Are you a U.S. citizen abroad?
If you are not a U.S. citizen (or other kind of U.S. person) you may have little to worry about. Panic is starting to set in. There were many U.S. citizens who became citizens of other countries. They may or may not have lost their U.S. citizenship. Even if at this moment you believe you are a U.S. citizen, I urge you to consider this issue.
If you are NOT a U.S. person there is no reason for you to read the rest of this post. But, if you are then:
It’s all about Cause, Reasonable Cause
The Good News – FATCA Is In Trouble
FATCA is in trouble – it appears to be stalled. Treasury was (at least it said) anticipating up to 50 IGAs by December 31, 2012. As of today, they have a total of four. That is a pathetic and pitiful number. To make matters worse, Treasury failed in its commitment to get regulations/information/direction to the foreign financial institutions by the December 31, 2012 date. (The word is that the release of the final FATCA rules is imminent. Update January 18: the IRS has finally released the final FATCA rules.)
At best FATCA is not going as smoothly as Treasury predicted. At worst FATCA is in serious trouble. As James Jatras preaches, it is a mistake to think that FATCA is inevitable. Furthermore, Canada (the Government and the banks) can put an end to FATCA by just saying no. Just Say No!
The Good News – We Are In A Pre-FATCA World For Non- Complaint U.S. Persons
That means today. That means while there is an opportunity to correct past tax and compliance problems. This means while you can correct the problems on your own initiative and NOT after being contacted by the IRS.
As it stands today, here are some logical options for how to come into compliance as described by one cross border tax professional:
David T. • I spend much of every week carefully reviewing all possible options for delivering overdue tax returns to the IRS before filing, as one can significantly increase the chances of a good outcome.
Americans Abroad can only do one of seven things at this stage.
1. Do nothing at all and hope never to found,
2. File going forward and hope that the IRS, US Treasury and Department of Justice do not ask about the past,
3. File the past returns and FBARs “quietly” by mail with the IRS without otherwise alerting the IRS,
4. File the past returns and FBARs with the IRS and include a written explanation of reasonable cause for not filing earlier,
5. File under traditional “voluntary disclosure” and negotiate directly with the IRS,
6. File under the “OVDP” (the Offshore Voluntary Disclosure Program) and pay a substantial penalty based on the maximum value of financial accounts (typically 27.5% of the maximum value of financial accounts in any of the previous eight years), or
7. File under the new “streamlined approach” for the overseas American, discussed below.
Each of these seven options carries different levels of risk or penalties. Seek professional advice if you or anyone you know is in this situation.
The implementation of FATCA is likely to limit some of these options.
The Possible News – A FATCA World For Non-Compliant U.S. Persons
This is of course purely hypothetical. Let’s imagine how FATCA would affect the large percentage and number of non-compliant U.S. persons in Canada. This exercise might also help persuade the Government of Canada, rather than be complicit in turning one million Canadians over to the IRS, to “Just Say No to FATCA!”
What “would” be different about a FATCA world?
I suggest at least two possible differences:
1. FATCA increases the chances of the IRS learning that one is non-compliant. That is the whole point of “rooting and ratting out U.S. persons”.
What does it matter if the IRS becomes aware that one is non-compliant? It means that you might be contacted by the IRS. It also means that certain compliance options may no longer be available to you. (For example the “voluntary disclosure options” described as options 5, 6 and 7 above. Furthermore, it makes option 1 above more difficult.)
2. FATCA requires that Foreign Financial Institutions take steps to make inquires with respect to the accounts of some U.S. persons. For example in a recent post I reported that Sun Life would be making inquires of certain policy holders. In my opinion this is likely to continue to close the window on “reasonable cause” arguments. FATCA will help the IRS convert non-willful behavior to willful behavior.
What does this matter? Fines, fines and more “draconian fines”. It also means that it will be more difficult to come into compliance.
To put it simply in a FATCA world:
– “reasonable cause” arguments may be harder for taxpayers to make
– “willfulness arguments” may be easier for the IRS to make
The Government of Canada needs to understand that by signing a FATCA IGA they are both:
– creating conditions where tens of thousands of Canadian citizens will be turned over to the IRS for processing; and
– worsening the conditions under which the IRS will take delivery of these people.
