This post has been cross posted on RenounceUSCitizenship.
Tax compliance for U.S. citizens living abroad is complicated and expensive. This is the fourth of a series of posts I have written on the recent problems of citizenship-based taxation.
Those interested in this post might also be interested in:
Possible Waiver of Tax and FBAR penalties for U.S. citizens living in Canada – December 2, 2011
IRS Issues Fact Sheet For U.S. citizens and dual citizens living outside the United States – December 9, 2011
Update on the IRS FS for U.S. citizens and dual citizens living outside the United States – No additional relief for Canadians – December 18, 2011
This post is related to this discussion.
As I have written on many occasions most U.S. citizens wish to be tax compliant – the problem is that they don’t know how. When one doesn’t “know how” – one seeks professional advice. In this case that professional advice comes from the “self proclaimed” “cross border professionals”. This post is prompted by the following part of a comment to a recent article in the Globe and Mail:
“And finally, ixnay on the infomercialsway– for all those designated “cross-border tax specialists” whom Globe writers have plied as sources since breaking the thread last June. The inevitable tagline? “Phil N. LeBlanc recommends seeking professional advice.” To paraphrase California legislator Hiram Johnson, the first casualty of tax war is integrity”
There are competent professionals and there are incompetent professionals. By competent or incompetent, I mean in a “technical” sense. Do they know the law? Do they understand the context of the law? Have they had experience with the IRS? The vast majority of lawyers and accountants do NOT have the technical expertise to advise you. There is a great line from the movie “The Untouchables” – what was:
“Just like a ___________, brings a knife to gunfight!”
There are also good professionals and bad professionals in a moral sense. The good professionals see the client’s interest as unrelated to the professional’s financial interest. For those who have the money to be fleeced, there is no shortage of “cross border professionals to help”.
Professionals are overwhelmingly comprised of lawyers and accountants. If you deal with a lawyer you have the advantage of “lawyer client privilege”. If you deal with accountants you don’t. Therefore, all other things being equal, I would suggest a lawyer. That is if you can afford one and find one you can trust.
The IRS assault on U.S. citizens living outside the United States has been a frightening interplay among three groups:
1. The Taxpayers
2. The Cross Border Professionals
3. The IRS
Let’s imagine the perspective of each.
The Perspective of the Taxpayers
I suspect that few U.S. expats will forget the events of 2011. It was a year where they realized how quickly life could change. For the most part U.S. citizens living abroad are hard working honest people who are paying higher income and value added taxes than they would be in the U.S. The U.S. uses citizenship-based taxation. Many of them have been filing U.S. tax returns. But, virtually none of them (except those who always had the benefit of specialized and expensive legal and tax advice) knew about FBAR. When they heard about FBAR, OVDI and the rest they were:
– scared out of their minds; and
– wanted to be compliant
It’ just that they didn’t know how. Hence, they did what anybody would do. They sought professional help.
Furthermore, professional help did not come easily. It did not come inexpensively. It was typically like this: “Yes, I will meet with you. But, bring in a money order for $2000 (or more) and we will start the conversation. The conversation usually focused on whether to enter OVDI. Entering OVDI was a logical option, an expensive option, but I believe for most people a bad option. It was also (because it was a new kind of program) something not well understood by the so called “cross border professionals”.
The Decision To Enter OVDI
For many there was no “decision” to enter OVDI. The entry into OVDI was an “emotional reaction” based on fear.
What happened was something like this:
1. Media publishes articles written by journalists who don’t have a clue what they are talking about. Yes, the IRS is going after U.S. taxpayers who don’t reside in the U.S. Yes, there is OVDI and you must get in the program by August 31, 2011. No, OVDI is not amnesty – but let’s pretend that it is and enter it. I have said before and I will say again that some people entered the OVDI program, without a consideration of their individual circumstances, following the advice of the so called “cross border professionals”. They will regret this.
It is interesting that the advice from a number of lawyers was something like:
“You must enter OVDI” – the IRS frowns on quiet disclosures, etc. These lawyers either did not think that “reasonable cause” was available or that the IRS would not consider arguments based on “reasonable cause”. The important point is that there were “cross border professionals” who did NOT inform their clients that:
A. OVDI was an optional program
B. Filing of FBARs was mandatory
C. The FBAR statute recognizes that “reasonable cause” was and continues to be a defense
(It is interesting that the effect of this advice was to deter people from doing what was mandatory (just file the damm FBARs) and encourage people to do what was voluntary (enter OVDI).
