30-year IRS vet writes, as a veteran litigator for the IRS who is now in private practice, about the IRS and about the rationale behind FATCA.
Dear friends from the Great Country to the North:
There have been a lot of thoughtful comments in the past few days and it is a privilege to participate in this discussion group.
A word to clarify who I am. After 30 years with the IRS I retired from the government and entered the private practice of law focusing solely on representing people before the IRS. I most definitely do not work for the IRS but I know a whole lot about it and how it works. Any person currently working for the IRS who published the things I have on the internet would be fired the very same day. The IRS speaks through its public relations office in Washington or through notices, announcements, regulations, revenue rulings and other approved avenues. All IRS employees have to have any public comments cleared first by someone above them. Even the Commissioner of Internal Revenue coordinates his significant comments to the press through the Treasury Department since the Commissioner of the IRS is also an Assistant Secretary of the Treasury Department.
As a private citizen I can say whatever I want to say about the law, our government, and the IRS. I am free to comment about things people say which are wrong or inaccurate and in my practice I find that my clients appreciate me because I often get them money back from the IRS when I can prove the IRS wrong. I also tell my clients up front when they take on the IRS in an audit or in court if the law is against them or if they have not properly understood the law or if they have little chance of succeeding.
I had a number of interesting jobs with the IRS as an attorney. I was a litigator for the IRS representing the organization in the United States Tax Court. I was also an assistant to a man who became the Acting Chief Counsel of the IRS responsible for managing all the IRS attorneys in the country. That was very interesting because I got to see up close and personal, how tax laws are enacted, how the IRS fits in the Washington scene vis a vis the Congress, the U.S. Treasury Department (where tax policy is formulated in cooperation with the White House), and the Department of Justice which represents the IRS in all US courts except the United States Tax Court.
Please trust me on this: the IRS does not make tax policy. Tax policy is determined by the Treasury Department and the White House who then fight it out with Congress who accepts what the Treasury Department wants, rejects it, or compromises on it.
When an idea for legislation in the Executive branch of government gets some traction, it is true that tax attorneys from the IRS work closely with the Treasury Department to craft the actual language. If a tax proposal continues to be viable, the Treasury Department takes it across town to Capitol Hill where people from the tax writing committees (in the House—Ways and Means, in the Senate, Senate Finance).
Often times the attorneys from the IRS who worked with their counterparts at Treasury on a proposed bill will then work with attorneys from the Congressional Tax writing committees who in turn work with the staffs of whoever in the Senate and the House is willing to introduce the bill in their respective houses. Sometimes lawyers from the IRS are still involved at this stage, often times not.
The reason I am so “defensive” about the people who work for the IRS is because I know from my 30 years’ experience that they are normal people like you and me. I have also learned that people who work for the IRS are over represented in our population amongst people who work with kids, do volunteer work, are involved in church activities and everything else Canadians and Americans think of in terms of what is good and right for society. They are not scheming in their offices on ways to deceive, cheat, or oppress people.
FATCA was conceived because our system of voluntarily self-reporting income and deductions was not working. The theory is, in a democratic society, the government has no right or reason to know what assets we hold or the extent of our personal wealth. The theory is that with an enlightened and educated citizenry, we are on our honor to honestly report our gains and losses on our tax returns. Unfortunately, the government concluded that that was not happening and many Americans were using off shore bank accounts and other foreign investments to cheat their fellow Americans by not paying their fair share.
FATCA was designed to target Americans who were cheating on their taxes through the use of offshore accounts. FATCA is a sad commentary on the fact that in some instances, our honor system was not working. No one in the US government was thinking of Canadian citizens who had little or no connection to the United States when FATCA was enacted.
Nevertheless, the statute which came out of Congress (not the IRS) literally applies to some dual nationals who were minding their own business and not looking for trouble, not cheating the American fisc or the US government and who couldn’t care less what the Americans were doing to administer their own tax system.
So we have a problem and the question is how to fix it. In my next installment I will address what can be done about it from Voluntary Disclosures (which are not for everyone), to organizing a writing campaign to make sure the detailed rules cover Canadian problems, doing nothing and simply blowing it off!
Respectfully submitted,
30-year IRS Veteran
30-yr IRS vet wrote: “The theory is, in a democratic society, the government has no right or reason to know what assets we hold or the extent of our personal wealth.”