What was once non-willful is more likely be construed to be willful. The pressures to enter the punitive OVDP program (if it is still possible with all the horror that it implies) will be heightened.
Therefore any FATCA IGA should include protection for tax compliant Canadians!
A recent letter to the Edmonton Journal opined that:
This is a bad situation for any U.S. citizen in Canada, including any of those one million dual citizens who thought it wise to plan for the future and invest in a government-sponsored RESP or TFSA. The cost of now hiring someone who understands foreign trusts well enough to file the necessary paperwork to comply with U.S. reporting requirements is easily many thousands of dollars. But the penalty for not filing would be in the tens of thousands of dollars per year.
And now the Canadian government will be helping the IRS to identify the people who have innocently got themselves into this mess by listening to their bank’s financial advice. The IRS has reportedly responded to “intense lobbying by Ottawa” by issuing guidance that those owing no U.S. tax would not be subject to penalties for failing to report in past years.
This is a positive development but does not provide any relief from the stress and high cost of amending past returns with complex forms to show the IRS that no tax is owed.
Because of relatively high Canadian taxes on earned income, it is unlikely Canadian residents whose livelihoods depend on employment income should ever have to pay U.S. tax in addition to Canadian taxes paid.
Canada is unlikely to influence the way the U.S. treats its citizens abroad, but the Canadian government should not be complicit in making life miserable for any of its law-abiding dual-citizen residents. If Canada is pressured into implementing the U.S. FATCA regulations, this should come with a complete amnesty from the U.S. with respect to past foreign trust filing requirements for Canadian government-registered TFSA and RESP accounts, and also the opportunity to close all such accounts without penalty from either the U.S. or Canada.
To this I would add, any IGA should:
1. Include a provision that excludes Canadian citizens who are resident in Canada from FATCA rules.
If an exclusion of Canadian citizens who are resident in Canada cannot be negotiated then, the IGA should:
2. Allow for Canadian citizens to renounce U.S. citizenship without payment of an “Exit Tax”
3. Provide for an amnesty from any FBAR (and other information return) penalties.
Thoughts on protecting oneself from “willfulness”
Those who don’t understand the implications of “willfulness” may find the following to be of interest (although this is an example of the IRS making an example out of this “Homelander”):
At a bare minimum, it may be prudent to protect oneself from a finding of being in “willful noncompliance”.
On that cheery note, what follows is a comment I made to another post.
*USXCanada
Referring to the part of your comment where you say:
“The math indicates that about 95% of assessable US persons in Canada are not compliant, and most of those are hamstrung by costs and bureaucratic tortuosities, with little prospect of ever becoming compliant. Simple passage of time viciously erodes the carapace of “reasonable cause.” Perhaps the largest subset of that massive herd of free meat is yummy ostrich. Out on the horizon lies Head-Smashed-In-Ostrich-Jump. Two beacons of hope for all this meat on the run: the kindnesses of the IRS (Irrational Rogue Suckmachine) and the bold defenses of TNSF (Twit North Smug & Feeble).
Sauve qui peut!”
Obviously in a perfect world most rational people would like to NOT BE IN NON-COMPLIANCE. That’s different from wanting to be in compliance (a double negative does not always make a positive). The anecdotal evidence is that most people are NOT in compliance. Furthermore, I expect that they never will be able to solve their PAST compliance problems. Why? Because the IRS simply won’t let them. The IRS has reduced all incentives for people to fix past problems. Reason: they have created a situation where people cannot afford to come into compliance. (This is of course unbelievably stupid on their part, but hey …)
1. This thread and others have estimates of professional fees of $20,000 to navigate the compliance terrain. These might be the fees for some simple back filings and legal advice. But, they will NOT be the fees for anybody with any degree of complexity. Any degree of complexity and the fees will be much more. Why? Because there are a number of compliance options and the hope is that there is a way to come into compliance that avoids OVDP (most long term expats should think long and hard before entering OVDP). The more complex your circumstances the greater the cost to come into compliance.
2. The professional fees are independent of and in addition to any taxes and penalties. The reality is that only those U.S. citizens abroad with the most simple lives imaginable will not owe any US taxes.
