Steven J. Mopsick, 30 year IRS vet, commented on the procedures announced by the IRS 26 June 2012:
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.”
@JaneB : you will never be able to get the United States government to put in writing, that it has no claims on, or against you, but if you ever get a letter from the Internal Revenue Service, my law firm will represent you for free!
@ 30 Year IRS Vet, That is a very kind offer. Thanks so much.
I gather that you are suggesting to Janeb, in not so many words, that if she just maintains her rights as a Canadian, as I have suggested, nothing is likely to go amiss.
A lot of our people are unsatisfied with the idea that the IRS can’t reach them. They want the full assurance that the IRS has no claim on them. Only that would give them peace of mind. Personally, if I had been in Janeb’s situation, I would not have relinquished my US citizenship–I wouldn’t have had to. But I had been filing from about the year 1998 or something, the years I started working, not making much money mind you, after finishing my studies. But I was filing every year, and I knew that the IRS would be on my tail, expecting it to continue. I had to end this relationship. But I don’t think for a minute that any of the Canadians born in the country and living here ever have to renounce their citizenship–even if they lived in the US for a time with one of their parents–not unless, they like me, maintained their relationship with the IRS.
Will accidental Americans like janeb be allowed to skate under FATCA? If the answer is ‘yes’ then she, and others like her with non-US birthplaces, are the proof that FATCA is a sham in that it targets primarily ‘marked’ Americans, and misses a very large segment of US persons.
*@30-year IRS vet — thank you very much for the offer, which of course I hope never to need, and thank you as well for the implicit reassurance that such a letter is highly unlikely ever to arrive! (I do know in my more calm and rational moments that that’s the case.) @bubblebustin — but isn’t that just the point of all this discussion, that FATCA is a sham? A law designed to catch major tax cheats that entangles the most innocent of innocents, like Calgary411’s son, is hardly a model of well-designed or well thought-through legislation.
@JaneB
Unfortionately it is difficult to make any predictions about FATCA at this point in time. I would make note of the comments of one David Rosenbloom who is a professor of law at NYU and works as a lawyer at Caplin and Drysdale with Mark Matthews(and was a long time official at the US Treasury Department in fact he negotiated most of the US Canada Tax Treaty for the US). Now just as 30 Year IRS Vet USED to work for the US government the fact that David Rosenbloom USED to work for the US Government might make absolutely no difference. However, he just hosted a big conference on FATCA at NYU that several top IRS and Treasury officials attended(A video is supposed to be up shortly).
HZ: Next year comes the American FATCA rules in force. This gives U.S. authorities more power.
Rosenbloom: FATCA is difficult. I think it is also not an ideal solution.
HZ: Why not?
Rosenbloom: A huge mass of information will arrive in the U.S. – who will analyze it? Most U.S. citizens with offshore accounts are like Mom and Pop Jones over in Toronto, with a savings account and a small pension. The cost is huge for a very low volume of revenue. The system is inefficient.
HZ: But it is a done deal. Or?
Rosenbloom: It is constantly evolving. I do not think FATCA is the standard. But that various governments around the world will exchange information automatically will be determined. Even the United States.
HZ: The U.S. has blocked that. Now is this the global standard for information exchange?
Rosenbloom: Yes. Between governments that are concerned about tax issues. The U.S. is concerned, the UK, Germany, France, Australia. They are all very worried. Either you will find a solution, that information can pass from country to country, or go directly from the individual institutions to the government.
Now where does Canada fit in this. I don’t know. I know the House of Commons Finance Committee is going to be holding hearings on “offshore” issues and FATCA in the fall and are asking for people to submit witnesses they would like to testify(I think a first hand story from a “Accidental American” might be very relevant). I think the “Constantly Evolving” term is one to take note of too as that is the exact same term Richard Harvey used the other night.
@Tim, Others: “Evolving” seems to be the latest US buzz word. Isn’t that what Obama called his changing views on same sex marriage?
Janeb: I have no idea how your bank could determine you are a “US person” under FATCA. You were born in Canada. In any case, under current Canadian law, they have no right to ask you or any other Canadian citizen or resident where they were born or if they hold the citizenship of another country.
