Caution to U.S. Citizens and U.S./Canada dual citizens who are residents of Canada about the IRS announcement (IR-2012-5) January 9, 2012, regarding Offshore Voluntary Disclosure
On January 9, 2012, the IRS announced a renewed Offshore Voluntary Disclosure program. This is an IRS program designed to bring tax cheats into compliance. During the last two disclosure programs in 2009 and 2011, a significant number of unsuspecting Canadian residents entered these programs to “make it right” with IRS. We strongly warn law-abiding Canadian residents of the dangers of entering this program which is intended to attract tax cheats who live in the United States but have undisclosed offshore accounts.
The United States has dusted off a long neglected, possibly unconstitutional law which requires all United States persons to file a yearly disclosure of foreign financial accounts (FBAR). There is widespread ignorance of FBAR, and up until recently, very limited compliance. A significant number of Canadians learned about the 2011 Offshore Voluntary Disclosure program from the Canadian media and entered it in fear, not realizing that the IRS had every intention of levying fines of 25% of their net worth (or in some cases 5% for those who were unaware that they were United States citizens), even though in most cases they owed no taxes to the United States, had no knowledge of the FBAR reporting requirement, and had innocent and necessary bank accounts in accordance with the laws of Canada. As a result of this crackdown by the IRS, Finance Minister Jim Flaherty went to bat for Canadian residents, insisting that the IRS get off the backs of hard working Canadian residents who had done no wrong and who were abiding by the tax and banking laws of Canada. “Canada is not a tax haven”, he insisted. As a result of Flaherty’s efforts, United States Ambassador to Canada, David Jacobson tried to assure Canadians that the IRS was not out to get grandma’s bank accounts. He said, “My message on this is to sit tight. We are not unreasonable. We are not unsympathetic. We are not irresponsible.” Law abiding residents of Canada, please do “sit tight”. Do not enter this program out of fear, and do not allow a lawyer to enter you into this program without clearly explaining why you should. If you enter the program, the IRS will surely fine you up to 27.5% of all of your monetary and non-monetary financial assets.
All residents of Canada, who may be affected by the extra-territorial reporting requirements of the United States, should also know the following points:
(1) The Canadian government has said it will not enforce the collection of FBAR fines. Thus the IRS has no means to collect fines from any accounts in Canada.
(2) The Canadian government has said it will not collect taxes for the IRS from Canadian citizens, provided that the person incurred the tax liability while a Canadian citizen.
(3) The IRS cannot be trusted. The Tax Advocate Service, the ombudsman service within the IRS, issued a rare Tax Advocate Directive rebuking the IRS and ordering them to respect the terms of the program and be more lenient, returning to the policy of the FAQ 35 which said that those who enter the program would not be fined more than they would have under existing statutes. To date the IRS has ignored the Taxpayer Advocate Directive. This suggests that the IRS has decided that Offshore Voluntary Disclosure should be a revenue generating instrument and apply the fines of 20% and 25% without regard to the innocence of the people that entered into the program. The IRS presumes that everyone who enters these programs is a tax cheat.
(4) We must stress that the Offshore Voluntary Disclosure program, which the IRS has announced, is not a mandatory law but a voluntary program. Therefore, enter it only if you wish to relinquish voluntarily 27.5% of your hard earned savings and other assets to the IRS.
(5) If you are a United States citizen or Green Card holder and are or were unaware of your filing requirements, we urge you to get sound information regarding your rights and responsibilities from reliable sources. If you are living in Canada and abiding by Canadian tax laws, you are not a criminal nor should you permit the government in Washington D. C. to treat you as one. Know also that “cross border” accountants and lawyers do not have equal standards of competency or morality. Buyer beware!
Peter W. Dunn has written this press release on behalf of the Isaac Brock Society, which is an informal group of individuals who are concerned about the treatment by the United States government of US persons who live in Canada and abroad. We have come together to fight the overreach of the IRS and to provide one another with accurate information, peer-to-peer advice and comfort. Our website is http://isaacbrocksociety.com.
Outragec They won’t ask and you don’t need to tell
The proposed regulations now exclude all accounts under 50k, RSPs (although this isn’t certain), and something called local banks (those that certify they have no US account holders.)