3. Let’s assume a successful reasonable cause argument for FBAR and other information return penalties – so $0 there.
3. Let’s imagine a low end situation of $20,000 prof fees and another $20,000 taxes. That’s $40,000. Where does the money come from to pay this? Answer you have to sell something which will generate more taxes payable. You see the problem.
Given that it is likely that it will be prohibitively expensive for people to come into compliance, what are they to do? You have made several comments suggesting that the window of opportunity for “reasonable cause” is closing. I think you are correct. It will get much worse if the FATCA comes to be and the FFIs start advertising for the IRS.
So, people with the most simple of situations must now deal with the question of:
“To be an ostrich or to not be an ostrich,
Whether tis better …”
Either way they are in trouble. But, one can cease to be an ostrich by simply filing on a “going forward basis”. This sort of person then assumes the risk of the IRS getting into the past. But, if it’s clear that there are no assets, why would the IRS do this? They know they can’t collect FBAR penalties in Canada. There is nothing to indicate high tax liability. There is nothing to indicate willfulness (meaning they may have trouble imposing 3520 fines, etc.) The IRS can’t get blood out of a stone.
Perhaps the real issue is whether one should:
1. Comply on a going forward basis (which would be a bar to “willful non-filing”) and deal with past problems if they do arise; or
2. Do the full ostrich. Remember that to ignore the whole thing it to keep “US tax compliance” around as a “life-time worry project”. Furthermore, since the window for “reasonable cause” is closing, the door for “willfulness” is opening. The opening of the “willfulness” door is I think the bigger concern.
It is possible to come into compliance on a “going forward” basis. You may or may not have to get into the past. “Going forward” compliance should (this is my non-professional opinion) help protect one from allegations of “willfulness”.
My musings apply only to those with no assets, low income, and simple lives. Those with more complexity probably should determine their possible exposure to back taxes and seek several competent legal opinions. But, remember you don’t ask the “OVDP Lawyer” whether you should go into “OVDP”!
Perhaps one should separate the decision of how to proceed from what professionals you use in order to proceed.
Finally, look at the numbers here. There are so many non-compliant U.S. persons abroad that I really don’t see how the IRS can deal with them. Furthermore, U.S. persons abroad are going to be destitute anyway because FATCA/FBAR etc. have made them unemployable, and undesirable for sharing any form of human activity. So, what’s the poor IRS to do – assuming there is no evidence of income and assets?
Conclusion
U.S. persons abroad are caught in a difficult mess that is NOT of their making. They are no particularly good options to come into compliance. The best approach may to minimize the “downside risk”. Furthermore, the U.S. is moving in the direction of making passports contingent on tax compliance.
U.S. Persons Abroad - Members of a Unique Tax, Form and Penalty Club 
Thanks for the thorough analysis of options. Now, how to get your important information to each US Person in Canada and beyond?
Or, will the Government of Canada stand up and protect 3% of its citizens from US extraterritorial FATCA and citizenship-based taxation absurdity? What is our worth?
No, the government of Canada will not protect 3% of its citizens. But, by not protecting that 3% they will establish the framework for the Canada to become an administrative region of the IRS. This is an issue of national sovereignty.
You ask “What is our worth”? I don’t know that. But, I do know that every U.S. person is worth less than a non-U.S. person. This is the result of the “IRS Discount” associated with “U.S. personhood”. Wee the following.
How to get this information to each U.S. person in Canada? They won’t believe it.
The plot may be thickening with a combination of Obamacare, taxes and the penchant of the Canadian media to advertise for the IRS.
This is all very unfortunate. If the IRS (US government) was willing and able to simply the reporting requirement for US citizens in Canada a significant amount of the challenges and costs involved in complying would be greatly diminished.
For example, we need simplified reporting (similar to 8891 for RRSP) for TFSA, RESP and Canadian mutual funds that are considered PFICs.
And perhaps increase the reporting threshold for FBAR forms (similar to the thresholds for 8938).
Phil
Phil:
We need for the PFIC rules to be done away with. They operate to disable U.S. citizens abroad from retirement planning. But, I agree the forms for reporting PFICs are expensive and “penalty laden”.
Editorial preface by blog owner:
__________________________________________
The comment from Just Me starts here:
For the person reading this comprehensive analysis of options, I would add a couple other links for their consideration:
Why is the Quiet Disclosure (QD) so controversial between Practitioners?
