The IRS is the biggest obstacle to tax compliance for U.S. citizens living outside the United States

We need direction and guidance!

Let’s begin with an excerpt from a comment from a U.S. citizen living outside the United States.

“I have not been able to get advice from the IRS, from the IRS Tax Advocate, from my financial planner, from my government representatives, from the US Ambassador to Canada – it all goes in a circle and the easy answer – ‘get advice from a US tax accountant’. I do get my US taxes (and Canadian taxes) prepared through a cross-border CA and it is probably my mistake to not have asked the right questions in the first place, but here I am, as are many others, in trouble and also called by the US and even many in Canada, tax evader.”

What’s a poor expat to do?

The mainstream media pounds away, stoking the flames of fear, informing U.S. persons (these include citizens and green card holders) abroad that: “The clock is ticking on filing with the IRS” (this is one of many examples). The mainstream media appears to be  issuing press releases for the IRS. (Perhaps the mainstream media is the “IRS  presence in Canada” – check this out.) Recently the “Isaac Brock Society” wrote a press release about OVDI 2012 and circulated it to the mainstream media. It has not been acknowledged.

The trusted “cross border professionals” remind us that they are here to help and they remind us that they will take our money as part of the process. How much will they take? They are happy to take what you have. You really can’t expect them to say anything else. After all, it is their professional obligation to remind us that we must be compliant with the U.S. tax and reporting laws:

– whether one knew of the reporting obligations or not (find me a single person who did not have a high priced accountant or lawyer in two who had heard of FBAR)

– whether we are tax compliant in our country of residence or not


For the most part U.S. citizens are an honest lot. They  believe that “if the law requires this, then we must do it” (even though the law has not been enforced until now). But, please, please, please, we beg you:

Just tell us how! Tell us how and we will do our best.

Here are two of the obvious points that I missed  (and I am sure there are more).

First, the financial cost of compliance is more than almost anybody can bear. I posted on this yesterday.

Second, the IRS is the biggest obstacle to compliance. I realized this after having read today’s Globe article by Barrie McKenna.

The IRS is the biggest obstacle to compliance? Why? Because they will not give people clear instructions on how to become compliant. This point has was acknowledged by a lawyer in the following excerpt from a comment by Calgary lawyer Roy Berg:

“The rules applicable to non-US residents are intractably complex.
There is little guidance available within the IRS on how to comply.
The IRS hasn’t given good, clear, guidance on how to “catch up” unfiled returns.
The consequences to non-compliance are more punative for those residing abroad than for those who do not.”

I would like to make a very simple observation. It’s this:

The IRS has communicated with people primarily through the three OVDI programs (2009, 2011 and 2012). It is understood (and is clearly true) that the IRS has designed these voluntary disclosure programs for criminals and presumes criminality on the part of those who enter them. Each of these communications contains a small section (within the larger discussion of criminality) that speaks to the “minnows” who are clearly not criminals and in most cases have conducted their lives in a prudent manner. The parts of the communication that are directed to the “minnows” are at best “fine print”. To put it simply: the IRS will not talk to U.S. citizens living outside the U.S.

It was and continues to be unconscionable that the IRS communicates with “minnows” in the same vehicle/announcement that it uses to communicate with the criminals.


OVDP -2009: It was all about the criminals. Lawyers took comfort in FAQ 35 which seemed to allow for a taxpayer to argue reasonable cause. The legal community understood it in this way. The taxpayers understood it this way. Two years into OVDP (on March 1, 2011) the IRS made a decision to treat all taxpayers who entered OVDP as criminals. This precipitated the TAD issued by Taxpayer Advocate which Mr. Shulman has until January 26, 2012 to respond to. But, my point is that there was little or nothing in the description of OVDP which instructed the honest taxpayer on how to come into compliance.

OVDP – 2011: Again it was all about criminals. The one exception was FAQ 17 and FAQ 18 which allowed for those who owed no tax to simply file FBARs and 5471s. There was no “deminumus rule”. So, it was “all or nothing”. Unless you were willing to sign off that you know for sure that you owed zero tax, FAQ 17 and FAQ 18 were not available to you. Of course, one question is: how can you know that you don’t owe tax without the involvement of the “cross border professional”? Furthermore, what assurance did you have that they could be trusted? In addition, there was the communication from the IRS to the effect that you must enter OVDI. We will destroy those who do quiet disclosures, etc. Why? Where do they get the right to behave this way? (I mean the legal and moral right. I understand that on a practical level the IRS will do what it wants.)

As I have said many times before, OVDI is voluntary. FBARs and tax filings are mandatory. The pressure to enter OVDI was enormous. By trying to force people into OVDI the IRS was really saying:

“Taxpayer, you should not comply with  the law as it appears in the statutes. The only way we are going to deal with you is through OVDI. We really don’t care if the law says that you have to file these documents with the U.S. treasury. You should not do this without letting us know that you are doing it. You may not see yourself as a criminal, but in the eyes of  the IRS you are a criminal.  Enter OVDI and give us 25% of your net worth. And consider yourself lucky that we are going to take only that.”

(This is the message that people were getting from the mainstream media and from the “cross border professionals. For example:

“We as practitioners also were aware of the drumbeat from the IRS against quiet disclosures or any kind of compliance short of participation in the [OVDP],” he said. “There was some genuine concern among practitioners that advising a client not to participate might be seen by the IRS as a Circular 230 violation — or worse, an obstruction of justice.”)

