More On Legal & Compliancefrom The Advisor's Professional Library
- Scope of the Fiduciary Duty Owed by Investment Advisors A fiduciary obligation goes beyond the suitability standard typically owed by registered representatives of broker-dealer firms to clients. The relationship is built on the premise that the advisor will always do the right thing for the person or entity receiving advice.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
The number of Americans living, particularly retiring, overseas is unknown, but the number of those renouncing their citizenship mainly because of onerous tax-reporting requirements is easier to get a hold of.
Kathleen Peddicord, publisher of a popular journal on overseas living, estimates that some 1.4 million Americans are retiring abroad out of a total of 2.4 million expatriates (excluding government and U.S. military personnel).
And while the number of Americans renouncing their U.S. citizenship is small, the trend has been accelerating dramatically.
While we don’t yet have final numbers for 2013, as of the third quarter they already exceeded—at 2,369 renunciations—the previous peak year of 2011, when the annual total stood at 1,781, according to attorney Andrew Mitchel, who tracks expatriations.
No less than the IRS’ ombudsman, Nina Olson, who recently released her annual report to Congress on the most serious problems faced by U.S. taxpayers, identified the Foreign Account Tax Compliance Act, or FATCA as it is known, as needing urgent attention—and openly questioning whether the law’s enforcement benefits justify the compliance burdens.
The real-world implications for Americans living, or wanting to live, overseas should not be minimized, says David Henderson, an international tax attorney and CPA with the Chicago law firm of Duggan Bertsch.
“But is this person really going to be able to conduct his financial affairs,” he says, adding “are you going to have the level of advisors needed to keep up with due diligence” or risk having to “pay a 27.5% penalty in retirement when you can no longer make up for it?”
That obscure sounding 27.5% figure is probably well known to those Americans renouncing their citizenship. It’s after a citizen comes clean and pays his taxes through the government’s voluntary disclosure program, and is assessed on the highest account value over an 8-year period.
“So if you have an account that had a high value in 2007 and then the market tanked — that’s in essence phantom gains you never realized. That penalty is very high can be very damaging financially,” Henderson says.
And it is not uncommon for Americans living abroad to be unaware of the many and increasing disclosure requirements.
“From what I see, the vast majority of people with these undisclosed or unreported account issues are not trying to evade tax or are willfully neglecting their duties to report these accounts."
Not everyone is Ty Warner, the Beanie Baby creator with massive accounts overseas. For the vast majority of clients, that’s not the case. They have money overseas form an inheritance, from currently working abroad; they have a past account, moved back to the U.S. and forgot about it” or the like, he said.
So, for ordinary Americans who just want to stretch their dollars and get the benefits of a Caribbean beach, Henderson says they should also be aware of that U.S. law requires a deep relationship with the IRS while living abroad, which can complicate relationships in their new home.
“The biggest issue is conducting financial transactions,” says Henderson, who estimates that between 5% and 10% of his firm’s clients are Americans living overseas — in virtually every part of the world and for a wide variety of reasons.
Because FATCA imposes onerous reporting requirements on foreign financial institutions — or intergovernmental agreements require another country to impose on those institutions or U.S.-born residents — it has become common for financial institutions to simply shun U.S. citizens.
“I have clients that have had accounts closed,” Henderson says. “Sometimes it’s as simple and friendly as ‘we need to find a new home for your account’ all the way to ‘your account is being closed and in a very short time you need to find a new place for your money.’”
Not only does that complicate, say, paying a mortgage on a home overseas, but the paperwork requirements far exceed the 10 minutes it may require to open a bank account in the U.S.
Moreover, in some cases Americans returning from some overseas destinations are “questioned a little more intently,” Henderson warns.
While the U.S. has been unique in the intensity of its tax-reporting demands, the Duggan Bertsch attorney says the U.S. example is beginning to find imitators.
“Many of these countries are coming up with their own FATCA-type agreements; it’s morphing into a global tax net [as other countries] try to catch their own people that may be avoiding their own home country taxes. So it’s squeezing the potential for avoidance down, but exponentially increasing disclosure requirements,” he says, adding: “The world of tax information sharing is really, really increasing at this point.”
Also increasing, for U.S. citizens, are reporting requirements. For example, until recently, U.S. citizens reported foreign investments when making tax elections. Now they must report foreign mutual funds and the like every year, regardless of tax elections.
“The Treasury wants more and more reports because more sunlight means everyone is paying the appropriate level of tax. I have had more and more discussions about expatriation” as a result, Henderson says — as well as actual expatriations.
A Britain-based client, for example, might come to the conclusion that having a British passport is as acceptable as a U.S. passport when it comes to international travel.
Henderson notes a disturbing trend. Whereas the expatriation procedure was once accomplished quickly, “now there is an 8-month wait to see a U.S. consul general.”
“It’s not so much driven wholly by tax considerations,” he says. “But if people have a bona fide connection to another country,” the calculation then could be: “All these forms have a cost every year because of the need of specialized counsel and accountants like us. At the end of the day, I’m already living here for X reasons and I’m gonna stay here. So why put up with these burdens?”
Those burdens include the risk that the expat’s CPA makes a mistake for which the client is ultimately liable.
Henderson has had clients pay penalties in the hundreds of thousands of dollars, something that can ruin an imagined dream retirement.
Check out Top 15 Best Foreign Countries for Retirement: 2014 on ThinkAdvisor.