Ah yes. The theory is. Yet necessity is the mother of invention. Because people are hiding their wealth that means that Congress has the right to make a general warrant and search everyone’s accounts in the entire world. Not so. The Fourth Amendment requires a specific warrant issued on the basis of probable cause naming the person or things to be seized. FBAR, FATCA and Form 8938 circumvent the limitation placed on the federal government not to issue general warrants. Your pleas notwithstanding, FATCA is detestable and not in alignment with the fundamental rights of human beings living on this planet.
@Petros, These comments are very informative and I am sure appreciated by all. I have one question that perhaps you can get clarified: Are there problems with FATCA that are unique to dual citizen Canadians, or are they the same or are they different for dual citizens in other counries as well? Certainly they are more visible because the two countries are next door neighbors, share a common language, etc. But I am aware from hearing from my colleagues in Europe and Latin America that they seemingly are facing what sound like many of the exact same problems.
And the reluctance of foreign banks to maintain bank accounts for US citizens appears to be pretty universal. It is nigh unto impossile to function living and working in any country without a bank account within that country. Some retirees who have gone back to spend their retirement where they came from may be able to function withdrawing cash from ATMs abroad as long as they have a US bank where their US social security and pension benefits are deposited, but under the Patriot Act many US banks are no longer willing to maintain “small” accounts for persons abroad that no longer have a US address, since they don’t want to run the risks of these accounts not being squeaky clean.
@roger The Fourth Amendment is a right of all people. So this would definitely apply to all people everywhere. Indeed, I would argue, according to my understanding of the Fourth Amendment, that FBAR is essentially unconstitutional for this reason. [I made this argument at the American Thinker and many normal thinking invidividual, I think would agree with me]
Yet if the IRS want to do the searches constitutionally, they would have a problem. They cannot issue a warrant to search papers on bank accounts that they know nothing about. Foreign banks are a black box to the IRS. They have no knowledge or basis for an investigation against anyone, nor do they normally subpoena power to compel foreign banks to fork over information (though in the case of Swiss banks the Feds used every sort of persuasion). Thus, FBAR is a circumvention of the 4th amendment, and equal to the issuing of a general warrant giving the US government the right to search anyone’s and everyone’s papers whether they have probable cause to suspect a crime or not, without naming persons or things to be seized.
I guess I am finally going to have to give a very long description of what FATCA is and what its predicessor something QI(still in existence is/was). Historically most countries in the world including the US and Canada(and interesingly enough even Switzerland) put something called witholding tax on payments to foreigners. In Canada this is called something like Part XXVI tax basically refering to the particular section of the Canadian Income Tax Act. In fact in a broader sense witholdings are a big part of the modern income tax system in both Canada and the US most people have to file a tax return but often owe no tax and in fact obtain a refund. However since the 1930s and accelerating more recent since the 1970s the financial services industry in the US pressed for witholdings to be eliminated on US source payments to foreign payees(In Canada this lobby did not exist to same degree). However this created a huge incentive for abuse. First a created a big incentive for foreigners to “hide” money tax free in the US either directly or three intermediary’s in places like the Caymans, Swizerland etc. Second it created a huge incentive for American’s to “cheat” and to pretend to be “foreign”. Third it put pressure on countries like Canada for competiveness reasons to eliminate their witholding tax even though Finance Canada has historically viewed as an important way of ensuring equality between foriegn and domestic taxpayers. Fourth it also created a big incentive for Americans to expatriate and to continue to recieve US source income often from a pre-existing portfolio they owned as US citizens(In this last case one the goals of Internal Revenue Code of 1966 which was one of the first attempts to limit expatriation was stop this particular practice).
To fast forward many years it became increasingly obvious the policy of limited witholding tax was particular ripe for abuse and their several attempts to essentially re-impose a standard 30% rate on non treaty partners. However, the banking/financial hollowed and cried and promised at the very least the would stop(or share tax information on) Americans from investing back into the US pretending to foreigners. Thus the QI or Qualified Intermediary program was created. QI has several distinct flaws first it created no mechanism where the US even knows which foreigners are investing in the US and what their home country tax status even though for example they have promised Canada many years ago they would share info back to CRA on Canadian residents holding in the US. Second from what I understand most of the Carribean tax havens followed the rules but the Swiss and some others who hadn’t historically targetted Americans saw an “opportunity” and moved in thinking the US wasn’t very serious about enforcing its tax laws much in the same way a lot of European countries historically weren’t. The key point I’ll make for now is QI started a shift towards this idea of “information sharing” of which I don’t think anyone involved has thought ramifications.
