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Here’s an article from CNBC’s website dated Nov 4th 2015 –
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They say the only certain things in life are death and taxes, but a large number of non-U.S. citizens may have found a way to avoid at least one of those.
Under U.S. tax law, the estates of foreign holders of U.S. assets, such as stocks, real estate, or valuables, are required to pay estate taxes on those assets after the death of the owner. There’s even a handy piece of IRS paperwork — form 706-NA — to help calculate the tax.
But one veteran Swiss banker tells CNBC that this rule is widely ignored around the world, and the U.S. government has no way to know how much money it is owed under its own laws.
The result, the banker said, is that the U.S. Treasury is likely being deprived of billions of dollars each year.
The banker, who is wary of the controversy over American tax cheats in Switzerland and asked not to be identified publicly, said the battle over the potentially vast pool of estate tax revenue could be the next front in the global tax wars.
“I’m just waiting for this bomb to blow up,” the banker said. “The estate tax, nobody is looking at it.”
“There are lots of U.S. assets that are owned by people not living in the U.S.,” he said. “At the moment, the U.S. cannot get ahold of it. Look at the people who have houses there. Look at how many people own Apple stock that are not living in the U.S.”
Exactly how much money foreigners owe in U.S. estate taxes each year is unclear — it appears to be a blind spot for the IRS. The tax-gathering agency publishes a detailed report every several years on what it calls the “tax gap,” or the difference between what taxpayers should pay and what they actually cough up to Uncle Sam. But the report doesn’t attempt to estimate overseas estate taxes.
“There’s no estimate for international noncompliance,” said an IRS official. “That’s kind of the 800-pound gorilla that’s not in the room.”
A back-of-the-envelope analysis by CNBC of estate tax payment patterns and total foreign holdings of U.S. stocks and real estate concluded that the IRS is missing several billion dollars in foreign estate taxes each year — money that could help a cash-strapped U.S. Treasury pay the nation’s bills.
The issue emerges at a time when foreign investment in the United States is on the upswing. Goldman Sachs reported in January that foreign ownership of U.S. stocks totaled 16 percent in 2014, the highest rate in the 69 years such records have been kept.
Despite that, publicly available statistics from the IRS show that very few foreign citizens file estate tax paperwork. According to the agency’s data, just 849 people worldwide filed nonresident alien estate tax returns in 2014, paying just more than $60 million in net taxes to the IRS.
Those figures pale in comparison to the breathtaking scale of U.S. assets owned by foreigners.
Consider two of the asset categories covered by the estate tax on foreigners: U.S. stocks and real estate.
The U.S. Treasury says that overseas individuals own about $6.7 trillion in U.S. equities. Much of that value could qualify for the estate tax when stockholders die. But according to the IRS, only 59 people in the countries that have tax treaties with the United States filed taxable returns disclosing stock holdings in 2014. The number wasn’t much bigger in the countries that do not have tax treaties. Just 93 people in those countries filed such returns. That’s less than two people per country.
No rules for disclosing foreign holdings of U.S. assets
There is no U.S. securities rule requiring banks to disclose foreign holders of U.S. assets to the U.S. government.
It’s a similar picture in real estate. The National Association of Realtors reports that foreigners bought approximately 209,000 homes in the United States in the year ended in March 2015, for a total of $104 billion in value. The association says it doesn’t know the total value of all homes purchased by foreigners over the past several decades. But much of the value accumulated in those transactions could be subject to the U.S. estate tax as well.
There doesn’t appear to be any way for the IRS to calculate how much estate tax should apply to all that property: It’s not even clear there is any way for the agency to learn about the deaths of foreign holders of U.S. real estate if the families involved do not voluntarily come forward.
But what is clear is that not very many foreigners are paying estate taxes on real estate. In 2014, according to IRS statistics, just 99 people from countries without an estate tax treaty filed taxable returns. Among the countries that do have such a treaty, the figure was even less: Just 72.
One estate tax expert, shown those IRS figures by CNBC, said the numbers are simply not plausible. “Seventy-two is not a believable number,” said Beth Shapiro Kaufman, an attorney at the law firm Caplin & Drysdale who specializes in estate planning for wealthy individuals. “There must be some serious slippage here.”
To Kaufman, who earlier in her career served in the Treasury Department’s Office of Tax Policy overseeing tax policy matters affecting trusts and estates, the IRS’ accounting for how much estate tax is actually paid by foreigners suggests a large amount of money is missing. “It appears that there are substantial amounts of tax not being paid,” she said.
Why is that? Partly because most foreigners have no idea how U.S. tax law treats U.S. assets, Kaufman said. “A number of foreigners would be astounded to learn that they owed any U.S. tax,” Kaufman said. Another reason is it would be difficult for the IRS to reach into foreign countries to try to collect the tax it says it is owed. “It could be a failure of enforcement when people are aware that they owe the taxes, but they simply don’t pay because there isn’t any enforcement mechanism for it,” Kaufman said.