To date, we have had no indication Canadian government will change Canadian law to accommodate a foreign government. If they don’t change the law and banks try to comply, we may have grounds for a lawsuit against the banks. If the government does change the law, we may have grounds for a Charter challenge against the government.
In an e-mail to Schubert and me several months ago, Canadian Bankers Association assured us no information would be released to IRS without consent of the customer. They were not able to say whether a bank would close an account if the customer did not give consent. But, as the President of TD pointed out in a letter to IRS and US Treasury, the fine for a bank doing that is up to $200,00. Plus, the bank would be required to immediately reopen an account.
So, how likely do you think it is a Canadian bank is going to report someone born in Canada to IRS? I think you have absolutely nothing to worry about–unless you decide for some reason that you want to Wake The Sleeping Bear.
As Steven said in his post “read between the lines.” Please do that as well with the offer he has made to represent you pro bono if you ever hear from IRS.
@JaneB, how would the US/IRS ever find out about you if you’re not the one telling them?
Janeb did at one point hold a US passport, long expired and lost. I read somewhere that the US started doing electronic reading of passports in the early ’80’s. Will the US input names from a Canadian passport into their US passport database? Don’t wake the sleeping bear AND steer clear of the US border.
@jameb, my comment about FATCA just drives home the fact the it’s unworkable in its lack of thoroughness. Will customers with US birthplaces be enough as offerings to appease the FATCA gods? Drawing attention to accidental Americans in this regard is our hope in getting FATCA derailed, because as Blaze has pointed out we ‘have no idea how your bank could determine you are a “US person” under FATCA’. For FATCA to be effective, bank customers will need to prove a negative, that they aren’t US persons, that they didn’t go to the US and stay too long, that they never were naturalized in the US, and so on.
@Petros: you wrote, “I gather that you are suggesting to Janeb, in not so many words, that if she just maintains her rights as a Canadian, as I have suggested, nothing is likely to go amiss.” You are absolutely correct! I am looking forward to the responses to my article which will be published in Tax Notes Today on July 9, entitled, “Tax Justice for Americans Abroad: No Penalties for Prospective Compliance,”; I know it will not go far enough for some and I am sure many will say there is no way the IRS can do what I am asking them to do but the article is a logical extension of what I posted on my blog and here about the June 26 “Simple Returns” solution.
@JaneB: I don’t think FATCA is a sham but there is something to keep in mind: it is one thing to be in a government data base as horrible as that thought is to so many, but it is quite another for a human being inside the government to start pushing buttons on the computer to seek you out and make your life miserable. I recall writing months ago on these pages in response to an expat who had not economic or real connection to the United States for 30 years who was wondering what to do about FBARs and FATCA. I recall my response, in essence was, “you havent heard from the IRS or had anything to do with the United States (or any other foreign government for that matter) for 30 years and you want to do what now?? Throw a bunch of delinquent returns and FBAR at the IRS and ask them how much to make the check out for?”
Randy Travis: a great American Country Singer said it well when he sang, “Is it still over? Are we still through? If my phone still ain’t ringin’ I’ll assume it still ain’t you”!!
@30yearsIRSvet
Wouldn’t the fact that FATCA is ineffective at exposing all US persons make it a sham?
I wouldn’t want to underestimate the desperation of the US government, if there’s gold in those hills, they’ll mine it!
@bubblebustin’: Even if there isn’t gold in those hills, IRS will try to mine it. That’s what’s so ridiculous about all of this!
The best we can do is make sure we don’t give them the necessary tools to start digging around in our hills.
@blaze, je concur
I think that if financial institutions, citizen groups and our government can make the case that financial institutions are faced with an impossible task of ferreting out all US persons, it would go a long way in derailing FATCA. The accidental American is a prime example of why.
@30 Year IRS Vet
I believe I might have been that person you commented to some months back re not having had any economic or real connection to the US for 30 years (it has actually been 48 years since they had a tax return from me!). I appreciated the comment when you first said it, and appreciate hearing it again. In fact, I have brought that comment up many times on this site. So thanks again.