For most accounts, the bank is supposed to electronically search for US addresses, P. O. boxes, forwarding addresses, place of birth etc. Note that your bank won’t have your birth place and won’t ask for it. To open an account in Canada you can use a driver’s lic. among other things for ID. remember DADT
@kalc- is it that the local banks must certify that they have no U.S. account holders or that they must certify that they have no U.S. assets?
I am thinking about such institutions as Credit Unions or any other financial institution that is provincially regulated and which by charter therefore has no foreign operations.
KalC – Regarding that $50K floor in the proposed regulations. If you were doing their job, starting up this asset scan, and had a shred of rationality, wouldn’t you begin with focus on the bigger, fatter fruit that you might be able to chaw a fast juicy chunk out of? Once that old harvesting machine is humming and adjusted, do not be surprised to see that floor get lowered to whatever has payback potential. After all, maybe somebody out there redistributed assets into multiple $40K accounts?
Thanks KalC. I, too, think they will start larger, but unless they’re stopped somehow, they’re going to focus deeper and deeper. Just like they were after money-launderers, and now it’s us average folks… where on earth does this, will this end… it’s a nightmare. The US (and maybe other govts, I have no idea) has a history of reinterpretation of laws, and changing laws to suit the needs of the moment…. frightening stuff.
Recalcitrant. The draft FATCA regs are 388 pages of newspeak. It is beyond a mere mortal to comprehend them
The draft regs are here
http://www.irs.gov/pub/newsroom/reg-121647-10.pdf
Page 299 deals with ‘local banks’
You would have to ask the credit union what they think. The RSP exception , if that’s what it is, is on page 286 and 287
Note. These are proposed regs for reporting by the banks not by the individual. i.e. the requirement to report your holdings with your tax return are probably still in effect.
As a tax lawyer dealing with voluntary disclosure cases, I just wanted to echo some of the thoughts above. There is no requirement to participate in the program. Sometimes it’s clearly the right move, and sometimes it’s clearly a very foolish move. Much depends on the particular circumstances. I’ve seen many tax advisors who take the view that everyone with a “foreign account problem” needs to make a formal voluntary disclosure. In my view, these advisors (who may or may not be thinking about their own fees) are giving very poor advice. Everyone in this situation should be considering, among other things, (1) a formal voluntary disclosure (and paying the one-size-fits-all penalty), (2) a so-called “quiet disclosure” (including amending some number of prior returns), and (3) simply complying on a going-forward basis (without doing anything about prior years). Each has different risks, depending on the circumstances.
@Michael J. Miller
Points well taken, I guess you are trying to play a game with IRS while IRS has made it clear in OVDI FAQ — don’t take risk on QD.
I believe most lawyers want to avoid the risk of huge penalty so OVDI is a right choice.
I do see some lawyers who represents taxpayers nothing more than a middle man between IRS and the person he/she represent.
See this story
http://forums.serbinski.com/viewtopic.php?t=6241
Tacova is a Canadian (likely from Quebec) US resident. His/her lawyer is doing nothing when IRS demands on RRSP statement. In fact he/she has sent a 9100 relief request along with back filing on f8891 tax deferral election. I would demand IRS to respond the 9100 relief request in writing before sending RRSP documents. Otherwise, the taxpayer would seem to prefer RRSP as non-retirement assets in US — and not to use US/Canada tax treaty.
With a rejection 9100 relief letter from IRS, the taxpayer can take this to TAS — and to show the world — the true face of IRS folks inside OVDI — and to prepare himself/herself to fight in Tax Court.
By the way, 80% Canadians living in US who have RRSP are not aware of f8891,
And, there has been no single rejection from IRS when a taxpayer requests for 9100 relief on RRSP.
I can understand the money driven IRS inside OVDI the way they deal with RRSP — I don’t understand this lawyer –how he/she is so comfortable taking the money from his/her clients without a fight ?
