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:
https://twitter.com/USCitizenAbroad/status/214412878239907842
Well crafted and important post @renounceuscitizenship. Thank you.
*Oh, of course not…they don’t want compliance, they want to develop situations where they can nail someone on failure to comply with FBAR regulations.
17 trillion dollar debt + potential bank coffers with expatriate US citizens = potential windfall through penalties.
Let’s not kid ourselves. The IRS is not our friend in this case.
I asked this question somewhere else but I’m not sure anyone saw it – or maybe it’s such a dumb question it’s not worthy of response? Anyway – here it goes.
I’m on a few expat forums and the word about FBAR seems to be getting out. There certainly seems to be quite a few people who are going to just ‘quietly’ send in how ever many 1040s/FBARs and hope for the best. From what I’m reading most of these are people who owe no tax and but break the ridiculous $10,000 FBAR threshold. How inundated are the IRS/Treasury Dept. going to be this year with these things? Are they really going to be able to cope with all the ‘minnows’ who are trying to bring themselves up to date?
As my lawyer just recently told me, they’re holding the Canadian OVDI submissions in Austin “until they get it together”. Many a US person’s sanity is being held in the balance, but let’s hope (springs eternal) that the many delays are because they are finally taking into consideration the consequences of their rulings. Heaven knows they’ve had enough blow back to give them pause!
I would guess that the IRS wants compliance but doesn’t know how such can be possible since each country in the world has a different system, making it extremely difficult, if not impossible, to figure out how all of these complex systems can work together with their different languages, currencies, customs, rules and exceptions.
@Expat in the UK
First of all, if we missed your question(s) previously, my apologies. I try to read everything here, but the volume is hard to keep up with at times… And, of course, welcome. If you are are on other blogs we encourage you to invite participants from there to here for reading prior to making very expensive and life changing decisions regarding offshore compliance.
If any Minnow is silly enough to think they want to join the OVDI, then please encourage them to read the OVDI Drudgery for Minnows first.
There is much debate about the best way to be compliant. The OVDI is a trap for Minnows, so avoiding that net is, depending on individual facts, something that needs to be seriously considered.
There has been disagreement between good attorneys as to the best approach for non OVDI options. If you did not read this thread called, Why is the Quiet Disclosure (QD) so controversial between Practitioners?, I would encourage you to do so. There is also a link there to a recent paper published by Jack Townsend which they should read before deciding courses of action.
There is another proposition, that, depending on your facts, a NON OVDI Noisy Disclosure is the proper way to go. 30 Year IRS vet is the proponent of this approach, and has spoke of it on Isaac Brock. We are expecting to hear a full proposal in this regard after it is published in International Tax Notes in July. We will be watching with great interest to see how that plays out.
You might start with his comments here, and read the comments that follow also. It is a “make my day” approach that is really calling the IRS’s bluff on FBAR penalty assertions, like the $10k you worry about. Just remember, any time you see a penalty, the Statutes that give the IRS the power, say “MAY” not “SHALL”, and so even though they threaten the max allowed, they seldom apply it except in grievous cases. So take those threats with a reasonable measure of salt. The IRS discretion often results in less penalties for Minnows, if they are applying the IRM (Internal Revenue Manual) procedures that examiners are required to follow.
The point to remember is this. Whether you do an OVDI Opt Out, a QD or a ND, you are open to varying degrees of risk of examination. If your facts are good, and benign, then the risk shouldn’t scare a person. You will be burdened with a hassle, and loss of LCUs or practitioner expense if you think you can’t handle it yourself. It is important that a person choosing those routes needs to know how the examination game is played and what discretion is available to them as provided by the IRM. If the IRS was just interested in compliance, then simple warning letters should be the worse case scenario for most minnows, plus having to pay some back taxes and interest, but then we have seen them do the wrong thing time and time again, so you have to be prepared for a bit of a tussle.
Finally, to your multiple question:
Truthful answer is, nobody knows! The IRS is not an information sharing organization, and the lack of transparency and the fear that arises from the unknown is their compliance friend, they think. There are some that say, the volume of FBARS being submitted by this June 30 th deadline might make it very hard for them to winnow out those that they want to tag for examination, and thus makes risk of audits less. Maybe, maybe not.
Budget woes also effect them, but it looks like the only thing that has come out of the Tax Advisory Panel member recommendations and the TAS report to Congress, is that the IRS will get more money for enforcement. Given how they think their offshore initiatives are a roaring success, given the FATCA Freight Train, then expect that more resources will be directed towards reviewing FBARs and looking for offshore audit opportunities.
Does that answer your questions?
@Just Me
Thanks for your response. Most of the discussions I have seen would indicate that most of these people don’t even know about the OVDI program – they just know they should have filed FBARs and/or 1040s but didn’t and are now trying to ‘catch up’. If I do see any discussions regarding OVDI and who should enter the program, I would probably send them to this website and advise them to speak with a tax attorney/tax professional before making that determination.
As far as answering my question goes, your response of:
“Truthful answer is, nobody knows”
sounds like the best answer I’m going to get. I hope someone on the inside spills the beans on how Treasury/IRS are managing to cope come 1st of July.
Thanks again.
@just me, to refresh our memories, how long did it take you to get an initial response to your OVD submissions? 6 mos and counting on OVDI.
