IRS Issues Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.

"Known unknowns and unknown unknowns"

On December 3, 2011 the Globe and Mail reported that the there would be possible waiver of tax and FBAR penalties for U.S. citizens living abroad. (On December 8, 2011 the Globe continued the story.) Once again – the directive was “sit tight” – information would be released by the end of December. Well, some (and there are surely more to come) information has been released. They apply to U.S. Citizens or Dual Citizens Residing Outside The U.S.

Is this welcome news or is it merely a restatement of the law and a further warning? In the online world, one can find a pundit to support any perspective.  The third party commentary varies from the:

Objective and Factual

http://twitter.com/#!/dondnelson/status/145211967345410051

https://twitter.com/#!/renounceus/status/145901627830833152

https://twitter.com/#!/renounceus/status/146573768859455489

Cautiously Optimistic

https://twitter.com/#!/renounceus/status/145937524240547841

https://twitter.com/#!/renounceus/status/145905412129034241

https://twitter.com/#!/joebwan/status/145138536188874752

Nothing New – Just a restatement of existing laws

https://twitter.com/#!/FBAR_Compliant/status/146486186213515264

https://twitter.com/#!/Moodystax/status/145246708421500928

https://twitter.com/#!/TaxProblemEsq/status/147059684401090561

A Warning – To Continue The Terror

https://twitter.com/#!/FBAR_Compliant/status/146420565954142208

https://twitter.com/#!/Moodystax/status/146592071053086720

What’s a poor U.S. citizen living abroad supposed to do? I suspect that the IRS Fact Sheet contains elements of all of the above. It does, however, provide guidance on “what to do”. The remaining issue is “how  to do it”.

The guidelines begin with the following statement:

“FS-2011-13, December 2011

The IRS is aware that some taxpayers who are dual citizens of the United States and a foreign country may have failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), despite being required to do so.  Some of those taxpayers are now aware of their filing obligations and seek to come into compliance with the law.  This fact sheet summarizes information about federal income tax return and FBAR filing requirements, how to file a federal income tax return or FBAR, and potential penalties.

Note that penalties will not be imposed in all cases.  As discussed in more detail below, taxpayers who owe no U.S. tax (e.g., due to the application of the foreign earned income exclusion or foreign tax credits) will owe no failure to file or failure to pay penalties.  In addition, no FBAR penalty applies in the case of a violation that the IRS determines was due to reasonable cause. 

This fact sheet is provided for information purposes only, and the topics discussed may or may not apply to a particular taxpayer’s situation.  The IRS continues to consider the topics discussed in this fact sheet and will provide additional information as it becomes available.”

Here are my initial thoughts on the “Fact Sheet” – this is not legal advice – or for that matter any advice at all. Let’s  put  this into context.  The initial announcement  came from David Jacobson – the U.S. Ambassador to Canada. It is unusual (and possibly unprecedented) for tax information to announced by a diplomat. Therefore, I infer that the U.S.  views the IRS attack on expats as a diplomatic issue.  The title of the title of the Fact Sheet indicates that it  is directed to U.S. citizens and dual citizens living abroad.  Specifically  toward “those taxpayers (who) are now aware of their filing obligations and seek to come into compliance with the law“. In addition, the Fact Sheet focuses on identifying reasons why penalties will not be assessed – including the statement that: “no  FBAR penalty applies in the case of a violation that the IRS determines was due to reasonable cause”. The Fact Sheet appears to be focused on allowing U.S. expats to come into compliance with their filing obligations. The Fact Sheet does not presume criminality.

This is very different from the purpose  of OVDI. OVDI was directed toward a different group of people – those who had used undisclosed foreign bank accounts and other foreign asserts to evade tax. In other words, OVDI was designed for people who were to attempting to evade tax.  The terms of OVDI were generous to criminals but devastating to honest taxpayers who were ignorant of their filing requirements. Furthermore, OVDI focused on the payment of penalties.

Here is a summary  of the basic differences between OVDI and the Fact Sheet For U.S. citizens and Dual citizens living outside the U.S.:

1. OVDI presumed “criminality” – the whole point was that a participant would avoid  criminal charges. There was NO room for introducing evidence of “reasonable cause” (unless one used the opt out provision and entered into a complete audit – along with the six figure cost).