@Michael J. Miller Thanks for your kindly comment. We have been having a debate with another tax lawyer, Steven Mopsick. I wonder if you could weigh in. Our advice in the above post is specifically for Canadian residents, who can rest upon the assurances that the Canadian government has provided, (1) never to collect taxes for the IRS from a Canadian citizen; (2) never ever to collect an FBAR fine, whether or not the person is a citizen of Canada. The sum of these two protections means that US residents in Canada need not fear FBAR, and as for extra-territorial taxation, their best protection is Canadian citizenship. People in other countries have to learn and weigh the assurances provided by their own country. Mopsick believes that there are some residents of Canada who should enter the OVDI. I’m still trying to figure out who they may be.
Each person has different exposure to the capricious and evil nature of the current US government. Some must be able to visit relatives in the United States. Others have business dealings in the states or jobs that take them regularly into the United States. Most of these should probably do go-forward compliance, if they really feel the need to maintain a good relationship with the State Department so that they can travel to the United States (as the State Department is beginning to use border guards now to enforce the tax rules).
Mr. Mopsick came up with a scenario dual citizens, Jack and Jill, to which I responded that they would probably renounce their citizenship rather than pay millions of dollars in fines in an OVDI.
My opinion is that a person who has no significant assets in the United States and no compelling need to go to the United States, has no need whatsoever to comply with the unconstitutional FBAR requirements which are the equivalent of a general warrant in violation of the Fourth Amendment, and a substantial hazard to the person filing, a violation of their Fifth Amendment rights. The draconian fines are a violation of the Eighth Amendment. What has happened to the United States that the government has so lost its way that Americans put up with this kind of invasion of rights?
Perhaps you yourself are aware of the avalanche, barely reported in the media, of renunciations of US citizenship. I myself have relinquished my US citizenship and am very unhappy with the United States right now.
Thanks again for your comment.
I think it’s difficult to get a responsible lawyer to agree to the kind of absolute statement you’re looking for, particularly in a scenario — such as that posed by Steve — that clearly has profound criminal implications. Having said that, I would (for a number of reasons, including but not limited to Canada’s position on collection of US tax/FBAR penalties) generally anticipate that a US citizen who has resided in Canada for many years, and has little connection with the US, is likely to be better off without submitting to the voluntary disclosure program.
@ij You’re correct that the IRS doesn’t like quiet disclosures. My concern, however, isn’t making the IRS happy; it’s looking out for my clients (within the bounds of the law). The IRS prefers to herd everyone with an undeclared offshore account into the voluntary disclosure program, because they can collect maximum penalties with a minimum of effort; but that may or may not be in the interests of a given taxpayer. If, for example, the penalties outside the program would likely be far lower than inside the program, if the taxpayer were audited, and moreover there is the possibility of no audit (or an audit taking place at a later time when certain tax years may be time-barred for income tax and/or FBAR purposes), a quiet disclosure (or even no disclosure) may well be a reasonable option for the taxpayer to consider. Of course, there are risks and the taxpayer should only choose a quiet disclosure after she or he is advised of and understands those risks. If you like, and if it would be useful, I could pose a hypothetical fact pattern in which I think any reasonable tax advisor would agree a taxpayer can consider options other than a formal voluntary disclosure.
@Michael J. Miller,
Thanks..
Given the publicity of OVDI and FBAR — anyone is doing QD right now does give an impression that he/she has been hiding money in the past and now wants to make it clean by sneaking into IRS system, as FATCA will be in place soon.
Of course, if there is no real bad facts such as entity or in tax haven — and most of all for expats and immigrants — they do have good reason to keep money “offshore” other than hiding for tax evasion. So QD may be a tactic to kick the ball to IRS (I think most likely it will just go through without much trouble) and prepare for audit and to fight for reasonable cause for FBAR failure. That would be the same for those who are already inside OVDI and choose to opt-out.
@ Michael J. Miller
Welcome to the IBS. It is a pleasure to hear a tax lawyer agree that one of the Voluntary Disclousure Programs just might not be the best way to approach the IRS. I think all of us who have been posting on the blog for sometime, agree that it is a great program for anyone commiting criminal or fraudulent acts, but not so good for anyone who only believed they had no obligation to file IRS forms.
