The Panama Papers, a massive data leak, has revealed a widespread tax scheme involving offshore structures that many have employed to evade taxes. More than 200,000 false companies were used to hold property and bank accounts anonymously. Some of these paper companies were traced back to a wide range of wealthy individuals and families in which the names like Vladimir Putin, Lionel Messi, and Jackie Chen were mentioned.
The reaction to the Panama Papers has obviously been negative, most notably the Prime Minister of Iceland, Sigmundur David Gunnlaugsson, was booed out of his office after his wife’s name surfaced in one of the leaked documents. The leak sheds a harsh light on the private financial activities of many rich and powerful people. Through the coverage of the event, there is also a growing assumption of guilt for ordinary, honest American expats who opened a bank account abroad out of necessity. The leaked documents don’t include the overwhelming majority of 8 million American expats living abroad currently. However, both the governmental and public perception of offshore accounts holders will continue to remain skeptical.
A typical American expat is considered an offshore accounts holder -it’s just that his/her financial account isn’t located in a tax haven under a false name like those included in the Panama Papers. To the general public, without the deep understanding of the situation, all offshore accounts holders may bear the responsibility to this scandal, meaning a billionaire tax evader may not be too distinct even in comparison to an American teacher abroad who have not realized the need to report the worldwide income. They both simply are offshore account holders who are evading taxes.
To a certain extent, this leak proves that information sharing laws such as FATCA fails to serve its original intent, which was to identify tax evaders. What the Panama Papers certainly prove is that tax evasion is very much possible and prevalent if one taps into the right resources and network. Already the public voices are calling for stricter policies to increase financial transparency, and just as FATCA and FBAR were originally created with a similar purpose, the legislative measures can once again affect the honest Americans living abroad while failing to pursue actual evasion cases. This means individuals are purposefully evading taxes may be caught more frequently, but this also could mean non-willful evasion may be punished more harshly with must less tolerance for mistakes.
However, to live in constant fear is to admit your unpreparedness. Financial transparency is the ultimate shield taxpayers should use against any punishment. With enough guidance and tax planning, expats should be able to comply with reporting requirements easily. Regardless of the duration, purpose, or location of the life abroad, Americans will have to report their worldwide income to the IRS. Events like the Panama Papers may make reporting requirements stricter and more complicated, but what remains unchanged is that with enough preparation, especially with expat tax professionals, the IRS should not be able to touch you.