. . . FATCA therefore flushed many U.S. expatriates “out of the shadows” of their overseas residencies, compelling either compliance with U.S. income tax law or renunciation of U.S. citizenship. . . .
On October 1, 2021, the U.S. Department of Justice announced that Oleg Tinkov pleaded guilty to filing a materially false individual income tax return for the 2013 tax year. See Press Release, Office of Public Affairs, USDOJ (October 1, 2021) (“Press Release”). Although Tinkov substantially understated his 2013 income on the return, his real crime was attaching a materially false IRS Form 8854, which required full and accurate reporting of personal assets owned at the time Tinkov renounced his U.S. citizenship.
Tinkov is one of a growing number of former U.S. citizens who renounced their citizenship and gave up their U.S. passports. Last year, the number of renunciations reached an all time high of 6,707 individuals, continuing an upward trend that began in 2010. Most of these former U.S. citizens, including Tinkov, renounced their citizenship to escape U.S. income tax, which applies to a citizen’s worldwide income even when living and working outside the United States.
The 2010 enactment of the Foreign Account Tax Compliance Act (FATCA) spawned the increasing numbers of citizenship renunciations. FATCA requires U.S. citizens to report annually certain foreign financial assets to the Internal Revenue Service. The act also requires non-U.S. foreign financial institutions to disclose the identities and holdings of their U.S. clients to the IRS. FATCA therefore flushed many U.S. expatriates “out of the shadows” of their overseas residencies, compelling either compliance with U.S. income tax law or renunciation of U.S. citizenship.
The renunciation of U.S. citizenship is not a tax-free event for certain “covered expatriates” as defined by Section 877(a)(2) of the Internal Revenue Code. For example, an expatriate whose net worth is $2 million or more at the time of renunciation must pay an exit tax. The tax is computed by “treating as sold” “all property” owned by the individual “on the day before the expatriation date for its fair market value” and applying the capital gains tax to any net gain from the deemed sale. 26 U.S.C. § 877A(a)(1).
The exit-tax computation is reported on IRS Form 8854. According to the Press Release, Tinkov reported substantially less than $2 million of personal assets on his Form 8854 and in doing so “brazenly violated United States tax laws” by evading payment of the exit tax on his enormous net worth.
Tinkov was born in Russia and later moved to the United States where he became a naturalized citizen in 1996. See Press Release. Near the end of 2005, Tinkov formed “Tinkoff Credit Services” (TCS), which is an online, branchless bank located in Russia. Id. Tinkov controlled the majority of TCS shares which swelled to over $1.1 billion in value following the October 2013 initial public offering of TCS shares on the London Stock Exchange. Id.
Three days after the IPO, Tinkov visited the U.S. embassy in Moscow to renounce his U.S. citizenship. Id. During the visit, the embassy staff told Tinkov about the Form 8854 reporting and payment obligations. Id. Months later, when his U.S. accountant asked Tinkov for information about his personal assets to complete his 2013 tax return, Tinkov gave the accountant a completed Form 8854 that reported a net worth of only $300,000. Id.
Tinkov therefore concealed his net worth from both his accountant and the IRS. The tax loss resulting from Tinkov’s underreported 2013 income and failure to report the gain from the constructive sale of his $1.1 billion of personal assets equaled $248,525,339. Id. As part of his plea deal, Tinkov agreed to pay the tax due and owing on the 2013 return, including the civil fraud penalty, statutory interest, and additional tax due and owing on prior returns, totaling $506,828,377. Id.
Although the Tax Division typically emphasizes non-monetary penalties to avoid the appearance that criminal tax law is enforced as an alternative means of revenue collection, the government “agreed to recommend a custodial sentence of time served, followed by one year of supervised release, and an additional fine of $250,000.” Id. This concession may have been motivated by evidence that Tinkov “is undergoing a UK-based intensive treatment plan for acute myeloid leukemia and graft versus host disease, which has rendered him immunocompromised” and unsuitable for extradition to the United States. Id.
The investigation originated in the IRS Criminal Investigation Division and was assisted by the DOJ Office of International Affairs in coordination with partnering agencies in the United Kingdom where Tinkov currently resides. Acting Special Agent in Charge, Darrell Waldon, commented that “[i]nternational tax cheats remain a priority for my office and our agency; and as such, the International Tax and Financial Crimes D.C.-based group will continue to aggressively pursue those committing international tax crimes.”