Hale Sheppard, who Renounce calls the FBAR Scholar, has published an article in the most recent issue of the International Tax Journal, which focuses on Form 8938. It is called “The New Duty to Report Foreign Financial Assets on Form 8938: Demystifying the Complex Rules and Severe Consequences for Noncompliance.”
He has distributed it to members of American Citizens Abroad (“ACA”) as he thought we would find it interesting, because (i) it contains a thorough analysis of the Form 8938 filing requirements and rules, incorporating guidance from various sources, (ii) it discusses the overlap between Form 8938 and the FBAR, and (iii) it explains the largely unappreciated consequences for taxpayers who fall into non-compliance.
Of course, there are other articles out there describing the rules related to Form 8938. Hale’s is different in two major ways:
First, to help clarify the complicated issues, the article incorporates guidance from all available sources, including the tax code, regulations, IRS forms and instructions, government reports, IRS websites, etc. The idea is that taxpayers should not have to consult a variety of sources to get the key data; it can all be found in one article.
Second, instead of just reciting the rules as many articles do, his actually describes why Form 8938 is extremely important in many unknown ways. This occurs in the portion called “The Importance of Code Sec. 6038D – Why Does It Really Matter?”
You may find a copy of this article at ACA here Alternately it can also be found on Camberlainlaw’s web site here.
BTW, if there are any new readers here who have never read Hale Sheppard’s “The Evolution of the FBAR, Where we were, Where we are, and Why it matters”, I highly recommend it. It is one of my key links on the OVDI Drudgery for Minnows. I wished I had known of it, and read it in 2006 when he published it. It would have saved me a lot of grief! 🙂
UNBELIEVABLE!!! ANOTHER REASON TO WATCH THIS!
Bless you @Just Me for making this available to us.
The Hale Sheppard article is well worth reading. He makes the complexities more comprehensible (though still hard for the layperson to fully grasp) and explains the size of the jeopardy – even for inadvertent errors – very clearly. If this isn’t killing an international taxpayer gnat with a ton weight, then it is hard to see how it could get worse – short of just summarily executing any US citizen abroad and seizing their entire assets like a despot might. Basically, after you read this, to me, (if you were in any doubt at all still up to now), the hazard of remaining a US citizen and living abroad is unsupportable. The hazards that 8938 imposes so far exceed that of the FBAR, and it looks so much more intricate in its design, that there will no doubt be many many more innocents caught unaware, taxpayer and preparer alike – which the IRS and Congress and the GAO are very well aware of (and Sheppard notes). They have deliberately chosen not to do anything about it, even in the face of professional feedback alerting them to the substantial risks that have been created for those required to file it, and their preparers.
It is so far in the opposite direction of what the Taxpayer Advocate has advised in terms of complexity and making compliance readily achievable for the average person. No talk of the tax code being tackled for reform will probably ever touch this one – as it is designed for maximum penalty revenue generation – and the provisions allow the IRS to take away any safeguards that may even usually exist in terms of SOL, etc. The penalties are layered, draconian and confiscatory. And, again, this is entirely the case without any actual US tax assessed or owed. The assets reported and penalized are – just like the FBARs, entirely post-tax, legal and most often may have zero US source or connection. So the damage will be done to the innocent and the otherwise compliant, and recourse is either not available, or would come with such complexity and cost as to completely obliterate an individual and their household – a thousand times more in scale than what we currently face. Sheppard notes that not only would any attempt at any recourse require considerable money and time to mount a defense, but that it would involve several venues – not just Tax court.
The US has gone utterly insane, and there is no recourse but to remove oneself. Imagine an annual government mandated lottery, where every year, you are forced to participate in a ritual imposed by a despot far far away, and you can never know what they will do to make the jeopardy harder and harder to avoid, (often to be applied retroactively), even if you are trying to follow the rules and be compliant. Any normal life event – operating a business, getting a loan or mortgage, inheriting from family, etc. could tip you over the reporting threshold – especially as with age, if lucky, your wages, and savings increased – even slowly. The peak of the jeopardy will come when you are a senior, and have less ability to cope with your own affairs, and the most savings at stake. So, eventually someone else might also be exposed to the jeopardy – on your behalf. If you’re both deemed US taxable persons – that is two or more people at direct risk, plus both family’s assets. Don’t even understand how this affects even modest estates, but it can’t possibly be good.