A final thought in my day job I work with GST/HST. CRA(Canada Revenue Agency) is absolutely insistent that GST be charged at each and every point in the distribution chain even though as a Value Added Tax all business input charges are claimed back. There are very few exempt purchasers. If the US Embassy in Ottawa buys office suppliers they are charged HST. They can claim it back from CRA by international treaty but you as the seller to the embassy must charge GST/HST or be heavily the fined. CRA isn’t into “information sharing” in the GST world they are into collecting “tax” on every sale of goods and services to every buy(ex zero rated exports) The only two “exempt” purchases from the GST are provincial government and First Nations. Even these two groups are slowly shrinking as a “harmonized” province now when you sell something to the Ontario provincial government you charge them HST when you sell something to the Federal government you charge HST. CRA wants you to have no excuse to have not collected GST/HST on other goods/services other than export sales.
My previously message was a bit rambling. I am hoping 30 year vet will explain FATCA more in his next post. I could probably try to describe it more myself except I am starting to fall asleep here in the Eastern Time Zone. Suffice to say the drafters of FATCA were well aware of the “general warrant” prohibition and used an “alternative” mechanism to get around it. They actually don’t require banks to provide info on their customers under FATCA in a strict legal sense. What they do is impose a very steep and broad based witholding tax(including on some types of payments that historically were not witholdable such as on a sale of securities even if sold at a loss) of 30% on Foreign Financial Institutions including their customers holding securities in “street name”. Now it is perfectly legitimate for the US as a soveriegn country to impose a witholding tax in fact with the current US budget situation I would strongly encourage them to. What FATCA does though is if a foreign bank “signs” an information sharing agreement with the US it is exempted from the FATCA witholding tax. Now given the broad based nature of the FATCA witholding tax most foreign banks REALLY REALLY REALLY don’t want to pay it instead they would rather sign an “information sharing” agreement instead. What is apparently starting to happen is non US banks as much as they don’t want to the FATCA tax on their US investments are running into so many legal conflicts that paying the “tax” may in fact be the only legal way out.
My final comment of the night is that the Congress required any information sharing agreement the IRS/US Treasury signed with a non US Bank requires the bank to share information on all “US Persons” This as I understand is set by statute. There might be ways around it(such as excluding non resident US Persons) and it is as I understand being discussed right now. However I really don’t know what their odds of success. I know 30 year vet has told me before the latest revision of the FATCA rules was supposed be released before the 1st of the year however as everyone knows we are now in Feburary and counting.
Non-resident U.S. persons should be excluded from any FATCA provisions. The easiest and only honest way to handle this is to rule that all bank accounts that are held in your country of residence are no longer deemed to be foreign bank accounts. The Treasury should only be focused on American residents who have foreign bank accounts. In other words- territorial taxation should be the norm.
The problem with trying to impose an extraterritorial taxation regime is that it cast such a wide and indescriminate net that the only way it can conceiveably be enforced is through very punitive and illegal practises.
An American citizen who lives in another country should not be forced to live as if he/she lives in the U.S. That is the short and long of the matter.
My final final comment I would definately hear 30 year vet out. This is going to be a very looong fight and something that is going to have to be dealt with brick by brick. Over the weekend I am going to try to post what I think are a number of different proposals of different degrees of difficultly that I think can be made directly to the US or to our respective countries governments. I do strongly think we have passed the point of just more voluntary disclosure programs although for quite a few who wish to maintain ties to the US or had returned to the US(I think in this regard there actually needs to be a program designed for minnows not whales) it will probably be the best option. At this point there has to be binding international agreement that there is some type of outer bounds to the US and other countries ability to tax just anyone whom they have no actual connection too(To the extent in the future some fatcats lawyer sees a legal precedent for someone to more easily renounce that will simply be the price the US has to pay for this massive “screwup”. ) It needs to be made expressly clear that “accidental” americans and thier children have absolutely no past tax obligation and will never have any future tax obligation. I think there is a “danger” in that if only an “administrative” agreement is reached between the US and Canada we could be riding the same roller coaster all over again in ten years under another administration. People can’t go on with this sword of damacles hanging over them for years and years.
@30-year IRS Veteran;
Your important perspective (one heretofor not well-represented in this forum) is but one of a multitude of perspectives, all of which – suitably individually weighted and taken in the aggregate – might be considered to adequately represent the quite complex underlying reality.
