The IRS has proudly trumpeted OVDP and OVDI as successes. Both programs were understood to be attempts to go after “big time tax evaders”, “whales”, U.S. residents who were using “offshore bank accounts” and entities to hide income from the U.S. Treasury. That has been the conventional wisdom up until now. Of course, these programs also have had “well known” and “well documented” side effects. Specifically the “collateral damage” suffered by U.S. Green Card holders and U.S. citizens living abroad. But, of course as good Americans, we understand that this “collateral damage” is understandable, completely appropriate, and a necessary incident of good citizenship. To put it simply: A good American citizen or Proud U.S. Green Card Holder, should be prepared to suffer this “collateral damage”. Your “collateral damage” is your “Contribution to America”.
Conventional wisdom has been that U.S. citizens living abroad are victims of OVDI collateral damage. Conventional wisdom has been that U.S. immigrants are victims of OVDI collateral damage. But, are these expats and immigrants really “collateral damage”? What are the real motives of the IRS? A recent post on Phil Hodgen’s blog is enlightening (presuming that it is true). You will find it here:
https://twitter.com/#!/nobledreamer16/status/184004976119525376
This incredible story, about an immigrant being chased out of the U.S., was heavily commented on at both the Hodgen blog and the Isaac Brock Society. Even a former IRS attorney referred to this as an outrage. When it comes to the intentions and credibility of the IRS, people are starting to presume the worst. People are prepared to believe that the purpose of OVDI was and is nothing more than a “shake down”. People are starting to believe that U.S. citizens living abroad and Green Card Holders either were or became the intended targets of OVDI. This is sad. The IRS cannot function without trust. But the facts really are starting to speak for themselves. After all, the IRS has done nothing to assist the thousands of minnows, who were victims of bad legal advice. The IRS has allowed Ambassador Jacobson’s 70 year old Grandma to be victimized by OVDI. The IRS even reactivated OVDI. When they reactivated OVDI, they promised special procedures for U.S. citizens living abroad. Those guidelines have not arrived (we are well into tax season). Once again, the IRS has become an obstacle to tax compliance. But, then again the IRS hasn’t responded to Nina Olsen’s TAD either. What’s a poor patriotic American taxpayer (who just wants to be in compliance) to believe? As Nina Olsen says:
The IRS continues to be unresponsive. It’s as though they are demonstrating the “full ostrich” to taxpayers. The IRS must take affirmative action to clarify its position! It’s obvious that the IRS needs the taxpayers a lot more than the taxpayers need the IRS!
In the last week there have been three thought provoking comments at the Isaac Brock Society. Comments tend to be buried. But, these two comments are worth a post themselves.
1. How can a group be “collateral damage” when penalties for them are spelled out in the OVDI FAQs? In OVDI 2011 the IRS wanted 5% of the net worth of people who did not even know they were U.S. citizens.
@Moby…
Thanks for coming back here… You are right about those “Sailing Permits”. Right now, in some Carl Levin amendment buried in some bill, is a provision to add a 10K non willful penalty for failing to obtain a Sailing Permit! I can see it happening…
btw, good response to Jack on the OVDI penalty structure. I could feel your ire rising..
And you were absolutely correct… Good reply.
For those who didn’t read it…. Here it is…
MobyMar 22, 2012 12:03 AM
@ Jack…. you said…“You are mistaken if you think this is an initiative to get the weak and the powerless who have no political power. Its principal aim is to get major tax cheats and the penalty structure is designed to incentivize them to come in.”
I must strongly disagree with this point. FAQ 52 of the 2011 OVDI specifies the 5% penalty for people that were unaware of their US citizenship. This is ***THE*** smoking gun that the IRS is intentionally shaking down the little guy. There can be no one on this planet who is less culpable in this matter than someone who is not even aware of their US citizenship. Rather than let these people of the hook, the IRS specifically called them out for application of penalties. This sets the baseline culpability:penalty ratio for the IRS effort. The most-innocent-of-innocent get the 5% penalty; people who are “less innocent” (recent immigrants, unsuspecting expats) obviously must pay more.
There was a time that the IRS could have claimed the moral high ground on who the targets were for OVDP/OVDI. They could still have claimed that they were targeting the bad actors. That time ended around the close of 2009 when they would have become fully aware of the true nature of the participants after they sifted through the stack of 2009 OVDP applicants. They could have (and should have) given all the benign actors an immediate and proactive pass on the penalties. Instead they chose to double down by further specifying which subgroups within the benign actor classification would be targeted for penalties.