After you read this article – and see the many sources Sheppard had to consult to put this together, ask yourself, what sane individuals could possibly think that those of us abroad can fully comprehend these rules, and comply without error? There will no doubt be additional complexity and contradictions added as time goes on, and the reporting thresholds could be lowered at any time if Congress so chooses.
Given too that the situation of the non-US spouse is jeopardized when the US taxable person is jeopardized, that makes joint assets even more at risk. And even if there weren’t joint assets, a life-altering debt for one is a life-altering debt for the whole household. Again, all this is the case without even one cent of US tax actually owed – on already taxed assets – reported in full to the countries where we live.
No US citizen resident faces this scale of reporting and jeopardy.
Comply Slave, and learn to like it. Its for your own good.
@Just Me – Thanks for finding this.
@Badger – I agree with you completely that the penalties are designed to be and will be a massive Fund Raiser for the IRS. As horrible as the penalties are, it actually goes well beyond this. In addition to the penalty purpose, this form also is setting the stage for the simple confiscation of your assets.
For those who believe in past lives: let me suggest that being born a
U.S. citizen in this life and living outside the U.S., is your
punishment for the worst and most immoral conduct possible in your
previous life.
Here is how the confiscation of your assets will work:
Those of you who have been in tax compliance for the duration of your
life abroad will likely be the first to be targeted. Targeted for what
you ask? As Steven Mospick pointed out, FATCA is really a tool to get
people to:
First, register their assets (stand up as the video says);
Once this assets are registered, the U.S. government will simply confiscate them (shoot as is done in the video).
In other words, those of you who have been in compliance will be the
first to go. (Of course if you are in compliance, you do have the option
of moving back to the U.S. That might be a way to escape the reality of
“Form Slavery” and constant worry about committing “Form Crime”. But then you must live in “Form Nation”. That may be part of the intention of the legislation.)
Those who are not in compliance are caught between a rock and a hard
place. The consequences of being in compliance are clear (although the
assets won’t be confiscated today). The consequences of NOT being in
compliance are less clear. (In the same way that those who are in OVDI
will probably fare worse than those who are not.) Of course, those who
are NOT in compliance may find it harder to move back to the U.S.
The ONLY reasonable option available to U.S. citizens abroad is to renounce and renounce quickly. I would be grateful if somebody would explain what I am not seeing.
I am not saying the confiscation of assets will happen tomorrow, but
it will surely happen. (The assessment of penalties will begin today.) It is becoming more and more clear to me that the
only real option for people is to make sure that they have no assets in
the United States and then make it a point to never return. In
addition, in order to protect yourself renunciation is essential. The
gig is up!
For those who are deciding whether to come into compliance, you might
take comfort in the Robert Frost poem: “The Road Less Taken”.
“The Road Not Taken
Two roads diverged in a yellow wood,
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth;
Then took the other, as just as fair,
And having perhaps the better claim
Because it was grassy and wanted wear,
Though as for that the passing there
Had worn them really about the same,
And both that morning equally lay
In leaves no step had trodden black.
Oh, I marked the first for another day!
Yet knowing how way leads on to way
I doubted if I should ever come back.
I shall be telling this with a sigh
Somewhere ages and ages hence:
Two roads diverged in a wood, and I,
I took the one less traveled by,
And that has made all the difference.
Robert Frost”
Question: Why don’t the Homelanders have to register all their assets?
@all
On another note, I think it will be harder and harder to get professional help with U.S. tax issues. Who would want the risk of involvement in this?
The time has come to renew the discussion as to whether the way the U.S. practices citizenship-based taxation is either a violation of international law, a crime against humanity or both.
@ Renounce, Confiscation by the United States of assets can’t happen provided (1) one’s assets are in Canada; (2) the United States doesn’t annex Canada–in which case it won’t be only the assets of US citizens in Canada but of all Canadians which will be at risk.
Of course what you say is true of those who desire to be compliant to the rules. If you just laugh at them, there doesn’t seem to be much they can do–of course, you have to be or become a Canadian citizen to have the full protection of Canada. Still, those who wish to be able to visit the United States will be adding risk to their portfolio.