Tho’ the perspective you’ve presented is an important one, it’s far from the only valid, relevant perspective/ description of the Agency itself. For proof of this, one need only consider the utter “cognitive dissonance” between 1] the benign and at least
reasonably respectable Agency outlook you skillfully present, and 2] the (at minimum, quite overzealous) ACTIVE IRS efforts to locate, threaten – and even heavily penalize – so many “accidental” U.S. citizens.
“The road to hell is paved with good intentions” – and more to the present point, “Actions speak (far) louder than words”!
We must also not overlook that the Agency has tremendous discretional leeway (‘de facto’, if not ‘de jure’) in which of its multitude of priorities to actively pursue (and with what vigor it pursues those targeted).
May i suggest perhaps the best way the Agency could validate the benign picture you’ve so skillfully painted of it, would be for it to:
1] immediately halt its witch-hunt of these innocent victims* – with suitable public, prominent announcement of this halt *(starting – at minimum – with those ‘accidental citizens’)
2] REFUND 100% of those penalties already collected from such victims in this misguided campaign (together with interest – at the rate IRS charges for underpayments!)
3] fully abate such penalties imposed but not yet collected; and,
4] issue both a general public AND individual apologies to every such victim, for IRS’ egregious behavior in this situation.
Simple justice demands nothing less, sir. I hope you will fully direct your considerable persuasive skills and important Agency connections to, as quickly as possible, correcting as outlined the Agency’s completely out-of-bounds behavior in this situation.
Nothing could better redeem your vision than successfully accomplishing that (most Just) correction.
A Jeffersonian
(who – by Providence’s grace – is in no manner, a target of the instant ‘witch-hunt’)
@30-year IRS Veteran: “No one in the US government was thinking of Canadian citizens who had little or no connection to the United States when FATCA was enacted.”
Congress is acutely aware that such people exist, and has made a conscious and collective decision to treat them as collateral damage. The just-following-orders defense offered for the IRS applies no more in this case than it did in the Nuremberg Trials.
FATCA is the US’s way of implementing capital and currency controls. It is framed as tax compliance, but its real aim is to make it impossible for US citizens to invest or live abroad, and so force repatriation of both funds and people back to the US, where they can be controlled exploited more directly than at present. The US government views its citizens as chattel.
“FATCA is the US’s way of implementing capital and currency controls. It is framed as tax compliance, but its real aim is to make it impossible for US citizens to invest or live abroad, and so force repatriation of both funds and people back to the US, where they can be controlled exploited more directly than at present. The US government views its citizens as chattel.”
Thanks! I don’t have to type very much! 🙂
I know we’re dealing with other cultures here, but I don’t think the people who work at the the IRS are altruistic. I have gone to the local (in my city) Brazilian IRS several times. The people there are local people, for real, not someone at an office in Austin, Philadelphia, DC, or wherever they have IRS offices in America. Everyone knows that if you get assessed with a tax, the worker is just following the rules, and they didn’t design the system. Taxes here rank amongst the highest in the world, but at least we can go to a LOCAL office to ask HOW, WHY, HOW MUCH, WHAT CAN I DO?
I was a little disppointed in 30-year’s comments, but I hope to hear more. Even from my lay perspective, all of the problems that he mentioned are very easy to fix. You don’t need every bank of the world reporting back to the US. You don’t need to have banks thinking that US clients are “toxic”. You just don’t need a contentious relationship between country and overseas people.
Given the “easy” options that the US disregarded, I’m left to thinking that they want more control over the world’s banking system, and to prevent US Citizens from doing ANYTHING outside of America.
@geeez
One thing I have learned over my life is to never to assume competency where there is no reason to assume it. For example I was never a fan of fromer president Bush and vice president Cheney however I never believed they were actually competent enough to pull off even half the schemes their opponents accused them over.
I can imagine President Obama having the following conversation with his staff in the next few months. “You guys told me when drafted this FATCA legislation we passed when we take down big time tax cheats with multi million dollar accounts in Switzerland. Now it turns out you idiots drafted legislation that attacks millions of Canadians. You know that movie Canadian Bacon with Alan Alda playng the dimwitted American President who goes to war with Canada. Now I’M that dimwitted American President thanks your guys screwups. This is now what three months before an election. Thanks a lot at least when I lose reelection YOU guys will be all out of jobs.”
This not really that good of a movie but it might be amusing to watch in the present circumstances if only for the fact it strains stereotype about both countries to the breaking point.
Personally I think though the following video though has very good advice on how to deal with incompetent “staffers.”
Just let us renounce.
http://www.un.org/en/documents/udhr/
Article 15.
