The world as of December 18, 2011
This is the third post about the treatment by the IRS of U.S. citizens and dual citizens living in Canada.
The first post was written on December 2, 2011. It reported on Barrie McKenna’s article in the Globe and Mail and Ambassador Jacobson’s statement (which was really a continuation of his remarks on October 18, 2011 in Ottawa). The focus was on the possible waiver of tax and FBAR penalties for U.S. citizens living outside the United States.
The second post was written on December 9, 2011. It reported on the information in the IRS Fact Sheet for U.S. Citizens and dual citizens living outside the U.S.
This third post – December 18, 2011 is providing an update to the first two posts. I will consider additional information that has become known this week.
Introduction
On December 2, 2011 Ambassador Jacobson (according to the Globe and Mail) reported that tax relief would be coming to U.S. Citizens living in Canada. It was reported that the relief would include three things:
1. Those who had entered OVDI would receive a refund of penalties.
- There would be no penalties if no tax was owed (hard to understand what this would mean)
- Those who had not filed the FBARs would be able to file without penalty.
The information – further “guidance” from the IRS – was to be forthcoming.
On December 7, 2011 the IRS posted on its site a “Fact Sheet (FS) for U.S. Citizens and dual citizens living outside the United States”. Although the FS did suggest that further information would be coming, it did NOT provide any penalty relief for those who had entered OVDI.
The FS sheet stated that not all those who had failed to file FBARs would be subject to penalties. It would be possible for people to argue that the failure to file was due to “reasonable cause”. The effect of “reasonable cause” would be to mitigate penalties. Predictably the lawyers (and they are correct) focused on “reasonable cause” – noting that there are certain facts that will give rise to a “reasonable cause” argument. In addition, certain facts would NOT, as a matter of law support an argument of “reasonable cause”. Furthermore, they noted that, ignorance of the FBAR requirement would not by itself support an argument for “reasonable cause”. The IRS in it’s FS describes certain factors that are relevant in determining whether “reasonable cause exists”. (I will do a separate post on “reasonable cause”.) In any case, what appeared to be good news (and I still believe it is) was characterized as “nothing new”, etc., etc. The “good news” is that the IRS will consider arguments based on “reasonable cause”. Although this has always been the law, since OVDP and OVDI, many lawyers have not been advising their clients that “reasonable cause” could be available. The IRS FS makes it clear that “reasonable cause” is alive and well – and this is very good news!
On December 15, 16 2011, there was a major tax conference in Washington D.C. Commissioner Shulman spoke at this conference. Apparently, Calgary lawyer Roy Berg attended. He directly asked Commissioner Shulman whether there would be any relief (additional or not for Canadians). He tweeted:
http://twitter.com/#!/RoyBerg1/status/147703071030513664
According to a blog post at Moody’s Tax firm, the answer was that there would be no further or specific relief for Canadians. In addition, he is reported to have said that the “guidance coming from the IRS”, to which Ambassador Jacobson was referring, was the the FS of December 7, 2011. In other words (as the cartoon used to say):
“That’s all folks”.
Mr. Berg was able to ask some additional questions. I refer you to his blog post.
But what is of most interest is the following:
“After he answered my question he introduced me to Rosemary Sereti, who is Director of International Individual Compliance for the IRS. Ms. Sereti is the chief architect and is in charge of the Offshore Voluntary Disclosure Initiative (OVDI). I spoke with Ms. Sereti at length at the conclusion of the lunch. Ms. Sereti was very generous with her time and provided the following insight:
- She confirmed Mr. Shulman’s comment that the Fact Sheet was the guidance the Ambassador had alluded to.
- Penalty abatement for Canadian residents participating in the OVDI is available only if the taxpayer “opts out” of the program and successfully argues that he had “reasonable cause” for failing to file the returns.
- The IRS is aware of the problems caused by including registered retirement savings plans (RRSPs) in the OVDI penalty computation.
- The IRS is on the lookout for taxpayers who attempt to bring their unfiled returns current by using “quiet disclosure” and those who attempt to resolve their filing obligations in this way will face harsh penalties.”