Sorry but I found the explanation as hard to digest as the information form for 8938. My husband hasn’t done his 1040 for 2011 yet (filed for an extension because he was out of the country at tax filing time). I decided 2011 is the year I will drop out from filing jointly and I will not file, not even as an NRA (Non Resident Alien — stupid term). As a Canadian, I’ve decided I’ve had enough of the IRS and my husband is eager to extract himself from their clutches too but it will take time. Since my husband does not exceed the threshold for living outside the USA he does not need to attach an 8938 to his 1040, right? BTW, if the IRS doesn’t like me “dropping out” do you think there would be any consequences for my husband? I do not have any USA ties but now with an inheritance from his American mother who passed away in June, my husband does have vulnerable US assets — until he figures out when and how to transfer everything to Canada.
*I actually couldn’t finish reading this article because my stomach was in such a terrible knot I almost felt like throwing up. I am not exaggerating. 🙁 I will finish reading it after I renounce, which will happen soon. It’s comforting to know the second appt in Vancouver won’t require waiting for months.
I feel so betrayed. I’ve been a good and dutiful citizen, do not owe any taxes to the US and all my accounts and financial dealings are legal and handled by accountants, investment advisors, and financial planners. What have I done to deserve this except have a birthplace in the States and a residency in another country?
As renounce says, it will become ever more difficult to find competent professional help and when one does, can you imagine the expense?! It’s expensive now, but they will increase their fees tremendously and I really don’t blame them. It will be a huge professional burden to stay up-to-date and the liability is huge. American citizens abroad will truly be pariahs, persona non grata, even in a place like Canada, which has so many Americans.
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Color me unimpressed. Lots of law firms are producing similar “FAQ” style FATCA guidance for their clients, and even putting it up on the web. 34 more pages of it? Well, let’s just say that no lawyer writes 34 pages without expecting to bring in more business from it. Given Sheppard’s previous comments about the FEIE I’m disinclined to offer him any free publicity.
http://www.chamberlainlaw.com/assets/attachments/37%20Vanderbilt.pdf
See here for our previous discussion of Sheppard’s 2004 FEIE article. Comments from Victoria, recalcitrantexpat, and myself:
http://isaacbrocksociety.ca/2012/02/28/perceptions-of-an-overseas-voter-the-saga-continues/comment-page-2/#comment-9948
Pingback: The Isaac Brock Society - FATCA – FBAR – OVDI – Ex-Patriot Act FATCA Form 8938 – Where it came from, how it came about, what it means for U.S. citizens abroad
@Eric…
Well, I don’t take your view as to direct motive for more business. So let me counter with another perspective.
Yes, as with everything you write for professional journals, when you are in the professional business world, benefit can accrue. It builds reputation and it establishes credence, just like a scientist to be taken seriously by his peers has to publish to have standing.
I take the view, that is what this is. It is a work of scholarly endeavor, and would hardly qualify as a great publicity or marketing tool! Not flashy enough or simply written enough to draw in new clients. However, if you are in a large firm with other attorneys that deal with clients that have offshore tax issues, it probably is good to have a subject matter expert and create reference documents for in house use as well as for the wider Tax professional community via journals. I would bet that attorneys like Steven Mopsick will be reading it right now. Well, not right now. He will be in bed !:)
You are right there are other articles out on attorney’s blogs describing the rules related to Form 8938. Hal’s is slightly different in two major ways. First, to help clarify the complicated issues, the article incorporates guidance from all available sources, including the tax code, regulations, IRS forms and instructions, government reports, IRS websites, etc. I think that has BIG value. I think the idea was that taxpayers like me (or their attorneys) should not have to consult a variety of sources to get the key data; it can ALL be found in one article. So this is comprehensive, and that is why 34 pages with footnotes and references.
Secondly, instead of just reciting the rules as many articles do, Hal’s actually describes why Form 8938 is extremely important in many unknown ways. This occurs in the portion called “The Importance of Code Sec. 6038D – Why Does It Really Matter?”
Maybe you agree with that analysis, or maybe you do not, but it does give more perspective than just cold rule reading. Also, as a member of the ACA Tax Attorney advisory panel, he wanted to provide a resource for its members.
Finally, I would note, that Hale does have a good enough reputation for scholarly work, that Jack Townsend who I respect also blogged about Hal’s resource to draw it to the attention of his readers. If Hale wasn’t well regarded, it would have never seen the light of day on Jack’s blog.
