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Tax Evasion Isn't Just for Beanie-Baby Billionaires Anymore

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, 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 UBS (NYSE: UBS  ) 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 other countries.

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 annually.

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 more onerous.

Willie Nelson. Source: Wikimedia Commons.

The issue has created incentives for U.S. banks to pull back on their own international business as well. JPMorgan Chase (NYSE: JPM  ) 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 British bank HSBC (NYSE: HSBC  ) 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 finding banks willing to deal with the paperwork. Increasingly, foreign banks don't want U.S. customers because of the disclosure laws.

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 Facebook (NASDAQ: FB  ) 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 report "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 planning this year. With its concrete advice on how to cut taxes for decades to come, you won't want to miss out. Click here to get your copy today -- it's absolutely free.

Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 21, 2013, at 5:00 PM, soliberating wrote:

    When I was at Sea Isle this summer at my friend's beach house, his neighbor chatted with us. He was bragging about he avoids paying taxes.

    Anything they can do to make these cheaters pay is worth it.

  • Report this Comment On September 21, 2013, at 5:35 PM, 2smartforlibs wrote:

    Lets see if the left has to worry about this. I'm betting Debbie Shultz DNC won't be investigated

  • Report this Comment On September 21, 2013, at 7:37 PM, syzygysyzygy wrote:

    the arrogance of the federal govt in taxing income on those abroad is so typical

    and years ago maybe now i dont know but they even had the gall to tax income on overseas even if the people had renounced citizenship fr 10 years thereafter!!!!

    USA not a democracy itsa hypocrisy

  • Report this Comment On September 21, 2013, at 10:38 PM, volcan357 wrote:

    Any country's power to tax should stop at it's border. I wonder if the USA would let foreign tax authorities into the country to harass people? They should leave Americans who live overseas alone. Most Americans who live abroad do so because they have a low income. They move to countries where the cost of living is lower. Only a very small minority of Americans who live abroad are wealthy.

  • Report this Comment On September 23, 2013, at 5:26 AM, bourse wrote:

    The US risks to loose a lot of loyal citizens who are living permanently abroad.

    Definetely not good news in times of rapid globalization!!

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