What was Ambassador Jacobson talking about? Refund of penalties for those who entered OVDI?
The question is what does all this mean and how can it be reconciled with Ambassador Jacobson’s statement? I find it hard to believe that there was no basis for Mr. Jacobson’s comment (unless it was not accurately reported). Mr. Jacobson and Mr. Shulman’s statements can be reconciled as follows:
Since the defense of “reasonable cause” is available if one opts out of OVDI, then:
One would “opt out” of OVDI (note the risks of this), argue “reasonable cause” and then if successful, one should receive a refund of penalties paid. In the absence of further clarification or information from the IRS, this would appear to be the most reasonable way to interpret this. This is not what people understood Ambassador Jacobson to be saying.
Cause, Reasonableness, and “Reasonable Cause” – What is it that makes “cause” reasonable?
Clearly one needs to review the relevant facts and determine whether those facts do, as a matter of law, and as a matter of common sense support “reasonable cause”. The IRS FS did provide a number of examples/illustrations. The examples, (seem to me) to describe the situations of many U.S. Citizens living outside the United States.
When Should You Disclose and How Loud Should Your Disclosure Be?
A further issue that needs to be considered is the question of how one comes into compliance. Logically there are three options:
- Noisy Disclosure
- Quiet Disclosure
- Compliance going forward
This post is not to give legal advice (or any other kind of advice). You should discuss your situation with your lawyer. In order to understand the different ways of coming into compliance, I refer you to this interesting post on which describes the different kinds of disclosure.
U.S. Persons Abroad - Members of a Unique Tax, Form and Penalty Club 
My husband and I are in OVDI. When we made our submission, our lawyer was instructed by the IRS to have us include a cheque for tax owing (capital gains on the sale of our principal residence), the penalties associated with that, but no cheque for penalties on late filing of FBAR’s. What I’ve heard all along is that it’s paramount that the “integrity of the OVDI remain intact” which I assume means NO NEGOTIATING, but, our lawyer told us that already someone in OVDI has been given a pass on their FBAR penalties. Unfortunately I don’t know the specifics of that determination. Now I’m hearing that to waive any penalties at all, we need to leave OVDI. Shifting sands, we call it. I guess we wait to hear the IRS’s response to our submission and decide what to do next. Is ignorance of the obligation to file law “reasonable cause” or not? If we leave OVDI to argue it, we could be in a much worse position if we are unsuccessful.
Thanks for your comment – will be doing a post on “reasonable cause” in the next few days. If you could find out “how somebody in OVDI has been given a pass on FBAR penalties” that would be great. Thanks again for your comment!
I’m all mixed up on this . I was born in the US from canadian parents which never lived in the US, never worked in the US and never had any assets in the US. My mon was 4 days in a US hospital after giving bitrth to me and came back to Canada with me. I have an American passport and social insurance number. I never lived in the US, never worked in the US, dont travel either and have no assets there . I’ve been living in Canada since day 4 of my birth. I work in Canada, have a pension plan, some savings and a bit of RRSP (barely enough to live on for a total year). I never even considered myself as an amrican citizen but always was clear on my dual citizenship. I didn’t know I was obliged (if I am) to do any disclose to IRS.
What should I do ? Disclose or not ?
Should I renounce to my american citizenship (because I have no reason to even keep it)?
Thanks for your comment:
You need to sit down with a lawyer and explain your situation – starting with the issue of your citizenship. I don’t know how old you are. The U.S. Immigration and Nationality Act defines a number of expatriating acts – perhaps you have performed one. Obviously this is not legal advice (or any kind of advice), but I would think that you should ask the lawyer whether you are still a U.S. citizen or not.
If you are satisfied that you are a U.S. citizen then you should move on to the issue of how to be in compliance with the law.
If you are indeed a U.S. citizen – it is clearly causing big big problems in your life. Why would you want to keep it? The problem though is that you may have to certify tax compliance to renounce. Again talk with a lawyer. You say you don’t consider yourself American but that you consider yourself to be a dual citizen.
