What the new IRS rules mean for U.S. citizens living in Canada natpo.st/KK2Oao – Not much so far – what is a “low compliance risk”?
— U.S. Citizen Abroad (@USCitizenAbroad) June 30, 2012
“For taxpayers in the grey zone — the small business owner, the high income earner, the wealthy grandmother with assets in a holding company — the news release may be less comforting,” said Christine Perry, a cross border tax specialist with Keel Cottrelle LLP.
“Until we get some indication of who is a compliance risk and who isn’t I think there will be a continued reluctance to come forward.”
U.S. taxman finally eases pressure on American citizens in Canada vancouversun.com/business/taxma… – Only for those who are “low compliance risk”
— U.S. Citizen Abroad (@USCitizenAbroad) July 1, 2012
The IRS was, in my view, slow to the point of negligence in determining some kind of relief for people who were put in a terrible situation through no wilful wrongdoing. And the agency still needs to clarify the details.
Brockers who are inclined to comment take note.
As posted, ‘The only way that a US person is going to get a pass from the IRS is if the US person doesn’t have what the IRS wants: money. Proceed with extreme caution.
For those who qualify as above, be aware that filing the min 3 years of tax returns will run you into the thousands, hardly an expense the qualified can afford.’
*Yeah, I am really jumping up for joy—3 yrs of $1000 1040x’s and 8 years of the long-ago-shredded bank-statements for multiple legitimate business and personal bank accounts (80 hours of work?). Then wait for the audit and pray to receive no penalties—-for doing nothing more than making a living. Sarcasm aside, the announcement is just confirmation of what KPMG accountants have been recommending their expatriate corporate clients during the last year.
*”Low compliance risk?” Interpret this to mean that the person has never failed to file a US tax return or if he has over $10,000 in foreign bank accounts has never failed to file a Fbar report..
These are the basic requirements to be classed as “compliant.”
@Roger, wouldn’t that make the amnesty initiative a paradox?
*@Bubblebustin, you might conclude that. But so far I have seen no indication that the IRS intends to not enforce the letter of the law. “Won’t you step into my parlor said the spider to the fly….” Come in and then you will find out.
@Roger, then really, for the taxpayer with assets seeking compliancy, the 5% FBAR penalty under OVDI is still the most secure deal out there short of the taxpayer being able to prove reasonable cause under the IRM or that he was completely unaware of his tax filing obligations under this new initiative. But to prove a lack of awareness is really to have to prove a negative to the IRS, which is impossible to do! This drives home the voluntary nature of the whole exercise, doesn’t it? The spider is making the rules here and it’s up to the fly to weigh the odds before entering the parlour.
A question begs: What will the taxpayer have to provide in the way of proof that he was unaware of his tax filing obligations? Will it have to be beyond all doubt? How do you prove a negative? It will, at the very least be at the discretion of the inquisitor whether the reason is plausible. Sadly, if we’re to predict Sept 1 by the past, don’t expect much for clarification when the guidelines come down. Interesting to note though, if not knowing about tax filing obligations is acceptable by the IRS, isn’t this really an admission by the US that they’ve done an inadequate job of informing its citizens of the requirement? Expect some behavioural changes here.
This is just another layer of bureaucracy with more winners and losers. To me a real amnesty would be from the present forward, or to offer a convincing likelihood that the stick won’t be used on our minnow hides but only on whales. We know that unless these whales are on the verge of being found out, they by nature they aren’t the types compelled to come forward!
Enter the conscientious tax evader. Citizenship based taxation is workable only in bizarro world and really more than this grandma wants to deal with much longer!
*@bubblebustin, all good observations and questions. Far be it for me to dispense valid advice. I only suggest Caveat Emptor – let the buyer beware. I would not want to be a pioneer in this newly-announced program.
NEW FILING PROCEDURE
FOR AMERICANS ABROAD: TOO LITTLE BUT NOT TOO LATE: On June 26, 2012, the IRS announced a new filing compliance procedure for non-resident U.S taxpayers. The procedure provides that current non-residents including dual citizens, who have not filed U.S. income tax and information returns, may file three years of delinquent tax returns and six years of delinquent FBAR’s without fear of IRS punishment. Provided the delinquent returns are (a)“simple returns,” (b) the IRS determines that the taxpayer’s package presents a “low level of compliance risk” (c) and the returns show less than $1,500 of tax due for each year, the taxpayer can expect an expedited review process possibly resulting in no assertion of penalties or further follow up procedures. The notice makes it clear that this new procedure is not a substitute for a voluntary disclosure nor the more formal OVDI 27.5% tribute program and that if a taxpayer has a well-founded worry about the risk of criminal prosecution he better consult a lawyer.
The new program is a good idea and is perhaps more notable for what it says between the lines rather than in its explicit details: the program says to me what I have been saying on these pages since February, namely the IRS has the ability to use common sense and good judgment in culling out the “no brainer” situations where the “one size fits all” approach of the OVDI program just doesn’t make sense.
