Yearly Archives: 2021

 

Estate Tax Problems Require 

On May 11, 2021 we posted Ten Facts About Tax Expatriation - Part I, where we discussed that whatever your motives, just because you leave the United States and renounce your citizenship, don't assume you can leave U.S. taxes (or U.S. tax forms and complexity) behind, particularly if you are financially well-off.

For those who expatriate after June 16, 2008, the rules are different, since Internal Revenue Code Section 877A applies instead of Section 877. You are subject to an immediate exit tax, which deems you (for tax purposes) to have sold all of your worldwide property for its fair market value the day before your departure from the U.S.
We also discussed in Ten Facts About Tax Expatriation - Part I:

1. Uncle Sam taxes income worldwide. 

2. Expatriating means really leaving.

3. The old 10-year window is closed.

4. Big changes came in 1996.
Thirty years later, in 1996, after the Forbes story on "The New Refugees" created a stir, Congress tried again. As part of the Health Insurance Portability and Accountability Act of 1996 (otherwise known as HIPAA), Congress added a presumption of tax avoidance if an expatriate's five-year average net income tax exceeded $100,000, or if the expatriate's net worth was $500,000 or more (both adjusted each year for inflation). But people could--and with the help of skilled lawyers did--rebut the presumption, and the IRS still had to show tax avoidance in most cases.

5. Tax avoidance is now irrelevant.
In 2004 (in the American Jobs Creation Act), Congress threw out the tax avoidance motive test altogether, imposing 10 years of U.S. tax on U.S. source gross income and gains on a net basis if you left the country for any reason. However, Congress increased the threshold for determining who was subject to this expatriation tax. An individual was only subject to the expatriation tax if he had an average net annual income tax for the five years preceding expatriation of $124,000, or if he had a net worth of $2 million or more on the date of expatriation. (If you expatriated on or after June 17, 2008, under the new Section 877A, there is a higher net worth threshold--currently $145,000 of annual net income tax for 2010.)

In some cases, even if you're below these thresholds, you'll get taxed. For example, expatriates must certify their past U.S. tax compliance by filing an IRS Form 8854. Any expatriate who fails to certify compliance with U.S. federal income tax laws for the five taxable years preceding expatriating is subject to the expatriate income tax even if he didn't meet the income tax liability or net worth tests.
Plus, later U.S. visits can be expensive if you expatriated before June 17, 2008 (and Internal Revenue Code Section 877 applies). In that case if an expatriate comes back to the U.S. for more than 30 days in any year during the 10 years following expatriation, that person is considered a resident of the U.S. for that whole tax year. That means the person would again be subject to U.S. tax on his worldwide income, not just his U.S.-source income. Ouch!

This 30-day rule does, however, have an exception for any days (up to a 30-day limit) that the individual performed personal services in the U.S. for an employer (who is not related). This exception only applies if that individual either had certain ties with other countries or was physically present in the U.S. for 30 days or less for each year in the 10-year period on the date of expatriation or termination of residency.

6. There are special rules for long-term residents.
It's easy to define who is or is not a U.S. citizen, but the term "long-term resident" isn't quite so clear. A long-term resident is a non-U.S. citizen who is a lawful permanent resident of the U.S. in at least eight years during the 15-year period before that person's residency ends. A "lawful permanent resident" means a green card holder. However, a person is not treated as a lawful permanent resident for purposes of this eight-year test in a year in which that person is treated as a resident of a foreign country under a tax treaty, and does not waive the treaty benefits applicable to the residents of that country. Caution: holding a green card for even one day during a year will taint the whole year.

7. There's an exit tax for expatriations on or after June 17, 2008.
The Heroes Earnings Assistance and Relief Tax Act of 2008 (generally known as the Heroes Act) changed the method of taxation for those who became expatriates on or after June 17, 2008, adding even more complexity and usually higher U.S. taxes. If you are a U.S. citizen or long-term resident who expatriates on or after June 17, 2008, you will be deemed (for tax purposes) to have sold all of your worldwide property for its fair market value the day before you leave the U.S.! All that gain is subject to U.S. tax at the capital gains rate. Plus, all your gain is taken into account without regard to any ameliorative tax provisions in the Internal Revenue Code.
Put differently, you get all of the bad parts of the tax code, and none of the good. That would include, for example, the inability to benefit from the $250,000 per person ($500,000 per couple) exclusion from gain on a principal residence (Section 121 of the Internal Revenue Code) and many other rules. The exit tax is like an estate tax, in the sense that everything that would be part of your estate will be subject to income tax on unrealized gains as of the day before you expatriate, as if you sold all your assets the day before leaving. In effect this is Congress' way of making sure your assets don't escape the estate tax entirely through expatriation.

The Justice Department also announced a deferred prosecution agreement with the Swiss Life Entities (“the Agreement”) under which they agreed to accept responsibility for their criminal conduct by stipulating to the accuracy of the Statement of Facts attached to the Agreement. The Agreement requires the Swiss Life Entities to refrain from all future criminal conduct, enhance remedial measures, and continue to cooperate fully with further investigations into hidden insurance policies and related policy investment accounts. 

Further, As Part of Today’s Resolution, The Swiss Life Entities Agreed To Pay Approximately $77.3 Million To The U.S. Treasury, Which Includes Restitution, Forfeiture of
All Gross Fees, and a Penalty Component.

If the Swiss Life Entities abide by all of the terms of the Agreement, the government will defer prosecution on the information for three years and then seek to dismiss the charge. 