Once again – this is just a thought – not legal advice – I suggest you do get legal advice.
I get sad when I read about those who’s nightmare has only just begun. My latest gut wrenching has been over how our banks will become minions for the IRS, and if you are suspected of having US connections, the onus will be on the customer to prove to the bank that they are not “US persons”. Maybe simple armbands or tatoos would make it easier for them to identify us? Non-dual Canadians need to be made aware of this gross overreach.
This is the Canadian Bankers Association customer guideline:
http://www.cba.ca/en/consumer-information/40-banking-basics/597-us-foreign-account-tax-compliance-act-fatca-information-for-clients
Thanks for your comment and the link to the Canadian Bankers Association site – check this out:
Any further information on what constitutes “reasonable cause”? What is your association with the CATO Institute?
No association with CATO – but they do great work.
Will update in conjunction with a post called “Looking For Mr. FBAR” that will be up this week.
Obviously none of this should be construed to be “legal advice” (or any other kind of advice): but, there is no one test for “reasonable cause” – many factors will be considered.
You might have a look at:
http://federaltaxcrimes.blogspot.com/2011/12/opting-out-of-ovdi-and-ovdp-what-is.html#comment-form
In particular see the post by Bryan Mahany – he does list some possible factors.
Once again, this is not legal advice and you need to discuss with your lawyer.
“Looking For Mr. FBAR” will be up soon.
Lol, “looking for Mr Fbar”! All the abuse without the sex and violence! Thanks for the link. I left a post there
Well, no sex anyway. But, FBAR does does seem to be pretty violent and of course extremely abusive.
(For those who don’t understand this exchange : “Looking For Mr. Goodbar” is a movie from the 70s.)
On expatriation:
Click to access Expatriating.pdf
Thanks very much for this – great article!
I assume that you are looking at exiting the USA?
We are considering all options, but as you know nothing can be done until we are square on taxes, which I am told can take up to a year or more in OVDI. What will the political climate be like then? Will more and more punitive compliance measures be placed on the non-resident US citizen? (I don’t like the use of the word “expat” as it really means one who has expatriated). My biggest resentment right now with the US government is the fact that they have placed, and continue to place, more and more reporting requirements on us sending the message that we must be “surveilled” in order to keep us honest. It places a unnecessary burden on law abiding non-residents and treats us like criminals. Do I want to continue to be a citizen of a country that treats me like a criminal? Do I renounce because of unjust and discriminatory laws that effect me or do I work to change things for non-residents? There’s a lot of educating that needs to be done, especially stateside. Most resident Americans don’t know that income reporting continues when they live beyond US borders. I’ve had Americans call me a liar when I tell them! How will this realization effect “tax cheater” chasing laws when the average American realizes the unfairness and the US’s uniqueness in this requirement? Renunciation should be a carefully considered choice. Under these circumstances it would be like getting a hysterectomy in protest to anti-abortion laws. But I would get a hysterectomy if I had uterine cancer. If my citizenship becomes something akin to cancer then I will. In the meantime I’ll continue feeling sick.
This is a comment I made on the Isaac Brock Society blog:
http://isaacbrocksociety.com/2012/01/27/reply-letter-from-minister-of-finance-hon-jim-flaherty/#comment-2958
Thanks very much for sharing this. You say that:
“Although the content is encouraging, I sense that the Canadian Government believes our problem has been ‘solved’ by the December 13th IRS Fact Sheet, and the only other obstacle to deal with is FATCA.”
You may be right, but I don’t read it that way. I do sense that Mr. Flaherty is more concerned about FATCA as a long term problem. But, I don’t read into the letter anything suggesting that he thinks the “past compliance” problems have been solved. Remember that he would have to be careful of what he says in public.
What I read into this is that:
– They may or may not be working on the “past compliance” FBAR issue;
– They are saying that in any event, the penalties won’t be collected by the Government of Canada.
