Are you a U.S. citizen abroad?
If you are not a U.S. citizen (or other kind of U.S. person) you may have little to worry about. Panic is starting to set in. There were many U.S. citizens who became citizens of other countries. They may or may not have lost their U.S. citizenship. Even if at this moment you believe you are a U.S. citizen, I urge you to consider this issue.
If you are NOT a U.S. person there is no reason for you to read the rest of this post. But, if you are then:
It’s all about Cause, Reasonable Cause
The Good News – FATCA Is In Trouble
FATCA is in trouble – it appears to be stalled. Treasury was (at least it said) anticipating up to 50 IGAs by December 31, 2012. As of today, they have a total of four. That is a pathetic and pitiful number. To make matters worse, Treasury failed in its commitment to get regulations/information/direction to the foreign financial institutions by the December 31, 2012 date. (The word is that the release of the final FATCA rules is imminent. Update January 18: the IRS has finally released the final FATCA rules.)
At best FATCA is not going as smoothly as Treasury predicted. At worst FATCA is in serious trouble. As James Jatras preaches, it is a mistake to think that FATCA is inevitable. Furthermore, Canada (the Government and the banks) can put an end to FATCA by just saying no. Just Say No!
The Good News – We Are In A Pre-FATCA World For Non- Complaint U.S. Persons
That means today. That means while there is an opportunity to correct past tax and compliance problems. This means while you can correct the problems on your own initiative and NOT after being contacted by the IRS.
As it stands today, here are some logical options for how to come into compliance as described by one cross border tax professional:
David T. • I spend much of every week carefully reviewing all possible options for delivering overdue tax returns to the IRS before filing, as one can significantly increase the chances of a good outcome.
Americans Abroad can only do one of seven things at this stage.
1. Do nothing at all and hope never to found,
2. File going forward and hope that the IRS, US Treasury and Department of Justice do not ask about the past,
3. File the past returns and FBARs “quietly” by mail with the IRS without otherwise alerting the IRS,
4. File the past returns and FBARs with the IRS and include a written explanation of reasonable cause for not filing earlier,
5. File under traditional “voluntary disclosure” and negotiate directly with the IRS,
6. File under the “OVDP” (the Offshore Voluntary Disclosure Program) and pay a substantial penalty based on the maximum value of financial accounts (typically 27.5% of the maximum value of financial accounts in any of the previous eight years), or
7. File under the new “streamlined approach” for the overseas American, discussed below.
Each of these seven options carries different levels of risk or penalties. Seek professional advice if you or anyone you know is in this situation.
The implementation of FATCA is likely to limit some of these options.
The Possible News – A FATCA World For Non-Compliant U.S. Persons
This is of course purely hypothetical. Let’s imagine how FATCA would affect the large percentage and number of non-compliant U.S. persons in Canada. This exercise might also help persuade the Government of Canada, rather than be complicit in turning one million Canadians over to the IRS, to “Just Say No to FATCA!”
What “would” be different about a FATCA world?
I suggest at least two possible differences:
1. FATCA increases the chances of the IRS learning that one is non-compliant. That is the whole point of “rooting and ratting out U.S. persons”.
What does it matter if the IRS becomes aware that one is non-compliant? It means that you might be contacted by the IRS. It also means that certain compliance options may no longer be available to you. (For example the “voluntary disclosure options” described as options 5, 6 and 7 above. Furthermore, it makes option 1 above more difficult.)
2. FATCA requires that Foreign Financial Institutions take steps to make inquires with respect to the accounts of some U.S. persons. For example in a recent post I reported that Sun Life would be making inquires of certain policy holders. In my opinion this is likely to continue to close the window on “reasonable cause” arguments. FATCA will help the IRS convert non-willful behavior to willful behavior.
What does this matter? Fines, fines and more “draconian fines”. It also means that it will be more difficult to come into compliance.
To put it simply in a FATCA world:
– “reasonable cause” arguments may be harder for taxpayers to make
– “willfulness arguments” may be easier for the IRS to make
The Government of Canada needs to understand that by signing a FATCA IGA they are both:
– creating conditions where tens of thousands of Canadian citizens will be turned over to the IRS for processing; and
– worsening the conditions under which the IRS will take delivery of these people.
What was once non-willful is more likely be construed to be willful. The pressures to enter the punitive OVDP program (if it is still possible with all the horror that it implies) will be heightened.
Therefore any FATCA IGA should include protection for tax compliant Canadians!
A recent letter to the Edmonton Journal opined that:
This is a bad situation for any U.S. citizen in Canada, including any of those one million dual citizens who thought it wise to plan for the future and invest in a government-sponsored RESP or TFSA. The cost of now hiring someone who understands foreign trusts well enough to file the necessary paperwork to comply with U.S. reporting requirements is easily many thousands of dollars. But the penalty for not filing would be in the tens of thousands of dollars per year.
And now the Canadian government will be helping the IRS to identify the people who have innocently got themselves into this mess by listening to their bank’s financial advice. The IRS has reportedly responded to “intense lobbying by Ottawa” by issuing guidance that those owing no U.S. tax would not be subject to penalties for failing to report in past years.
This is a positive development but does not provide any relief from the stress and high cost of amending past returns with complex forms to show the IRS that no tax is owed.
Because of relatively high Canadian taxes on earned income, it is unlikely Canadian residents whose livelihoods depend on employment income should ever have to pay U.S. tax in addition to Canadian taxes paid.