The purpose of OVDI was to go after people who were using foreign banks and other entities to evade U.S. taxes. There is nothing illegal about having a foreign bank account. Most U.S. citizens living outside the United States had local bank accounts for the purpose of living their lives. On the other hand, the IRS has publicized the cases of U.S. citizens living inside the U.S. who used foreign bank accounts for tax evasion. Those of you who are aware of (outside of OVDI) anybody paying FBAR penalties based on willfulness) please leave a comment.
Anybody could have entered OVDI – why would the IRS stop you? By entering OVDI you are simply agreeing to pay them penalties. Furthermore, the range of assets subjected to penalties in the OVDI program is greater than what is required to be disclosed on an FBAR (something not explained by some lawyers). Hence, it is clearly to the advantage of the IRS that people enter OVDI (plus the IRS doesn’t have to waste time on “reasonable cause” arguments).
It is important to note that OVDI is a program which is designed for criminals and removes “reasonable cause” from the discussion. The only way to get “reasonable cause” into the discussion is to “opt out” and subject yourself to a full audit along with all the risks and high costs associated with it.
“Reasonable cause” has always been a defense to FBAR penalties. S. 5314 of the FBAR statute bars the imposition of FBAR penalties if two conditions are met:
1. Failure to file FBARs was due to “reasonable cause”; and
2. The FBAR is filed
Now, I understand that there is no clear definition of “reasonable cause”. I also understand that this is a determination made by the IRS. My point is that the same “reasonable cause” arguments must be made either inside OVDI (after an opt out) or outside OVDI.
While OVDI was going on, few “cross border professionals” talked about “reasonable cause”. Maybe, they thought that the IRS wouldn’t recognize or apply the law. Who knows? I invite a lawyer who encouraged clients to enter OVDI to comment on this.
The Perspective of the “Cross Border Professionals”
Make no mistake. For the most part they exploited the fear of the taxpayers. It is quite obvious that few had any experience with a problem of this magnitude. As “professionals” they were concerned about their potential liability. Many were simply in over their head. The OVDI decision was not primarily a tax issue. It was a compliance issue. Those are NOT the same thing. To advise on “compliance issues” is more difficult and requires some experience in dealing with the IRS. For that reason, many of the professionals consulted were simply not competent to advise people.
Those who were competent to advise seemed to fall into two camps:
Camp 1 – Let’s get you into OVDI without even considering your facts – yes these people existed – they were clearly just taking advantage of the fear – taxpayers were being exploited
Camp 2 – Let’s make a determination based on your facts and then make the appropriate decision – this is the only kind of advice worth paying for – but it will cost because you need to analyze your situation
Unfortunately, there were few in the second camp. Furthermore, those in Camp 2 were simply too expensive for the average person who was ignorant of FBAR.
A final thought on this: from the perspective of professional liability, I suspect that many professionals thought that there was a liability risk to them if they did NOT encourage people to enter OVDI. Clearly the route of least risk for all was to enter OVDI.
But In Fairness to the lawyers – What About The Risk of The “Quiet Disclosure”?
Some advisers presented the options to taxpayers as follows: entering OVDI or a “quiet disclosure”. The IRS had make it clear that “quiet disclosures” (instead of entering OVDI) were frowned upon and were very risky. On the other hand, shouldn’t the risk of a “quiet disclosure” be understood in the context of people who had been hiding income or who had been using foreign bank accounts to hide evade tax? OVDI was aimed at people using foreign bank accounts and assets to evade tax. I simply cannot understand (and I invite somebody to educate me) how this principle can apply in the context of a U.S. citizen living outside the United States who has not been evading taxes. When you look in the mirror, do you see a criminal? Surely, there must be a way to come into compliance (even if small amounts of tax are owed) that does not require the apparatus of OVDI.
The Perspective of The IRS
Although the IRS has great discretion (probably too much) the reality is that the IRS is the administrative agency charged with administering the law. The IRS can neither make nor change the law. For this reason it is impossible for the IRS to somehow offer a special deal or treat Canadians differently. Ambassador Jacobson’s October and December statements and the IRS FS published on December 7, 2011 need to be understood in this context.
IRS Fact Sheet for U.S. Citizens and Duals Citizens Residing Outside The United States
There was great disappointment with this FS. Where was the relief for those who had entered OVDI? Where was the FBAR amnesty? Hadn’t the IRS simply just restated the law?
