The purpose of this post is to explore how inflation results in the facilitation of enhanced penalty collection in America today.
What is inflation? “Inflation is defined as a sustained increase in the general level of prices for goods and services in a county, and is measured as an annual percentage change. Under conditions of inflation, the prices of things rise over time. Put differently, as inflation rises, every dollar you own buys a smaller percentage of a good or service. When prices rise, and alternatively when the value of money falls you have inflation.”
(Note the use of the words “goods and services.” Are FBAR penalties and the S. 877A Exit Tax consumer goods or government services?)
Inflation can either be helpful or can be hurtful. Some benefit from inflation and others are hurt by inflation. At a minimum, inflation will always erode the value of cash.
Effect of inflation on owners/lenders of cash: When it comes to cash inflation will hurt the owners/lenders of cash. This is because inflation will erode the value of cash.
Effect of inflation on borrowers of cash: Inflation will help he borrowers of cash. This is because inflation erodes the value of the cash that must be repaid.
The use of inflation as a means of confiscation
Inflation is the “silent destroyer” of those who hold their wealth in cash. The late Sir John Templeton (one of the earliest renunciants of U.S. citizenship) often referred to “the folly of holding cash.” (There is some speculation that Sir John Templeton’s renunciation of U.S. citizenship was a direct result of the the U.S. CFC (“Controlled Foreign Corporation”) and Subpart F income rules rules that were enacted in 1962.)
The use of inflation as a means of creating wealth
The prudent use of debt of and inflation can result in the creation of wealth. Consider the situation of home owners in Toronto and Vancouver and rapidly rising real estate prices. Let’s see how inflation was used to create wealth for those who borrowed money to invest in residential real estate.
Mr. X. buys a home in 2008 for $500,000. The $500,000 is paid by:
1. Equity: Investing $125,000 in cash (25% down); and
2. Debt: Securing a mortgage for $375,000.
The effects of inflation are:
To increase the FULL value of the house AND Second to decrease the value of the debt. This principle of “leverage” (the use of other peoples’ money) has made home ownership a good deal for many middle-class people.
How inflation can INCREASE the size (bringing more people into) of an IRS “penalty base”
Example 1: Mr. FBAR
The FBAR penalty base has – meaning the number of people potentially subject to FBAR penalties – increased enormously.
There are two reasons for this:
1. Inflation: As you know Mr. FBAR was born in 1970. In approximately 1970, the standard FBAR penalty was set at $10,000. In 1970 one could buy a house for $10,000. In 1970 $10,000 was a significant amount of money.
By 2009 – with the advent of the “FBAR Fundraiser” – inflation had significantly eroded the value of $10,000 to the point where almost all Americans abroad (necessarily committing “personal finance abroad“) exceed the $10,000 threshold. Inflation had vastly increased the FBAR penalty base!
The $10,000 is NOT indexed to inflation!
2. More Americans Living and Travelling Abroad: In 1970 fewer people had “foreign accounts” and because fewer people had $10,000 the number of people subject to FBAR penalties was relatively small. But now, Global mobility and more Americans living abroad have increased the number of people who likely have offshore bank accounts – also increasing the FBAR penalty base. Think of it: Every American Teaching English Abroad is now potentially part of the FBAR penalty base.)
Example 2: The S. 877A Exit Tax
Generally, one will be a “covered expatriate” and subject to the S. 877A Exit Tax if one has a net worth of two million USD.
The two million is NOT indexed to inflation!
Sooner or later everybody will become a “covered expatriate”!
These are two examples (there are many) of how inflation will result in an increase in the size of a “penalty base”. These are also two examples (of many) which also have a disproportionate effect on Americans abroad. These examples also indicate the potential for Americans abroad to play a significant role in the U.S. Federal budget!
To allow inflation to increase the size of a “penalty base” is to allow people to be subjected to a penalty that the penalty was NOT intended to apply to!
Inflation is now being used to INCREASE the amount of penalties on those who are now part of the larger penalty base!
After allowing inflation to increase the size of the penalty base, Congress is NOW using inflation to increase the magnitude of the penalties imposed on that penalty base. Yes!!
The incorporation of anticipated penalty revenue in the Federal budget
On November 2, 2015 Congress (“It’s 11:00 p.m. – do you know what your Congress is doing?) passed the Bipartisan Budget Act of 2015.
The overall purpose of the Act was obviously to assist in the management of the Federal budget. Interestingly, anticipated penalty revenue is calculated into the budget.
The Bipartisan Budget Act included Sec. 701 which was titled:
SEC. 701. CIVIL MONETARY PENALTY INFLATION ADJUSTMENTS.(a) SHORT TITLE.—This section may be cited as the ‘‘Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015’’.
The purpose of the “Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015” was to impose a mandatory increase in Federal penalties. The increase is to be tied to inflation and is a an anticipated source of revenue contributing to the Federal budget.
Penalties and American Culture – Three points are worthy of note:
1. After having relied on inflation to increase the size of the penalty base, the Government is now using inflation to increase the actual penalties imposed on people who are part of that penalty base.
2. This speaks volumes about American culture. Penalties are an important part of American culture. By imposing an “inflation adjustment” on penalties, Congress is acknowledging that “penalties” are really just another “good or service” (a “good” consumed by an American and/or a “service” provided by the U.S. Government).
3. American culture has become a “culture of penalty” where “penalties are an unremarkable and normal part of day-to-day life!
Mr. FBAR receives a gift – an inflation adjustment to his penalties!!!
FBAR penalties are both a “service provided” by the U.S. Government and a “good” consumed by those who with offshore accounts. As a result, FBAR penalties are NO LONGER the $10,000 minimum. FBAR penalties are now subject to an inflation adjustment.
You will find the FBAR penalty adjustment tables here. For example, the $10,000 standard FBAR penalty has increased to $12,663!
(Okay, so we have an approximate 25% increase in the penalty without any adjustment to the $10,000 penalty base.)
Note that the inflation adjusted penalties apply (not just to FBAR) to a wide range of U.S. penalties!
You Can’t Make This Up
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