Petros has learned that Steven J. Mopsick made one mistake about Jack and Jill: before paying their OVDI fines, they decide to opt out.
Steven J. Mopsick gave us the following scenario:
Consider Jack and Jill , who are a composite of some of my clients, some of my colleagues’ clients, and perhaps a couple the drafters of FATCA might have had in mind when they drafted this legislation.
Jack and his wife Jill are dual nationals. They were both born in Detroit of Canadian parents but their principal residence is in Montreal and they consider themselves proud Canadians.
Jack has a very lucrative import/export business in Montreal which has offices all over the world. Jack has been filing US tax returns for his entire adult life and he started filing FBARs in 2004 when he first found out about them. Jack uses a big name accounting firm in Montreal to do his family’s taxes. Each year since the 1980′s, Jack would meet with his accountant to give him the information he needed to fill out his Canadian and his American tax returns but each year Jack purposefully fails to disclose to his accountant, the following facts about his financial affairs.
When Jack’s father died in the 70′s, he inherited a Swiss bank account from his father worth $15,000,000. The account was never reported on Jack’s father’s estate tax return and the principle has grown to $30,000,000 as of 2012. During the years, Jack diversified his inherited account by opening new investment accounts in the Cayman Islands, the Channel Islands, Liechtenstein, and Panama. He picked these places on the advice of his private banker who told him that these jurisdictions laugh up their sleeves at the IRS whenever the IRS tries to get the names of their American depositors.
Jack and Jill also have a home in the Hamptons on Long Island, New York but he put the title to the house and another cozy “get away house” on Vancouver Island in the name of a Liechtenstein trust Jack set up for his children. None of this has been disclosed to his CPA in Montreal. In 2011 they bought another home in Malibu California because their daughter was accepted to study at the University of Southern California and Jack and Jill thought it would be nice if she and her friends had place to get away on weekends to party and escape the rigors of academic life in sunny southern California.
Jack’s worldwide investments are managed by a suave and cultured Swiss banker named William. William, Jack and Jill become good friends. Every summer, Jack and Jill go to Switzerland where they stay at their banker’s lovely home on Lake Geneva. Jack had previously made it clear to William that he wanted no mail whatsoever to be sent to him from Switzerland with bank statements or anything else. Jack didn’t even trust the internet or e mail so the annual visits to Switzerland served as an opportunity for Jack and William to review his vast portfolio and make decisions about what to sell and where to invest next.
In the year 2002, William, the Swiss banker, offers Jack a deal. He says, “bring me other clients like you and I will cut my commissions on all the stock trades I do for year each year and I will also give you a kick back on the fees I collect from the new client’s accounts.” These extra bonuses will be paid to you by way of deposits into your Cayman Islands account. Jack takes his banker up on the offer and for the past ten years he has helped a large group of Canadian friends and his cool American friends he met at the Hamptons, to open their own secret accounts abroad. Over the years, his Canadian and American buddies earn small fortunes just from the taxes they are saving from the interest and dividends on their secret overseas accounts which William set up for them just he did for Jack and Jill.
In April of 2012, Jack learns from his accountant that starting with the 2011 tax year he is going to have to file a new form 8938 with the IRS which requires that he disclose all of his foreign assets to the IRS. At the same time William, his foreign banker, calls him up and says his best friend who is also a private banker was just arrested in Switzerland for doing the same thing he did and he is afraid that he might be next!
Jack, almost in a panic, tells his accountant that he has been lying to him for decades, that he has millions of dollars in unreported income and assets all over the world and he is fed up with his own lying, deception, and cheating on his taxes. He cannot sleep at night and wants to know what he should do.
His CPA has a heart attack with this news but from his hospital bed he calls Jack and gives him the name of a reputable Toronto tax law firm and Jack makes an appointment.
His Canadian tax lawyer tells him the IRS may not accept a voluntary disclosure because Jack knew it was just a matter of time before his Swiss banker was arrested and therefore he may not qualify for a voluntary disclosure.
They apply under the 2012 voluntary disclosure program and miraculously, the IRS agrees to accept him into the program as long as he cooperates and gives up the names of his friends and other Swiss bankers he knew were traveling to the Hamptons, Vancouver, Malibu, and Toronto to line up clients who might be interested in getting on the same gravy train Jack has been enjoying for decades.