Well yes, but … What the FS sheet DID DO was confirm that the IRS recognized that “reasonable cause” existed and invited taxpayers to make arguments based on “reasonable cause”. Most “cross border professionals” are singing to the tune that the “IRS is not offering anything new”. Of course not. Something new has to come from Congress. It is impossible for the IRS to somehow exempt residents of Canada from the law that affects everybody. In that sense the IRS is not offering anything new (because it can’t).
What the IRS is doing is making it clear that “reasonable cause” arguments may be viable. The IRS is offering the only “something new” that it can – namely communication of the recognition that they understand that “reasonable cause” is a defense. Entering OVDI removed any consideration (subject to the “opt out”) of “reasonable cause”. Now, the IRS is signaling that “reasonable cause” will be considered.
If you are a “cross border” professional – don’t worry – there is lots of money to be made in advising on “reasonable cause”.
Conclusion and a request …
I don’t think that there will be a better time or opportunity for U.S. citizens living outside the United States to come into compliance. If nothing else, the IRS FS makes it clear that it is possible to do so. Why not do it? The answer is: because you don’t really know how. Furthermore, you don’t trust the lawyers and you don’t trust the IRS (all for good reason).
I request your comments sharing your experiences and thoughts on this important issue.
Very good article. Ultimately the only answer to this problem is for the U.S. to honour its tax treaties which were all written for the purpose of avoiding “double taxation” of each country’s citizen. Citizen based taxation is a violation of that goal of the tax treaties.
This is a very good post Petro. You are correct in your statement that there are many cross border professionals out there who have little experience in tax controversy work, the 2009 amnesty program, and who have offered very bad advice.
A good source resource to find cross border attorneys is Jack Townsend’s Federal Tax Crimes Blog: http://federaltaxcrimes.blogspot.com/p/ovdi-attorneys.html
Roy
Thanks for the compliment. I only mention that Renounceuscitizenship is the author of post, as much as I would like to take credit for everything that happens on this blog, it is a group blog.
I have begun to wonder if the best thing for Canada to do, and other nations that have tax treaties with the U.S., wouldn’t be to opt out of the treaties until such time as the U.S. decides to honour them? The U.S. wants to have things both ways. It wants to tax its resident aliens and it wants to tax its non-resident citizens. This is cheating the treaties.
Why can’t Canada just declare its soverignty over the incomes and bank accounts of all of its residents and prohibit them from extraterriotorial taxation in any form? The U.S. needs to be taught that it isn’t the only nation in the world that can act unilaterally.
Trying to negotiate with the Americans is pointless because they believe that they are the top dog.
These so called cross border professionals are just the “Carpet Baggers” of the IRS. All that they do is suck you dry and if their advice happens to be wrong then it is you who pays the penalty, not them.
In a just tax system it wouldn’t be necessary to pay for these secondary intermediaries. But then in a just world we wouldn’t be subject to extra territorial taxation by a parasitic government.
I just want to second the comments about the quality of this post. It was very good. Thanks.
Fear of the unknown trumped reason and logical deduction thought processes, and for those that were not the target of the OVDP or OVDI, in the first place. The outcomes 2 years later do seem to indicate that many (how many we will never know until there is a successful FOIA) should have never been directed into the programs, but in defense of attorneys, at least back in 2009, I do think that many thought FAQ 35 allowed for that reasonable cause exception that would have lead to less onerous results. Unfortunately, I think that many OVDP participants, just rolled over and paid their 20% penalties when the IRS employed its unintentional “bait and switch” and removed those provisions.
My frustration always was that the IRS never (and still hasn’t) came up with a way to filter out the non targeted (Minnows) from the targeted (Whales) at the beginning of the process. Bureaucratic inertia and lack of creative thinking is my only explanation of why they have failed to deal with the issue at the front end, rather than add more complex technical exclusions and threshold exceptions and an Opt Out back end process. What an incredible waste of LCUs and Tax Examiner time!
Part of the problem in wanting to be FBAR and tax compliant is, as one cross border lawyer once told me:
“You can’t just call up the IRS”
Whether this is true or not, the perception (which is reinforced by the lawyers) is that the only way to talk to the IRS is through the lawyers.
This strikes me as being the same thing as the church in the middle ages. Only way to talk to God was through the priests – and that did cost money. How much? It was determined in this way:
Hello I would like to communicate with God?
Okay, we can find a priest to do that.
The priest arrives and you ask – how much will it cost me to talk to God?
