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.
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:
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.