God, grant me the serenity to accept the things I cannot change,
The courage to change the things I can,
And wisdom to know the difference.
We are now more than two years into the Obama/Geithner/Shulman/IRS assault on U.S. Citizens Abroad. It is commonly accepted that the origin of the assault has been – what can now be understood to be – a clear, deliberate, and conscious decision of the Obama administration. That decision is to equate the day-to-day bank accounts of U.S. citizens abroad with the offshore accounts used by Homelander tax cheats. It’s no longer possible to believe the administration and the IRS are unaware of what they have done. There are signs that the IRS is slowly trying to change the rules, change the policies, and change the enforcement. That said, one gets the feeling that the IRS is motivated by considerations of “processing efficiency” and not by considerations of “fairness and justice”.
Two important aspects of the problem are:
1. All bank accounts outside the United States are considered to be “sacred instruments” of tax evasion. Not even the IRS is stupid enough to believe this. Therefore, it’s clear that the IRS is at least threatening (how do like freedom now?) to use the day-to-day bank accounts of U.S. citizens abroad as an “FBAR Fundraiser“. The IRS is using the retirements plans of U.S. citizens in their country of residence, to levy fines for failure to file Form 3520. The IRS is using the fact that middle class U.S. citizens invest in mutual funds to subject them to impossible compliance costs and more threats of penalties. This has been documented by Taxpayer Advocate and ignored by the IRS. We know this. What is different is that in 2011, there was a sense that this “must be some kind of mistake”. It must be “some kind of misunderstanding”. Only a fool would believe that today. The only sane way to view this today is as follows:
The Obama administration is deliberately using penalties and threats of penalties to confiscate the assets of U.S. citizens abroad. Don’t believe it? What’s Form 8938? This is not about taxation. It is about confiscation. But you know that. But, this is not the purpose of this post.
2. The purpose of this post is to explore an aspect of this that has not been adequately discussed. In the same way that it is a mistake to treat all “non-U.S. banks accounts” the same. It is a mistake to think that the impact of all of this is the same on all. In fact, the people who are the hardest hit are those U.S. citizens abroad who have tried the hardest.
Group 1 – Those Who Have Been In The U.S. Tax System
This group has been filing their U.S. tax returns, to the best of their abilities. They are in the system. They are now “low hanging fruit”. The fact that they have been filing all these years means that they are likely very financially responsible, very aware, very law abiding people. That’s the good news. The bad news is that they are also people who by vritue of having tried to save for retirement have assets that the U.S. wants to confiscate. Obviously this includes the PFIC mutual fund problem.
The problem of owning mutual funds is two-fold:
First, mutual funds are not subject to rules of taxation. They are subject to rules of confiscation.
Second, that in order for the IRS to confiscate them, one must first comply with all kinds of reporting requirements that are impossible to understand and are far too expensive for the average person.
Here is a historical analogy to the IRS treatment of U.S. citizens abroad who have mutual funds:
Jesus was forced to carry his own cross (paying the cross-border professionals to complete the forms) to his crucifixion (the confiscation rules will take it all).
Now, I know that at this moment, at least some readers are howling at the last sentence. Really! What that tells me is that you:
A. Have not tried to be U.S. tax compliant;
B. Have not tried to use mutual funds to invest for retirement;
C. Probably do NOT feel strongly that one should be tax compliant;
D. Probably are far enough enough away from retirement age so that you can make up the losses.
Just try living this reality!
The people most hurt by this are the people who have tried the hardest to comply with the law. I remind you that it was not until OVDP started in 2009 that the IRS enough knew now to deal with mutual funds and not until 2010 that the ruling came from an IRS counsel (that the cross-border professionals are using to deem mutual funds as vehicles of confiscation).
Group 2 – Those Who Tried To Fix Any Past Compliance Problems
It has become increasingly clear that those who entered OVDP or OVDI were simply suckered. After the vicious and frightening propaganda of the summer of 2011, many people were terrorized into entering OVDI. The lawyers were there to usher them in. They are now locked into the program (although there is some indication that some will be moved to “Streamlined Compliance”). Those who waited appear to have better compliance options.
