US taxation. This is true even if the individual inherited US citizenship from their parents but have NEVER set foot in the US. Indeed many non-resident non-filers are completely unaware that the US has a taxation system (unique in the developed world) that is based on 'citizenship'. These are people who often pay local taxes in the country where they live and where their tax liability is most likely based on residence. They are, therefore astounded to discover that the US taxes citizens who live abroad and who may never have received any type of service from the US government. They are even more appalled to learn that they themselves may be taxable!

Fact 2: The US allows dual citizenship.

Many individuals mistakenly assume that they automatically lose their US citizenship (and tax liability) when they move abroad and acquire a foreign citizenship or when they reach adulthood. 'Losing US citizenship is not easy. About the only way you can lose your citizenship is if you renounce it,' according to Robert Mautino, a San Diego immigration lawyer who is a leading expert on US citizenship law. The concept of dual citizenship is well-established in US law and one does not lose their US citizenship without taking drastic and active steps to do so.

Fact 3: If you are born outside the United States to a US parent, you do not have to register with the US government to be deemed to have acquired US citizenship.

Many individuals mistakenly assume that they are not US citizens because, while they may have been eligible for US citizenship through one or both of their parents, the US government was never notified of their birth. Only in rare situations are foreign-born US citizens deemed to have lost their US citizenship because of a failure to fulfill subsequent US residence requirements. It is also worth noting that the individual does not escape their deemed US citizenship because only one of their parents was an American or because their parents never married.

You may be a non-resident, non-filer … but you haven't filed US tax returns for 40 years … why should you worry now?

Many non-resident non-filers believe they have permanently fallen off the IRS radar screen because they left the US many years ago, took up residence and citizenship abroad, and have not received an IRS tax assessment since their departure. Others believe they will never appear on the IRS radar since their US parent(s) never advised the American government of their existence or, although they were born in the US, they left before they were old enough to file a tax return or even apply for a Social Security Number. Several trends are converging that will make the 'IRS radar system' increasingly powerful in the future.

The first obvious development is the computerization of various US government records relating to birth, death, adoption, marriage, name change, immigration, citizenship, passport, selective service, voter's registration and social security. This computerization greatly increases the ability of the IRS to 'data-mine' and find non-resident non-filers. Events such as the US election fiasco in Florida and the current war on terrorism have also resulted in increased funding and motivation to combine and compare information that may be collected at a local, county, state, or federal level. These changes are also occurring internationally as the US signs Mutual Legal Assistance and tax treaties with foreign countries. The war on drugs, money laundering, and terrorism are certainly fueling rapid international sharing of information with the US.

The second trend is that the US has been actively searching for non-resident non-filers. In 1992, the IRS launched a 'non-filer program' to locate non-resident non-filers. The first step taken was the institution of a requirement that an IRS information return be completed in conjunction with the process-ing of US passport applications. This system was only partially effective as many Americans either did not travel inter-nationally or already had another foreign passport and simply did not need to renew their US travel document.

The third step in uncovering non-resident non-filers was taken in 1999, when the Qualified Intermediary Regime (QI) came into effect. The QI regime saw financial institutions (brokerage firms, banks, life insurance companies) entering into direct agreements with the US government despite being located in financial privacy jurisdictions. These institutions agreed to enter into QI agreements in exchange for on-going access to US securities markets for all their clients. By the end of 2001, over 1000 financial institutions had signed on as Qualified Intermediaries. This group consists of almost every reputable international financial institution including most private banks. The full impact of the QI program will start to be felt in 2003.

Entering into a QI agreement calls for the financial institution to implement client review mechanisms that determine if new or existing clients are subject to US tax. This client review mechanism is also designed to uncover clients who hold foreign passports indicating a US birthplace or those who were born abroad to a US parent. If any client proves to be a US taxpayer, the financial institution submits a report on the client's brokerage account to the IRS and withholds and remits the appropriate tax to the US government. The client then has to apply to the IRS for any entitled refund. If the prior existence of the account has not been disclosed on the client's US returns (or no returns exist), they will face some very hard questions from US tax authorities. The QI agreement also allows for the seizure of the client's entire assets (held by the QI) if the IRS asserts that there is an outstanding tax liability.

The fourth method used to expose non-resident non-filers is the recently enacted 'Uniting and Strengthening of America by Providing Tools Required to Intercept and Obstruct Terrorism Act of 2001' (USA Patriot Act). The Patriot Act will uncover those last remaining non-resident non-filers who may have bank but not brokerage accounts. The Patriot Act requires all foreign financial institutions that have a correspondent banking relationship with a US bank to disclose (upon request) the name, and personal and business background of the ultimate individual beneficiary of all accounts held in the foreign institution. Foreign and offshore financial institutions that require US correspondent banking relationships are those that offer services such as the processing of US checks, US money orders, US dollar accounts, or execution of US wire transfers. Financial experts unanimously warn against dealing with offshore financial institutions that have not entered into a correspondent banking relationship with a US bank (i.e. non-Patriot Act compliant), as the US dollar is the defacto worldwide currency of business. Lack of US correspondent banking relationships would severely hamper an institution's ability to function and its absence would probably signal inherent instability.

The fifth method in the hunt to identify non-resident non-filers was the recent (and successful) action by the IRS to find those US taxpayers who may be purchasing goods and services with credit cards linked to undisclosed offshore accounts. The IRS has, in over 30 countries, successfully forced MasterCard, American Express and Visa International to provide information on their cardholders.

As a follow-up, the IRS recently won court-ordered “John Doe” summonses to obtain credit card transaction records from some 44 companies that may have sold consumer services and retail products to offshore credit card holders. This group of merchants includes everything from airlines to The GAP™ stores and even E-Bay™. John Doe summonses are used for “fishing expeditions” – where the IRS knows there is a good chance of finding tax offenders but are unable to identify them by name until after their investigation is complete.

It is anticipated that the combination of information obtained by the IRS from the credit card issuers and merchants will help identify those customers who paid for products or services by way of a credit card linked to offshore bank accounts that may have been established to evade US taxes.

The latest initiative to uncover non-resident non-fillers is the intensified scrutiny by immigration officials at US ports of entry. Overseas visitors who fly into the US have noticed a marked increase in the scrutiny of their documentation. Individuals who have foreign passports listing US birthplaces are now being told that they are required to secure US passports or be denied entry to the US. Another consequence of the computerization and sharing of information is that individuals born overseas to US parents will inevitably find this fact displayed on a US Immigration officer's computer screen.

Even those people entering the US through Canada are discovering they are under increasing scrutiny. Indeed, Canadian citizens and permanent residents who wish to enter and stay in the US for more than 30 days are now required to undergo as detailed an examination and documentation procedure as those who enter the country on overseas flights.

The combined effect of all these efforts will be the complete disclosure (to the US government) of all non-resident non-filers who: