Our new friend, 30-year IRS veteran, Steven Mopsick, has been a really good sport. He’s defended the orcs of Mordor, his former colleagues at the IRS fearlessly, and he’s taken our abuse like a trooper. He’s asked me if I wanted to put up his new post on FATCA, and I said to myself, why the heck not? Meanwhile, go have a look at his blog, especially this little piece, called FATCA Red Herring, which starts with this whopper, “For all the groaning about FATCA, there is one ‘red herring’ which should be given the lie right away, and that is the silly notion that FATCA is an attempt to force the application of U.S. law on foreign financial institutions.” Well, if nearly 400 pages of orcish regulation isn’t an attempt to force U.S. law on FFIs then I don’t know –but wait, these regs still hadn’t come out when Steven wrote that post–so you’re off the hook, Steve–I am being unfair.
Again, caveat emptor! The Isaac Brock Society maintains a non-endorsement policy of tax-professionals (see here). Also, please read not just the post, but the full comment stream.
New Rules For Foreign (Non-American) Banks with American Clients
by 30-year IRS veteran
With the publication on February 8, 2012 of the FATCA bank withholding regulations, it is clear that the FATCA train has left the station. The 400 pages of new Regulations would apply to almost every non-American bank in the world if they wish to continue to do business with American clients and financial institutions.
How FATCA works in a nutshell. The impact of the new law is two-fold. Americans with assets outside the United States starting with their 2011 tax returns, now have to disclose to the IRS, all of their foreign financial assets exceeding a specified dollar threshold, including their non-American bank accounts.
For non-American banks with American clients, they must agree to become a “withholding agent” of the United States government through the IRS, agree to an IRS review of their internal procedures, file an annual tax information return with the IRS disclosing the names and ID numbers of all their American clients, and if the American client refuses to cooperate with the bank, close the account immediately.
As part of a worldwide effort to stop Americans from using offshore banks and other financial institutions to cheat on their taxes, it was also announced on February 8, that five European countries including Spain, are working toward sharing certain data bases so that the European countries can benefit from FATCA and catch their own people who are cheating on their taxes, as well as European bankers and advisers who have been counseling American investors about how to evade taxes by using European banks and other entities. What is significant about the European announcement is the FATCA concept that participating European banks in those five countries will soon be able to give their information on American account holders TO THEIR GOVERNMENTS instead of directly to the IRS. Banks in those countries may soon be relieved of the requirement of entering into a separate agreement with the IRS. Their governments will turn over their records on their Americans and their banks will not have to deal with the IRS. We believe this creates a huge advantage for banks in those countries and we predict a scramble in other western countries to become part of that elite group of countries which are working hard to implement FATCA.
DETAILS ON THE NEW REGULATIONS AS THEY APPLY TOFOREIGN BANKS AND WHAT IS COMING UP NEXT.
The Regulations published on February 8, 2012, reflect the IRS response to the many comments the IRS has received from banks all over the world over the past several months. Most banks today have been very busy making changes to their IT systems to identify their American customers and comply with the new FATCA rules.
The IRS announced a formal comment period on the proposed Regulations which closes on April 30 of this year. Banks with concerns about the implementation of FATCA should participate in this process by submitting comments. Following the comment period, there will be a public forum on May 15 in Washington, D.C., at which time banking institutions will have another opportunity to talk directly with the IRS and raise any concerns they may have on how the processes are supposed to work.
Some foreign bank compliance officers with whom I have spoken have confirmed they are busy revamping their systems to get ready for the new rules which will be summarized below. Foreign banks which are inactive, waiting for further direction from domestic ministries or fiscal agencies are losing precious time and are doing so at their extreme peril. Moreover, even if the deadline to apply to be a withholding agent for the IRS is postponed again, those foreign banks who are late getting in their paperwork are going to cost their shareholders and owners money because of lost business, direct liability for the taxes they should have withheld, and attorney and accounting fees to straighten the mess out with the IRS once the bank fully complies.
Here is what each foreign bank must do if it wishes to continue doing business in the United States’ financial arena
A participating bank must agree to become a withholding agent of the IRS and
(1) Report certain information on an annual basis to the IRS with respect to each U.S. account and other accounts controlled by Americans and to comply with requests for additional information with respect to any U.S. account.
(2) The information that must be reported with respect to each U.S. account includes: (i) the name, address, and taxpayer identifying number (TIN) of each account holder who is a specified U.S. person (or, in the case of an account holder that is a U.S. owned foreign entity, the name, address, and TIN of each specified U.S. person that is a substantial U.S. owner of such entity); (ii) the account number; (iii) the account balance or value; and (iv) the gross receipts and gross withdrawals or payments from the account .
(3) The bank must obtain a signed waiver of its American clients’ privacy rights, if any, in that foreign country.
(4) If the American depositor refuses to cooperate, the bank must close the account.
All banks which decline to participate in the program will be at risk for a 30% withholding tax on certain defined transfers of US source income to them. This includes pass through payments of US source income to, or from other foreign banks who the IRS determines are non-Participating Foreign Financial Institutions.
ONE OF THE MOST IMPORTANT POINTS IN THIS PAPER IS THE FACT THAT FATCA APPLIES TO TRANSFERS OF US SOURCE INCOME BETWEEN FOREIGN BANKS; IF JUST ONE OF THE BANKS IS NOT PARTICIPATING, THE WITHHOLDING REQUIREMENTS APPLY.
In today’s world, a banker cannot do his job properly if he does not ask whether or not FATCA applies to every single transfer of funds involving US Source Income to or from a bank which is not a U.S. bank.
I have extensive information on the implementation dates, the rules for identifying Americans from amongst other depositors, streamlined rules for affiliates and branches of banks, the circumstances of how a bank might qualify as a “deemed compliant” bank which permits certain relief from some of the administrative burdens, key definitions, record keeping requirements, how the Anti-Money Laundering and Know Your Customer rules operate within this arena, the treatment of certain life insurance policies, and the potential liability of the banks themselves for the payment of withholding taxes which were not correctly reported.
The newly-published rules also announced a relaxation of the threshold for rules which are specifically targeted toward Private Banking and personally against Private Bankers.
Banks all over the world have realized that compliance with FATCA is simply the cost of doing business in today’s computerized, modern financial environment. Please feel free to share my summary of the new regulations contained herein as you deem appropriate. Additionally, I am available for consultation, which can be arranged by contacting my office.
@Steven: I’m glad we haven’t chased you away yet. Thanks for hanging in with us–and hopefully learning how this is affecting real people with real lives around the world–many of whom have had no connections with US for decades (or in the case of children born outside of US to anyone born in US–maybe never had any connections to US). Let me remind you again, many of us were told decades ago the termination of our American citizenship was permanent and irreversible when we voluntarily became citizens of another country.
Calgary411’s example is one of many of the atrocities in these efforts of IRS to grab money wherever it can on the planet. I hope you will accept her challenge to you to represent Canadians with disabilities who risk losing to the US the benefits of the superb RDSP, established by the Canadian government to allow Canadian citizens and residents and their families to plan for their future. The respect and inclusiveness shown to Canadians with disabilities by their federal and provincial governments through RDSPs is one of the many differences in core values between US and Canada. Neither Calgar411’s son nor any other Canadian should be denied the right to full benefit and participation in this or any other program in Canada by the intrusion of a foreign government in their lives.
I hope you will carefully review the post and comments in the link below about what would happen if there was world-wide citizenship based taxation. This was written by a very esteemed American in Geneva.
With IRS now exploring “reciprocity” on an international level, the implications are significant–including for the US.