A person seriously contemplating that option number 3, might want to read through the arguments and comments from the link above as they weigh a decision.
In the comments is a lot of discussion on that subject between lawyers who strongly disagree if a ‘quiet disclosure’ is an option or not. I think it is (with qualifiers) , but… A ‘BIG BUT”, as it does depend on an examination of facts, reasonable cause and risk tolerances.
The question of “quiet disclosure” or just compliance going forwards, as you know, has also been discussed at Jack Townsend’s blog too (Federal Tax Crimes), and what the risks are associated with it in light of the 2102 OVDP FAQ 15, that states:
” Taxpayers are strongly encouraged to come forward under the OVDP to make timely, accurate, and complete disclosures. Those taxpayers making “quiet” disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years.”
Ref: http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers
Now, that comment, in my opinion, is a scare tactic for the Homeland evading Whales that have a lot to lose if discovered in a routine audit or outed via FATCA or DOJ investigations of Wegelin Bank. A 50% penalty of an account value plus prosecution and prison time is not something you want to ignore, but I doubt that any Widows facing a similar $21 Million dollar penalty you site above are reading here. They are not your audience! For the Minnow of low asset value, it should not be considered as a prohibition, rather a statement that audits are ‘possible’ and the risk associated with each audit depends on the facts and the examiner discretion that is applied.
A person contemplating a quiet disclosure would be silly not to become familiar with the IRM 4.26.16 and what penalties or discretion may or may not be applied
http://www.irs.gov/irm/part4/irm_04-026-016.html
Another factor in the decision related to quiet disclosure is the “Candy Store Effect” that Stephen Mopsick discussed on his blog.
http://mopsicktaxlaw.blogspot.co.nz/2012/12/offshore-voluntary-disclosures-update.html
If you are really a non compliant minnow living abroad outside the reach of FBAR penalties, how much effort will the IRS expend in looking for grains of sugar on the floor when they are giddy with excitement at all the candy choices the previous OVDI/OVDP data mining has given them?
Look at the flood of data they are going to get out of the Swiss Wegelin Bank capitulation. The guilty plea agreement says they have to produce all records of account transactions. http://bit.ly/Xo8zC9
The IRS and DOJ must be wetting their pants with pleasure at the prospects of what they will get! The Justice Department doesn’t have enough prosecutors for these cases, let alone your measly little quiet disclosure.
Finally to your comment about the inadvertent transition from “non willful” behavior to ‘willful” behavior and arguments about reasonable cause.
I had that dilemma myself back in 2009 when I came face to face with the realization of my own “non compliance”. Struggling with the decision what to do once you have knowledge is ‘anxiety on steroids!’ I have a lot of empathy with those struggling with that decision now.
If you reading this and getting knowledge about compliance requirements for the first time, your NEXT action involves that line. Step carefully.
I agree with you, that FATCA with or without an IGA will create the conversion point for many people. They will cross that line without due diligence consideration of what it means to now be considered ‘willful’ in your evasion from a known obligation. The Ostrich approach of “willful blindness” will not work in the long term, in my opinion. FATCA is going to create a lot of ‘willful’ penalty fodder for the IRS should they chose to try and collect it.
Given the religious zeal of these FATCAnatics at Treasury, and the myopic focus offshore that ex-Commission Shulman liked to brag about, I would not expect to see a lot of sympathy out of the IRS for your complaints that this “isn’t fair or isn’t right!” They DON”T CARE!
They feel they have listened to Nina Olson of the TAS, American Citizens Abroad (ACA) and/or the Democrats Abroad complaints. They have been as generous as they will be. If you don’t take advantage of what they consider their generosity, then they are gunning for you.
The still have NO recognition of what a friggin minefield of bureaucrat nonsense their programs and technical thresholds creates for the average man. Don’t like it, renounce your citizenship is even their council’s advice given to a friend of mine. And, as we see, thousands are lining up to do it. This from Taiwan doesn’t bother them one iota. http://bit.ly/W16JX1 Not their problem. Congress made the laws, and they are going to enforce them, consequences be damned!
They don’t even listen to Nina Olsen either.
