Boris Johnson, the mayor of London, just became the unlikely spokesperson for the 8 million or so US citizens living abroad.
Boris is an “accidental” US citizen. Although his parents were British, he was born in the US. That makes him a US citizen even though his family left the US when he was only 5 years old, nearly 50 years ago. And recently, the IRS sent him a bill for capital gains tax on the sale of his personal residence in London.
Boris isn’t happy about it. Under UK law, this gain is exempt from any tax. But since the US, uniquely among major countries, taxes its non-resident citizens wherever they live, the gain isn’t exempt from US tax.
I learned about Boris’ situation a couple of weeks ago when I was on my way to meet a client in Scottsdale. Boris has just written a biography of former British Prime Minister Winston Churchill and is on a US media blitz to promote it. I heard Susan Page interview him on NPR (National Public Radio).
Near the end of the interview, Susan threw Boris a wild card. In response to a question from a listener, she started questioning him about his responsibility to pay US tax on his worldwide income, even though he’s lived in the UK for almost half a century.
Boris didn’t want to take the bait. After all, he was trying to pitch his book. But Susan was persistent. She demanded to know if he was compliant in his US tax responsibilities.
Boris finally revealed that the IRS was trying to collect an assessment thought to be for several hundred thousand dollars on the sale of his longtime home in London. He pointed out that he already paid heavy taxes in the UK, although he had no UK tax obligations on the gain from the sale. Boris called the IRS demand “absolutely outrageous.”
So how will the IRS make Boris pay up? Under the US-UK tax treaty, the UK tax authorities must assist the US Treasury in collecting tax owed by US citizens living in the UK. That, of course, includes Boris Johnson. In theory, once a final assessment has been issued and all appeals concluded, the UK Inland Revenue could simply seize the money the IRS is seeking from Boris’s UK bank accounts. It could even foreclose upon property Boris owns, auction it off and award the IRS the proceeds.
The IRS might also impose an “undisclosed foreign financial asset understatement” penalty of 40% of the unpaid tax and possibly even a civil tax fraud penalty of 75%. The Justice Department could even indict Boris for criminal tax evasion if he “willfully” concealed income from the IRS. Guess what… If Boris didn’t declare this income on his US tax return, it would be a cinch to prove willfulness, since Boris announced his intention not to pay the tax on a nationally broadcast radio show.
Since Boris visits the US frequently, the IRS could also apply to a federal court for a legal writ called ne exeat republica. Basically, once he arrives, this would require Boris to turn over his passport(s) and forbid him from leaving the US until he pays the assessment or at least makes arrangements to pay.
Will the IRS use this golden opportunity to make Boris Johnson its latest celebrity victim, the way that it’s gone after Wesley Snipes, Willie Nelson, and so many others? I doubt it. Boris is the mayor of one of the world’s largest cities. He’s got enough of a power base that he may be politically untouchable, at least by the IRS.
I’m reminded of the case of Eliot Spitzer, who, back in 2008, was forced to resign as governor of New York due to a scandal involving cash payments to an elite prostitution ring. The so-called “Sheriff of Wall Street” made the mistake of withdrawing large amounts of cash from his bank account and trying to prevent the bank from reporting the withdrawal to the US Treasury. That apparently set off alarm bells in the bank’s software used to identify “suspicious transactions” in customer accounts.
It turns out that Spitzer had at least seven liaisons with women from the agency over six months and paid more than $15,000. In cash.
And that’s what led to the problem.
US law requires that banks report the withdrawal of more than $10,000 to the US Treasury. Eliot apparently realized that any cash withdrawal over $10,000 would lead to a filing requirement. But he may not have realized that any effort to avoid this filing requirement by breaking up a series of related cash transactions into smaller amounts is a federal crime called “structuring.” I wrote about Eliot’s case here.
Fortunately for Eliot, the US attorney declined to bring criminal structuring charges against him. Nor did the IRS seek to confiscate the structured funds, as it has for countless less politically connected persons, as discussed in this essay.
I suspect Boris will get the same kid-glove treatment. The Treasury Department isn’t likely to get into an international political row by going after him in a serious way.
Boris could, of course, end future problems with the IRS by expatriating – giving up his US citizenship and passport. Indeed, he announced his intention to do so in 2006, although he now says a US passport is “very difficult to give up.”
In Boris’s case, that could well be true. US law imposes a stiff “exit tax” on the unrealized gains of wealthy US citizens and long-term residents. The exit tax might put a decent-sized dent in his personal fortune. In addition, legislation pending in Congress would prohibit wealthy expatriates from ever returning to the US, unless they can prove they’re paying as much tax to another country as they would to the US.
No matter how Boris reacts to the tax demand, or how the IRS decides to act (or not act) against him, one thing is certain: His case has placed the imperialistic US tax system in the media spotlight. It may or may not spur Congress into amending the Tax Code to exempt US citizens living abroad from paying US tax. But it will spur a discussion… and that’s a start.
Mark Nestmann
Nestmann.com
