Note: if, for some reason, you’d rather get this information in the style of a morning newscast rather 
than read it, I’ve got a link for you at the end of the post.
You’ve probably heard by now about the Panama Papers leak: basically, the International Consortium of Investigative Journalists got 40 years of documents (about 11 million documents, or 2.6 terabytes of data) from Panamanian law firm Mossack Fonseca.
Mossack Fonseca apparently specializes in creating offshore entities and otherwise providing the tools people need to hide their money. (Note that the law firm claims it didn’t do anything wrong, and that there are non-illegal and -immoral reasons for putting money offshore.)
Even though there’s nothing Mormon about the leak, it’s a big enough thing that Mormons (and, frankly, everybody else) should know something about it. In Q&A format.
What’s the Scope of Offshore Money?
It’s naturally hard to nail down (because it is, almost by definition, hidden), but Gabriel Zucman of the London School of Economics estimates that there is about $7.6 trillion in tax havens. His is neither the highest nor the lowest estimate, but his methodology is relatively convincing.
Why Do People Put Their Money Offshore?
There are plenty of reasons, most of which involve hiding it. Many of the reasons we’d consider bad: hiding money from creditors, from a spouse, or from taxing authorities. Some, though, aren’t. In countries with unstable or corrupt governments (think, for example, Syria), there could be reasons to have money out of the reach or knowledge of the government.
But Not Everybody’s Hiding Their Money Offshore
That’s right. Apple, for example, has about $181 billion offshore. That money isn’t hidden; there may be issues with their keeping so much cash overseas, but there’s nothing secretive about it, and it’s not what the Panama Papers are getting at.
What If I Have Money Offshore?
Look, there is nothing inherently wrong with having money offshore. But if you have more than $10,000 in offshore bank accounts, mutual funds, or certain other kinds of accounts, you have to file an FBAR with the IRS. Every year. (Also, if you own a foreign corporation, you may be subject to all kinds of complicated tax requirements.)
Fine. But What If I Have Money Offshore and I Don’t Want to Pay Taxes?
Our one Mormon-specific response: if you don’t pay your taxes, you’re in “direct conflict” with the teachings of the church. On the other hand, if you’re looking to put your money offshore to avoid paying taxes, that direct conflict’s probably not going to stop you.
So now we’re getting to the heart of the Panama Papers. Here’s the deal: the US taxpaying system is a voluntary system. That doesn’t mean you can choose whether or not to pay your taxes, of course. (Or, rather, you can, but you can’t avoid the consequences of not paying.) What voluntary means here is, you tell the IRS how much you earn. I mean, the IRS has ways to check, but it can’t check on all types of income you earn. If you have money offshore and don’t file your FBAR, the IRS may never find out you have it.
So You’re Saying I Should Hide Money Offshore and Not Tell the IRS?
Absolutely not. I said the IRS may never find out about your money.
But it probably will.
The US passed a law called FATCA, which puts significant pressure on foreign banks and financial institutions to disclose the identities of their US account holders. And, with that law in the background, the US has entered into agreements with about 112 other governments to exchange that kind of information automatically. And non-US governments are replicating these types of information exchange agreements with each other.
Even without FATCA, though, the Panama Papers aren’t the first tax haven leak; a couple years ago, the ICIJ published Luxembourg leaks. And before that, a Swiss banker offered to sell Swiss bank data to Germany. The US Department of Justice is already looking at the leaks (as are various other governments). Wherever you hid your money could easily be next.
And US taxpayers are legitimately scared. Since 2009, the IRS has provided a number of opportunities for taxpayers with hidden offshore accounts to come forward and disclose them. Along with the disclosure, taxpayers have to pay back taxes, interest, and enormous penalties on the accounts, but the government agreed to waive criminal penalties. And more than 45,000 people have come forward, paying more than $6.5 billion in taxes, interest, and penalties.
Okay, That’s Well and Good. Except My Eyes Glazed Over. Is There Any Way You Could Say It In a Morning News Show Format?
You’re in luck. This morning I was on Good Day Chicago talking about this very thing. You can watch it here if you want.
Also, the stories are going to be fascinating; you really should follow @ICIJorg on Twitter, or periodically look for #panamapapers and #PanamaLeaks.
By Common Consent, a Mormon Blog 
Why oh why couldn’t the government have found a way to put a word starting with “t” at the end of the Foreign Account Tax Compliance Act? Whyyyyyyy?
Otherwise, thank you. I’m just now starting to hear about this and while it doesn’t surprise me in the least, it’s still a little appalling.
Very nice summary, Sam. I would add to comments:
(a) “In countries with unstable or corrupt governments . . . there could be reasons to have money out of the reach or knowledge of the government.” Yes, but the legitimacy or legality or morality of those reasons is a very complicated topic with greatly different points of view. We believe in “obeying, honoring and sustaining the law” and instability or corruption is not a blanket excuse.