@bubblebustin…
For me it was 6 months before I got a response. However, I just talked today with an Indian immigrant who joined the OVDI on September 9th, of 2011 and has still heard nothing.
@Expat in the UK
They need to be real careful about which tax attorney they talk to. There have been some good ones that comment here, but there are also unscrupulous ones that take them for a FEE ride that can be as much or more than the penalties, so advise caution and self education first.
mvh
@just me, are you still in the US? You-or anyone else in the US-might consider arranging to participate in tomorrow’s teleconference with Taxpayer Advocacy Panel:
Wednesday, June 13 The TAP Tax Forms and Publications Project Committee has scheduled an open meeting via teleconference at 2 p.m. ET to gather input from taxpayers on ways to improve the IRS. For more information, contact Marisa Knispel at (888) 912-1227 or (718) 488-3557.
http://www.improveirs.org/event-calendar/
There’s two other panels as well:
Wednesday, June 20
The TAP Taxpayer Burden Reduction Project Committee
has scheduled an open meeting via teleconference at 2:30 p.m. ET to
gather input from taxpayers on ways to improve the IRS. For more
information, contact Audrey Jenkins at (888) 912-1227 or (718) 488-2085.
Wednesday, June 27
The TAP Joint Committee
has scheduled an open meeting via teleconference at 2 p.m. ET and
welcomes input from taxpayers on how to improve the IRS. For more
information, contact Susan Gilbert at (888) 912-1227 or (515) 564-6638.
Is any one participating in these?
See http://www.improveirs.org/event-calendar/
At the TAP site there is an opportunity for anyone to offer suggestions. They don’t require you to identify yourself but I would like to suggest that if you do this, do it from a library or internet cafe. Sad to say but the IRS is acting like a terrorist (overused term, sorry) and I advise caution at all times when interacting with it (even TAP which presents itself as being on the side of the taxpayer). Chances are your suggestions go from their e-mail box into their e-shredder, after they collect an IP address. I woke up on the cynical side this morning and yet I do appreciate what Nina Olson has tried to do, unfortunately I still don’t see anything being done.
My suggestions would be get the US tax code down to 2000 pages and stop citizenship based taxation. And I don’t care how many job losses would occur in the tax industrial complex. Let them learn how to bake cake. (I also woke up cranky because it’s too wet to work outside.)
http://www.improveirs.org/speakup.aspx
@all, oops I guess I cut and pasted the wrong date. Thanks for catching that @Expat!
If I made only one suggestion it would be to increase the amounts for the FBAR filing requirements to match those of the FATCA form 8393. It is just ludicrous that the amount requiring one to file an FBAR is $10,000. Unless you are under the age of 20 or you live in a cardboard box, it is highly likely that all of the high points of your financial accounts in a year are going to exceed the $10,000 limit. Especially with the weak dollar. From what I understand, this amount has not been increased in the past 30 years, or whenever they introduced the FBAR.
If they really insist on keeping this limit, my hope is that all 7 million expats wise up at once and rush to send in current and back FBARS all at one time, making a building in Detroit explode from the impact of paper hitting it.
@Expat, LOL! It’s probably the only public building that has lights on in Detroit.
@bubblebustin
I just saw that, and I am checking to see if ACA is going to be involved or not. I will explore more if they are really accepting comments from some like just me! 🙂
@Expat in UK… Like like your imaginary! I have posted this elsewhere, (wished I could find a better copy), but might as well put it here too. Here is how FBARs are handled by those “Top Men” of the IRS.
@Expat in the UK: Even kids under 20 years need to file FBAR, if he receives US$6K as gift from grandparents in to his joint savings account with his mother and if he opens a brokerage account using that money to invest. Now the total amount in all accounts is US$12K, so he must file FBAR. I just filed FBARs for my son for past three years.
@Indian_Expat You are absolutely right, sadly to say. We have a daughter who spent exactly 9 months of her life in the U.S. She is going to have to make some hard decisions when she turns 17 and I hate the fact that she is having to make these decisions. I used to be happy that she would have choices about her identity – but now, not so much. We have also decided to hold off any ideas of moving back to the U.S. because my husband, who has no ties to the U.S. (other than me) does not want to fall into the tax trap of getting a green card to live and work in the U.S. And that is a loss to the U.S. because my husband is highly educated with many skills. Instead he has chosen to use his expertise in the European market, who are more than happy to have him.
@Expat in the UK: I feel over 90% of the immigrants and expats don’t know about FBAR, but if the IRS continues this FBAR jihad against minnows, eventually large percent of them would be aware of life altering consequences. I am sure all law-abiding and smart persons make the choice your husband made.
I read somewhere that IRS offered OVDI, because it is not possible to prosecute few thousand UBS clients. If they don’t have enough lawyers to prosecute couple of thousand cases in the courts, how could they prosecute several million immigrants and expats?
So IRS must offer blanket amnesty to expats live in high tax countries and/or owe no taxes. I feel IRS would do it, if every minnow in the OVDI program ‘opts out’. It is huge waste of resources for them for little or no gains. I feel, they are hopping that their threats would work and only few would dare to ‘opt out’.
@just me, considering TAS invited everyone who likes their Facebook page to join in the discussion, I would think that they would like to hear from people just like you!
@bubblebustin
Today doesn’t work for me, as traveling. I am going to try for the 27th session.
@just me, have a safe journey!
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