Of course, by December 2011, the IRS had issued the infamous FS which made it clear that, one didn’t need a formal program of voluntary disclosure. Of course, that didn’t stop the IRS, with full knowledge that minnow were being terrorized into the program, from resurrecting (another Biblical analogy) the corrupt OVDP program in 2012.
My point is a simple one: those who tried to be compliant, those who tried to become compliant by entering the OVDP programs have been the hardest hit. The main reason has nothing to do with taxes. It has nothing to do with compliance. It is the fact that many of them have heard nothing from the IRS. Reminds of the Steven Miller (a cousin of his perhaps) song:
Those who entered OVDI have been living in fear and anxiety since entering the program. What have they heard from the IRS? In many cases, nothing.
IRS Bait and Switch Tactics in OVDP and OVDI
One would think the terms of the OVDP programs were abusive enough. But, the IRS didn’t stop there. In 2009 the IRS changed the terms of the program after people had entered the program. In 2013 the IRS kicked a group of people out of the program after accepting them into the program. It is now certain that:
Any lawyer who advises a client to enter the OVDP program should be disbarred!
The only benefit to the OVDP program was certainty of result and now that certainty has been forever compromised. As a letter from the New York State Bar suggests, who could possibly trust the IRS? The trust issue was recently highlighted by former IRS lawyer Steven Mopsick on this blog. (See also the Mopsick Trilogy – a series of posts about OVDP and its impact on U.S. citizens abroad and Green Card Holders.)
So, what’s a law abiding person who believes he is supposed to be tax compliant supposed to do?
I am writing this post in response to a series of comments at the Isaac Brock Society. The post was about PFICs and it generated a number of comments. The interesting comment stream starts here. We are confronted with a situation of a frightened, confused U.S. citizen abroad, who really wants to be tax compliant, did his best to save for retirement, like the IRS knew nothing about the perils of mutual funds, and must now choose between:
A. Financial ruin – all his money must to to the IRS and compliance costs
B. Non-compliance – but having to live as a “tax cheat”
The problem is that this is exactly the situation of many U.S. citizens abroad who have have lived commendable responsible lives. It is worth noting that neither the IRS nor the U.S. government has ever AND TO THIS DAY DOES NOT make any real effort to educate U.S. citizens about their tax responsibilities! The IRS defines “education” as “threats or penalties”. I feel for the children of Douglass Shulman and Steve Miller (if they have any).
I am going to reproduce this comment stream and invite suggestions on how what people like this should do.
@USCitizenAbroad, @Kalc, @Bubblebustin
“What would you expect a U.S. person with many years of fillings in the system to do?”
That is exactly the issue. This whole PFIC thing makes me SO ANGRY and FRUSTRATED!
I don’t see ANY good answer for such persons. No matter what option you look at it spells financial disaster, especially for people who are at or near retirement age. They cannot afford
to lose all of the money they have invested over many years just to now become “compliant” (i.e.pay big bucks to have some accountant fill dozens of 8621s, pay back taxes, interest, and penalties and more taxes and interest after they sell the PFICs) and they do not have any other regular source of revenue to replace such a loss.
“If you are a Canadian citizen without US assets, you are protected. Don’t tell your FI if you happen to have been born in the US. Don’t have more than 1 million in one account.”
It’s not so simple. If you’ve had a long term relationship with your financial advisor, he likely may already know that you are a USC. Many mutual fund portfolios contain a mixture of US and non- US assets, so you likely may have some in your portfolio already. What should you do? Sell them and then what?
How do you deal with them on the following year’s tax return? FATCA kicks in way below having 1 million in one account.
“I do NOT believe that the Government of Canada understands this problem in its entirety. Would you be willing to collect these comments (including the one about the interaction between PFICs and SubPart F),”
I agree totally. If the government of Canada DID understand all the implications and what a horrendous financial burden this will create for U S persons in Canada, when their financial institutions turn over the data about their TFSAs, RESPs, PFICs, and other investments via FATCA, I think they would not be so ready to sign an IGA. Those persons will be financial bankrupted if the IRS gets their data and goes after them. And when these people are left bankrupted, it will be the Canadian government that will have
to help support them because we all know that the US government won’t do anything for USCs abroad.
So, please, please do everything that you can to inform them (Kevin Schoom and others) of what are all the implications if they go down the FATCA compliance path. I think this PFIC problem has certainly not been given enough visibility with our government. It is incredulous to me that the IRS could make a policy change in 2010 about Canadian mutual funds without a formal regulation and then apply it retroactively. This is just WRONG and the Canadian govenment needs to stand up for us and fight this.