His lawyer tells him there is only one hitch: Jack has to disclose everything for the past eight years, pay the tax due plus interest and a penalty equal to 27.5 per cent of the highest aggregate balance of his hidden accounts and investment assets for the past eight years. The IRS agent assigned to the case also says, there will be no 75% civil fraud penalty and that the agent doesn’t care about the unreported income he earned from the 70′s to today as long as Jack files truthful and correct amended tax returns for only the past eight years.
Jack and Jill are elated and can hardly contain their glee! They try to figure out how much money they saved in unpaid taxes for all those years but they give up because their calculator doesn’t go that high.
Jack and Jill file the correct amended returns, pay the tax, interest and penalties and are now resolved to file honest tax returns and FBAR’s forever!
Jack gets a call from @Petros who heard he might have gone through a voluntary disclosure and he wants to know if Jack and Jill are willing to get involved in the Isaac Brock Society and help publicize the inequities and absurdity of making a voluntary disclosure.
Jack and Jill are polite and don’t laugh out loud at Petros’ request but they respectfully decline to talk about their tax ordeal preferring to remain quiet about it.
Respectfully submitted,
30 Year IRS Vet
Steven Mopsick got one thing wrong in the above scenario. When Jack and Jill finally got their OVDI fine, they were flabbergasted. They were also thinking about opting out of the program because they learned later that one of their “friends” whom they had referred to their Swiss banker was a member of the New Jersey Mafia, and they became afraid that their lives would be in danger if they revealed his name to the IRS. They didn’t want to go into witness protection, since the United States didn’t offer that program to residents of Canada–and besides, it would really mess up their lives and their businesses.
Furthermore, entering the OVDI program, they had no idea that the fine base would include not just their undisclosed offshore accounts, but all of their accounts and real estate in Canada too: a Whistler Condo (2m), their primary residence in Montreal (4m), and their main office headquarters of their business in Montreal (5m); their investment account at TD Waterhouse (30m); their RRSPs (2m); their RESP for their daughter (500k). Their total fine base including the Swiss account (30m) is $73.5 million. The OVDI fine alone would be $20 million and that is before calculating back taxes, penalties and interest charges.
They also didn’t know that the OVDI penalty would be based on the highest balances in all their accounts over the entire period. But now, all of their investment accounts have suffered from the 2008-9 and 2011 stock market crashes; the actual account balances in their Swiss et al. accounts is now a modest 18 million. Their business has suffered too, from the Great Recession of 2007-2012, and they are running a huge line of credit (currently 5m) and that’s after they used their entire TD Waterhouse account to pay off their business debts. They realized they were going to have either to liquidate their RRSPs, sell a number of properties, or opt out and take their chances outside the OVDI–but how was that now possible since the IRS had enough information to lock them up and throw out the key?
Jack and Jill have finally realized the United States’ extraterritoriality is absolutely crazy; they therefore go to the United States Consulate in Montreal and relinquish their citizenship. They have also closed the branches of their business in the United States, admitting that it is impossible to comply with all of the onerous tax obligations of two countries. This puts 65 Americans out of work. Besides, they had to file the fraudulent US forms as business owners in a foreign company, they could not possibly keep up with all the filing obligations of the IRS and had decided to give a simplified version of their taxes to the IRS, just to make it easier to cross the border when they wanted to visit their daughter.
So they decide to opt out of the 2012 OVDI. Meanwhile, rather than pay the onerous OVDI fines, they quickly sell the houses in Malibu and in the Hamptons–realizing a $10 million capital loss because the real estate market is so depressed; they move their daughter out of the California University back to McGill University (which has very fine programs in both law and medicine). She was starting to take designer drugs on the weekends with the other students at the University of Southern CA who partied with her in the Malibu house; recently, they continued their festive activities on weekdays, and the daughter’s grades had suffered; they decided that they wanted her close to home where they could make sure she actually studied.
They decide to enter the Canada Voluntary Disclosure Program, which does not include FBAR fines. Thus, the advantage of the Canadian program was that it did not include a fine on the percentage of their accounts; it was only based on taxes owed, interest and other penalties. This saved them tens of millions of dollars. They then liquidate their accounts in Swizterland et al. and bring the money to the Canada, where the Ministry of Finance has indicated that FBAR fines would never be collected. Furthermore, their Canadian lawyer assures them that they cannot be extradited to the United States for taxes or FBAR.