Referring to your comment above: ” I would generally anticipate that a U.S. citizen, who has resided in Canada for many years and has had little connection with the U.S., is likely to be better off without submitting to the voluntary disclosure program.” – there are many of us on this site, who have posted under other headings, who have been Canadian citizens for 30, 40 or more years with no connection to the U.S.during all of that time. We believed then (when we became citizens of Canada) and we believe now that we relinquished our citizenship in the performance of the expatriating act (and in some cases actually swore a renunciatory oath); we, therefore, feel no obligation to file any U.S. tax return or any other U.S. form. In fact, to do so would “set aside” the relinquishment of U.S. citizenship.
Again, I thank you for your input to IBS. Your reasonable approach to the present situation will benefit many readers of this blog.
“If you like, and if it would be useful, I could pose a hypothetical fact pattern in which I think any reasonable tax advisor would agree a taxpayer can consider options other than a formal voluntary disclosure.”
Michael,
I would like you to pose a hypothetical fact pattern that can consider options other than a formal voluntary disclosure especially in the context of immigrants who had legacy (old) assets in their home country before they moved to US or immigrants who have sent money to their home country to take care of their parents,siblings etc,.
@ Michael J. Miller
I too add my welcome. I have seen you comment on other forums, and have found your comments to be well measured. Thanks for contributing here. It doesn’t pay well, but it should give you a sense of well being knowing that many here who probably could not afford you in individual cases. Your comments means they still get some benefit of your knowledge thus shared. Just like Jack Townsend and Phil Hodgens, and even Stephen Mopsick who we have had spirited debate with recently. You all need to be commended for your contribution to general education of the masses…
I appreciate the reasoned three alternatives you provided. I think more and more attorneys see this to be true, now. In fact some of them are the very same ones who did not have such views when the OVDP was rolled out in 2009. I don’t know where you or others were in your opinions back then, but Jack Townsend pretty much says the same things as you do as does Phil. I think this is exactly what Stephen Mopsick, our 30 year IRS vet is saying also. I think it is good advice.
However, retrospectively speaking, l don’t want to be too critical. None of us are perfect when it comes to making the right choices or even seeing the right options. Doing nothing is a much of a decision as any, but for those agonizing over the OVDI now, time has allowed for more clarify of opinions based upon experiences of others. Hopefully, that provides for better decision making.
So, I would encourage others to listen carefully to your comments.
That said, the 3 decisions you list implies that how one becomes compliant is simply a risk analysis process, much the same as making any analysis on which stock to buy and at what price, or which side of a trade to be on. Some here would add a 4th option, and that is not to become compliant at all based upon certain facts. But, whatever the decision it is better made absent emotion, especially fear. However, we are humans not robots and separating that emotion out is very hard to do. For some, it is an impossibility.
So, ideally you should be taking the IRS hyperbolic warnings of audits and penalties in FAQs and press releases cynically as just risk guidance and not commands. Whether or not you want to confess your past sins (willful or nonwillful) is between you and your ability to sleep at night. Deciding to do nothing related to the 3 options you present has its risk too.
Now, admitted, what I have to say now is 20/20 hindsight, but had I been hearing this advice back in 2009, I would have taken the route of becoming compliant going forward and let bygones be bygones. By doing what I thought was the right thing at the time was exactly the wrong thing to do when dealing with the IRS. Maybe I thought the IRS was god, and so from my biblical and religious upbringing I was predisposed to believe in confession. I should have know better! Confession might be good for your soul, but it is bad for your bank and LCU balance!
So, if anyone is looking to me for advice, suggestions or opinions take note! Full disclosure, my track record is not so good! Don’t ask me to predict the price of gold or the Stock market either. LOL I am just the outcome of one branch of the risk analysis tree. Look at my example as one data point to help evaluate your decision.
Thanks to all for the kind welcome. It feels a little bit like moving into a new neighborhood and everyone coming over with a freshly baked apple pie to say howdy. But I digress.