Sorry for the rant, but this issue makes me crazy. Reading what USCitizenAbroad suggested as the only solution for the most financially responsible citizens today just makes me feel more depressed about an already depressing situation. Yes, it does help to be able to talk about it here with others but the reality that is looming in the near future if FATCA kicks in as planned is just too awful.
Here are the solutions:
Solutions From The Government of Canada
Any IGA would exempt from its application lawful residents of Canada regardless of their citizenship. Put it another way, the U.S. can’t both have FATCA and citizenship-based taxation. Is this possible? Not unless this issue is really understood which is not.
Solutions From U.S. Persons Abroad – Take Charge Yourself
You and I agree that the ones with the biggest problems are the ones who are entrenched in the system. Their options are:
1. Do not sell their PFICs. The problems kick in when they are sold. Continue to treat the distributions the way you have always treated them on your tax return. Repeat: It’s the sale that triggers the very worst of the problems.
2. The time has come to recognize that you will never be able to be U.S. tax compliant. Just not possible unless you pay the staggering costs of compliance and all the fines associated with trying to plan for retirement. I would stay away from the lawyers who will scare you to death. Just keep living your life. Don’t do anything that will trigger taxable events. The advice that most accountants and lawyers give is: sell your PFICs. For those who have had them for the long term, that is the worst possible advice. You do NOT sell them. You hold them and simply pay tax on the distributions the way you always have. That’s the best case scenario. Include the income on your taxes.
3. RRSPs – This may be the exception to my suggestion for holding the PFICs. Assuming that because they are in an RRSP that the sale inside the RRSP is NOT a taxable event, then perhaps you get rid of those (but get competent advice for taking that step).
4. Don’t listen to the F_____ cross border professionals. Most of them have really not thought this through plus they have trouble separating their interest from your interest.
5. If all else fails, hide behind the treaty.
6. Become a Canadian citizen if you are not already. Then start lobbying the Cdn government to pass law saying that all naturalized Canadian citizens were Canadian citizens from birth. This will protect their own tax base and their citizens from the U.S. exit tax.
7. Just accept that the US considers you to be a criminal. Hell, people live like that all the time. Of course, you should stay out of the U.S. You might even learn to like it. Dress the part. Pick up the language. Learn to talk that way. It might be fun for you. You might get the respect that you think you are lacking. Pick a criminal to model yourself on – say Barack Obama.
8. If none of these work, and you have Supart F income, then, well you know my suggestion.
Curious what you think of those suggestions?
For those entrenched in the system, surely renouncing is still a better option than continuing to have to deal with this BS year after year. At least that frees you from the ongoing obligation. Yes, I accept that it may leave issues from the past and may not be a great idea for those that have a need or desire to set foot in the US in the future.
Yes, there is still an issue with the 8854 compliance, but there is still a choice on how to play that game, depending on the circumstances and risk tolerance.
Thanks for your comments on my posting. Here are my thoughts on your suggestions. I’ve included a
few questions I have on some points you raised.
Solutions from the Government of Canada
Yes, I agree that this would be a great solution, but I don’t believe they do understand it.
Solutions From U.S. Persons Abroad – Take Charge Yourself
1. Yes, I agree that it makes no sense to sell the PFICs as that will trigger a nightmare.
2. Yes, the lawyers and accountants that I’ve talked to have all said to sell ALL the PFICs, but of course they don’t have to worry about paying the costs associated with doing so. I concur that there is thus NO
way to ever be tax compliant in this scenario, unless of course the tax code changes.
“You hold them and simply pay tax on the distributions the way you always have. That’s the best case scenario. Include the income on your taxes.”
QUESTION: So I infer from your suggestion that one should not bother with now filing 8621′s and the
complicated calculation of “income” derived from them, but just continue to include the actual interest or
dividends or capital gains distributions you receive from the mutual funds on your tax return. Is that what you are suggesting? As soon as you look at filing 8621s for each mutual fund you are talking BIG bucks
to have an accountant prepare it and these forms are way too complex for the average taxpayer to attempt.
