Overview
For decades the US Department of Justice (DOJ) has investigated and prosecuted individuals for violations of the Foreign Corrupt Practices Act (FCPA) and other US federal laws with an extraterritorial focus, even if the conduct transpired outside the United States. For experienced people doing business across borders, that is not a new topic. However, what may be unknown to some executives, entrepreneurs, and others is the possibility of also running afoul of the US Internal Revenue Service (IRS) and DOJ Tax Division.
Many corporate executives in China, India, and elsewhere studied at universities in the United States and obtained US citizenship or permanent resident status before returning to their native country to start their own business or to rise up the ranks at an existing company. There are also many native-born Americans working and living overseas. This is notable because US citizens and permanent residents are subject to US federal income tax on their worldwide income no matter where earned. In the author’s experience, having practiced in Hong Kong for several years, this reporting obligation has not historically been widely understood by many expats. IRS enforcement mechanisms, such as the Foreign Account Tax Compliance Act (FATCA) and tax information exchange agreements, are improving but there is still a very large “tax gap” of unreported tax liability. Some expats living abroad gamble that the IRS will not uncover their noncompliance, while others are simply unaware of or confused about their reporting obligations.
For US citizens and permanent residents earning income or owning assets abroad, any noncompliance may be discovered in unexpected ways. Criminal and civil tax cases can be originated by US government agencies investigating matters that originally were not connected to tax reporting, like investigations into corporate transactions or political corruption. What may start as a matter unrelated to personal taxes can, after digging by investigators, give rise to other charges such as individual tax fraud or related penalties.
Fortunately, the IRS currently offers options to voluntarily come into compliance. Anecdotally, often it is the case that penalty exposure may be reduced by coming forward before the IRS discovers any noncompliance. One option, the IRS Streamlined Compliance Procedures, is a more “streamlined” path with potentially less disclosure required and with a possibility for no penalties for some applicants. Another option, through the IRS voluntary disclosure practice, offers the chance to take criminal penalties off the table for more egregious mistakes, though the monetary penalties may be substantially higher than through a Streamlined Procedures disclosure. Other, more narrowly tailored options may be available depending on the circumstances. Legal advice is recommended to understand any instances of noncompliance, possible penalty exposure, and the best option for becoming compliant.
For American corporate executives, managers, and entrepreneurs living abroad or with cross-border business activities, tax compliance is not a simple matter but it is a legal obligation and one that can lead to a great deal of trouble if not satisfied. Any noncompliance should be remedied before the IRS or DOJ finds out.