Now let’s look at this from the U.S. perspective. It is simply impossible for the IRS to publicly carve out an exemption for Canada. In other words, everybody is subject to the same laws. But, the country you live in, how long you have lived there, whether you had paid tax on the money in the accounts are (I believe) all factors in deciding whether there is “reasonable cause”. It may be that “reasonable cause” will be more available to U.S. citizens living in Canada than in other places. Interestingly the IRS news release of the FS referred to:
“FS-2011-13, December 2011 – This fact sheet summarizes information about federal income tax return and FBAR filing requirements for duel citizens in Canada, the United Kingdon and other countries.”
Canada and the U.K. are two countries that are actually named.
The U.S. government is becoming a diplomatic problem for well – the U.S. government. Although we are feeling intense pain, I think this is still early in the game.
Remember this: Outside of OVDI there is no instance (that I am aware) of anybody being subjected to huge reporting penalties. I am certain that the moment that some Canadian citizen is hit with these penalties that there will be both a strong objection from the Canadian government and a restatement that they won’t collect the penalty. This would exacerbate the diplomatic problem that the U.S. already has.
Anyway, that is just my thought on this.
The Tax Advocate within the IRS has written a report critical of the IRS in its handling of OVDP and OVDI participants and US taxpayers abroad identifying it as a “Most Serious Problem”. For my own purposes I’ve distilled into a few critical paragraphs:
“Existing statutes, as implemented in the IRM (Internal Revenue Manual), do not authorize the IRS to assert the maximum FBAR penalty in every case.
Even before congress increased FBAR penalties in 2004, the IRS published tiered penalty mitigation guidelines in the Internal Revenue Manual (IRM), directing examiners to apply less than the statutory maximums. In 2008 the IRS updated these guidelines, explaining that the maximum FBAR penalty amounts can “greatly exceed an amount that would be appropriate in view of the violation.” It required examiners to apply even lesser penalties or a warning letter in lieu of penalties in many cases. It explained that applying multiple FBAR penalties is to be “considered only in the most egregious cases.” Because the statute only specifies “maximum” FBAR penalty amounts that the IRS “may” impose, it would be inconsistent with the statute for the IRS to assert the maximum penalty amounts in every case. Some have gone so far as to suggest that in the absence of these taxpayer-favorable IRM provisions, the FBAR penalties can be so disproportionate as to violate the excessive Fines clause of the eighth amendment to the U.S. constitution. Thus, examiners have long been required (under “existing statutes,” as implemented by the IRM) to assert FBAR penalties of significantly less than the statutory maximums in all but the most egregious cases.
As discussed in the Memo to the commissioner, even if the IRS chooses to ignore the damage caused by its reversal on FAQ #35, it must clarify its seemingly inconsistent statements about what people should do if they learn they have inadvertently failed to file an FBAR. In an effort to encourage taxpayers to enter into the OVDP and OVDI, the IRS emphasized that severe FBAR penalties that could apply outside of these programs, suggesting that the more reasonable provisions of the still-current IRM might be obsolete, and that those making “quiet” corrections might be subject to more severe penalties than they had been in the past. TAS, American Citizens Abroad (an organization representing Americans overseas), and the U.S. ambassador to Canada have been receiving complaints from people who inadvertently failed to file an FBAR and are confused and worried about how the IRS is administering FBAR penalties both inside and outside of the voluntary disclosure programs. Many are under the impression the IRS will always seek to apply the maximum FBAR penalty applicable to willful violations, regardless of the situation. the U.S. ambassador to Canada reportedly sought to reassure them, stating:
[the United States] government isn’t out to get honest “grandmas” who don’t owe anything to the internal revenue Service….My message on this is to sit tight. We are not unreasonable. We are not unsympathetic. We are not irresponsible. The IRS is exploring ways to accommodate the roughly one million dual Canadian- American citizens living here.
