Introduction: This post applies only to people who are U.S. persons (citizens, green card holders, etc.). Those who are long term residents of other countries and who have become citizens of that country should first investigate whether they are a U.S. person before doing anything. This may be the best advice you will get. Investigate the status of your U.S. citizenship.
The Compliance Problem:
Many U.S. citizens abroad want to come into compliance with U.S. tax laws. As Steven Mopsick has so aptly noted:
Becoming compliant is not easy to do: Knowing full-well that the IRS is likely to learn their names sooner or later, many ex-patriates abroad and recent immigrants are trying to get ahead of the curve and come forward under the current voluntary disclosure program. The problem is a voluntary disclosure under the current IRS program is known as a “noisy” disclosure where total cooperation is a precondition and the IRS has a right to inquire about whatever they want before they agree to anything before they close the case. The IRS has also made it very clear that it does not like “quiet” disclosures, where a taxpayer just decides to comply with reporting prospectively or simply files a few years of back returns. That leaves the taxpayers few choices. Either do a “full ostrich” which is to do nothing and keep your head in the sand as deeply as it can go, or jump in and get with the program. But here is the hitch: the program is essentially “one size fits all.” Under the program the very same outcome is dictated by terms which were designed to apply to the American high roller who jets all over the world in his private plane visiting his secret accounts in Monaco and Switzerland, as well as a third generation Canadian family struggling to support a family on a middle class income working in a lumber mill whose grandparents immigrated from Wisconsin sixty years ago.
On January 9, 2012 the IRS reopened OVDI – The Offshore Voluntary Disclosure Program. (In my view OVDI is nothing more than an intentional shakedown of unsuspecting people. Under OVDI, even those who had no idea they were U.S. citizens are required to pay the IRS 5% of their net worth.) The Isaac Brock Society wrote a brilliant press release warning people against entering OVDI. (Please note that there may be good reasons to enter OVDI and there may be no reason. I am not trying to drum up basis for our resident lawyers, but this decision cannot be made without considering all of your facts. OVDI is one of a number of ways to solve your compliance problems.)
OVDI was reintroduced after U.S. citizens abroad had endured the uncertainty of the fall of 2011 where they were caught like “deers in the headlights” – frozen with fear. They had no idea what to do. As noted in the 2012 Taxpayer Advocate Report to Congress, the IRS would not give any advice. In fact “The silence was deafening”. During this time I wrote a post suggesting the IRS is the single biggest obstacle to tax compliance for U.S. citizens abroad.
With the reintroduction of OVDI, the IRS promised to announce procedures for U.S. and dual citizens who had just become aware of their tax filing obligations. The announcement included:
“The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.”
You will note that the IRS committed itself to developing “procedures” for coming into compliance. June 15 has come and gone. Those promised “procedures” never came. What is a U.S. taxpayer abroad supposed to do? The IRS continues to make it very difficult. The stats indicate that there are few U.S. citizens abroad who actually owe taxes. Therefore, there is not a great return to the IRS for those people to be in compliance. But, for them to NOT be in compliance, now that’s a different story! It is hard to resist the inference, that although there is not much money in for U.S. citizens abroad to be tax compliant, there is a lot of money in it for U.S. citizens abroad to NOT be in compliance. Calling Mr. FBAR!
My thought: if your situation is a simple one, take the December 2011 IRS FS for U.S. citizens abroad and dual citizens, to a good adviser and begin the discussion around that. But, this is certainly not legal or any other kind of advice. What do I know? Nothing. Why? The IRS continues to keep people in the dark.
One wonders: does the IRS really want U.S. citizens abroad to be in tax compliance?
Update – Some final considerations from Steven Mopsick: