Whatever this means was announced on June 26, 2012 under the title of New Filing Compliance Procedures for Non-Resident U.S. Taxpayers. Those interested in this topic should check back frequently for more specifics. The specifics should be available no later than September 1, 2012. I am certain that the “cross border professionals” will say that this is “nothing new”. After all the statute of limitations for FBARs is six years. This is a message from the IRS and therefore it needs to be read carefully. It also needs to be read in the context of:
1. OVDI – You are all criminals
2. The December 2011 FS – well maybe “reasonable cause” does really exist
3. Voluntary disclosure in general – always been there anway
You can be sure that the IRS chooses its words carefully. Therefore, we must read the words of the IRS carefully.
The IRS cannot change the law and is an administrative agency in charge of enforcing the law
First, please note that in its express terms the June 26 announcement applies only to taxpayers living outside the U.S. who have NOT been filing 1040s, associated information returns and FBARs. This means it does NOT apply to U.S. residents. Furthermore, it doesn’t look like it can be used to amend existing returns. Although the information appears to allow RRSP holders to make the appropriate 8891 election, it is not clear whether this can be done if someone has been filing 1040s, but just failed to include the RRSP 8891 election. I would hope that this procedure can be used to “fix the RRSP” even if 1040s have been filed. In any event, the devil is in the details and we will see.
The IRS cannot change the law – the issue is what does all of this mean in terms of IRS administration of the law
This is an important point. We all agree that the problem is citizenship-based taxation. The IRS cannot change the law that requires citizens to pay tax. The IRS cannot change the law that determines what is taxed and how much tax is owed. But, it can change the way that it administers the existing law. By “law” I include: laws that determine tax liability, information reporting requirements and FBAR. Therefore, the real questions are:
1. What do these IRS announcements (OVDI, December 11 FS, and June 26 12 information sheet) as individual documents tell us about IRS attitude toward the administration of the law in relation to U.S. person’s living outside the United States?
2. When we read these documents together what do they suggest about an evolution of attitude?
I read that IRS attitude as follows:
– OVDI (especially summer and fall of 2011): Every single U.S. citizen outside the United States is a tax evader. We will take a hard line with them. “Reasonable cause” (if it ever existed) is a thing of the past. It is unreasonable that any true American would live outside the United States. Therefore, if you live outside the United States you are unreasonable. Because you are unreasonable, “reasonable cause” could not apply to you. Of course the “cross border professionals” did a wonderful job reinforcing this point of view. Conclusion: OVDI focused on penalties.
– December 2011 FS: Okay, maybe there are some people living outside the United States who are (if not reasonable) at least not unreasonable. We will remove our presumption that living outside the United States makes you an “unreasonable person” (but we still think its unAmerican to live outside the U.S.). Therefore, we will allow you to make “reasonable cause” arguments. But of course, you do so at your own risk. Conclusion: The December 2011 FS focused on “reasonable cause”.
– June 26, 2012: Okay, we really want you to come in and be compliant. So, if you haven’t been compliant, under certain circumstances, we are going to allow you to come back without too many problems. But, hey don’t forget to add your “reasonable cause” letter. But, in order for you to get the benefit of this kind treatment you must be a person with “low compliance risk”. If you are NOT a person with “low compliance risk” we are NOT going to tell you how we will respond. But, make no mistake this is NOT an amnesty. We know that you will all want to know what we mean by “low compliance risk”. Here is what (as of June 26, 2012) the IRS is saying about “low compliance risk” (remember this can change):
Compliance risk determination:
The IRS will determine the level of compliance risk presented by the submission based on certain information provided on the returns filed, and based on certain additional information that will be required as part of the submission. Low risk will be predicated on simple returns with little or no U.S. tax due. Absent high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk. In general, the risk level will rise as the income and assets of the taxpayer rise, if there are indications of sophisticated tax planning or avoidance, or if there is material economic activity in the United States. Additional risk factors include any additional history of noncompliance with United States tax law and the amount and type of United States source income. Additional information regarding the specific factors the IRS will use to assess the level of compliance risk, and how information regarding those factors should be presented in the submission, will be released prior to the effective date of the new procedure.
If you read carefully this tells you nothing. It doesn’t even guarantee that if you owe less than $1500 a year in tax that you will be deemed to be of “low compliance risk”. I repeat it tells you nothing other than that if you are of “low compliance risk” you are probably safe. But, it doesn’t tell you what they mean. So, I would be very very careful. This does NOT say that if you owe less than $1500 a year in tax that you are a “low compliance risk” person.
The Proper Way For the IRS To Assess “Compliance Risk” (In my humble opinion)
The telling statement is “Low risk will be predicated on simple returns with little of no U.S. tax due”. Note the focus on “simple returns”. I would guess that they mean a wage earner. I suspect that if you run your own business you are NOT low compliance risk (but who knows).
What is interesting is that the determination of “low compliance risk” is based on the kinds of activities one is involved in (“simple returns”). “Low compliance risk” is NOT based on one’s willingness to comply with the law. In other words, the IRS seems to be operating on the presumption that everybody organizes their lives to evade taxes. This is offensive and stupid. The reality is that people have suffered so much stress and pain because they DO want to be in compliance. They want to learn HOW. They don’t want to be bankrupted for unintentional omissions. For months I have been using this blog to ask the IRS to “come clean”. (On January 9, 2012 the IRS promised procedures for how dual citizens can come into compliance. They still have not done this.) Just tell people what they need to do and how to do it? The overwhelming majority of U.S. citizens abroad desperately just want to be in compliance. Why the IRS can’t see this is beyond me.
What it really means to be “low compliance risk”
The people who are really “low compliance risk” are those who understand their legal obligations and are given clear instructions for how to come into compliance and stay in compliance. That’s all we want. Other countries seem to be able to do this? Why can’t the IRS?
While we wait for clarification on what “low compliance risk” means, I would be careful. As always, my advice is: seek competent legal advice.
A final point:
Note the following message from the IRS:
Taxpayers who are in a situation where they are concerned about the risk of criminal prosecution should be advised that this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution. Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware of and consult their legal advisers about the Offshore Voluntary Disclosure Program (OVDP), announced on January 9, 2012, which offers another means by which taxpayers with undisclosed offshore accounts may become compliant. For additional information about the OVDP, see www.irs.gov. It should be noted, however, that once a taxpayer makes a submission under the new procedure described in this document, OVDP is no longer available. It should also be noted that taxpayers who are ineligible to participate in OVDP are also ineligible to participate in this procedure.