Finally, Jack and Jill fire their tax attorney who frightened them into entering the OVDI program in the first place–and they contemplate whether it would be possible to sue him for malpractice. They hire a new attorney who guides them through the Voluntary Disclosure Program in Canada, and who reassures them that as long as they never return to the United States, they will never have to worry about the IRS again. This they are happy to do, since the United States tried to steal such a large portion of their remaining wealth. The capital losses on their houses in the Hamptons and Malibu help offset the realized capital gains that were in their undisclosed Swiss et al. accounts, and they walk away with paying less than 1 million in fines and back taxes (as most of the growth in their Swiss et al. accounts had not shown any realized capital gains).
At the end, when Jack’s friends ask why he relinquished his US citizenship, he responds: “Hey it just wasn’t worth it any more.” “Ce n’est plus la peine être Americain”.
@Petros: excellent!! Just one thought: what if they go to the US Consulate in Montreal to renounce their US citizenship and they are told, “You are forgetting the Hotel California Rule!”
“What’s that?!” Jack and Jill ask perilously. To which the Consular Offical replies, “You are dealing with the IRS here. You can check out anytime you like, but you can never leave.”
Respectfully submitted,
30 Year IRS Vet
@Steven: Jack and Jill are prepared to fight this out in international court. They have an airtight case that their dominant nationality is Canadian, and that they have a unilateral right to expatriate, in accordance not only with the Universal Declaration of Human Rights of the United Nations but also the laws of the United States. See the following post and links in it: http://isaacbrocksociety.com/2011/12/19/forget-about-form-8854-filing-last-5-years-of-tax-etc-usa-law-establishes-a-right-to-unilateral-expatriation/
Perhaps Jack and Jill could find new careers as book authors. Their first book could be called “How to fly anywhere in the world without going through the United States”. That would be one thick book.
@Petros and Steven
This whole case is highly hypothetical. The problem is the Jack and Jill’s with money to fight in court don’t exist its all Dick and Jane’s with no money. Most of the litigation I found involving the US Canada tax treaty were US citizen Jack and Jill’s who were living in Canada temporarily and trying to minimize the tax bill as much as possible. In the cases I found by the time their case actually went to US Tax Court they were already back living in the US. At the end of the day Canada isn’t really that low tax of a place compared to living in the US state of Florida for example.
The key thing Steven mentioned was they WERE filing US tax returns that were false. I don’t believe anyone attempting to pull off what Petros is suggesting would be stupid enough to actually file a FALSE US Tax return. Much better to stop filing and slip in behind all the people back from 1960s and 1970s that believed they renounced and haven’t been filing since. The real cases where Canadians HAVE gotten in trouble with the IRS is where they were running identify theft scams, filing false returns asking for big refunds etc.
I do note though there are people like Patrick Carmody over at Jack Townsend’s blog suggesting that spike in renounciation is due to people who have REAL tax issues. I am not sure I believe it but its definately out there.
@Everyone
Where there is a well known flaw in the expatriation tax regime is once someone becomes a citizen of a country such as Canada that refuses to collect foreign taxes on its own citizens it become very difficult to collect any unpaid exit tax.
I agree though this Jack and Jill would be one with the collection procedures under the tax treaty would come into play. You also have the five year window issues for new residents of Canada during which CRA doesn’t require you to report foreign assets unless you repratiate and proceeds into Canada. Plus the other situation is you only have to report to CRA foreign assets over 100,000CAD however, this based on the amount the asset was worth when purchased or created. Thus there are many immigrants to Canada that have offshore businesses with millions in places like Hong Kong but there original investment was less than 100,000CAD often decades ago and thus don’t have to report it to CRA even after the five year exemption.
@ Tim The filing of false returns is a possible scenario. First, they did not disclose their accounts in tax havens to either the Canadian or US government. Secondly, they didn’t reveal their business activities in Canada to the US. Thirdly, with all the complicated rules, anyone filing returns from overseas has probably filed a “false return” without even knowing it.
It is a hypothetical scenario–that was the point. Steven was trying to get me to see that some Canadians residents, that I am unaware of, would be happy for the OVDI. My post is pointing out that there are alternatives that are much better than OVDI, for the type of Canadians in the scenario that Steven created.
For your reference, this Chinese American guy is on the run (still lives in China).
Key point here, he is US citizen, and his tax problem occurred during the time he lived in Hong Kong
http://www.justice.gov/tax/usaopress/2003/txdv03cheung012803.html
And his argument is that He does not owe US tax –because he defies US tax on his US citizenship.
by the way, he is very famous now in China — not because his tax problem, but his academic view on economics.
I wrote a blog in Chinese mentioning his tax problem on a Chinese blog space (in Chinese) and was censored — as he is being protected by Chinese Government.