Also, it is an admission on the part of the IRS that they didn’t think the OVDI program through carefully enough to anticipate what must be an overwhelming flood of OVDI applications which are now clogging the system, many of which really do not belong in the program in the first place.
For all the griping and skeptical comments so far, there is clearly good news here because it is a great chance for some people with simple returns to get an almost free pass to the world of future compliance assuming they really care about their status with the IRS.
The problem is the new program will only apply to a tiny fraction of Americans abroad with real tax issues. Moreover, many of the folks who qualify to file “simple returns” with little tax due already have one foot out the door when it comes to American tax compliance and could care less about what the IRS thinks. Also, @Petros and other Brockers should feel some sense of vindication because (1) it is an IRS admission that its menacing public pronouncements notwithstanding, its OVDI “bluff” has been called and (2) it is a public acknowledgement that the IRS has known all along that it “ just had to do something” to tell the world that there should be, and can be a mechanism available for low level IRS workers to use common sense and good judgment when they process simple cases.
But the IRS is fooling itself if it thinks that many people are going to jump on the band wagon as a result of the June 26 announcement. Many Americans abroad will read the new program as a better chance to argue “reasonable cause” or “no tax avoidance motive” at some time in the future, if and when the IRS ever catches up with them. The reason is, the IRS will find it hard to argue that the publication of an obscure announcement in tiny print on its web site is sufficient notice to the entire world-wide expatriate community that they are now on notice that they better act now to get into compliance or risk a heavy hammer if they don’t develop a healthy fear of what the IRS could possibly do to them.
It should be clear to even the most paranoid expatriates that ignoring the new program will in no way increase their chances of the IRS opening a criminal investigation against them, nor should anyone believe that the failure to elect the “simple returns” procedure or the draconian 27.5% tribute program will result in the IRS throwing the penalty book at them in the face of the remote possibility that they will get caught by the IRS at some time in the future.
The new procedure is “too little” because my guess is when the IRS announces the details, “simple returns” are likely to include those with only a schedule A and B and not much more. If there is a small amount of “economic activity” in the United States, if a taxpayer is doing business through a corporation or partnership, if there is a relatively small amount of US source income, a legitimate trust or foundation to support an elderly relative, a foreign mutual fund or PFIC, a residency or filing status issue, or any complication at all which would cause a return to require a regular revenue agent’s attention (as opposed to a lower level office auditor) those taxpayers will have to go through the rigors of the OVDI 27.5% tribute program or a noisy disclosure outside the program if the practitioner has the guts to stand fast and look the IRS straight in the eye.
The new program is not “too late” because it says finally, that (1) there is in fact a de minimus amount of unreported income which will be excused contrary to the OVDI FAQ’s, (2) a noisy disclosure outside the 27.5% tribute program will be ok to show reasonable cause for failure to file income and information returns AND FBAR’s, and (3) legitimate retirement and savings plans are not at risk for IRS abuse or confiscation.
The new program is a good start. We hope that in the future the IRS will continue to issue further guidance and be a bit more broad-minded when defining “no brainers.”
Bwaaah! Welcome to welfare state nirvana, slave. Big Brother and his muscle are offering you a way to get straight with big brother, now ain’t he generous?
Anybody who would be an IRS officer for 30 years has no self respect. They are lower than trial lawyers.
@ConfederateH
30 Year Vet has been posting for a long long time on and off and has been quite helpful on many occasions. I would not disregard what he has to say. I tend to think this is a step in the right direction but a long way from a final solution.
@ConfederateH
As a frequent reader and poster of this site, I find the above comment distasteful. Personally, I have been delighted to have Michael J Miller and Steven Mopsick posting on this site. I feel both have had much to add. I hope others feel the same way.
@Confederate: I appreciate the time Steven has given to this site to provide us with his input. I often haven’t agreed with him, but I value his efforts. Several of his past statements have eased some of the stress for those of us who believe we relinquished decades ago. As we learned from Steven, I believe he also learned from us and is trying to use that knowledge to make a difference through his work with ACA.
Thank you for hanging in with us Steven.
As for the IRS itself, unfortunately, the best indicator of future performance is past performance. A change at the top is needed before we will see any real common sense.
*@Blaze, @Tiger, @Tim: thanks for your support and kind words. One of the things I have appreciated most about the Isaac Brock Society web page is the fact that almost all of the contributors have good manners and show common decency.
Under this new initiative, if a taxpayer is deemed “high compliance risk” they will be disqualified from claiming ignorance of the law as a reason for non-compliance. In other words, like exit taxes and the ex-patriot act, a taxpayer will not easily get a pass if they can pay tribute. With other options to compliance, ignorance of the law is not considered reasonable cause.
@Confederate
30 year IRS vet…aka Steven Mopsick…has proved to be an invaluable source of information on this forum and i respect every post he has written. Whether i agree with him or not….
Sometimes the truth is hard to take, but his experience has brought a keen insight to the IBS and we should not bring any discussion down to a personal level.
On an additional note regarding the new IRS directive…to date ( to the best of my knowledge) not one Canadian (excluding OVDI) has been hit with non-compliance issues….tax returns or otherwise.
I filed 6 years of back taxes, FBARs, and 8891s in what i consider a ‘noisy’ disclosure. I have lost weight and sleep over this whole issue and know more about the US tax system than i care to …..however…i can tell you that my last call to the IRS to confirm my returns were processed…i found them very accomodating and left me with the indication that they just want people to comply.
It is my feeling that, regardless of this new procedure…anyone that owe’s no tax and has previously filed there returns…FBARS and 8891s..is going to be alright.
*Mach73
Please advise us, when the time comes, how you make out. Back 1040s,FBARs and8891s is precisely what I would need.
*ConfederateH
You really need to get some anger issues under control. I find Mopsick’s analysis to be dead on and consistent with my lived experience.
@Steven: In the midst of all this furor, Happy Canada Day. As you know, 2012 is the 200th Anniversary of the War of 1812–which, of course, Canada won.
You are welcome in Canada anytime–and we won’t even declare you a “Canadian person” for tax purposes (well, not unless you move here).
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*@
Bubblebustin: you raise a good point. Note that the announcement says, “it should be noted however that once a taxpayer makes a submission under the new procedure described in this document, OVDP is no longer available.” OK. So what are they going to do with those people who the IRS determines to have a high level of compliance risk? My guess is they are not going to refer them to CID nor are they going to throw the book at them by stacking up as many penalties as they can find. The notice says those with a higher compliance risk will not be entitled to the streamlined review procedures “and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of” OVDP.
This sounds to me like the IRS has just announced that a noisy disclosure outside of the 27.5% Tribute Program is ok. They are saying in my opinion, that they created a Frankenstein Monster with the three formal voluntary disclosure programs and they just cannot handle all the paper any more, so stop sending us eight years of amended returns and delinquent FBARs if you are not a tax cheat and if you have not been using offshore accounts and unreported secret earnings to avoid taxes.
Under the new procedure, the IRS will determine if your case is a “no brainer” or whether there may be a middle ground approach to making you cough up 27.5% of your net worth just to hear us say, “thank you!”
So now we ask the question again. If everyone can see that in some situations, a 27.5% tribute is unfair but at the same time your tax picture is more complicated than the new streamlined procedure calls for, does that mean the IRS throws the book at us? I don’t think so. Until we have more empirical evidence on how fair the IRS has been to people who opt out of OVDI, we will not know how to answer Bubblebustin’s concern about what happens to those who feel the the Tribute Program is unfair but don’t qualify for the quicky audit under the June 26 announcement?
*@Blaze: Thank you! Happy Canada Day to all of you as well.
@Cornwalliscal
With respect to your question
Please advise us, when the time comes, how you make out. Back 1040s,FBARs and8891s is precisely what I would need.
I believe that the time has come and gone…in other words i feel that i can safely say that i am now ‘compliant’ in the eyes of the IRS.
Like i stated in my previous post, i filed in November of 2011, and they actually owed me some money, so i was not in a ‘tax owing’ situation.
I had some personal issues…as everyone else has, with understanding the tax code and weeding out the inconsistencies from numerous Accountants (i went through 2 that each had a PTIN or a firm EIN number…i will be on number 3 for 2012 filing).
In fact, i would strongly suggest ‘buyer beware’ when it comes to Accountants…no matter how big the firm is, you will be surprised how many little details they overlook, just don’t know or are blatently wrong.
I ended up filing an amendment for my 6 years of back FBARs as my first accountant was under the impression that if the value of the account was under 10k…it did not have to be listed…..i guess he did not know what the definition of aggregate was.
The second accountant was about to send my 8938 forms in until i saw he had listed my principle residence (which does not go on the 8938) and used the wrong exchange rate and account values.
When i sent the changes to the 8938 form, She berated me for not including my RRSP information, and when i pointed out that page 9 of the 8938 instructions specifically states that for individuals filing 8891s…you do not have to include the account on the 8938, but rather just check mark the box for 3520 form on part 3.
For some reason she must have just saw ‘3520’ as Her response was a cost estimate from there firm to tabulate a 3520 form for my RRSP….unbelieveable!
Anyway, I ended up doing all my own 8938s as well….although they still charged me the 1200 dollar fee!
So basically everything has been completed….albeit a bit bumpy…but at least i can sleep at night now.
With respect to the FBARs….no new’s is good new’s…and besides they Canadian government has our backs on that one 🙂
*@ Steven Mopsick
Many thanks for all your input and advice.
@ Confederate
Please, a little respect for someone who has helped me personally and I’m sure many others as we grapple with these impossibly complicated issues.
Happy Canada Day one and all.
@all in relation to comments to this post.
I have never learned anything from people who always agree with me.
I have learned a great deal from people with whom I disagree or with people who disagree with me.
I have disagreed with the views of many people on this board. As a result, in some cases, I have learned something.