If you’re cleaning up your tax messes with a voluntary disclosure process (oh, hypothetically, offshore accounts that were unreported) it is important to do it right. As the saying goes “Half-measures availed us nothing.” Put it all on the table and clean it up entirely.
Jack Townsend has a post today summarizing United States v Salisbury. This is a cautionary tale about a gent who thought he could come clean and continue to lie.
Oh, I know. “Lie” is such a strong word. “Take an aggressive tax reporting position” sounds much nicer, doesn’t it?
Memo to all personnel: when you’re trying to avoid prison and/or life-altering fines, be smart. Don’t poke the bear with a pointed stick (YouTube) when the bear has your head in his mouth. Remember your primary purpose, and calibrate your actions to achieve it. (Hint for Mr. Salisbury and others like him: your primary purpose is to Stay. Out. Of. Prison. FFS.)
The moral of the story is that if one is going to evade taxes, and especially if there is a paper trail or a potentially antagonistic or even just adversarial witness, leave (or stay outside) the USA. And if you’re not a Canadian citizen stay out of Canada too (mutual collection agreement). Of course that won’t work if your revenue stream remains US-based (Norman F. Dacey cases — his expatriation was too little, too late). There are, in fact, millions of “accidental Americans” abroad, some of whom don’t even know they have a claim to US citizenship. These people are liable for US tax. But happily in most cases the IRS neither seeks them out nor claims the tax due if the person does not hold a US passport and has never claimed or used an “attribute” of US citizenship.
It’s a pity there’s not more on this subject: good-faith denial of US citizenship or, bad-faith perhaps, absconding. But the bars of Latin America and Southeast Asia are full of Americans who have absconded not only from US taxes but from child support too.
Another interesting class of nonfilers consists of those who hold a foreign passport and use only that passport, never visiting the USA. Multiple $10,000 penalties are enough to keep such people from ever visiting the US. The interesting challenge is in respect of estate planning: avoiding transferee liability. The most creative workaround for the directors of a Stiftung (ref. In re Swan, a good-faith estate case, deciding that such “foundations” and other anomalous entities are trusts for US tax purposes, and never mind that any trust lawyer will tell you a trust is not an entity) was to have an operating business and pay the “heirs” for actual work done overseas, on which they would pay proper income and payroll (US or foreign social security) tax. Again, I’ve seen nothing on the Internet, in RIA or anywhere else on such strategies. But I’ve interviewed private bankers, lawyers and absconders who are familiar with such practices.