blog/tax

From the TaxProf blog, a quick post noting that UBS is not the only target anymore — Credit Suisse and HSBC are getting scrutiny from the IRS as well.

I have worked with all of these banks.  I guess I must have missed the pirates at each of these places, because my experience has been that we did things right and turned square corners. Their internal auditors were active, asking for backup information on various items.  So again, if evil lurks at these institutions I haven’t seen it.

My theory is that secrecy doesn’t exist.  For instance, only a mug would rely on bearer shares or nominee shareholders and directors.

Do you think you can really rely on a stranger — on another continent — who is getting paid $250/year (or $2,500/year or whatever amount of money you care to pay) will keep a secret?  A secret that might put you in jail if revealed?  Goodluckwiththat.

Do your planning with the expectation that everything will be on the table in front of a skeptical and unfriendly bureacrat at some point.

Keep it clean.  Great wonders can be done within the four walls of the Internal Revenue Code.

The IRS published the latest in its missives assailing the infernal international tax gap, this one about reporting gifts received from foreign sources.

Translation: file that Form 3520 (PDF).

Minimums? Receiving $100,000 or more from an individual, or $13,528 or more via an entity (like a corporation or partnership).

Instructions to Form 3520 (PDF).

There are two messages here. The immediate message is to remind you of what has to be done for calendar year 2008.

The meta-message is to treat this as a sign. It foreshadows an inevitable enforcement campaign by the U.S. tax authorities. So take care of things now while you can.

Since this is one of the things we are wrestling with right now, here is a link to a recent Law21 post on lawyers and saving electronic documents in the “client file” (wow what a Dickensian anachronism that sounds like).

This is for insiders only (meaning people who care about arcana like this).  FWIW we’re aiming at paperless and the effort needed to do so it magnificent in its hugeness.  For those of you on the paperless office kick the best tool we have at the moment is Worldox.

Just because you’ve been looking for them, here are the Joint Committee’s explanation of the law and the budget estimates for the exit tax passed earlier this year.

Joint Committee on Taxation Technical Explanation of the HEART Act of 2008

Joint Committee on Taxation Estimated Budget Effects of H.R. 6081

There’s a pop quiz on Friday.  :-)

The TaxProf blog has a recent post about expatriation. The TaxProf refers to a recent academic paper on the topic, which you can download here.

It’s always interesting to see the academic perspective on something that I do, y’know, for money.

Expatriation is mostly estate tax driven

Giving up U.S. citizenship–when it is tax driven–is mostly about estate taxation. Given a choice between passing 100% or 55% of your assets to your kids, most people choose 100%.

Income tax isn’t such a problem, because in many cases the U.S. income tax rate is lower than the person’s home country. Income tax burdens on U.S. citizens living abroad are usually burdens of paperwork and accounting fees, not tax.

Exit tax? Dumb move

I see the new exit tax as one of the dumber tax moves that Congress has done. Yes, dumber even than this. Why dumber? The bike commuter tax benefit is stupid because the costs of running a program exceed the value of the program itself. I think the bike commuter boondoggle is there just as a sop to the green police. But I digress.

The expatriation tax is a dumb move because:

• It generates almost no tax revenue;
• It promotes political disconnectedness–isolationism, if you like;
• It creates tax problems that are unenforceable by the U.S.

Expected tax revenue will be puny

The revenue projections are puny. The Joint Committee on Taxation estimates that the tax collections will be $411 million for 2008 through 2018.

That’s Four! Hundred! Eleven! Million! folks. Like that’s going to make any difference at all to the Federal government.

The revenue projections assume a static universe. Ask yourself. Will people adjust their behavior to minimize potential taxes? You know the answer to that. (This point continues to elude elected officials). Thus I would expect the total revenues generated by Section 877A to be even less than estimates.

It’s an incentive to drop U.S. citizenship

The new exit tax creates an incentive for people to drop U.S. citizenship. No, you say. It makes people keep their citizenship because the tax cost is so high to give it up.

Wrongo, buddy. In the short term, maybe. In the long term, no. I believe there is an important cohort of citizens that have an incentive to drop citizenship at the first available opportunity.