As you know, in the 2012 NTA Report to Congress, she still lists the problems that she has with the way the IRS conducts its self with regards to Americans abroad. I am sure the guys at the IRS think they have done enough and just glaze over at her criticisms. I doubt more than a couple Congressmen will read any of these. Don’t expect any action by them to change the playing field or make it more fair.
MSP 8: The IRS’s Offshore Voluntary Disclosure Programs Discourage Voluntary Compliance by Those Who Inadvertently Failed to Report Foreign Accounts http://1.usa.gov/VRJVsc
MSP 15: Challenges Persist for International Taxpayers as the IRS Moves Slowly to Address Their Needs http://1.usa.gov/TLFb9l
For the non compliant, you could also someday be pushed into willful behavior when you receive a “soft notice” of your non compliance from the IRS, if they ever read her suggestions in MSP 15. Then what would you do?
I am with you, Mr US Citizen Abroad, when you say, it is better to “correct the problems on your own initiative”, even knowing how difficult it is to do. Thanks for doing such a good job of laying out the “how to deal with it” options.
Thanks very much for the extensive comment – very valuable additions indeed!
Since you have raised the issue of the “quiet disclosure” (option 3), I will add my thoughts on this. The real question is should you do the “quiet” disclosure (filing quietly) or let them know what you are doing (either by including a “reasonable cause” letter, entering traditional voluntary disclosure or by entering OVDP – options 4, 5 or 6).
Now every person with this problem should seek competent legal counsel. But remember that all of this information must be put in context.
Let’s consider the issue of option 3 – the “quiet disclosure” without explanation.
I believe that the “fear of quiet” disclosure has its roots in a May 2010 ABA meeting described by Phil Hodgen here:
http://hodgen.com/the-official-irs-position-on-quiet-disclosures/
Note that the title of the panel was “Offshore Voluntary Compliance Update panel”. In other words, the context of the discussion is in relation to people for whom the Voluntary Disclosure Program was intended. The Offshore Voluntary Disclosure Programs were (at least at that time) intended for criminals. I believe that Mr. Hodgen’s post needs to be understood in that context. To put it another way:
1. Assume we are dealing with 100 criminal tax evaders (the type that OVDP was intended for).
2. Assume that half of them go into OVDP (tell the government what they are doing) and half do quiet disclosures (do not tell the government what they are doing).
In the context of all 100 of them being criminals for whom the program was intended, it is reasonable to NOT give a break to those who do the quiet disclosures.
But what if you are not dealing with 100 criminals. What if you are dealing with your “basic minnow/U.S. person abroad” who is clearly NOT a criminal for whom the program was intended. Although OVDP is a good deal for the criminal it is a terrible thing for the minnow.
Therefore, I read the “don’t do a quiet disclosure” as meaning:
If you are the type of person for whom OVDP was intended, THEN don’t try to get a better deal by doing a quiet disclosure.
To repeat: If you think about the context of the Hodgen article, and the context of the IRS warnings against quiet disclosures (OVDP), then it means:
No quiet disclosures if your facts suggest you are the kind of person for whom OVDP is intended.
Also, I appreciate your reference to the your post on the Isaac Brock Society which discusses the quiet disclosure issue. I encourage anybody reading this post to read that one too. When reading that post you may want to consider the background of the various lawyers and ask to what extent that might influence their position. There is a significant group of lawyers who try to get anybody and everybody into OVDP. OVDP (option 6) is not suitable for most minnows.
In fact, the IRS in its Dec 2011 FS for U.S. citizens abroad makes it clear that one cam come into compliance without OVDP. The Dec 2011 FS seems to suggest that some kind of “reasonable cause” letter should be included.
Also, by creating option 7 (which I would be very very careful of) is making it clear that OVDP is not the only option.
(If you have any fear of criminal prosecution then OVDP is the only rational option.)
Here is list of posts on this blog that reference the “quiet disclosure” issue.
@Just Me
Thanks again for such a comprehensive comment. In closing I will echo your views:
It is better to deal with the compliance question on your own initiative.
Finally, consider separating the “what should I do lawyer” from the “I am going to do it lawyer”. You need to be aware that voluntary disclosure programs are a “financial annuity” for lawyers. They are costly and they go on for a long time.
Thanks again and I welcome more thoughts/comments.