@Petros
I agree as I pointed out CRA doesn’t care about your offshore from a Canadian perspective assets during your first five years of residence. By the time someone has lived in Canada for five years they generally have enough time to cleanup their offshore affairs. Additionally in the case of UBS for example the Swiss refused to turn over any names of US citizens not living in the US. Additionally if you in theory opened an account at UBS lets say as a dual US Canadian citizen living in Canada on a Canadian passport even the Swiss don’t know what connection you have to the US other than if they recorded your birthplace which I haven’t heard of yet pre FATCA.
Wow, I can’t believe that Cheung ran a parking lot business. How sordid! But I lol-ed when I say this line:
My wife’s family business owns a web of corporations too. But it’s actually a holding company structure, typical of family businesses in Canada. But to have it called a web! It makes it sound criminal.
@omg May be not so hard. Montreal and Toronto have direct flights to major cities in Latin America, Caribbean, Europe–stopovers in Vancouver to get to Asia. Now, I think there is no problem unless for mechanical reasons a flight going over the United States has to make an emergency landing.
Perhaps we need to starting putting pressure on Rob Nicholson, Canada’s Minister of Justice and Public Safety Minister Vic Toews also for Canada law enforcement community to be totally “unprofessional” when dealing with the US Department of Justice.
I will add again this appears to be a case of filing false returns. Perhaps the individual in question should have simply not filed any returns additionaly his wife and himself were living in Seattle at least part of the time. I am wondering though when there is going to be a case of someone with no ties to the US beyond citizenship being prosecuted. I haven’t seen any yet.
@Petros
I will add that Vietnam era “Deserters” not “Draft Dodgers” living in Canada are still fugitives from the US being harbored by Canada(as they were never pardoned). There are lot fewer of them than draft dodgers but every now and then one sneaks into the US and gets themselves arrested.
http://en.wikipedia.org/wiki/Canada_and_the_Vietnam_War#Deserters
@Petros
There are also some cases of people such as Ian Delaney CEO of Sheritt International and his wife who are “banned” from the US for doing business with Cuba. There are also foreigners such as Oleg Derispaska the Russian Aluminum baron with suspected ties to organized crime that are banned from the US but allowed to enter Canada.
@ Tim: “I will add again this appears to be a case of filing false returns. Perhaps the individual in question should have simply not filed any returns additionaly his wife and himself were living in Seattle at least part of the time.”
I would think that this would really only be a problem if filing a false tax return were covered under the United States Canada extradition treaty: http://www.lexum.com/ca_us/en/cts.1976.03.en.html
FYI,
Cheung and his wife ran to Mainland China and have been living in China. Because US and Hong Kong has extradition treaty.
So folks, if you believe that US government still sees you a US citizen and you are rich, please do stay low.
The law will be applied to anyone regardless if it is fair or not. Cheung has lost all his assets in US (frozen by US government). He can only work and live in China. He may not even have the ability to travel to Europe. Of course, he is not that important to US national security — otherwise, US may even want to make a deal on his extradition with China.
@Everyone. I think Tim said it all when he said, ” I am wondering though when there is going to be a case of someone with no ties to the US beyond citizenship being prosecuted. I haven’t seen any yet.”
My point exactly, because you are not going to find one based on anything the IRS started.
30 Year IRS Vet
@Petros
I don’t know all the details of the extradition treaty. I do know people from Canada(and I mean people who weren’t born in the US absolutely no ties to the US etc) have gotten in trouble with the IRS for running identify theft scams, filing false returns asking for big refunds etc. I seemed to remember one case when someone living in Ontario crossed over to Buffalo to cash a bunch of fraudlently obtained refund checks at US bank with the police lying in wait. I don’t know what happened with some of the other case.
I will say that if this Cheung fellow was living part time in Vancouver BC instead of Seattle, WA he would almost certainly be considered a Canadian “tax resident” based on the circumstances described and nailed by the CRA. This both upon existing Canadian legal precedent and the language likely to be in the proposed Canada Hong Kong Double Taxation Treaty(which is basically the same in every treaty each jurisdiction signs other than US ones). The wife continuing to live in Seattle absolutely creamed him along with sending money from the businesses in Hong Kong to Seattle(If it was Vancouver instead of Seattle it would have been just as bad under Canadian law). Canada might be a little more generous if they thought individual was genuinely try to claim non resident status. However tax non resident status under Canadian law is not as necessarily to as easy to claim as it might seem and the CRA expects those with substantial assets to actually comply with the rules. There have been several cases similar to this Cheung fellow that have gone to the Tax Court of Canada. Rule #1 you can’t leave your spouse in Canada and send her money from offshore while claiming to be non resident.