As far as I am concerned the IRS have fully clarified their position on the benign actors and it is a disgraceful position. I have been fortunate in my opt-out result and I hope that others follow suit and get the equivalent treatment. However, I will always be wondering what my opt-out result would have been if I wasn’t living outside US jurisdiction, making the assessment of any penalties irrelevant.
2. Who is/are the real targets of OVDI and FATCA?
(Note that the following comment was also discussed by Petros in a brilliant post about bears and other animals (or was it about animals?).
On the glass half full front, it was good to see the question raised, but the response and the intent of Congress Statement by Geinther just made me sick to my stomach.
Maybe I should give him the benefit of the doubt, but I think that time has now passed. As slow and measured as he was in this response, that was not a slip of the tongue. He knew exactly what he was saying.
“We are working very closely to try to meet the Congressional intent in making it harder for American Citizens overseas to avoid US taxes without putting undo burden on their ability to have a bank account for example…”
That was a such a deliberate expression and no one on that committee challenged it, I have now stepped across the line in giving him any benefit of the doubt. This is no longer “involuntary manslaughter” to be a bit hyperbolic here!
Further, when it comes to intents of Congress, he pays NO attention with his IRS DATCA imposition on US Banks. As Congressman Charles Boustany, Jr., Chairman of the Ways and Means Subcommittee on Oversight said in his September 27, 2011,
http://waysandmeans.house.gov/UploadedFiles/Letter_on_NRA_taxation_final.pdf
“Congress has long had the opportunity to legislate reporting requirements on deposit interest, and has declined to do so. In the waning days of the Clinton Administration, the IRS attempted to put in place similar reporting requirements. After Congress, the Federal Deposit Insurance Corporation, and the U.S. Small Business Administration raised strong concerns, the proposal was eventually withdrawn. It is disappointing to see the IRS once again try to impose unnecessary regulations and costs on U.S. banks.”
So intent of Congress only matters to Geithner, when it is his intent, and clearly it is his intent to go after Citizens abroad who he considers to be tax evaders.
I revise my previous statements which gave him/them the benefit of the doubt or chalked up these OVD activities and FATCA to “unintended Consequences”. Those abroad are not Collateral Damage, but were clearly prime objectives of this legislation and the offshore Voluntary Disclosure processes. Clearly he, Geithner, knows what he is saying and what he is doing.
Expats abroad, be forewarned. They are playing a serious game here, and compliance or denunciation are your “black and white” choices. Both come with great cost emotionally, financially and with LCU expenditure. After a long conversation with a progressive friend back in the States yesterday, if he is any example of the majority of progressive Americans, he doesn’t get it, nor does he care. In the myriad of issues he is concerned about in America today, Citizenship taxation doesn’t rate 2 seconds of time and attention, and he is all for DATCA! I have to say, I understand why he thinks that way. As he scornfully said, “If this is such an important issue, where are those GOP leaders of individual freedom and Democracy speaking up for your issue?” Answer, there are none!
So, like when I went sailing and launched offshore for the first time, once out there, you are on your own! You have to make your own decisions and chart your own course. If you want to cling to the shoreline and be part of the US Exceptionalism Club, then these are your choices, “Complain but Comply or Renounce.” Ignoring, evading or doing the full Ostrich, over time, given the current trends, is going to turn out badly for you, in my opinion.
3. You couldn’t create a better shake down than the OVDI
That said, I think I have made the mistake of thinking that compliance was the goal, and so have criticized the approach on that basis. If you really want compliance, you start with a full out education program, and a real amnesty with no penalties. You create educational materials for every new visa applicant to inform them of obligations that come with residency. The IRS has done NONE of this.
However, I now think compliance matters not, and only is given lips service, because no one asks the real questions about it. Even in the latest Hearings with the Ways and Means Committee oversight, Shulman is not questioned or challenge at all about his banal triumph.
This effort, is about using penalties to produce revenue, pure and simple. Compliance hardly matters. Just take the penalties as you can. It is easy picking, considering the fear the program creates. Minnows are too afraid to Opt Out and so pay up! You couldn’t create a better shake down than the OVDI.
JustMe advises that you have two options:
“Complain but Comply” or “Renounce”
Nina Olsen of TaxPayer Advocate has noted that it is almost impossible for U.S. citizens living abroad to comply with U.S. tax requirements.
The logical conclusion is:
Renounce U.S. citizenship and rejoice!
Remember to bring yourself into tax compliance first!
U.S. Persons Abroad - Members of a Unique Tax, Form and Penalty Club 
“Renounce U.S. citizenship and rejoice!
Remember to bring yourself into tax compliance first!”
Agree 100%.