I have been remiss not to point out that Robert Woods at Forbes, also did a story on the new found “common sense” by Commissioner Shulman on June 26th..
IRS Announces Tax Relief For Dual Citizens And US Citizens Abroad
I put up a comment to also call for mitigation for minnow immigrants.
@bubblebustin
FATCA isn’t a sham in the sense its primary purpose wasn’t(at least in terms of what I believe other may disagree) to ferret out US Citizens living abroad who haven’t been filing for years and have no ties when it was proposed. It was mainly directed towards ferreting out US “residents” that do file but are not reporting foreign source income. I also do think there is a realization there is a huge publicity risk if the IRS were go after someone living outside the US who isn’t even a US citizen just because the ended up being “classified” as recalcitrant under FATCA. The proposed regulation “attempt” to screen out anyone in mass with no US “indicia” from even coming under FATCA the problem is there is a lot of confusion on what is “US indicia” and thus in the banking industry there is a view they need to treaty everyone as having US indicia and apply FULL FATCA screening to all account holders. The desire under the proposed rules is if there is no US indicia associated with your account you are not even put in a position of filling out a W8-BEN , W9, or being recalcitrant you are simply booted from the electronic screening process.
@tim
When my husband asked a financial advisor how he expects to screen for Americans, he said he would just ask them if they are American, lol!
If I’m going to be scrutinized because of a US birthplace and someone just as equally a US person (accidental born in Canada, or naturalized US citizen) passes undetected, what does this mean to you?
@Just Me. Robert Woods is one lawyer who has always pushed OVDI and scared his readers, without taking Jack Townsend’s, or Mike Miller’s more analytic approach of the issue.
I read all his Forbes articles. I don’t like him…
@Christrophe…
Yes, but he has also been sympathetic at times, and has kept the issue in the forefront, especially related to FATCA. I also try to comment back so he has more information.You can’t like them all, but even the ones you disagree with, I feel a need to respond. You too can tell him what you don’t like about how he protrays the issues, and it might help shape his narrative in the future.
Just like this one from the Hartford Business Journal. I didn’t like this well worn narrative about “Tax Cheats fessing up”, etc, so posted another reply. I can’t let these go unanswered by no one. The comment is in moderation, so don’t know if they will let it see the light of day, but certainly questioned their narrative and pointed out what they don’t know including giving them a link to the National Tax Advocate Report to Congress.
32 years since my last return…
27 years since I last renewed my passport…
17 years a Canadian citizen…
3 years since my last border crossing…
*@Joe, That is cute!! Looks just like you!
Ahh Joe. You look exactly like I imagined you–right down to the devilish grin.
Why don’t you make it your gravatar?
Just Me,
As a participant of OVDI, I hate to see this kind article. My “crime”is no worse than Tim Geithner. I might just opt-out with reason for being labeled a tax cheat.
I will keep this in mind in case of opt-out. If I do choose opt-out,
I will tell IRS “I choose to opt-out and want you guys to spend
time/resource to audit me and to see what kind tax cheat I am! It is not about money — it is the way you treat us.”
@ IJ, your crime is much less than Geithner’s. You will never be the Secretary of the Treasury. He had little excuse for his tax evasion since he’s supposed to be an expert and he would become the law enforcer on expats–the very aspect of the tax law which he came into violation. Did he ever do an FBAR while overseas? One wonders.
But there are two sets of rules in the United States: one for the elite ruling classes of which Mr. Geithner is a member; another for little people like you and me. You can steal billions of dollars if you are member of the ruling elite, as Jon Corzine has shown. But if you are one of us, you can’t even have an innocent bank account without that the United States threatens your life savings.
@ij
I’m in OVDI too and have been in touch with the tax advocate (TAS)? She’s stated that they may be able to eliminate penalties within OVDI without opt out. The information is still pretty muddy even with out lawyer trying to determine what the IRS is doing with our submission, and those of all Canadians being held up in Austin.
@bubblebustin,
Thanks… I guess you are non-resident of US. That will make you much less guilty than I am. But still, I would not cheat that small amount tax. If I would, I would do as much the same as Mr. Geithner. It is an insult to me for evading such as small amount money -:)