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Tax Complexity Overcomes the American Dream?

Posted in International, Tax, U.S. Federal Income, Uncategorized

Are taxes and the complexity of the U.S. tax system driving citizens away?  Earlier this year Fortune reported an increase in the number of Americans relinquishing their U.S. citizenship.  The author hypothesized that if the pace of expatriations continued, 2013 would become a record year for Americans leaving the Land of the Free.  It appear that that prediction is coming true, based on an article published in Businessweek just this month.

Complying with U.S. tax rules is certainly no easy task for anyone with any type of investment or holding outside the U.S., whether it is an investment account or income producing assets such as real estate.  In many instances U.S. citizens and residents with foreign holdings are entirely unaware of the myriad of complex rules they are subject to.  Some learn of their U.S. tax and reporting obligations through a casual encounter with a friend or family member, or just by reading an article such as those linked above.  Then, panic sets in when they realize that they have not filed a particular form or have not properly reported foreign income.

The Fortune and Businessweek articles certainly drive the point home that the U.S. tax system has become overcomplicated and burdensome, and it is certainly understandable that people relinquish their U.S. citizenship because of this.  Surprising to some, expatriates remain subject to specific expatriation rules (i.e. section 877A of the Internal Revenue Code).

But what of those with compliance problems that do not expatriate?  There are certainly options on how to correct tax reporting compliance problems.  For example, some seek to participate in the IRS Offshore Voluntary Disclosure Program while others attempt a “quiet disclosure” (i.e., file corrective returns and reporting forms without making any formal disclosure).  This latter approach brings us to the complaint recently filed by the Department of Justice against Carl W. Zwerner (the complaint is available at the Wall Street Journal here) and is discussed in Forbes.  While the complaint filed by the DOJ does not specifically indicate whether Mr. Zwerner attempted a “quiet disclosure,” it certainly appears that way.  Perhaps the DOJ wants to make an example of him (by seeking civil penalties that are approximately 200% greater than the maximum balance of Mr. Zwerner’s unreported foreign account), or perhaps this is just a taste of things to come.