Here’s the hypothetical I promised. Suppose a nonresident alien, Tom, has a single non-US, interest-bearing bank account, which, at the outset of our story, had a balance of say $50,000. Tom sells his old home (outside the US) for $948,000 on December 31, 2009 and the proceeds go into his account, bringing the balance to $998,000. As of January 1, 2010, Tom becomes a US resident. In February 2010, he closes his non-US account and transfers the entire $1,000,000 (including $2,000 of interest since December 2009) to his newly opened US account. Due to Tom’s ignorance of US reporting requirements (and his accountant’s lack of attention to detail about foreign accounts), his 2010 return checked the “no” box (in response to the question about foreign accounts); he failed to include the $2,000 of interest income; and he failed to file an FBAR. Tom’s accountant never asked about foreign accounts, and it never occurred to Tom to bring it up. Inside the program (absent an opt-out), Tom must pay a 27.5% penalty of $275,000. Absent some other, very bad, facts, I would say that any attorney who advises Tom to join the program and pay the $275,000 is incompetent (or, worse yet, more interested earning fees than serving his client). Outside the program, Tom could expect to pay an accuracy penalty, equal to 20% of the tax owed, and perhaps a single penalty of $10,000 for a nonwillful failure to disclose the account on a 2010 FBAR. On these facts, even talking about the penalty for a willful failure to disclose the account on an FBAR is ridiculous. Moreover, the maximum possible penalty, even if the violation were willful, is $100,000 because the 50% would be based on the balance on the date the FBAR was due, which is zero. (Just to clarify, the max penalty for a willful failure (per account, per year) is the greater of $100,000 and the balance of the account on the date the FBAR was due, i.e., June 30 of the following year.) And, just to complete the loop, I would think it should be obvious, but I’ll say it anyway, this simplified fact pattern would (absent other, very bad facts) present no risk whatsoever of criminal prosecution. If I were Tom in this instance, I might or might not amend my 2010 return, but I’d laugh if anyone told me to do a voluntary disclosure.
I’d also be disinclined to file a late FBAR for 2010 in this scenario, but this is a point about which I believe reasonable minds can disagree.
@justme- My religious upbringing has also been something that I have had to wrestle with throughout this whole mess. I have always filed my taxes whether I lived in the States or Canada. Never would I have thought that I had any legal tax filing obligations to a country where I was no longer a resident and had no financial connections or earnings of any sort. I find the notion that one does have such ongoing obligations in the absence of any connections to be dishonest and arbitrary.
There was a book which I read some years ago which examined from a Biblical perspective what exactly are the obligations that a believer owes to his/her government and when are those obligations no longer enforceable upon a countries citizentry. That book was, “Lex Rex”, which is Latin for “The Law is King”. This book is written by the great Reformed Puritan Samuel Rutherford and this book he gives a Biblical exposition on what should a Christian’s response be to a government that has become despotic.
I am convinced that the U.S. government is behaving in a despotic fashion with regards to its expats and that it is now deserving of only the amount of compliance that will relieve the citizen from the oppressive burdens that the despotic government is placing on him/her. Here is a link to a site which lists a few of Rev. Rutherford’s arguments against despotism of the King. It should be noted that Rev. Rutherford’s arguments formed a basis for the arguments that the American colonists used in their revolt against British rule.
http://www.constitution.org/primarysources/rutherford.html
Now although this book was written with regards to a Monarchial government the arguments are equally applicable to a nation that has any other form of government. It is just that under certain forms of government, such as a Republican one, it may be harder to see or we may be unwilling to see, the tryranny/despotism that has creeped in.
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By the way, in case anyone wanted to read the article mentioned above about expatriation (and the Government’s shameful behavior in certain respects), here is the link. The link posted above doesn’t go to the right place, because my firm’s website is deceptive.
http://robertsandholland.com/content/604article.pdf
@Michael J. Miller
Weclome, and another virtual apple pie for you.
Re: your comments, especially: “You’re correct that the IRS doesn’t like quiet disclosures…. The IRS prefers to herd everyone with an undeclared offshore account into the voluntary disclosure program…”
The December Fact Sheet aimed (!) at expats and dual citizens never mentions any kind of disclosure program at all. It essentially advises you to file/ammend for the past 5 years, including FBARs, along with a letter explaining your reasonable cause(s) – so, a “noisy” disclosure. Would you consider this as a 4th option to the original 3 you originally mentioned?
Also, would you care to outline a hypothetical in which the go-forward option would be preferable to a quiet disclosure, or noisy disclosure, specifically for minnow expats?
Thanks.