(b) If you are a U.S. taxpayer and do have offshore accounts and have not already come forward with disclosure and proper reporting, your situation is complicated and you absolutely need expert advice (not me) and you likely won’t like what you hear.
Great interview and write-up, Brother Professor. It really helps to have someone as knowledgeable as you break it down into more digestible terms.
Well done Sam! This is great stuff!
Thanks, all. And Chris, thanks for the additions; those should certainly be in there!
Thanks for sharing this breakdown, Sam.
And, if you are an expatriate who wants to live a normal life–owning property, saving money for your children’s education, saving for retirement, etc., etc.–you are still under the damnable constraints of the U.S. tax regime, which taxes your income no matter where you reside or where you earn it, and of FATCA, which applies to you and your bankers and your mortgage lenders and on and on even if you are not a fat-cat at all.
While a great summary, this story is being well-covered elsewhere.
So, as you said, “Even though there’s nothing Mormon about the leak, it’s a big enough thing that Mormons (and, frankly, everybody else) should know something about it.”
For me this post is on a topic best covered elsewhere–IMO I like specificity, not omnibus web sites. There are many, many things that “Mormons should know about” and they can’t all fit on BCC.
Of course, Mark, you entirely leave out the damnable foreign earned income exclusion, which allows expatriates to earn more than $100,000 without owing US taxes and allows them to exclude or deduct a portion of their housing cost, as well as the foreign tax credit, which will largely eliminate the rest of their US tax liability.
As for FATCA: yep, it applies, and it may be overbroad (it is, after all, a new regime), but the IGAs make it unlikely to be terribly painful for most US expatriates.
As with everything that ever happens in law school, you ignore transaction costs. So there’s no tax due at the end of the day? Big deal. The “taxpayer”–whose only tie to the U.S. is her citizenship and a hope to visit family who live here sometime–is still out $500 or $1,000 annually for an accountant to guide her through the filing. Because it won’t do to find the local equivalent of H&R Block to tell you if your tax-advantaged savings for children, etc., will be taxable to you under U.S. law.
There’s no “may be” to the overbreadth of FATCA. It may have been aimed at FATCATS, but it catches ordinary people who just want to engage in ordinary banking transactions abroad–because that’s where they live. So IGAs make “terribly painful” unlikely? Just moderately painful is an acceptable level?
Because I’m a bigger person, Mark, I’m going to ignore your ignorant slam at my profession. Please don’t do it again.
Yes. That’s more than enough. The US has a worldwide tax system, something expatriates know (or, at least, can know) before leaving. Is the price of (for most people, not) paying US taxes too steep? The expatriate can revoke her citizenship. Or she can choose not to return to the US. It’s not like she’s trapped. Sure, there’s a cost. Are the transaction costs too steep? Then there may be a business opportunity selling less-expensive services to expatriates. Or they may want to lobby for legal change.
As for the costs of FATCA: yep, there are costs. Again, you have plenty of ways to avoid those costs and that pain; I presume if you decide to subject yourself to it, the benefits outweigh the costs for you. In any event, if you’re a utilitarian, if the overall benefits of FATCA outweigh the individual costs, you should be fine with it. And, according to any number of countries that are implementing their own versions of IGAs (with countries that aren’t the US), it seems to be.
As you well know, a lot of law is a balancing act. Is FATCA a perfect balance? No. It’s both over- and underbroad. And, if you have a better idea, I’m sure Congress would love to hear it. That said, your complaint, popularized among expatriates, is overblown.
I would add to this that I think there are some legitimate reasons to have money offshore to avoid creditors. All creditors are not created equal and just because someone is suing to get money from you does not mean they have a legitimate reason for doing so.
@SamBrunson: “That said, your complaint, popularized among expatriates, is overblown.” Sorry, and with respect for your professional expertise, but now you’re the one guilty of an “ignorant slam.”
FATCA’s burdens on middle-class expatriate earners (many of whom do not benefit from the foreign earned income exclusion) are indeed onerous, egregious, and disproportionate. Expatriates have been increasing their lobbying to have more sensible rules put in place, but it’s a long shot. Stories like the Panama Papers don’t involve middle-class expatriates but make it harder to change the rules.
There’s a legitimate complaint that return and reporting requirements are onerous and that compliance costs are too high. However, there is also a not so legitimate complaint that income shouldn’t be taxed, that what’s hidden should stay hidden, that what’s mine should stay mine. The compliance complaint is so often a pretense for what’s really a tax protest that, if I were lobbying or complaining, I would go out of my way to be clear what I’m complaining about.
Thanks, Chris.