OVDI (2012):  OVDI  continues to be a program designed for criminals. The second to the last paragraph made it clear that (after all this time) the IRS was acknowledging that there might (just might) be a few U.S. citizens living outside the United States who were not criminals and needed to know how to come into compliance. OVDI is a program for criminals. The mainstream media has also acted in a way that is at the very least immoral. During the summer of 2011, the mainstream media (although not explicitly stating this) reported on the assumption that OVDI was mandatory. A paraphrase of the media message would be:

“Good morning “tax cheats”, you have until August 31, 2011 to “come clean” with the IRS.”


Three Attempts By The IRS To Talk To U.S. Citizens Living Outside The United States:

1. Ambassador Jacobson speech – October 18, 2011

During the summer and early fall of 2011, it was becoming clear that the fear and panic experienced by U.S. citizens in Canada had reached a “fever pitch”. It was on the way to becoming a diplomatic problem for the United States. On October 18, 2011 the U.S. Ambassador to Canada  – David Jacobson – made a speech in which he advised U.S. taxpayers to “sit tight” that a solution would be forthcoming. That solution never came.

2. December 7, 2011 –  IRS issued its FS for “U.S. citizens and dual citizens living outside the United States”

Interestingly, my interpretation of this was that by emphasizing “reasonable cause” (instead of penalties) that the IRS was providing some guidelines for how to come into compliance. The “cross border professionals” immediately informed us that this was nothing of value.

– it didn’t offer anything new

– it left too many unanswered questions

– it didn’t define “reasonable cause”

Regardless of the intent of the December 7, 2011 FS, it was issued in a climate:

– where nobody trusted the IRS (and I would argue for good reason after their “bait and switch tatics” in OVDP 2009)

nobody trusted the “cross border professional” (also for good reason – talk to some of the people who regret their decision to enter OVDI)

In fact, it was so confusing that I wrote three posts on this – once a week. If you read the posts you will see a progression from hope to bitter disappointment. For those interested:

December 2, 2011:

Possible Waiver of U.S tax and FBAR penalties for U.S. citizens living outside the United States

December 9, 2011:

IRS issues information for U.S. citizens and dual citizens residing outside the United States

December 18, 2011:

Update on the IRS FS for U.S. citizens and dual citizens living outside the United States – no additional relief for Canadians

3. January 9, 2012 – Announcement of the continuation of OVDI

In the second to the last paragraph the IRS stated that it would be issuing procedures that would allow U.S. citizens living outside the U.S. to come into compliance. This acknowledges that the December 7, 2011 FS did not contain sufficient guidance. The IRS acknowledged that:

“The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations.  This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax.  The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.”

Mr. Shulman: we need those procedures and we need them now!

We are now in 2012. The 2011 filings are due soon! These “procedures” are coming very late. Will it even be possible for taxpayers to come into past compliance before before the 2011 filings are due? Some “cross border professionals” have advised (in certain circumstances) for taxpayers to wait and see what the procedures are. We are running out of time!

U.S. citizens living outside of the United States need:

– very clear guidance from the IRS

– that guidance must include an assurance that they will not be treated as criminals

– a reasonably clear definition of “reasonable cause”

Today is January 17, 2012. The biggest obstacle to U.S. citizens coming into compliance is a lack of direction from the IRS.


Taxpayer Advocate Would Express This More Politely – But They Seem To Be In Agreement

I was recently introduced to Taxpayer Advocate. What is that? I see them as the “good cop” of the IRS. (You already know the “bad cop”.) Taxpayer Advocate is the division of the IRS that exists to assist the taxpayer who is having difficulties with the IRS.

The Taxpayer Advocate Report To Congress

This is a fascinating read – settle in for the evening. You will find it discussed here. In particular, you should read the report starting from page 63.

Page 70:

“Benign actors need clear guidance on how to avoid FBAR, FATCA and other penalties if they are reasonably trying to comply or return into compliance.”

Page 110 – Begins a specific discussion about U.S. persons in Canada.

The complete is worth reading. The bottom line is that it is highly critical of the conduct of the IRS during OVDI in general. Furthermore, it is very critical of the failure of the IRS to distinguish “minnows” from “whales” and to provide clear guidelines for how “minnows” can come into compliance. An interesting post on the Taxpayer Advocate Report may be found here.

Where To Go From Here – Perhaps Taxpayer Advocate Can Help

General information about Taxpayer Advocate is here. Of particular interest is the following:

“TAS also handles large-scale or systemic problems that affect many taxpayers.  If you know of one of these broad issues, please report it to us through our Systemic Advocacy Management System.”

The failure of he IRS to provide clear guidance for how U.S. citizens and dual citizens living outside the United States  is a “large-scale or systemic problem” that surely affects many taxpayers. There are approximately six million U.S. citizens living outside the United States. I believe that it is time for Taxpayer Advocate to become involved.

U.S. citizens and dual citizens residing outside the United States should ask Taxpayer Advocate to issue a directive (“TAD”) to force the IRS to publish and administer: fair, transparent, equitable and reasonable procedures to allow the them to come into past compliance and make it possible for them to be in ongoing compliance.

Without  this guidance, U.S. citizens will be forced to “Renounce U.S. Citizenship“.

Of course all of these problems would be solved it the U.S. would:

Stop citizenship-based taxation and repeal FATCA

In the interim: enjoy the obligations of U.S. citizenship.

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