“Swiss Life today is held responsible for creating and marketing specially designed insurance products to U.S. tax evaders seeking a new way to hide their offshore assets, in light of heightened Justice Department and IRS tax enforcement efforts,” said Acting Deputy Assistant Attorney General Stuart M. Goldberg of the Justice Department’s Tax Division. 

“Financial Enablers Here And Abroad,
And The Taxpayers Seeking Their Services,

Should Know That We Will Continue
To Identify And Unmask Such Schemes.”

As they admit, Swiss Life and its subsidiaries sought out and offered their services to U.S. taxpayers to help them become U.S. tax evaders,” said U.S. Attorney Audrey Strauss for the Southern District of New York. “The Swiss Life Entities offered private placement life insurance policies and related investment accounts to U.S. customers, and provided services that concealed the policies and other assets from the IRS. Indeed, the Swiss Life Entities saw U.S. authorities’ stepped-up offshore tax enforcement as an opportunity to pitch themselves to tax-evading U.S. customers as an alternative to Swiss banks. Under the terms of today’s agreement, Swiss Life will turn over more than $77 million and be required to continue to cooperate with the United States in identifying U.S. tax evaders.” 

“The successful resolution of this investigation is an important victory for the American taxpayer for two primary reasons,” said Chief James C. Lee of the IRS Criminal Investigation. “First, the recovery of more $77 million owed to the U.S. government sends an unequivocal message that offshore evasion is still a high priority of IRS Criminal Investigation. Secondly, this agreement further requires Swiss Life Entities to continue to cooperate with the government and does not shield them from future civil or criminal sanctions, which should put every entity engaged in offshore evasion on notice.

According to documents filed on May 14, 2021 in Manhattan federal court: 

Swiss Life Holding is the ultimate parent company of the Swiss Life group of companies (Swiss Life), a Switzerland based provider of comprehensive life insurance and pension products for individuals and corporations, as well as asset management and financial planning services. From 2005 to 2014, Swiss Life through affiliated insurance carriers in Liechtenstein (Swiss Life Liechtenstein), Luxembourg (Swiss Life Luxembourg), and Singapore (Swiss Life Singapore), (collectively, the PPLI Carriers) maintained approximately 1,608 Private Placement Life Insurance (PPLI) policies. The PPLI Carriers’ issuance and administration of those policies (colloquially known as “insurance wrappers”) and the related investment accounts were often done in a manner to assist U.S. taxpayers in evading U.S. taxes and reporting requirements and concealing the ownership of offshore assets. 

Swiss Life engaged in other misconduct with respect to U.S.-related policies: 

• U.S.-related PPLI Policies were funded or terminated through asset transfers from/to an account maintained by a third party associated with the policyholder, such as an offshore law firm or intermediary. 
• Swiss Life PPLI personnel assisted U.S. taxpayers in establishing and maintaining Swiss Life PPLI policies in the name of a foreign relative with the effect of obscuring the U.S. nexus of the assets used to fund the policy or to repatriate the U.S. taxpayer’s undeclared assets through a sham death payout. 
• Certain U.S.-related PPLI Policies issued by Swiss Life Liechtenstein involved transfers of physical gold, other precious metals, or precious gemstones into or out of the policy investment account, presumably for the purpose of avoiding detection by U.S. authorities. 
• The PPLI Carriers allowed policyholders to designate an authorized recipient – typically the policyholder’s asset manager or other foreign representative – to receive policy documents and custodian investment account statements, rather than having those documents sent directly to the policyholder. 
• Certain Swiss Life Liechtenstein personnel promoted the use of Swiss Life products to turn U.S. taxpayers’ undeclared or so-called “black” money into so-called “white” money by parking the funds in a Swiss Life insurance policy until the clock had run on the perceived statute of limitations for tax offenses. 
• Corporate premium bank accounts were also misused as a transitory account to help conceal the movement of U.S. clients’ funds. 

Under today’s resolution, the Swiss Life Entities are required to continue to cooperate fully with ongoing investigations and affirmatively disclose any information they may later uncover regarding U.S.-related insurance policies and related policy investment accounts. The Swiss Life Entities are also required to disclose information consistent with the Department of Justice’s Swiss Bank Program relating to accounts closed between Jan. 1, 2008, and Dec. 31, 2019. The Agreement provides no protection from criminal or civil prosecution for any individuals.

Swiss Life Holding will pay a total of $77,374,337, which has three parts. First, Swiss Life Holding has agreed to pay $16,345,454 in restitution to the IRS, which represents the approximate unpaid taxes resulting from the Swiss Life Entities’ participation in the conspiracy. Second, Swiss Life Holding has agreed to forfeit $35,782,375 to the United States, which represents the approximate gross fees (not profits) that the Swiss Life Entities earned on the penalized insurance policies and related policy investment accounts between 2002 and 2014. Finally, Swiss Life Holding has agreed to pay a penalty of $25,246,508. 

The penalty amount takes into consideration that:

1. Swiss Life conducted a robust internal investigation, 
2. Supplied client related data, 
3. Facilitated the acquisition by the Justice Department of information relating to custodian banks, asset managers, and other entities and individuals related to Switzerland, Liechtenstein, and Singapore, and 
4. Otherwise meaningfully assisted the department’s cross-border tax enforcement efforts. 
5. In addition, Swiss Life conducted extensive outreach to current and former U.S. clients to confirm historical tax compliance, and to encourage disclosure to the IRS when policyholders’ historical tax compliance issues had not yet been resolved. 
6. Swiss Life further implemented remedial measures to protect against the use of its services for tax evasion in the future.

  Do You Have Undeclared Income from an Offshore PPLI?