And ExpatOne, basically, unless you’re a government employee, you do benefit from the expatriate foreign income exclusion. It may not exclude all of your income (in fact, if you’re earning more than roughly $101,000 this year, it won’t exclude the amount in excess of that), but it does exclude your first $101,000.
You say that FATCA imposes an inordinate burden on you; I’m genuinely curious: what is the burden you face as a result of FATCA? I’ve glanced through a couple WSJ op-eds, and the complaints listed have nothing to do with FATCA. It may impose a significant burden on expats, but what are those burdens?
@SamBrunson
“And ExpatOne, basically, unless you’re a government employee, you do benefit from the expatriate foreign income exclusion.”
No, not really. It depends on the employer and the purpose of being abroad.
“It may impose a significant burden on expats, but what are those burdens?”
You might try Google. Here’s a sample starting point that gets to the key issue:
“In recent years, the introduction of the Foreign Account Tax Compliance Act has dramatically increased the requirements for tax reporting.”
http://blogs.wsj.com/expat/2016/02/10/tips-for-u-s-expats-using-foreign-credits-to-avoid-double-tax-on-investment-income/
ExpatOne: you might try stowing the attitude a little.
Sorry, Steve. I’ll exit the thread. I admit Sam’s reply to Mark B. got a little under my skin, given that Sam has neither first- nor second-hand knowledge of the subject of expats and FATCA and was confidently spouting nonsense. I guess I’m used to BCC permabloggers knowing what they’re talking about, or at least showing a little humility when they don’t. /out
Another thing to think about “hiding” money off-shore, is how you intend to get it back on-shore if you need it.
I’ve got first hand knowledge of expacts (and FATCA) and yeah, Sam’s not an expert on that front (yet). But that’s ok!
Hi Sam:
I found interesting in the article the discussion of how many other countries consider Nevada and Wyoming tax havens! People are hiding money right here in the US of A!
Of course I’m a fan of all this because extra reporting because it’s additional services my Firm can offer for a more-than-nominal fee (though I do get think the W8BEN is getting out of hand). But really, people need to get over being miffed that the IRS finally has teeth. It’s about freaking time.
And as a former expat, the system was more than generous to me.
While I realize ExpatOne has bowed out, I need to respond to a couple things.
First, section 911 of the Code applies to exclude the first $100,000 of foreign-source income for pretty much all US citizens who live and work abroad for enough days. (Government employees are a different story, but they’re pretty much the only different story.)
I will confess that I learned something, though: I’ve generally focused on the parts of FATCA that require banks to report; you’re absolutely right (it turns out) that there is an individual filing requirement, too. The form (8938) looks kind of like a pain, but not oppressively so, unless you have a whole lot of depository accounts. (That said, I haven’t sat down to fill it out, so I guess I’ll defer to those who have. Also, I did Google around, and the bulk of the WSJ complaints about FATCA aren’t actually about FATCA requirements; they’re about the tax law as it existed before FATCA.)
And, like Chadwick said, it really is about time Congress gave the IRS some teeth.
Mark B.,
“Income”– as the term is used within, and in regard to, the tax code– has a narrow legal meaning confined to the monetary proceeds from the exercise of federally privileged activities, such as holding or administering a government office, or working in one. If you get any of that, the “income” tax applies. Working at common (private sector) occupations is NOT a privileged activity, and is NOT taxable; and no language to the contrary will be found in the law.
Gene Ray, please go away with your tax protester arguments. They’re neither interesting nor even a colorable reading of the law.
Oh, and Chadwick: Nevada and Wyoming (and, probably, Delaware) almost certainly qualify as tax havens for non-US people. The US tax system is significantly ring-fenced—foreign people can earn significant amounts of passive income (particularly capital gains, but also lots of types of interest) without owing US taxes. And those states provide for the fairly easy creation of anonymous corporate entities. I mean, they probably don’t meet the OECD definition of “tax haven,” but the OECD definition is carefully designed to not include member states. Still, my understanding is they serve tax haven purposes fairly well.
Dear Sam Brunson,
Greetings.
I think I see that you are trying to clarify upon whom income taxes fall. Please forgive me for disagreeing with your statements. I am definitely not a tax protester.
Here are relevant portions of the IRS Code, both from Cornell University and from IRS.gov web site.
These references should not be disregarded, nor classified as tax protests.
This is simply for your information. If you are informing others about tax laws, these items need to be considered.
https://www.law.cornell.edu/uscode/text/26/7701
Internal Revenue Code – Section 7701. Definitions (a)(26) defines the term “Trade or business”: “(26) Trade or business The term “trade or business” includes the performance of the functions of a public office”
In Black’s Law Dictionary “includes” means “limited to”.
Click to access i1099msc.pdf
“Personal payments are not reportable” according to the Instructions for Form 1099-MISC.
Very sincerely yours,
Gene Ray
LOL