2. The IRS Fact Sheet does not presume criminal behavior.  – The IRS is acknowledging that there are people who were unaware of their filing obligations. As a result, the fact sheet assumes and the IRS is stating the “reasonable cause” is alive and well. This does NOT mean that all taxpayers will able to establish “reasonable cause”.

3.  The IRS is delinking  the FBAR issue from the tax return issue. (This is what OVDI failed to do).  In other words (at least the way I read this), you could owe some tax and still plead “reasonable cause” on the FBAR issue.

4. The IRS has given examples which create a possible basis for a finding of “reasonable cause”.  Once again – this is NOT legal advice – 0r any other kind of advice. You and your adviser must read these examples carefully and consider your specific facts. The examples appear to fit the circumstances of many typical U.S. citizens living abroad.

5. The IRS is requiring returns to be filed for the last six years – presumably the 2005 – 2010 years. As you know OVDI required the filing of returns for eight years.

Factors That The IRS May Use To Determine Reasonable Cause

These should be read carefully. Although there can be no guarantees, it is clear that the IRS has put a great deal of thought into the facts which are likely to support  “reasonable cause”. They are deserving of a careful read. In addition, one must ask: why those facts? Why are those particular facts significant? Your lawyer (and I would suggest a lawyer) will help you with this. Consider  the factors the IRS may consider to constitute reasonable cause. Furthermore, it is essential that you ensure that the facts that are offered as “reasonable cause”, do, as a matter of law, constitute “reasonable cause”.

What About The People Who Entered OVDI?

Barrie McKenna’s Globe article suggested that those who had entered OVDI could get a refund on those penalties. There is no evidence of this the IRS directive. On the other hand, the IRS included the following statement in the information sheet:

“The IRS continues to consider the topics discussed in this fact sheet and will provide additional information as it becomes available.”

(Update: On December 15, 2011, Roy Berg tweeted from a Washington Tax Conference that:

https://twitter.com/#!/Moodystax/status/147387285137141760

Calgary tax lawyer, Roy Berg, identified may areas of uncertainty that needed clarification. Most of those areas continue to be uncertain.

The Distrust of The IRS

A decision to bring yourself into tax and FBAR compliance presumes that you are able to trust the IRS. The comments to the most recent Globe article indicate that many do not and will never trust the IRS. In the 2009 OVDI program, the IRS changed the rules two years into the program. Taxpayers entered the 2009 OVDI program based on a representation that, under no circumstances would they have to pay penalties that exceeded penalties payable under other statutes.  This was understood to mean that failure to file may not have been willful. The IRS reversed this position after people entered the program. Taxpayer Advocate strongly criticized the IRS pointing out this violated most conceptions of fairness and due process. As might be expected American Citizens Abroad and various tax lawyers have been helpful in calling attention to this. In addition, read Amy Feldman’s recent article where she describes the experience of one taxpayer who entered the 2009 OVDI program.

Any interaction with the IRS should be done with the advice and counsel of a professional.

You must be careful and thoughtful. That said,  it is time for the IRS to generate trust.

I will risk an opinion here. The long term interests of the IRS are to bring people back into the tax system. OVDI has been a failure. This IRS Fact Sheet is an attempt to bring people into compliance – which is in the “long term” interests of the IRS and the U.S. government (which OVDI was not).

In terms of the future – Known unknowns and Unknown unknowns

There are still many unanswered questions. Because, people have different fact situations, this IRS Fact Sheet, is at best an aid in deciding how to interpret your specific situation.

What I see is the following:

This is an opportunity to address past issues of noncompliance. Furthermore, the last six months have created an environment where it will be hard for U.S. citizens living abroad to plead ignorance of FBAR and the tax filing requirements. This means that the window of “reasonable cause” is probably closing. You must now decide whether you can live with the new reality of being a U.S. citizen living abroad. Can you deal with:

– the time required to deal with with all the tax and reporting requirements

– the expense of having all this paperwork done by a paid tax preparer who is registered with the IRS (this will make all of this much more expensive)

– the fear and anxiety of making a mistake

– the problems of FATCA

I believe that the U.S. will come to its senses and either repeal or massively water down FATCA. To see why see:

http://twitter.com/#!/renounceus/status/144454905166446592

Can you live with all of this?

If the answer is yes – then you can expect a life of forms, forms and more forms.

If the answer is no  – then you have a fantastic opportunity to get your last five years of filing in order to renounce  U.S. citizenship.

I welcome your comments!