< Send a Letter to the Editor><Subscribe><Submit An Article>< Disclaimer> <Return to Issue Index>

. There are several million people living around the world who may be unknowingly committing tax evasion in the U.S. each year. The U.S. 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. However times are dramatically changing, as the U.S. now possesses the means to both find these individuals and collect outstanding taxes, interest and penalties from assets located outside the U.S. In addition, given the current political climate in Washington, where normal corporate tax avoidance planning is labeled “unpatriotic”, there is a renewed passion to flush out these non-resident non-filers and apply the full force of U.S. law against them. (For illuminating articles on the current political climate in Washington with respect to legal corporate tax avoidance, conduct a Googleä search using the keywords “Stanley Tools Bermuda”.) Are you one of these individuals who is suddenly going to receive an unexpected U.S. tax bill?  In order to answer this question, there are several basic elements of U.S. tax and citizenship law that need to be clarified. Fact 1: A U.S. tax payer (a.k.a. "U.S. person") is anyone who is either a U.S. citizen, OR a resident alien, OR is physically present in the U.S. for a specified number of days. Most noteworthy is the fact that a U.S. citizen who does not currently reside in the U.S. is still subject to U.S. taxation. This is true even if the individual acquired U.S. citizenship from their parents and has NEVER set foot in the U.S. Since many of these non-resident non-filers grew up outside of the U.S., they are completely unaware that the U.S. has a "citizenship" basis of taxation, which is unique in the developed world. The country that they live in (and often pay local taxes) most likely bases their tax liability on residence (i.e. day count or centralization of lifestyle). Therefore they are astounded to discover that the U.S. taxes citizens who reside abroad but who may never have received any type of services from the U.S. government. They are more appalled to learn that they themselves may be taxable!

Wake Up Call For more information, contact: David S. Lesperance Barrister & Solicitor, Legal Counsel to Global Relocation Consultants S.A. email: information@globalrelocate.com Website: http://www.usnonfilers.com ~

Many individuals mistakenly assume that they automatically lose their U.S. citizenship (and tax liability) when they move abroad and acquire a foreign citizenship or when they reach adulthood. "Losing U.S. 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 U.S. citizenship law. The concept of dual citizenship is well established in U.S. law and one does not lose their U.S. citizenship without taking drastic active steps to do so.

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

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

Uncle Sam wouldn't really take everything you own and throw you in jail.  Those stories are grossly exaggerated fabrications...  ~

I may be a "non-resident, non-filer" but I haven't filed U.S. tax returns for 40 years, why should I worry now? Many non-resident non-filers believe that they have permanently fallen off the IRS radar screen. They left the U.S. many years ago, took up residence and citizenship abroad and have not received an IRS tax assessment since their departure. Others believe that they will never appear on the IRS radar since their U.S. parent(s) never advised the American government of their existence, or although they were born in the U.S. they left before being old enough to file a tax return or even apply for a Social Security Number. Several trends are converging and combining that will make the "IRS radar system" increasingly powerful in the future.  The first obvious development is  the computerization of various U.S. 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. In addition, events such as the last U.S. election mess in Florida and the current war on terrorism are resulting in increased funding and motivation to combine and compare information that may be collected at a local, county, state, or federal level. This combination and ability to cross-check data is also occurring internationally as the U.S. signs Mutual Legal Assistance and tax treaties with foreign countries. The "wars" on drugs, money laundering, and terrorism are certainly fueling rapid international sharing of information with the U.S..

The second trend is that the U.S. has been actively seeking to find non-resident non-filers. In 1992, the IRS launched a "non-filer program" to try and 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 processing of U.S. passport applications. This system was only partially effective as many Americans either did not travel internationally or already had another foreign passport and simply did not need to renew their U.S. travel document..

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

A Q.I. agreement calls for the financial institution to implement client review mechanisms to determine if new or existing clients are subject to U.S. tax. This client review mechanism is also designed to uncover clients who have foreign passports indicating a U.S. birthplace or who were born abroad but had a U.S. parent. If any client is a U.S. 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 U.S. 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 U.S. returns (or no returns exist!), they will face some very hard questions from U.S. 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.

A fourth event in bringing to light 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 (a.k.a.: the "USA Patriot Act"). .

The Patriot Act will uncover those last remaining non-resident non-filers that may have bank but not brokerage accounts. The Patriot Act requires all foreign financial institutions which have a correspondent banking relationship with a U.S. 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 which require U.S. correspondent banking relationships are those which offer services such as the processing of U.S. checks/ 
money orders, U.S. dollar accounts, or executing U.S. wire transfers. Financial experts unanimously warn against dealing with offshore financial institutions that have not entered into a correspondent banking relationship with a U.S. bank,  (i.e. non-Patriot Act compliant), as the U.S. dollar is the defacto worldwide currency of business. Lack of U.S. correspondent banking relationships is a sever hamper on an institution's ability to function and its absence would probably signal inherent instability.
 