I posted on that thread about how even the President on the United States could be affected by “reciprocity” if he were to be considered a “Kenyan person” or an “Indonesian person” for tax purposes because of his family ancestry and history. In the same way, the President’s sister was born in Indonesia and her husband is Chinese-Canadian, so there could also be implications from “reciprocity” within President Obama’s extended family.
Please provide us with your comments about citizenship-based taxation after you have read this, especially for those who have every reason to believe they are citizens of only the country in which they live.
http://isaacbrocksociety.com/2012/02/16/what-is-the-systemic-risk-to-the-worlds-economy/#comment-6099 about
@ steven
I, too, would be interested in your answer to hijacked2012’s question from earlier today. Do those “persons” who performed their expatriating act, pre 1994 have to file tax forms when applying for their CLN or are they exempt from the obligation?
Also, in reference to Calgary411’s plight regarding the Canadian Disability Tax Plan for her disabled son and its’ treatment in the U.S., I have a severely mentally and physically disabled brother, living in the United States. I also have a severely disabled “godson” living here in Canada. The treatment of the disabled in Canada is so superior to the treatment and “assistance” to the disabled in the U.S., it is shocking. Particularly shocking when you think how wealthy a nation the United States has always been. Any assistance for my brother has been a difficult fight and I know for certain that my now deceased mother, fought very hard for any help my brother has received. She went to her grave frightened that he would not be taken care of, knowing that myself and other siblings would do all we could do even as she did not want him to be a “burden” to us. Shame on the United States!
Tiger, I am so sorry to hear of your disabled brother in the US. And, I agree with your assessment, based informally on what I’ve seen.
Your mother’s feelings regarding the well-being of your brother are shared by many. It’s why I know it is so important to assist in making this easier for families in the same situation as mine.
There is no good reason that disabled US persons in Canada should be bound to a US citizenship — choice in the matter by parents, trustees, guardians who look out for their best interests would only be humane. And, there is no reason for negating benefits the Canadian government has created for its disabled population.
Thanks for your comment and support. And, @Blaze. Take care, both of you!
@hijacked2012′s “Do those “persons” who performed their expatriating act, pre 1994 have to file tax forms when applying for their CLN or are they exempt from the obligation?” I need a little more help from you here or any one who wants to chime in. I cannot give you any advice you can rely on because we do not have an attorney client relationship but my answer would depend on when was the last filing? Also without doing a bunch of research can someone take a crack at a little more of a write up on the issue? Please tell me exactly how you read section X of the referenced IRS revenue procedure?
30 Year IRS Vet.
@steven mopsick
I have never filed a US tax return.
I came to Canada at the age of 7, became a Canadian citizen at the age of 20 in 1967 (expatriating act) and was told that by so doing I was giving up my American citizenship.
I read Section X as stating that anyone who relinquished citizenship before Feb. 1994 and who has obtained a CLN backdated prior to 1994 would not be required to fill out Form 8854 and would thus not be required to swear that they have been compliant with federal tax obligations for the last 5 years. I am unclear about the reference to Form 1040NR.
Thanks again for your time.
@steven mopsick
Re: above. I first came to Canada as an 18 year old University student in 1961. In 1964, I “landed” in Canada newly married to my Canadian born husband. I started my family and in 1972 I took out Canadian Citizenship. At that time, part of Canada’s citizenship oath also included the following words: “I hereby renounce all allegiance and fidelity to any foreign sovereign or state of whom or which I may at this time be a subject or citizen”. I did this voluntarily and with intent to relinquish my U.S. citizenship.
I never voted in a U.S.election, never held a U.S. passport and would have only ever filed U.S.tax returns for part time work in 1963 and 1964, prior to “landing” in Canada. During the next 25 years I also was never obligated to file Canadian returns as I was a stay at home mother.
I never received a CLN, never even heard of a CLN until recently. Like hijacked, above, I would like to know if I apply to the U.S. Consulate at this time for a CLN, am I also obligated to file U.S. tax returns and other forms or does my pre 1994 expatriation act relieve me of that obligation.