@ Tim “Rule #1 you can’t leave your spouse in Canada and send her money from offshore while claiming to be non resident.” That is a funny rule in light of the Canadian treating each taxpayer as an individual. I have a separate bank account from my wife for that reason. If we mix our funds, then our income from investment may have problems (income splitting). I don’t see how the CRA can turn around and say I am resident in Canada just because my wife is here, when I am not even allowed to invest her money in my own name.
Well, Jack and Jill….
Sorry about your problems, but if the IRS is going to create this OVDI program to give you this “wonderful’ opportunity to come clean (assuming you want to remain US citizens and give up 27.5% of your assets), why can’t it be more selective in it administration?
Just leave me out of it!
Does it have to grind up and spit out Minnows too just because you- Whales exist? Are we to filter the entire ocean of all living life, just to catch you? Is it that tough to separate Whale and Minnow from the same uniform penalty structure and the same administrative grind that takes 2 years!!
Has these dunces at the IRS no ability to do things differently, and once locked in, do they have no ability to change course.
Guess not, as Shulman doesn’t even want to formally respond formally to the TAD he received. Why? Is he afraid? I guess he would rather have a 30 year IRS veteran parse the law for him then do the right thing. What a Wiesel! I assume he will soon become an Ex commissioner, and join with some prestigious Law firm in DC and then start advising the very clients he is pursuing now, and think nothing of it.
I am totally disgusted.
mvh
@Petros
I agree. Most of the cases I have seen regarding rejections of non resident status often had to do with a husband working overseas supporting his family back in Canada but not filing tax as Canadian resident. My sense in this Cheung case is if it was Canada he would very likely still be considered a Canadian resident. A more sucessful claim of non residence would be if you and your wife sold your house in Canada and all of its belongings and purchased a residence in the Bahamas and did not return to Canada afterwards for at least a year. (Note I didn’t say anything about your wife’s business however once you moved it would have to withold any payments to you and your wife at the standard 25% non resident witholding rate). There many Canadian citizens not living in Canada that are tax non resident it just isn’t as automatic as not being in Canada for more than 153 days(although this plays a part). Someday I’ll do a post on all the nuances of non resident status.
@Petros
Here is where it really gets fun. While perhaps not you personally given your specific issues with the US but a generic Canadian couple lets say living in the Bahamas but perhaps finding the island lifestyle a little too isolating all the time. Well then once becoming a Canadian non resident citizen living in the Bahamas you can buy a nice house in someplace like Coral Gables or Star Island in Miami Beach just a few minutes away by air. As long as you don’t stay in the US for more than 153 days a year have no obligation to pay income tax to the US(I need to do a bit more reseach on what exactly is the number of days). This perspective Canadian couple can enjoy the finest shops at Bal Harbor Shopping Center, Dadeland Mall, or the Village at Merrick Park. Or perhaps enjoy a night on the town in South Beach. If one finds the financial services of the Bahamas a little too primitive you can open up a “non resident alien” account at one of the fine “Private Bankers” on Brickell Avenue. And as a Canadian citizen well your just like any other Canadian citizen that doesn’t require a visa to enter the US.
What I see basically is that the US is trying to catch rich residents with money overseas. Good. I hope they catch them all. But would it be soooo hard to update the FATCA rules stating the US person has to show substantial ties to another country instead of lumping all “US persons” into the same basket? My life is very different from someone who lives in America. I have documentation to back that up….
Tim says: I will add that Vietnam era “Deserters” not “Draft Dodgers” living in Canada are still fugitives from the US being harbored by Canada (as they were never pardoned). There are lot fewer of them than draft dodgers but every now and then one sneaks into the US and gets themselves arrested.
More complicated than that, Tim. Some few deserters did obtain “special discharge” under a separate time-limited program in mid-1977 and therefore are not “still fugitives.” You are correct about the ongoing occurrence of arrests at the border.
Extract follows from: Lacie Ballinger, “Amnesty,” p. 45-46 in Encyclopedia of the Vietnam War [thankyou to books.google.ca]
In March 1977 the Defense Department announced the Special Discharge Review Program. … The Carter program … required offenders to apply for their pardons within the first six months of the announcement. At the end of the six-month period, only 15 percent had applied. This small number was attributed to the requirement that offenders apply in person. … In the end, there was to be no national reconciliation. (p. 46)