The priest answers – well, this is a complicated thing – how much money do you have?
I have _______________.
I’ll take it.
This is what it is like when you deal with a “cross border professional”.
Perhaps the time has to come to create our own organization – we can call it “The Martin Luther Society” dedicated to speaking to the IRS without the “cross border professional”.
The Canadian government will never opt out of the tax treaty with US because it serves Canada’s purpose too. The US helps Canada go after Canadian tax cheats in the US. The Canadian government may express sympathy for us but it will not opt out of a treaty for us. If the Canadian government acts resolutely on this matter at all, it is most likely to do so in response to the cries of pain from the banks. It would be nice if the Canadian government convinced the US government to alter FATCA such that Canadian banks would not have to report the accounts of people who clearly are not tax cheats, but there is no way the Canadian government will try to get the US to repeal FATCA nor will we be relieved of the FBAR requirement.
I think the biggest difference between OVDP (2009) and OVDI (2011) is that it was clear in OVDI (2011) that there was no FAQ 35 equivalent – that “reasonable cause” would not be considered. For this reason, (and given that lawyers knew that the IRS had changed the rules on FAQ 35 in 2009) I would argue that the advice lawyers gave in relation to OVDI 2011 was far worse, far more self-serving (fees) and generally far worse than in 2009.
Of course there is no doubt that NOBODY but NOBODY trusted the IRS after their unconscionable and immoral “bait and switch” tactics of 2009.
If the IRS is ever going to begin to gain the trust of taxpayers and lawyers they must come forward with step-by-step guidance for how taxpayers can become compliant and how to do it without lawyers.
In fact, the “IRS trust” issue is so extreme that I wrote a separate post about this:
http://renounceuscitizenship.wordpress.com/2011/11/21/what-ia-a-poor-u-s-expat-patriot-to-do/
In order to do this, the IRS must offer an FBAR amnesty. Otherwise they will never be trusted. But, this is precisely what they are unwilling to do. Hence, this problem will linger and linger. The poor will disappear into the woodwork. The rich will renounce and the middle class will continue to live a life of desperation and fear.
In order to bring this to an end, this problem needs to be addressed from the perspective of past, present and future.
Past:
There must be an amnesty for U.S. citizens who live and have been living outside the United States.
Present:
Step-by-step guidance for how to be in compliance on an ongoing basis.
Future:
Stop the insanity of citizenship-based taxation. As other posts I have written demonstrate, citizenship-based taxation is bad for the U.S. economy. And of course, this FATCA BS has to stop. (But, I am confident that other countries – China in particular – will put an end to that).
http://renounceuscitizenship.wordpress.com/2012/01/01/u-s-citizen-employees-and-fbar-requirements/
As part of the considerations leading up to the 2011 changes in the regulations dealing with FBAR the Treasury specifically considered exempting U.S. citizens living in other countries from the FBAR requirement. After considering this possibility, they declined to do this. Hence, you are right – we are stuck with FBAR.
Don’t know if you have been following the comments on the WSJ Jan 3rd, opinion piece titled: Washington’s Assault on American Expats, I think you will appreciate the active comments of one Roger Conklin. There are other good comments besides his, but he is real good at making the case why the Citizenship taxation model is very bad for exports. Here is a link, and if it doesn’t get you past the account page, then copy and paste the title into Google News, and you should get there…
http://on.wsj.com/yv26Qu
Hi Renounce: I was wondering where you learned about that juicy bit of information. It confirms my point that they can exempt entire countries from the requirements if they wanted. Perhaps also they gave reasons (or didn’t) as to why they did not make changes.
The IRS won’t do exemptions because then it leaves a potential big hole in the net. This is the same reason why they won’t exempt the developmentally disabled or those who are senile etc. The problem is basically with the law itself. Instead of doing the TOUGH work and using criminal investigation as a way of finding tax cheats it is much easier and cheaper to just make everyone a criminal and put all of us under their probation.
The Constitution and the sovereignty of other nations is of no importance to the U.S. And they could care less about what it is like to have to prove your innocence each year.
That is a brilliant post. You capture perfectly my panic when I found out about the FBAR requirement. Ever since I’ve been trying to get answers and I confess that I am totally confused. I’ve talked to two accountants , I’ve read the IRS website and I have searched (oh did I search) the Internet. I even called the IRS office in Paris (they were closed). Today I don’t feel any less bewildered but I did go ahead and file them because that seem to be the only course of action that made any sense at all. But I filed before the IRS “clarified” and I didn’t write a cover letter explaining myself. And even if I had known they wanted that, it would have been a one-liner – “Because I don’t understand what you want me to do and how to do it right.”