@Steven: Many of us are in similar position to Tiger and Hijacked. The US Consulate was very clear and firm then. We were permanently and irreversibly renouncing our American citizenship when we became Canadian citizens. The Consulate strongly indicated our actions were legal, binding and final. They did not mention the need for a CLN nor provide one. Now, four or more decades later, US seems to be trying to reclaim us and our money.
While I realize you cannot comment on individual situations, please clarify whether a pre 1994 expatriation act relieves us of obligations to IRS. This would seem to be a simple “yes” or “no” answer.
Thanks.
@Steven Mopsick
For further clarification, this was Petros’ post on the subject.
Posted by Petros — December 16, 2011
8
The blog post on ex post facto stirred up a flurry of e-mails between members of the society. It switched on a light bulb for some that the State Department and the IRS were trying to pull a fast one, and that those who were following rules at the time of their relinquishment were not required to follow the new rules.
According to the instructions for 8854, and USC 26 section 877, the date of expatriation is as follows (US Code at Cornell University):
“(4)Relinquishment of citizenship
A citizen shall be treated as relinquishing his United States citizenship on the earliest of—
(A) the date the individual renounces his United States nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)),
(B) the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C.1481(a)(1)–(4)),
(C) the date the United States Department of State issues to the individual a certificate of loss of nationality, or
(D) the date a court of the United States cancels a naturalized citizen’s certificate of naturalization.
Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State.
Now this is all well and good, namely with regard to item (B) above, which states that the expatriation date is the day that a person informs the State Department. But the question remains when did this law actually come into effect; for it cannot be applied ex post facto to those who committed an expatriating act before that date. One of the members of the Isaac Brock Society tracked it down: The answer is that if you relinquished your US citizenship before February 6, 1995, you were not required to have informed the State Department. My correspondent thus wrote to me (reproduced with permission):
As it turns out, the timeline of important amendments and changes to Section 877 of the Internal Revenue Code (26 USC) dealing with Loss of Nationality begins much earlier than the June 2, 2004 amendment which introduced the infamous IRS Form 8854. For our purposes (meaning those who committed relinquishing acts in the 60′s, 70′s and early 80′s), the truly significant date vis-a-vis the IRS is actually February 6, 1994, as referenced in the 1996 Amendment – the most important one for us to understand, I believe. In a nutshell, those of us who committed qualifying relinquishing acts before February 6, 1994 are absolutely NOT subject to amendments made after this date under the terms of a “special rule”. As a result, it appears that we have no requirement to provide any IRS-specific forms or statements to the IRS, including form 8854! It would appear that a simple notification letter from us (notarized and duplicated, I would suggest) indicating that the Department of State has processed and issued a CLN showing a relinquishment date prior to February 6, 1994 should suffice. This seems to be the means by which a back-dated CLN issued by State could be used to provide sufficient information to the IRS to not require any further action. Of course, while State eventually provides its own direct notification to the IRS, I think it is important that we provide a “good faith” letter as well.
@Mr. Mopsick,
Further to your most generous offer to assist me in your comment above (FEBRUARY 17, 2012 AT 1:01 AM), and my reply that it would duplicate assistance from professionals that I already had engaged…
We have a new person, Cecilia, here, and her family’s situation is quite similar to mine. See @Cecilia and @Blaze comments: http://isaacbrocksociety.com/2011/12/14/my-story-calgary411/
Blaze asks “Did Steven Mopsick ever reply to Calgary411′s suggestion that he take on this issue pro-bono. He had agreed to represent Calgary411, but she already has a Canadian lawyer working on this. Perhaps he could one of you as an example to get this addressed.”
Would that be possible?
@calgary411: @all
Re Cecelia:
This has been handled.
I would represent anyone IN CANADA pro bono against the IRS, with facts like Cecelia’s.
30 Year IRS Vet