Finally, as far as publicity goes, frankly I don’t think he needs any. He is quite well established and well known. I am pretty sure he is not looking for new clients as a result of writing this. 🙂 And as far as past writing goes, he certainly nailed the issues on FBARs back in 2006, so let’s give credit where credit is due.
That’s my view, and it is ok to disagree.
@Just Me
@Eric
One thing that strikes about Sheppard’s work is that it so:
– dry
– detailed
– thorough
– comprehensive
that it can only be read by another lawyer or a lay person with tons and tons of patience. His stuff is good – I don’t call him the “FBAR Scholar” for nothing. But, there is no way that one can get all is he is saying on the first read.
Therefore, if it is intended to be promotional it doesn’t achieve that purpose without the promotion of writers on this and other blogs.
@Eric
But with regard to your general point of some cross-border professionals capitalizing on anxiety – there is no question about it.
Agree with Just Me and Renounce — a useful article.
Yes, lawyers will receive business because of theUS ’ bizarre, unfair tax laws. However, I don’t see a lawyer who makes income from helping a person deal with their US tax issues as being any different than a doctor who makes income from treating a person for a horrible disease.
I’ve seen some of those “shill” websites and articles, generally short and catchy with misleading information.
This article is seriously researched and written. A member of the general public can benefit from it as an educational tool – can use it in their personal research in deciding what they should do. One part of their decision is if they even want to use a professional. And, very importantly, it (and other articles of this nature) gives a person some background and knowledge which can help them evaluate the competence and appropriateness of a professional whom they consult with a view to engaging.
Unlike most areas of practice, even lawyers and accountants have a lot of misconceptions in this area. So, if a person wants to consult a professional, the person, themself, must read up on the matter, so that they know enough to be able to tell if the professional they approach actually has the specialized knowledge to provide the assistance they need.
And very important, due to all the scare-tactics shilling going on, a person’s own knowledge, gained through reading serious articles like this, enables the person to recognise a shill.
@pacifica777
….And very important, due to all the scare-tactics shilling going on, a person’s own knowledge, gained through reading serious articles like this, enables the person to recognize a shill.
Well said.
@badger
‘Any normal life event – operating a business, getting a loan or mortgage, inheriting from family, etc. could tip you over the reporting threshold’.
Let’s add currency fluctuations to that list.
*Currency fluctuation is a complicator. My small income in the country where I am now can increase or decrease when translated into US dollars, according to the correncies fluctuations. A pain.
*And Joe Smith thinks we have no right to complain?
@foxyladyhawk, just be prepared to take a few bullets if you do!
*One example. Someone bought a property 10 years ago when US$1.00 was $4.00 in the local currency. So he bought it for $4000.00, in dollar US$1000.00. Ten years later US$1.00 equals $2.00. Well, if he sells it for the same price he bought in local money $4000.00 this would be US$2000.00, so he had a “capital gain” for the IRS of US$2000.00… And would pay US taxes on this. Simple. no? Of course the other way around would be true too. It is a question of being or not being lucky.
Thought I would update an IRS page on what is reportable on the FATCA form 8938 as a quick reference… Last updated March 2013
Types of Foreign Assets and Whether They are Reportable on Form 8938
Financial (deposit and custodial) accounts held at foreign financial institutions
Yes
Financial account held at a foreign branch of a U.S. financial institution
No
Financial account held at a U.S. branch of a foreign financial institution
No
Foreign financial account or asset for which you have signature authority
No, unless any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the account or asset are or would be required to be reported, included, or otherwise reflected on your income tax return
Foreign stock or securities held in a financial account at a foreign financial institution
Yes and No The account itself is subject to reporting, but the contents of the account do not have to be separately reported
Foreign stock or securities not held in a financial account
Yes
Foreign partnership interests
Yes
Indirect interests in foreign financial assets through an entity
No
Foreign mutual funds
Yes
Domestic mutual fund investing in foreign stocks and securities
No
Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor
Yes, as to both foreign accounts and foreign non-account investment assets
Foreign-issued life insurance or annuity contract with a cash-value
Yes
Foreign hedge funds and foreign private equity funds
Yes
Foreign real estate held directly
No
Foreign real estate held through a foreign entity
No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate
Foreign currency held directly
No
Precious Metals held directly
No
Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles
No
‘Social Security’- type program benefits provided by a foreign government
No