.....the passing of the USA Patriot Act in late 2001, and the recent offshore credit card record requests by the IRS, mean the US is aggressively leading the way in scrutinizing all domestic and international financial trans-actions of its taxpayers.

The fifth event in the hunt to identify non-resident non-filers was taken with the recent successful action by the IRS to find those U.S. taxpayers who may be purchasing goods and services with credit cards linked to undisclosed offshore accounts. Initially, the IRS successfully forced MasterCard, American Express and Visa International to turn over information on their cardholders in over 30 countries.  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 those that 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 the investigation is complete.

The latest initiative that will help the IRS to uncover non-resident non-fillers is intensified scrutiny by immigration officials at U.S. ports of entry. Those overseas visitors who fly into the U.S. have noted a marked increase in the scrutiny of their documentation. Individuals who have foreign passports with U.S. birthplaces are now being told that they are required to secure U.S. passports or be denied entry. As a consequence of the computerization and sharing of information, it is inevitable that individuals born overseas to U.S. parents will find this fact about them appearing on a U.S. Immigration officer's computer. 

Even people entering the U.S. through Canada are discovering that they are undergoing a closer examination. Those "snowbirds" that seek to enter the U.S. for more than 30 days are now required to undergo as detailed an examination and documentation procedure as those who come on overseas flights. 

The combined effect of all these efforts will be the complete disclosure to the U.S. government of all non-resident non-filers who a) travel to the U.S.; or b) hold a bank account with a bank that has a U.S. correspondent banking relationship; c) hold a brokerage account in any worthwhile financial institution in the world; or d) hold and use a major credit card. When IRS "data-mining" hits its full stride, those final few non-resident non-filers who thought they were well hidden will undoubtedly be uncovered and pursued. 

I may be a "non-resident non-filer" but I either earn less than the U.S. foreign earned income tax exemption and/or I pay local tax to a country that has a tax treaty with the U.S. that eliminates dual taxation. Why should I worry?

Exemptions for foreign earned income or foreign tax credits for foreign tax paid are only available to those individuals who file U.S. tax returns before the expiry of the relevant limitation periods. In short, an individual who does not file a U.S. return may end up paying tax twice (i.e. local and U.S.) on the same income or capital gain. Furthermore, these exemptions and credits do not apply to all types of income or capital gains.

Finally, since the U.S. has estate/death taxes, you will have a brand new and exclusive tax liability that you, and your financial advisor, may not have contemplated if your current tax home (i.e. Canada) does not impose this type of taxation

Even if the IRS does find and assess me, how will they collect their taxes when my income and assets are all outside of the U.S.?

The U.S. Government has signed new or amended tax treaties with a number of countries, which allows the IRS to use the local tax authorities to collect on outstanding U.S. tax debts. One of the first tax treaties which included this collection power was the Canada-U.S. tax treaty (Note: The U.S. has used this treaty as a precedent when entering into or revising tax treaties with other countries). As a result, if the non-resident non-filer has any assets within a country that has this type of tax treaty with the U.S., they will find that these assets are as subject to seizure as they would be if located in the U.S. 
.

Furthermore, as previously mentioned, if the non-resident non-filer has a brokerage account with a Qualified Intermediary institution (Note: the Q.I. program now includes most financial institutions in the developed world), they will find that their entire account is subject to seizure by the IRS. Finally, if the non-resident non-filer holds an account with an institution that has correspondent banking relationships with a U.S. bank, they may find that the contents of this account may be subject to seizure under the terms of the Patriot Act. In summary, the IRS now has many avenues at their disposal to seize assets around the world to satisfy a U.S. tax debt If I suspect that I may be a "non-resident non-filer" what can I do today to head off a disastrous U.S. tax assessment and collection? Step 1: Confirm current U.S. citizenship or resident alien status. Step 2: Get an assessment of what it would cost to voluntarily file U.S. returns and pay any outstanding U.S. taxes (Note: Voluntarily filing of U.S. tax returns for the past 3 years eliminates the assessment of any penalties over and above the taxes owed and interest). Step 3: Get an assessment of future U.S. income, capital gains and estate tax liability and explore the ways of lowering that liability through legitimate tax avoidance planning. Step 4: If your future U.S. tax liability after tax planning is still significant, then explore your ability to ultimately sever U.S. tax liability by giving up your U.S. citizenship or resident alien status.

Closer examination of taxes, less freedom of movement - means more control over your life by the US government.

.
Conclusion

If you can identify with any of the persons or situations described above, you may be surprised to learn that you are not only a member of the American family, but you are also liable to your long-lost Uncle Sam for past and future taxes.  It may be difficult, if not impossible, to change the past, but the future is in your hands. 
.