A spokesman for the IRS said the U.S. is focused on tax compliance. “The IRS is committed to stopping international tax evasion wherever it occurs and tackles the problem through multiple programs,” said agency spokesman Dean Patterson in a statement to CNBC. “This applies to all types of taxes including income, estate and excise.” Patterson also said that the IRS has global reach. “Even though the IRS has faced several years of budget reductions, the agency continues to pursue cases in all parts of the world,” he said.
There are myriad difficulties in calculating how much estate tax should, in theory, be flowing into the U.S. Treasury. The first is figuring out how many foreign holders of U.S. assets die each year, a morbid task that no government or private agency appears to have assigned itself.
Also clouding the picture: the difficulty in understanding international tax treaty implications for those families in each country, and in calculating taxable valuations of the underlying assets once all deductions and exemptions have been applied. And there are a number of ways for savvy foreigners to plan their estates in advance to avoid having to pay the tax.
But to the Swiss banker, the situation is reminiscent of the days before the IRS cracked down on wealthy Americans who hid assets overseas, an effort that has generated $6.5 billion in back taxes and penalties from Americans who decided to confess their offshore accounts once the enforcement began. In that case, foreign banks found to be involved in helping those Americans hide assets were forced to pay hundreds of millions of dollars in penalties.
Why did the US pay this former Swiss banker$104M?
The Swiss banker sees the foreign estate tax as a similar situation: A long-neglected tax rule on the books, massive amounts of hidden money around the world and a deficit-burdened United States government eager for revenue. “It’s like the SEC Act of 1940,” the banker said. “Nobody in the U.S. ever cared about whether foreign institutions were following that. Then all of the sudden the U.S. decides for economic reasons: ‘We need money. How do we get money?'”
In that earlier tax battle, the United States had one other crucial asset: A Swiss bank whistleblower, Bradley Birkenfeld, who turned over reams of data on how the banks operated and how much American money they held.
There is no such figure known to be providing secret records of estate tax avoidance to the U.S. government.
But the Swiss banker said financial institutions around the world are involved in keeping the IRS from learning about generational transfers of wealth among their clients. The tactics include in some cases holding stock in the financial institution’s name, he said, so U.S. brokerages are not aware of the identities of the ultimate owners of the equities, even when that ownership is transferred by the overseas bank to the next generation.
In some cases, sources familiar with overseas tax holdings said, some foreigners can hold stocks in an “omnibus,” or pooled, account inside a foreign investment bank. The bank can allocate the stocks held in the account to each foreign customer. That way, even if the foreign bank uses a U.S. broker to buy U.S. stocks, the names of the owners of the assets are not transmitted to the United States.
What four foreign banks say
CNBC contacted four foreign banks that have been forced to pay settlements related to U.S. tax evasion in the past to ask them about foreign estate tax payments. Each bank was asked whether it informs the U.S. government of the deaths of its U.S. asset holders and whether it informs foreign clients of potential U.S. estate tax liabilities.
Gregg Rosenberg, a spokesman for UBS, which agreed to pay $780 million in 2009 to settle allegations that it helped thousands of Americans evade taxes, said the Swiss bank “actively informed” all clients with U.S. assets about the estate tax in 2011, when the tax was reinstated by Congress.
“In 2013, we actively informed all clients (regardless of U.S. situs assets) about estate tax considerations in different jurisdictions,” Rosenberg said. But he added that any transfer of information on U.S. asset holders to the U.S. government would have to be done through the Swiss federal government.
“Exchange of client information always has to occur via the official way over the respective federal authorities,” Rosenberg said. “UBS must not, by law, give client information to foreign authorities directly.”
Credit Suisse, which pleaded guilty in 2014 to criminal wrongdoing in helping thousands of American clients hide assets overseas and agreed to pay $2.6 billion in related penalties, declined to comment.
Deutsche Bank, which agreed to pay more than $500 million in 2010 to settle a probe into fraudulent tax shelters, did not respond to several requests for comment.
In 2012, HSBC agreed to a $1.9 billion settlement over allegations that weak anti-money laundering procedures allowed the bank to transfer billions of dollars to sanctioned countries and enabled Mexican drug cartels to move money through U.S. subsidiaries.
A spokesman for HSBC declined to disclose its policies on the foreign estate tax, instead providing a written statement to CNBC. “HSBC complies with applicable United States tax laws,” the spokesman wrote. “We are not in the business of giving tax advice and encourage our clients to consult with their own tax advisors.”
One question is just how enforceable the IRS rules are, considering that they apply to people who live outside U.S. legal jurisdiction and who may not travel to or have business in the United States. Kaufman said any effort to vigorously enforce the foreign estate tax would require new laws as well as policy changes by American regulators.
One start, she said, would be a rule blocking the sale of U.S. equities to foreign accounts that don’t have a specific Social Security or Individual Taxpayer Identification Number associated with them.
The U.S. could also require foreign banks that do business in the United States to inform the IRS when foreign holders of U.S. assets die.
But such measures would likely be met with fierce resistance by the banks, governments around the world and wealthy families. And American business would not be likely to embrace new regulations that provided any disincentive for investors to buy stock in U.S. companies.
And all of that may mean that the IRS is not likely to see an influx of 706-NA forms anytime soon — despite the surge in foreign ownership of U.S. assets.
— CNBC’s Mark Fahey contributed to this report.