For nearly two months the IRS responded with deafening silence. As the press continued to repeat the IRS’s tough talk about how seemingly minor FBAR violations could trigger draconian penalties and dual citizens tearfully described to reporters how the IRS was actually seeking such outrageous penalties, the IRS declined to comment. Finally, in early December, as this document was in-route to the printer, the IRS posted some guidance on its website, which suggested that it might still apply the reasonable provisions that appear in IRM 2.26.16, and that it might issue additional guidance. The U.S. ambassador to Canada announced that the guidance would waive penalties against inadvertent late-filers and also allow those who took part in the OVDI and OVDP to get money back, as recommended by the National taxpayer advocate. While the IRS-released fact sheet is helpful, it has not been vetted like changes to the IRM or items published in the internal revenue Bulletin, and the IRS would be the first to point out that taxpayers generally cannot rely on fact sheets and press releases. As of this writing, we do not know what other steps the IRS will take to address the problem.”
To read the report go to: http://www.taxpayeradvocate.irs.gov/userfiles/file/2011_ARC_MSP%2012.pdf
Thanks very much for this comment – I remember reading this. Here is a recent post on FBAR:
Reasonable cause: There is no one test for “reasonable cause”. That said, the IRS may not define it the way a reasonable person would. I feel strongly that people should consider getting competent, experienced, professional help in this area (particularly if the stakes are high). But for the moment here are some interesting things to read and consider:
Category A – Factors That Might Constitute Reasonable Cause
1. IRS on “reasonable cause” – this is hard to read, but essential:
http://www.irs.gov/irm/part20/irm_20-001-001r.html#d0e1042
2. Roy Berg comment on “reasonable cause”:
http://isaacbrocksociety.com/2012/02/06/letters-from-the-irs/#comment-4366
Petros, yours is a VERY IMPORTANT POST. It underscores the why the “reasonable cause” argument for not filing on time is one that must not be taken lightly.
Certain arguments under “reasonable cause” are supported by case law and statutory law (e.g., reliance on advisors, information unavaiable, ignorance, etc.), but the elements of these defenses must be set forth in the accompanying letter. Without addressing the elements of the defense, the IRS can easily deny the defense.
Likewise, certain arguments under “reasonable cause” are NOT SUPPORTED in the law. If you don’t use the correct argument, the IRS WILL deny the defense and assert penalties.
Further, if the facts used to support reasonable cause argument are false or misleading, that can constitute criminal conduct.
Finally, as Mr. Mopsick notes, there are additional penalties ($5,000 in fact) for advancing a frivolous position.
Everyone needs to be advised to proceed with extreme caution.
3. Steven Mopsick on “reasonable cause”
http://isaacbrocksociety.com/2012/02/01/comment-from-a-30-year-tax-lawyer/
For those in the second category, here is a thought from a 30 year IRS veteran attorney. The name of the game here is the abatement of civil penalties (assuming your tax problems do not arise from an illegal activity). Under widely recognized IRS procedures, civil penalties can be abated upon a showing of reasonable cause. That could mean reliance on the wrong advice of a professional, or ignorance of the law, say for someone who has lived in Canada all their lives and is an “accidental” US citizens who never had any reason to know about FBARs or FATCA.
At the present time, the IRS is under an enormous amount of pressure to “be reasonable” in its administration of these new penalties and statutes. If you happen to “get caught up in the system” and the IRS comes after you, you can be sure at some time you will get a computer generated notice with penalties stacked up automatically. If you choose to cooperate and play the game, it is usually an easy matter to get to talk to a human being and talk some sense into them and agree to pay the tax owed but get all the penalties abated.
Category B – Factors That Would NOT Constitute “Reasonable Cause”
I posted this at the Isaac Brock Society. It generated a number of interesting comments.
http://isaacbrocksociety.com/2012/02/07/what-facts-will-not-support-reasonable-cause-arguments-for-fbar/
What I would do is read all of this stuff and try to digest it. You will be then equipped to have a conversation with a lawyer and judge his or her competency.
Finally, you need to take a look at:
http://isaacbrocksociety.com/2012/01/28/the-ovdi-drudgery-for-minnows/