Howard,
Thanks for the pie. I’d characterize the filings in that case as a variation on the quiet disclosure, albeit one the IRS seems to not mind (consistency not always being an IRS strong point). Whether to go quiet or just comply going forward isn’t necessarily a choice with an objectively correct answer, and certainly either is reasonable in the Tom hypo above. If we add in the fact that foreign taxes were imposed on the interest, at a rate of say 35%, such that literally zero U.S. federal tax is owed, I’d probably say why bother even amending. It creates a possible red flag that may draw IRS attention, and otherwise doesn’t seem to accomplish much.
Thanks, Michael.
So, as others have characterized the situation, it is a game of Russian roulette – essentially trying to second-guess what might be more likely to raise a red flag?
I wonder, though, if ammended returns would be more of a red flag than suddenly going forward with current return, FBAR and 8938. That is, would the sudden appearance of foreign accounts with, say, $200-$300k not call attention to yourself? And if so, wouldn’t that make you look pretty wilful in respect to previous years? In contrast, a noisy disclosure with ammended returns might demonstrate good faith. Or maybe that’s just naive….
Howard,
I agree that nothinig more than the sudden filing of FBARs on a going-forward basis could trigger IRS attention. Nevertheless, I would absolutely think that filing amended returns and/or late FBARs is more of a red flag. So, I would think merely complying going forward decreases somewhat (how much, I don’t know) the likelihood of unpleasant interation with the IRS. On the other hand, if one does end up interacting with the IRS, I would certainly imagine that they’re more likely to consider one’s failures to be inadvertent if amended returns (and better yet late FBARs) were filed; and, conversely, more likely to consider one’s failures to be willful/fraudulent if one did not take those steps. These are tough choices, and it’s difficult to point to clear “rules” that one should follow.
@Howard
Regarding your “Good Faith” assumption. Naive is correct. You may be thinking that logic and reason would prevail, and that “ain’t necessarily so” as I have learned the hard way. As Michael says, these are very tough choices that I struggled with back in 2009.
You might read over my attempt to find reason and responsiveness, once you are inside the OVDI. I am not going to advise you want to do, but you might be informed by my process. It is here…
http://isaacbrocksociety.com/2012/02/04/letters-to-shulman-or-a-case-study-of-ovdp-communication-attempts-with-the-irs/
Yours is a Catch 22 decision, and as such, a tough one. I have a lot of empathy for you.
@Howard
Why not to make it simple, No OVDI — just file amended returns for the last 6 years (whatever FBAR SOL stands), with a letter — “I am sorry, I have never heard of this requirement until NOW”.
This is the best faith you can show after the “inadvertent” failure was discovered.
Let IRS come after you if they want to FBAR penalty — that will be a tough decision for them as well as they can hardly to prove that you were willful. Then the civil penalty should be reasonable or even to zero.
Failure on FBAR should have reasonable cause because it was hardly known requirement before 2009
@Howard…
Just one final word of a caution, and maybe by now this goes without saying, but advice on a blog should not be substituted for a sound legal opinion.
If you are here now, self educating and doing your personal drudgery, than this is good. But, at some point you may need to take the knowledge you have gained, and pay a knowledgeable OVDI attorney to look over your very specific facts. That doesn’t necessarily mean their opinion is better or worse than what is gained here, but don’t be penny wise, pound foolish as they say.
Ultimately you will have to take your own council.
If you were to decide to enter, and I am not making a recommendation, just know that you can definitely do it yourself, and do not need an attorney POV unless your financial life is so complicated and egregious that it might make sense.
Take your time here, and if you haven’t read over the process of doing your own drudgery before consulting with an attorney, I would encourage you to read it. It is nothing earth shattering in terms of enlightenment, but it might help you. If not, you can just ignore it.
http://isaacbrocksociety.com/2012/01/28/the-ovdi-drudgery-for-minnows/
Tough decisions. However, as ij points out. The IRS will also have a tough decision on whether or not they want to pursue you for the civil FBAR penalty should you be discovered and audited. You you can fight an unreasonable application of their FBAR penalty discretion all the way through appeals and ultimately they will have to sue you to collect. So, given the limited DOJ resources they have which should be better placed going after Whales, you will also need to consider what ij says above.