Finally anybody considering OVDP should read Just Me’s post “OVDI Drudgery for Minnows” at:
Sorry I haven’t commented more often on your well written blog. I have been doing a lot of responses and posting on FATCA groups on Linkedin recently, trying to be a counter balance voice to the continued marketing messages from the FCC of why everyone has to comply with FATCA.
You make good points on the QD. I agree, the wording of the original FAQ was directed to the real evading Whales, but back in 2009 no one including very reputable attorneys had figured that out yet.
#7 is a good comment, but as you know, I do feel that the “deer in the headlight” person just discovering their “problem” should spend time reading blogs like this to increase their level of understanding before they approach a professional. The Drudgery, as I say.
Final comment, whether or not a person decides to do a QD, Noisy Disclosure, OVDP, streamline or nothing to fix the past, for sure, once they have knowledge, they do need to be compliant from that point forward. I would not step over the line into willfulness.
Without a current deadline, they have time to study up,and think hard and long whether they should amend returns or not. It may not be necessary to clean up the past. Professional advice, after due diligence, can be worth the money. I would never put the entire process into the hands of an attorney, unless I had more money than sense, and if I had that much money, I probably was willful, so I deserve to be reamed out by their fees! LOL
Thanks, regarding this part of your comment:
“Without a current deadline, they have time to study up,and think hard and long whether they should amend returns or not. It may not be necessary to clean up the past. Professional advice, after due diligence, can be worth the money. I would never put the entire process into the hands of an attorney, unless I had more money than sense, and if I had that much money, I probably was willful, so I deserve to be reamed out by their fees! LOL”
__________________________________________________
Here are some starting thoughts for Non-Compliant #americansabroad:
When it comes to US tax compliance (or coming into compliance), for most people/minnows there is no clear right answer. That’s why people seek professional advice. Good professional advice is hard to find. This is a good moment to introduce some posts/issues I have previously written about “cross-border professionals” and how to select them.
1. What is a cross-border professional? What is the difference between a lawyer, CPA, EA, etc.?
My basic point is that:
“Not all tax professionals are the same.”
You should understand the differences.
2. Are The Tax Professionals or the IRS the greater threat?
The most important decision is the first decision of HOW (this post makes clear that there are options) to come into compliance. A mistake made here (see the description in this post), …
3. How To Choose A Compliance Lawyer
The lawyer who helps you make the compliance decision (and there are lots of options) may/should not be the lawyer who actually does the compliance work. (You do NOT want someone with a financial interest in how you come into compliance helping you decide how to come into compliance. This is the difference between fee based financial counseling and the financial counselor selling you mutual funds.)
Finally (and I apologize to the accountants and Enrolled Agents) my personal opinion is that the decision of how to come into compliance should be made with a lawyer. Only a lawyer will give you “Lawyer client privilege”. The accountants and enrolled agents will get to do most of the actual work anyway (including an assessment of whether taxes are owing). The question that needs to be determined is:
What exactly is the work that needs to be done?
4. Consider using a lawyer in your country of residence
I emphasize this is my opinion only, but:
There are plenty of US Tax lawyers outside the US. For reasons I have previously discussed, I would consider using a lawyer in your country of residence.
There are at least two reasons for this:
First: Consider the following comment by a U.S. tax lawyer in Canada:
Roy Berg
September 17, 2012 at 1:23 pm
*@ renouncecitizenship: I acknowledge that the following statement will sound self- serving, but I agree with your conclusions about finding a US tax professional in your country of residence.
International tax is difficult, and you need a professional who “speaks” not only US tax, but also the tax language of your country of residence as well. For example, the typical US tax professional may be familiar with foreign trusts, but if that individual does not “speak” Canadian tax, he may not be aware that TFSAs, RDSPs, DPSPs, etc. are all foreign trusts for US purposes. In otherwords, knowledge of the nuances of non-US tax law is critical in the correct application of US tax principals.
Jack Townsend has a great list of US tax lawyers located all over the world who are experienced in these matters.
Second: The problems of using lawyers who are U.S. based and practice before the IRS are illuminated in the following post (are the lawyers really working for you?):
The conscience of a lawyer and the FBAR Fundraiser
Just came across this article which is I think a useful contribution to this discussion – especially like:
“The dog ate my FBAR”