Yes, I know you have the quaint idea that it belongs to you. But, Obama and his inside-the-beltway friends know better than you what to do with your money. And, after all, they really need it. You know, with a projected $1.6 trillion deficit and all that.
On February 1, the Obamites released their financial fiasco for fiscal year 2011, otherwise known as the proposed federal budget. A key portion of the budget is the revenue proposals, contained in a document referred to as the Greenbook, because—surprise! —It's printed with a green cover.
If you suffer from insomnia, download the Greenbook from the Treasury Web site and spend a few hours looking it over. You'll save on your Ambien prescription. And, you'll gain fascinating insights into vital national priorities like the "Inland Waterways Trust Fund."
But I digress. The real point of the Greenbook is to outline how the Obamites' plans on how they intend to forcibly extract money from you, a concept otherwise know as "taxation." Think of it as sort of a root canal, but on your money, not your mouth.
Since my consulting practice focuses on international tax, I spent a recent sleepless night reading up on the Treasury's modest proposals to "Combat Under-Reporting of Income on Accounts and Entities in Offshore Jurisdictions." Here's a summary—in as plain English as I can muster—of their proposals.
"Require Increased Reporting on Certain Foreign Accounts." Basically, this would impose a 30% tax on many types of U.S-source income to foreign financial institutions (FFIs). The definition of a FFI is very broad, and includes "certain entities engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interests in the foregoing." In any words, "hedge funds." And that's not all. The rules "would be designed so as not to disrupt ordinary and customary market transactions." Well, of course!
H.R. 4213, the "Foreign Account Tax Compliance Act" (FATCA) contains a similar provision. This bill passed the House of Representatives in December, and is now before the Senate. President Obama strongly supports it, and my colleague, former Congressman Bob Bauman, tells me that even the most conservative senators are afraid to stand in its way because it punishes those supposedly evil offshore investors. The only way to avoid the withholding tax would be for FFIs to acknowledge the existence of offshore accounts with a U.S. beneficial owner to the IRS. They would also be required to disclose relevant information including account ownership, balances and amounts moving in and out of the accounts.
In many offshore jurisdictions, disclosing this information violates bank secrecy laws. H.R. 4213 requires FFIs to seek a waiver of secrecy laws so they can provide this data to the IRS. Otherwise, they would need to close all accounts with U.S. beneficial owners. And that's what I suspect a lot of FFIs will do when Obama signs H.R. 4213.
"Require Disclosure of Foreign Financial Assets to Be Filed with Tax Return." If a U.S. taxpayer holds foreign "bank, brokerage, or 'other'" financial accounts with an aggregate value of $10,000 or more, the IRS wants to know about it. But the Obamites want more. The Greenbook proposes to significantly widen the reporting requirements if the aggregate value of assets you hold offshore exceeds $50,000. You'd need to report not only foreign financial accounts, but also any "interest in a foreign entity or any financial instrument or contract held for investment and issued by a foreign person."
What's more, you're guilty until proven innocent. Once the IRS establishes that you have an interest in an offshore account you didn't report, it's value would be presumed to exceed $50,000.
"Impose Penalties for Underpayments Attributable to Undisclosed Foreign Financial Assets." The penalties associated with non-disclosure of foreign accounts are already almost unbelievable. Just ask anyone who's ever had to pay up. But the Obamites want more. The Greenbook proposes doubling the 20% accuracy-related penalty to 40% "in regard to any understatement attributable to undisclosed foreign financial assets." However, "the penalty would not be imposed when the understatement is due to reasonable cause." Whew, that's a relief!
"Extend Statute of Limitations for Significant Omission of Income Attributable to Foreign Financial Assets." This proposal is also similar to a provision in FATCA. It would double the time the IRS has to audit a U.S. taxpayer involved in international transactions from three to six years. And, the clock doesn't start ticking until you file your tax return or other reporting form. There is a $5,000 threshold in the Greenbook proposal, so that the provision wouldn't apply if less than that amount of income is at stake. Take that, taxpayers!
"Require Third-Party Information Reporting Regarding the Transfer of Assets to or from Foreign Financial Accounts and the Establishment of Foreign Financial Accounts." Under this proposal, you'd have to report any transfer of money or property exceeding $50,000 to or from any foreign bank, brokerage, or other financial account. You'd also have to file a separate report for any such transfer by an entity in which you have a 25% or greater ownership interest.
"Permit the Secretary to Require Electronic Filing by Financial Institutions of Certain Withholding Tax Returns." This is also part of FATCA. In concert with the self-reporting provisions I just described, it means that your domestic bank or brokerage would also need to tattle on you to the IRS if you transfer $50,000 or more overseas. After all, financial privacy is dangerous. We wouldn't want Americans having any of that, would we?
"Establish Presumption of U.S. Beneficiary in Case of Transfers to Foreign Trusts by a U.S. Person." FATCA contains a similar provision, which would presume that the U.S. person who conveys property to a foreign trust should pay tax on that trust's income in accordance with the "grantor trust rules" in the Internal Revenue Code. You could remove this presumption if you convince the IRS that no part of the income or assets of the trust was paid to or accumulated for the benefit of any U.S. person, and that if the trust were terminated, no trust assets or income could be paid to or benefit any U.S. person.
"Treat Certain Uncompensated Uses of Foreign Trust Property as a Distribution to U.S. Grantor or Beneficiary." This provision tries to crack down on what the IRS considers abusive uses of property owned by a foreign trust by U.S. persons, without the trust receiving payment in return for that use. Naturally, any such payment usually results in a tax liability to the trust grantor. The Greenbook proposes that such use (or a loan of trust assets) would be considered a taxable distribution, "except to the extent that the U.S. person repays the loan at market rates (or pays the fair market value of the use) within a reasonable period of time."
"Improve Foreign Trust Reporting Penalty." Don't you love the word "improve?" Basically, this provision puts the screws to any U.S. person who funds a foreign trust and fails to inform the IRS about it. There's already a $10,000 penalty for failing to do so, plus the IRS can impose a whopping 35% penalty of the "gross reportable amount." That can be as much as 100% of the value of the assets in the trust. However, without the taxpayer cooperating—that's you, dear reader—"it is often difficult for the IRS to determine the gross reportable amount." So the Greenbook proposes to impose a $10,000 penalty each month to recalcitrant taxpayers.
According to the Greenbook, "The Administration is concerned about the use of foreign accounts by U.S. citizens and residents to evade U.S. tax." That may be, but as draconian as these provisions are, they're slated to raise an average of $540 million annually, according to the sharp-eyed Treasury analysts who prepared the Greenbook. By comparison, Sen. Carl Levin (D.-Mich.) asserts that U.S. taxpayers hiding assets offshore costs the Treasury over $100 billion annually.
How much are you willing to bet that the honorable Sen. Levin will reduce his estimate in line with these official Treasury estimates? I hope not much. Because if anything is clear in the U.S. government's "War on Offshore," it's that telling the truth isn't the highest priority of those congressional blowhards like Senator Levin who are leading the charge.
Copyright © 2010 by Mark Nestmann
(An earlier version of this post was published by The Sovereign Society, https://banyanhill.com/)
