Expatriation Numbers Soar

Expatriation Numbers Soar in 3Q 2016 and donations to Donor Advised Funds Soar in 4Q 2016

Expatriation Numbers:  Whether it was a result of the pending presidential election or part of something greater, the IRS released figures that in 3Q 2016, greater numbers of U.S. Citizens were renouncing their citizenship and expatriating.  See this Press Release announcing the former U.S. Citizens expatriating.  A total of 1,380 individuals expatriated, the second highest total ever for a quarter, and for the first 3 quarters of 2016, there have been a total of 3,046 individuals that have expatriated.  See this blog for a chart of the number of Expatriations in 2016.

This leads to the question of why so many people are expatriating from the U.S.  One explanation might be increased enforcement by the IRS and U.S. Treasury in offshore bank account reporting as a result of the Swiss banking fiascos (UBS, Credit Suisse) and Foreign Account Tax Compliance Act ("FACTA").  See this CNBC article n 2015, trying to explain the surge in expatriation.

So what are the costs for expatriation?  See this article.  See also this Forbes article.

1. You must file a document with the State Department. Which raised the price from $450 to $2,350 in 2014 (Note: here is the State Department information for Renunciation of Citizenship, and a listing of fees if renouncing through the UK embassy).
2. Show 5 years of tax compliance (filing returns and taxes paid).
3. Exit Tax if your net worth is greater than $2,000,000 or annual average income in the last 5 years is greater than $157,000. (Note: The exit tax is calculated as if you sold all your assets at market value and after an exemption of $693,000, you would pay capital gains taxes on the remaining value).  See IRS form 8854 for more information at calculating the exit tax.
4. Then pay a gift/estate tax for any transfer of your US assets at the existing gift/estate tax.

For a comparison of Donor Advised Funds and Private Foundations, see the National Philanthropic Trust's website outlining the difference between the two.

One Recent Notable Expatriation:  In 2011, Eduardo Saverin, Co-founder of Facebook, expatriated and paid the expatriation tax, estimated to be 15% of (53 million shares of Facebook at $50/share) or an estimated $397,500,000.  However, the Wall Street Journal estimated that Saverin saved about $700 million in taxes otherwise due to the U.S. Government by expatriating.

Donor Advised Funds:  Additionally, as noted by the Wall Street Journal, there is an increase level of activity by Americans prior to the close of the year.  In summarizing the WSJ article, Paul Caron's TaxProfBlog states that donors associated with Schwab Charitable have put more than $693 million into new and existing accounts between Thanksgiving and December 18, which represents a 20% increase over the same period in 2015.

The WSJ article speculates that the cause is President-elect Donald Trump and Republicans' proposal to limit the value of charitable deductions in 2017 and onward by either lowering tax rates or limiting the deductibility of charitable gifts.  The WSJ also notes that a recent boost to markets may also have contributed to this recent surge.

So what is a Donor Advised Fund?  IRS describes the Donor Advised Fund as: 

“a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.”

— Internal Revenue Service

IRS has in the past warned against using Donor Advised Funds because promoters of Donor Advised Funds had allowed taxpayer to misuse the Donor Advised Funds to claim charitable deductions while retaining control over the donated property.  See 2005 IRS Dirty Dozen.  Since this pronouncement and the passage of Pension Protection Act of 2006 (which Congress legally defined donor-advised funds and provided the IRS with tools to enforce the usage of Donor Advised Funds) IRS has since removed the Donor Advised Funds from its Dirty Dozen Lists, but lists fake charities as a Dirty Dozen for 2016.

Conclusion:  So why are people leaving the U.S. in record numbers and donating to their Donor Advised Funds in record numbers?  Simple, to avoid taxes, or to preserve deductions prior to the new administration's removal or reduction of the charitable deduction.

If you know anyone that has expatriated but has failed to pay their exit tax, in excess of $2,000,000, or is misusing their Donor Advised Fund to take charitable deductions that they are not otherwise permitted to in excess of $2,000,000, you should consider filing a tax whistleblower claim.  Or if you know of someone who isn't paying their taxes in excess of $2,000,000 you should also consider filing a claim.  Contact us to discuss filing your claim.  As a reminder, the IRS is willing to pay 15-30% of the tax, penalties, interest, and other amounts collected based on a whistleblower's substantial and credible information.