QUESTION: What happens when FATCA kicks in and the FFI or CRA turns over the details of these funds to the IRS? Won’t they then identify them as PFICs and come screaming for all they back taxes, 8621 forms, etc? Is that where your suggestion 5 comes in?
3. Don’t know about the RRSPs. This would require more research. For now these are not as
important since the tax is deferred by 8891.
5. “If all else fails, hide behind the treaty” Not sure just how one can hide behind the treaty. Can you
clarify what you mean here?
6. Definitely a Canadian citizen. Ideas how we can get the Canadian government to pass such a law?
7. Yes, definitely safer to stay out of the US. Not really a big hardship on that point for many of us.
8. I didn’t really understand the Subpart F business completely but sure hope it doesn’t apply. I’d hate to think that that would be the only solution.
I’d be interested in your further comments and answers to my questions above. Your comments are always very informative. I appreciate having the means to exchange thoughts with people like you who do understand this complex and horrendous issue.
It is clear that this person is in a situation where he completely compromises his financial security by allowing the cross-border professionals and the IRS to confiscate his assets or he must live with the knowledge that the U.S. considers him to be a “tax cheat”, somebody who is worthy of a “FATCA Hunt” or possibly a Whistle Blower’s Retirement Plan.
It is impossible to live with either scenario.
The first scenario subjects one to a total rape and having to live with the consequences the rest of your life.
The second scenario, if not dealt with properly, has the potential to change your own “self image”. On this point though I would say:
To be considered a criminal by the U.S. government is like being called ugly by a frog. To be a criminal is to have a certain moral stature. In the U.S. there is no correlation between law and morality – in fact, law has become a substitute for morality.
At a minimum, leaving aside the financial issues, the emotional stress and damage is more than a person who was financially responsible can bear. So, those U.S. citizens abroad who are nearing their retirement years and have most of their wealth in mutual funds must choose one of two options. Tax compliance is possible only in a logical sense. In a practical sense, for many U.S. citizens abroad, tax compliance is not possible. This is perfectly understandable when issues of “taxation” are confused with “confiscation”.
The current U.S. Canada Tax Treaty, as I understand it, does NOT require Canada to assist the U.S. in the collection of taxes on Canadian residents, if the person was a Canadian citizen at the time the “debt” arose. This is information of possible relevance. It doesn’t mean you don’t owe the money. It just means Canada won’t help the U.S. collect it. I presume that that those renouncing U.S. citizenship would be able to use the treaty to shield them from possible Exit Tax Enforcement. But, to use the treaty is to live with another layer of worry!
The best solution is always to renounce. At this point the only reason to NOT renounce is because you think the U.S. will move to Residence Based Taxation. Who knows? Tax reform is on the agenda. U.S. citizens abroad made a number of excellent submissions to the Ways and Means Committee. I don’t know about you. But, there are NO circumstances under which I would want to be a U.S. citizen.
I am writing this post at time when:
1. Canada is considering a FATCA IGA with the U.S. I hope Canada understands what it will do to one million Canadians by turning them over to the IRS.
2. Generalized IRS abuse of taxpayers is under way in Washington. It is possible that this post has relevance to that issue.
3. Congress is considering moving to Residence Based Taxation. That would solve ALL of these problems.
In closing, to all U.S. citizens abroad who worked so hard to save for your retirement …
God, grant me the serenity to accept the things I cannot change,
The courage to change the things I can,
And wisdom to know the difference.
This is for real. You must accept that the U.S. government is not what you thought it was. It has made a conscious decision to attack you, your families and your assets.
Courage is the willingness to proceed in the face of fear. In this case it requires you to face up to a decision with no good outcome. You must choose between being destitute or being tax compliant. “American exeptionalism” means you cannot have both.
Wisdom means finding a way to move beyond this frightening chapter in your life. Look at it this way: there are parts of the world where people have never experienced life without U.S. tyranny. The good news is that you do NOT live in the United States.
On that note, I will conclude with a thought from Winston Churchill. His wife did not approve of his drinking. One night he came home and she said:
Winston, you are drunk.
Winston thought about it a minute and said:
Yes, I am drunk. But you are ugly and tomorrow I will be sober.
Put it this way, you can renounce your U.S. citizenship. Every day, for the rest of their lives, Homelanders will wake up in the Homeland!