Petros: It comes from the Federal Register which publishes the regulations and some commentary about them. Can’t find the exact cite, but I read it a couple of days ago.
Thanks, do you have a link to the Federal Register?
This article questions (among other things) why lawyers seemed so eager to push people into the OVDI of 2011. Why did more lawyers not encourage people to stay out of the OVDI?
The IRS was perceived to have changed the rules in OVDP 2009 after taxpayers had entered the program. At the risk of oversimplification, taxpayers entering OVDP did do on the basis that “reasonable cause” was available without opting out of the program. After people had entered the program, the IRS made it clear that “reasonable cause” was available only with an “opt out”. The reason implied was the deeply rooted IRS assumption that only “tax cheats” entered OVDI (making “reasonable cause” less likely).
It seems to me that if lawyers had good reason to believe that the IRS viewed all participants in OVDI as criminals and that the IRS could not be trusted, then they should have advised people to stay out of OVDI.
Here is a link to a fascinating discussion about this on Jack Townsend’s blog.
http://federaltaxcrimes.blogspot.com/2012/01/tax-notes-discusses-dispute-between.html
(Read this slowly and carefully. You will also be introduced to Taxpayer Advocate – Your Friend at the IRS.)
Highlights include:
“At the heart of the dispute is the IRS’s implicit assumption that persons with offshore accounts are tax cheats and that taxpayers entering the program should live with its one-size fits all approach or, if they really think they can get a better result, then opt out and take the IRS’s wrath on audit by examiners who would have the same attitude. (That statement as to wrath is hyperbolic, but that was the fear of taxpayers and practitioners.)
The context for the dispute was the IRS’s decision to stop permitting OVDP 2009 participants to accept arguments resulting in an “in lieu of” penalty of less than 20%. OVDP FAQ 35 suggested that, in appropriate cases, the examiner could do that.”
“Many practitioners had encouraged clients who had not willfully evaded tax to enter the program on the belief that FAQ 35 afforded them the possibility of a review of their reasonable cause arguments, and they were dismayed to learn that the IRS wouldn’t grant that review unless taxpayers opted out of the program.”
Thanks for highlighting this post on Jack’s blog. I think it is one of the more significant developments I have seen, and I really congratulate Nino Olsen for taking this on.
Now, as I understand the process, Commissioner Shulman has to respond, and ultimately the final decision is his. The buck stops at his desk, and there are no further appeals. He has two choices.
One, is to uphold Nina’s ruling, and if so that is good news for all the OVDP participants who just rolled over and paid their 20% out of fear, or never had the chance for a FAQ 35 reasonable cause argument.
Two, he can rule against Nina.
If he refuses to uphold her directive, which is his right, he still has to report to Congress that he has done so, and why. In this political year, it will be interesting to see what he does. This forces Congressional visibility on a subject that has been very much mis-characterized both by the IRS and the press, and could be come political.
In light of recent IRS actions to try, by unilateral regulation, to enforce the domestic version of FATCA, or DATCA (as I call it) on US Banks over the oppositions of some Republicans in Congress, I wonder how much visibility he wants on this issue. If he rules in the negative against Nina and has to report, how politically partisan will this become? That is the key issue to me. I personally would rather have logic prevail over than political partisanship and have the IRS do the right thing and follow Nina’s directive, but I know that is not how it works in DC. Very very interesting and significant, I think, but then what do I know, as I am just me.
This is interesting news! There is a taxpayer advocate? I see from the IRS page that:
“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.”
Although it also says on the IRS page that the IRS has to follow her rulings, which this post seems to suggest is not exactly true all the time.
Canuck.
See my previous post (above) about how the ruling appeal process goes. Shulman is stuck now with doing something. Either accepting or rejecting and neither result will be a happy one for him, from a political perspective. At least that is my read. If you wondering about the TAS, or have never heard about it, I would direct you to these links…
Here
http://federaltaxcrimes.blogspot.com/2011/06/taxpayer-advocate-criticizes-irs.html
and Here…
http://federaltaxcrimes.blogspot.com/2011/08/taxpayer-advocate-service-to-smooth.html
I have had real life experience with them, and told some of my story on there. I was very much impressed with their advocacy and the professionalism. They truly represent you.
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