Pfizer and the Inversion Debate.

As everyone is aware, America will lose another company in 2016 to Ireland with the closing of the Pfizer – Allergan inversion.  See Bloomberg article.  With the inversion (See this Fortune article for more information about inversions), Pfizer will relocate its corporate headquarters to Ireland and continue its long standing policy of transferring profits from the U.S. to a lower tax jurisdiction.  Pfizer’s move will continue a trend of U.S. companies playing the shell game with its U.S. sourced profits through transfer pricing.  See these Bloomberg articles regarding profit shifting to avoid taxes and  the U.S. corporate tax-dodge

The obvious question about such a move is: What happened to President Obama’s and Treasury Secretary’s, Jacob J. Lew, position that the US would try and prevent future inversions (See Forbes article for more information of the Treasury Regulations) in response to Pfizer’s first failed attempt to invert by purchasing Astra Zeneca?  (Note: see Bloomberg article about Pfizer’s attempt to acquire Astra Zeneca).  As stated by the Wall Street Journal, the Treasury’s efforts failed to prevent US inversions or foreign corporations from acquiring US corporations. 

So how does the U.S. solve the problem given the ineffectiveness of the changes to the Treasury Regulations?  Possible solutions could be: 1. To lower the corporate tax rate in the United States; or 2. A Tax Holiday.  See Congressional Research Service’s article: Corporate Expatriation, Inversion and Mergers: Tax Issues for a discussion of the solutions proposed to solve the inversion problem.

The first solution would be to de-incentivize corporations from changing their home jurisdiction by matching the corporate rates in other countries.  However, that might not stop the mass exodus of corporations or generate job in the U.S.  See Sam Becker’s article about Kansas’ attempt to lower tax rates for businesses and the negative impact on jobs in Kansas.

The second solution might be to declare a tax holiday and allow the companies to bring back money to the United States at a reduced rate or without paying tax.  As stated in Jaimie Woo’s Huffington Post article this might not be the best idea, because it is rewarding the companies that shifted its profits offshore through transfer pricing by allowing them to bring the profits home at a much lower rate.  Also, the tax holiday would not address the problem of inversions, because the reason the companies are inverting is to avoid all U.S. taxation, not just at a reduced rate.

Another possibility, but rarely discussed is an expatriation tax.  This solution wouldn’t solve the corporate inversion problem, but would provide a huge incentive to not invert. What is an expatriation tax?  If you are a U.S. Citizen and want to renounce your citizenship (or are ordered to renounce your U.S. citizenship), the IRS treats that situation as an expatriation and imposes a tax on all your assets.  See Internal Revenue Code Section 877A.  As stated by the IRS, the Expatriation Tax would treat the individual as having sold all of his/her assets the day before expatriating their citizenship, and would impose a tax on the sale of those assets (with a sizable exemption).

The Expatriation Tax Model could be implemented to include Corporations and not just U.S. individuals.  This would require the U.S. Corporations to pay the tax on the deferred earnings of their offshore subsidiaries, and all other assets prior to inverting to the foreign jurisdiction.  This would make sure the company pays its fair share of U.S. taxes before utilizing the foreign jurisdictions tax benefits.

Could this unique solution work?  It might not stop the inversions, but it would at least cause the corporations to pay their fair share of taxes for choosing to relocate (on paper) its corporate headquarters in another jurisdiction.  Unfortunately, as with the proposed legislation (changing the tax rate and a tax holiday) it is unlikely that Congress will implement this solution to prevent corporations from avoiding U.S. taxes.

If you feel strongly about inversions and have specific/credible information about corporations avoiding the payment of tax, something that you can do now to limit the tax avoidance is to utilize the IRS tax whistleblower program.  The IRS pays an award between 15% to 30% of the tax collected to a whistleblower with specific and credible information about a corporate taxpayer’s avoidance of tax (either through an inversion or other methods, such as transfer pricing, or sham transactions).   Contact us if you want to file a tax whistleblower claim.