Let’s say you are a citizen of the Kingdom of Saudi Arabia. Your son is born in the United States and automatically acquires U.S. citizenship in addition to KSA citizenship.

When you die, your son will inherit money and property from you. Now your son must worry about U.S. estate taxation on assets that have perhaps never touched the United States.

And that’s not the only thing your son needs to worry about. As a U.S. citizen, he needs to report his worldwide income and pay U.S. income tax every year — even if he is under the age of 18. If he receives gifts from you, he must report them on Form 3520.

If your son has no plans to live in the United States, why should he suffer these tax problems?

What I expect to see is that in the longer term, as minors reach age 18 they will voluntarily give up their U.S. citizenship. This can be done under the new exit tax rules without any tax being imposed.

Thomas P. M. Barnett probably doesn’t think about U.S. tax policy but my guess is that if he did he would say this is a bad result. Connectedness across borders brings peace and prosperity. Nothing quite says “I’m connected to the United States” as having the U.S. passport.

The exit tax promotes disconnection.

The exit tax creates unenforceable valuation issues

Think of a random person living outside the United States, whose assets are outside the United States. Let’s say the person’s assets are hard to value–real estate, privately-held businesses.

The person has a U.S. passport. She’s thinking of giving up citizenship.

If that person jumps through the exit tax hoops, what we have is a valuation fight between the United States of America and the random person. How is the Internal Revenue Service going to challenge the valuation of real estate in up-country Kenya?

That’s the least of the problem.

The basic concept of international sovereignty makes enforcement of the exit tax rules difficult at best. Let’s just leave it there for now.

The best enforcement mechanism available to the U.S. is the threat that a person who gives up citizenship will be barred from re-entry to the United States for the rest of his or her life. This is not a credible threat (it’s been rattled around for a decade without enforcement) and in any event many expatriates would respond with “So what?” They don’t care. So this is yet another small piece of political plate tectonics, which is bad for the U.S.

As the Conference Co-Chair of the CalCPA Education Foundation’s 2008 Tax Update and Planning Conference, my job is to introduce the speakers and take care of small glitches as they arise in the conference.  I figured I would sit through the whole day of presentations, and did.

Scared the hell of of me.

Sitting through Tom Daley’s Federal Tax Update was like being on the wrong end of a firehose.  Followed by Skip Kessler discussing changes in real estate taxation, including 1031 exchange stuff.  How do these guys keep up with this?  And even if you’re finding this stuff as it changes, how do you remember it?  Onward to Matthew Burke from the State Board of Equalization (California property tax, change of ownership rules, etc.), Jonathan Karp on passthrough entities and Alex Brucker on retirement plans.

David Nguyen talking about foreign nongrantor trusts?  That at least was a piece of cake.  I understood that stuff.

International tax law is basically an area where the prevailing enforcement attitude from the IRS is “Death penalties for parking tickets!” and I see that this is true in other areas as well. It seems that the general POV for the IRS is that of the Borg.  “Resistance is futile.”

I am not sure why a small business would even bother offering a pension plan to its employees given the utter insanity erupting from the Department of Labor and the Internal Revenue Service.

Nor am I exactly sure why a sensible person would voluntarily be an accountant, given the way that Congress dinks around with the Internal Revenue Code and the Internal Revenue Service spews administrative rulings.  I’m sure there are nice people at the IRS (I’ve met some, and they truly are) and I’m sure that their mothers love them.  But there is something dreadfully wrong with the tax system.  Something has gone off the rails.

Having just purchased and devoured Charles T. Munger’s Poor Charlie’s Almanack (highly recommended) I cannot help but compare Munger’s clarity of purpose and thought with the muddled aimlessness of Congress and its bureaucratic minions.

Let’s just put it this way.  The laws of asymmetrical warfare seem to have been utterly lost on Congress and the Treasury Department.  There is a congenital failure–in tax policy and enforcement actions–to look beyond the immediately-desired effect, to the knock-on effects that really aren’t that hard to predict.