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

Cautiously Optimistic

Nothing New – Just a restatement of existing laws

A Warning – To Continue The Terror

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:

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:

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!

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6 thoughts on “IRS Issues Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.

  1. Petros

    I am late this year with my zero tax owed return. So the fact that they require no fine for late filing is indeed welcome; but then if I had not relinquished my citizenship I’d see no reason to continue filing, as I would still owe nothing, and then there would be no late filing penalties (which $135 for two months and $250 for wilful non-filing).

    They haven’t really change anything else. They are just trying to make it sound good so that there lapdogs in the press will tell everyone about the kinder gentler IRS.

    Reply
    1. renounceuscitizenship Post author

      They have not changed anything in terms of the law. In fact, the IRS cannot make law. But, the law is only as good as the people who administer it. The IRS does administer the law. There are two things that are different in terms of how the IRS plans (if they are to be believed) to administer the law.

      1. They are making it clear that reasonable cause will be considered. They even went so far as to cite the section from the IRS manual which allows for a letter directing compliance to be written rather than an FBAR find assessed.

      2. They have not (as they did in OVDI) linked the filing of “no penalty” FBAR returns to “zero tax owing”.

      Obviously this all depends on their being trusted (which many do not). But, the above are two very significant statements about how they plan to administer the law.

      Clearly people need to make appropriate decision based on their particular facts and whether they wish to renounce. The argument for taking advantage of this may be stronger for those who wish to renounce and need to have the five years of filing up-to-date.

      Let’s see what the next information sheets say.

      Reply
      1. renounceuscitizenship Post author

        As I said in the post – the trust issue is huge. But, the trust issue exists with respect to both the IRS and the accountants and lawyers who have been involved in this (often giving advice that was clearly of benefit to the accountant/lawyer and not necessarily to the client).

        With Respect To The IRS:

        The distrust of the IRS is richly deserved. Examples include their “bait and switch” (described above) tactics in the 2009 OVDI, There other examples of people being mistreated in OVDI. See:

        http://hodgen.com/yet-another-ovdi-victims-story/

        http://hodgen.com/a-real-life-voluntary-disclosure-program-participants-story/

        http://hodgen.com/why-the-irs-is-pushing-to-close-all-2009-vdp-cases/

        http://federaltaxcrimes.blogspot.com/2011/09/experiences-inside-ovdp-ovdi-91411.html

        http://www.reuters.com/article/2011/12/08/us-usa-taxes-foreign-idUSTRE7B723920111208

        http://www.expatforum.com/expats/expat-tax/93621-ovdi-program-information-updates-stories.html

        On the other hand here is an example of what is arguably better treatment from the IRS:

        http://hodgen.com/damsel-in-distress-a-vdp-success-story/

        The basis of the problem is a sense that the rules are not clear and even if they were clear one doesn’t know how they will be applied. The only thing one can be certain of – if you are an honest taxpayer, trying to come into compliance with requirements you didn’t know about it – is unfairness. But remember that OVDI is not premised on “reasonable cause”. It is premised on “criminality”.

        With Respect To The Accountants and Lawyers:

        Let me begin with this article:

        In my opinion this is an “infomerrcial” to encourage people to enter OVDI without determining whether their circumstances justify it. OVDI was part of “Voluntary Disclosure”. That means entry into OVDI was not required. The media during the summer of 2011 portrayed OVDI as mandatory. The media wrote many articles about OVDI without understanding it.

        Next, it is clear to me that this is not an issue of completing tax returns. It is an issue of how to get into compliance (or not) with the laws of the U.S. (however insane they are). For this, you need a professional that specializes in this kind of work. It is quite obvious that many people sought advice from people who were not specialists. They will pay a heavy, heavy price for the advice that they paid a fortune for.

        We are now is a position where the lawyers/accounts are not trusted either.

        So, the problem remains in a context where: people don’t trust the IRS (as you point out, one can’t be certain what reasonable cause is), people do not have confidence in the advice of lawyers/accountants. Yet, the IRS laws and procedure are so complicated that people need lawyers/accountants in order to know how to proceed (if that is what they want).

        Finally, the issue of costs of compliance. Very few people have the money to pay professional fees.

        Conclusion: Even though the IRS (in my irrelevant opinion) is attempting to solve this problem, it may no longer be solvable. The distrust of the IRS, the lawyers, and the accountants, coupled with the legal and accounting costs may be too much for people. But, remember that this Fact Sheet directed to taxpayers living outside the U.S.(the subject of the above article) is NOT the same thing as OVDI. Perhaps different treatment can be expected from the IRS if you enter through the door that reads “I didn’t know about the FBAR requirement” as opposed to entering through the door that reads: “Presumptive Tax Cheats Enter Here”. Once again – this is not intended to be any kind of whatsoever – whether legal or otherwise.

        It would be good if some others would “weigh in” on this.

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