On 18 October 2011, The Globe and Mail reported reassuring words from the Ambassador of the United States to Canada:
“My message on this is to sit tight,” Mr. Jacobson said in a speech to the Canadian Club of Ottawa on Tuesday. “We are not unreasonable. We are not unsympathetic. We are not irresponsible.”
The IRS is exploring ways to accommodate the roughly one million dual Canadian-American citizens living here, Mr. Jacobson said.
Canada’s Finance Minister felt that he should get the credit, since he had fought hard to get relief for Canadians. Jacobson said the United States wasn’t after grandmas (see the full speech here):
Second, the penalties [FBAR] — at least in a theoretical sense — can be quite severe.
So you could have a situation where some 70-year-old grandma:
- was born in the US;
- moved back to Canada as a young child;
- never earned any money in the US;
- has no assets in the US; and
- dutifully paid all of her taxes in Canada.
She didn’t file a US return because she didn’t think she had to. And because she didn’t owe any US taxes. Nonetheless, grandma could be theoretically subject to serious penalties. To my knowledge we have never gone after a grandma in those circumstances.
Later, on Dec. 2, 2011, the Globe’s Barrie McKenna reported that relief was coming (emphasis mine):
The policy shift will come in the form of new guidance from the IRS, expected to be issued before the end of December. U.S. officials said the statement will make it clear that:
- If a U.S. citizen files tax returns late and owes no taxes, there are no penalties for failure to file.
- U.S. citizens who were unaware of the bank account reporting requirement can file previous reports now, along with a statement explaining why they’re late. No penalty will be imposed if the IRS determines that there is reasonable cause.
- Individuals who took part in earlier amnesty programs this year and in 2009 can reapply and get back penalties already paid.
Now either Mr. McKenna got this last point wrong, or the US official lied to him. The IRS guidance came out a couple days later, but so far there is no relief in it for OVDI and so the only way to get relief is to “opt out”, which could expose the person to higher penalties and criminal charges. So to the Expat Forum, I wrote the following complaint:
The IRS says that people who want a refunds*, must opt out of the program. Roy Berg of Moodys LLP Tax Advisors wrote of his meeting with Douglas Shulman, the Commissioner of the IRS:
Both my question and Mr. Shulman’s response were quoted in Tax Notes Today on December 16, 2011, which you can read by clicking here.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.
So if you opt out, you risk a steeper penalties and criminal charges. The IRS is dishonest and not to be trusted. They have proven this. So in order to make good on the word of Jacobson, they’ve done a bit of a bait and switch. Typical. You get your money back but you have to take a extreme risk to do so. A bit like gambling the house to win a $1000 in a poker game. Those in the OVDI are not extreme risk takers, but those who want to play it safe who thought that a 5%, 20% or 25% penalty hurts, but that’s better than risking everything and a prison sentence. So the US Feds are playing a game with Canadian government–oh, we are not out to steal from grandmas, but they are, they are, they are. Why don’t they just exempt registered savings accounts (they can), if they aren’t out to get grandmas? Because they are out to get your retirement, grandma’s RRIF and the disabled’s RDSP and children’s’ future education (RESP)–and your TFSA. There is one word for this: “evil”. The sooner we figure that out, the sooner we can find the right way to cope with it. Since the ambassador lied in a public statement to the Canadian people, the United States is guilty of bad faith negotiations with our government, and we are all the victims.
*Actually, I think now that I’ve not heard of any refunds being offered at all. Has anyone heard something different?