Canada is unlikely to influence the way the U.S. treats its citizens abroad, but the Canadian government should not be complicit in making life miserable for any of its law-abiding dual-citizen residents. If Canada is pressured into implementing the U.S. FATCA regulations, this should come with a complete amnesty from the U.S. with respect to past foreign trust filing requirements for Canadian government-registered TFSA and RESP accounts, and also the opportunity to close all such accounts without penalty from either the U.S. or Canada.
To this I would add, any IGA should:
1. Include a provision that excludes Canadian citizens who are resident in Canada from FATCA rules.
If an exclusion of Canadian citizens who are resident in Canada cannot be negotiated then, the IGA should:
2. Allow for Canadian citizens to renounce U.S. citizenship without payment of an “Exit Tax”
3. Provide for an amnesty from any FBAR (and other information return) penalties.
Thoughts on protecting oneself from “willfulness”
Those who don’t understand the implications of “willfulness” may find the following to be of interest (although this is an example of the IRS making an example out of this “Homelander”):
At a bare minimum, it may be prudent to protect oneself from a finding of being in “willful noncompliance”.
On that cheery note, what follows is a comment I made to another post.
Referring to the part of your comment where you say:
“The math indicates that about 95% of assessable US persons in Canada are not compliant, and most of those are hamstrung by costs and bureaucratic tortuosities, with little prospect of ever becoming compliant. Simple passage of time viciously erodes the carapace of “reasonable cause.” Perhaps the largest subset of that massive herd of free meat is yummy ostrich. Out on the horizon lies Head-Smashed-In-Ostrich-Jump. Two beacons of hope for all this meat on the run: the kindnesses of the IRS (Irrational Rogue Suckmachine) and the bold defenses of TNSF (Twit North Smug & Feeble).
Sauve qui peut!”
Obviously in a perfect world most rational people would like to NOT BE IN NON-COMPLIANCE. That’s different from wanting to be in compliance (a double negative does not always make a positive). The anecdotal evidence is that most people are NOT in compliance. Furthermore, I expect that they never will be able to solve their PAST compliance problems. Why? Because the IRS simply won’t let them. The IRS has reduced all incentives for people to fix past problems. Reason: they have created a situation where people cannot afford to come into compliance. (This is of course unbelievably stupid on their part, but hey …)
1. This thread and others have estimates of professional fees of $20,000 to navigate the compliance terrain. These might be the fees for some simple back filings and legal advice. But, they will NOT be the fees for anybody with any degree of complexity. Any degree of complexity and the fees will be much more. Why? Because there are a number of compliance options and the hope is that there is a way to come into compliance that avoids OVDP (most long term expats should think long and hard before entering OVDP). The more complex your circumstances the greater the cost to come into compliance.
2. The professional fees are independent of and in addition to any taxes and penalties. The reality is that only those U.S. citizens abroad with the most simple lives imaginable will not owe any US taxes.
3. Let’s assume a successful reasonable cause argument for FBAR and other information return penalties – so $0 there.
3. Let’s imagine a low end situation of $20,000 prof fees and another $20,000 taxes. That’s $40,000. Where does the money come from to pay this? Answer you have to sell something which will generate more taxes payable. You see the problem.
Given that it is likely that it will be prohibitively expensive for people to come into compliance, what are they to do? You have made several comments suggesting that the window of opportunity for “reasonable cause” is closing. I think you are correct. It will get much worse if the FATCA comes to be and the FFIs start advertising for the IRS.
So, people with the most simple of situations must now deal with the question of:
“To be an ostrich or to not be an ostrich,
Whether tis better …”
Either way they are in trouble. But, one can cease to be an ostrich by simply filing on a “going forward basis”. This sort of person then assumes the risk of the IRS getting into the past. But, if it’s clear that there are no assets, why would the IRS do this? They know they can’t collect FBAR penalties in Canada. There is nothing to indicate high tax liability. There is nothing to indicate willfulness (meaning they may have trouble imposing 3520 fines, etc.) The IRS can’t get blood out of a stone.
Perhaps the real issue is whether one should:
1. Comply on a going forward basis (which would be a bar to “willful non-filing”) and deal with past problems if they do arise; or
2. Do the full ostrich. Remember that to ignore the whole thing it to keep “US tax compliance” around as a “life-time worry project”. Furthermore, since the window for “reasonable cause” is closing, the door for “willfulness” is opening. The opening of the “willfulness” door is I think the bigger concern.
It is possible to come into compliance on a “going forward” basis. You may or may not have to get into the past. “Going forward” compliance should (this is my non-professional opinion) help protect one from allegations of “willfulness”.
My musings apply only to those with no assets, low income, and simple lives. Those with more complexity probably should determine their possible exposure to back taxes and seek several competent legal opinions. But, remember you don’t ask the “OVDP Lawyer” whether you should go into “OVDP”!
Perhaps one should separate the decision of how to proceed from what professionals you use in order to proceed.
Finally, look at the numbers here. There are so many non-compliant U.S. persons abroad that I really don’t see how the IRS can deal with them. Furthermore, U.S. persons abroad are going to be destitute anyway because FATCA/FBAR etc. have made them unemployable, and undesirable for sharing any form of human activity. So, what’s the poor IRS to do – assuming there is no evidence of income and assets?
U.S. persons abroad are caught in a difficult mess that is NOT of their making. They are no particularly good options to come into compliance. The best approach may to minimize the “downside risk”. Furthermore, the U.S. is moving in the direction of making passports contingent on tax compliance.