(1) Everyone has the right to a nationality.
(2) No one shall be arbitrarily deprived of his nationality nor denied the right to change his nationality.
@ProudCanadian
You are correct, you have the right to your nationality, and you can have as many as you want…but the US is the ex-wife that just won’t go away.
Unfortunately, renouncing still does not solve the problem of US tax obligations and therefore does not solve the individuals problem of FATCA.
They will have to be dealt with (tax) before the United States will let you out of citizenship prison.
I’m not sure but it seems to me that citizenship based taxation violates just about every article mentioned in THE UNIVERSAL DECLARATION OF HUMAN RIGHTS. 🙁
@UncleTell Why even appeal to the UN? What about the Declaration of Independence?
OK, so the logic of the US government is: since there is a terrorist at the wedding party, we have the right to kill all the civilians to get at the terrorist. Sorry, American law is supposed to be based on the premise that it is better to let 100 guilty people free rather than convict one innocent. Sure, it’s fine that the U.S. wants to crack down on cheaters; but leave everyone else out of it. And if you can’t crack down on the cheaters without leaving everyone else out of it, then you accept the cheaters rather than hurting everyone else.
@Proud Canadia,
Great link. I wonder how many of those UN articles the US is already breaking!!
In Brazil, you can be stripped of citizenship, but I think it’s quite rare.
@ ax I’m really happy that 30-yr has explained the mentality of the IRS. The use of reporting requirements to circumvent constitutional rights, shows that the IRS (as the Frankenstein monster created by body parts called “laws” passed by Congress) has redefined the purpose of man–from being a free being who seeks his own happiness, to a taxpayer whose duty as a citizen is to pay all his taxes. Yet the framers of the Constitution distrusted government and intentionally installed within it fail-safes which would protect the People from the abuse of government–these are the rights: the rights in the US constitution are all negative rights (much to Obama’s chagrin), to prevent government from shaking down the people. Thus, the only way that the IRS can obtain the “fair share” is by circumventing the rights enshrined in the Constitution. At this website, we have seen that the current government is shredding all of the rights in order to become a much bigger part of everyone’s lives, even those who no longer live in the United States.
Obama on “negative rights” vs. redistribution:
First, we are very fortunate to have the insight and participation of “30-year IRS vet” here! And I agree that ad hominem attacks on individuals who work at the IRS are pointless, and counter-productive.
This is a result of a profound failure of political leadership, originating in the US Congress. But also at fault are Canadian leaders, for not taking a stronger stand sooner against this violation of sovereignty, morality and common sense.
For many of the US born Canadians caught up in this, it is more an issue of discrimination by nationality than application or interpretation of any kind of tax code. Many of these Canadians have no economic tie to the US. Their assets, income, domicile and economic lives are in the jurisdiction of Canada. And they are Canadian citizens. The only thing which differentiates them from their local Canadian bank’s other customers is “place of birth”.
For many US-born Canadians, FATCA is fundamentally a rights issue; a matter of discrimination by Canadian banks based upon that Canadian citizen’s particular place of birth. Because Canada’s banks have no record of their Canadian customers place of birth, they must ask. And that is where the rubber will meet the road.
Here’s something interesting:
“And then there are those who are just disappearing altogether without a fare thee well. John Gaver, editor of Action America, wrote that there is a “vast and increasing number of wealthy US citizens who are just ‘dropping out’ — taking all of their wealth and leaving the US without renouncing. They just disappear off the US tax rolls and appear on some other country’s tax rolls.””
Rich Americans Are Fleeing the Country
http://www.thenewamerican.com/usnews/immigration/10743-rich-americans-are-fleeing-the-country
The following link is fascinating reading on how success is being punished in America which is causing a mass exodus by the rich. Since this is probably the root cause of most of our problems by way of FATCA I thought it would be good to learn why the rich are running away from the United States.
Tick-Tick-Tick The Economy Bomb:
http://actionamerica.org/taxecon/ticktick.shtml
Tim said:
“What is apparently starting to happen is non US banks as much as they don’t want to the FATCA tax on their US investments are running into so many legal conflicts that paying the “tax” may in fact be the only legal way out.”
“…the Congress required any information sharing agreement the IRS/US Treasury signed with a non US Bank requires the bank to share information on all “US Persons” This as I understand is set by statute.”
Tim doesn’t the term “US Persons” also include US corporations according to the IRS?
The banks may be willing to throw dual citizens under the bus but doing that to powerful US corporations could prove an expensive violation of their privacy.