When most people think of tax evasion, famous figures like
Chicago gangster Al Capone come to mind. Willie Nelson's
tax-evasion rap even inspired an album from the country legend,
as he released
The IRS Tapes
after getting hit with a $16 million tax bill.
Al Capone. Source: Wikimedia Commons.
But as the recent case of Beanie Baby billionaire Ty Warner
shows, there's a new way for the IRS to go after Americans for
tax evasion. In fact, the new law that helped nab Warner is
causing havoc for millions of Americans worldwide.
What Warner did and how he got caught
Warner became one of the richest Americans on the back of his
Beanie Baby empire, with the collectible stuffed animals
inspiring a feeding frenzy among collectors in the 1990s. In a
burst of demand that brought comparisons to the
Dutch Tulip Bubble in the 17th century
Dutch Tulip Bubble in the 17th century, Beanie Babies fetched
huge prices at auctions, with speculators paying ever-higher
amounts to get the latest offerings.
But the IRS alleged that Warner was keeping assets overseas
without reporting them or their income on his taxes. The IRS
found out because Swiss bank
provided the U.S. government with information about Warner's
identity. Warner has chosen not to fight the tax-evasion charge,
with plans to plead guilty and pay a whopping $53.6 million to
settle the charges.
Why millions of Americans could be next
The scale of Warner's tax evasion was obviously larger than most
Americans could ever manage. But based in part on the success the
government had in working with UBS, a controversial law has
already affected millions of expatriate U.S. citizens who live in
To root out more tax evasion, the Foreign Account Tax
Compliance Act requires foreign banks and financial institutions
to report assets that U.S. citizens hold overseas. Congressional
estimates put the value of lost taxes at as much as $100 billion
But the problem is that for an estimated 6 million Americans
who live abroad, the law doesn't just cover seven-figure Swiss
bank accounts. Americans and their banks have to complete
complicated paperwork just for ordinary checking and savings
accounts, making even ordinary aspects of personal finance a lot
Willie Nelson. Source: Wikimedia Commons.
The issue has created incentives for U.S. banks to pull back
on their own international business as well.
last month reportedly stopped taking on new business with foreign
correspondent banks for which it provides transaction processing
and currency-exchange services. Regulations to prevent money
laundering make such business full of potential pitfalls, as
discovered when it had to pay a fine of almost $2 billion because
of a lack of such regulatory controls.
A tough deal for expats
Meanwhile, many American expatriates are having trouble even
banks willing to deal with the paperwork. Increasingly, foreign
banks don't want U.S. customers because of the disclosure
In fact, some American expatriates are so fed up that they've
renounced their U.S. citizenship over the law. Especially among
wealthier citizens living abroad, the tax savings from changing
citizenship to low-tax jurisdictions can be too much to pass up.
That's part of what motivated
co-founder Eduardo Saverin to give up his U.S. citizenship just
before Facebook's IPO last year in favor of Singapore. The move
saved Saverin from potential capital-gains tax liability and
earned him lower rates on future earnings.
Don't be a tax-evader
With penalties of $10,000 for those who don't report overseas
financial assets worth $50,000 or more and extra penalties
applying for taxes resulting from unreported assets and income,
the IRS means serious business. Even if the move prevents some
true tax evasion, it has greatly inconvenienced the lives of
millions of law-abiding Americans overseas and has cast a shadow
over the perception of the U.S. around the world.
Tax evasion is the least of most Americans' problems, but
tax increases that took effect at the beginning of 2013
affected nearly every American taxpayer. Still, with the right
planning, you can take steps to take control of your taxes and
potentially even lower your tax bill. In our brand-new special
How You Can Fight Back Against Higher Taxes
How You Can Fight Back Against Higher Taxes," the Motley Fool's
tax experts run through what to watch out for in doing your tax
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