Under U.S. tax law, the estates of foreign holders of U.S. assets, such as stocks, real estate and 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 laws.
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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."
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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.The report is much offers much more detail as to the potential scope of the tax avoidance and the difficulties the IRS faces in enforcing the tax. I recommend the full report.
Perhaps the IRS could make a start at enforcing the estate tax by bringing pressure of the sort imposed by FATCA on foreign financial institutions who act in the capacity of executor (or equivalent). Or, alternatively, perhaps there could be legislation requiring any nominal holder of U.S. assets beneficially owned by nonresident aliens to report the death and related information about the assets nominally held. These would just be starts.
I offer links to the key form and its instructions.
Form 706-NA, United States Estate (and Generation Skipping Transfer) Tax Return, Estate of nonresident not a citizen of the United States, here.
Instructions for Form 706-NA (Rev. August 2013), here. Here are some excepts from the instructions:
Note. In order to complete this return, you must obtain Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, and its instructions.
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Who Must File
The executor must file Form 706-NA if the date of death value of the gross estate located in the United States exceeds the filing limit of $60,000. The total value of the gross estate may be reduced by the sum of:
- The gift tax specific exemption (section 2521) allowed for gifts made between September 9, 1976, and December 31, 1976, inclusive, and
- The amount of adjusted taxable gifts made after December 31, 1976.