While perusing the ever-fascinating Federal Register, I came across this Comment Request from last month, asking for submissions from the public about collection of information under Notice 97-19 and 98-34.
What are those, you might ask?
Notice 97-19 and Notice 98-34 provide guidance regarding the federal tax consequences for certain individuals who lose U.S. citizenship, cease to be taxed as U.S. lawful permanent residents, or are otherwise subject to tax under Code section 877. The information required by these notices will be used to help make a determination as to whether these taxpayers expatriated with a principal purpose to avoid tax.
The Comment Request also helpfully gives the “estimated number of respondents”: 12,350. Another similar notice from December 2000, pertaining specifically to Form 8854, gives the “estimated number of respondents” as 11,000.
Why was this number so hard to find?
First, a bit of backstory. I’d been looking for these numbers on-and-off for a few months now. This is part of my ongoing quest to sanity-check the numbers derived from the Federal Register “name-and-shame” list — by finding anything to which those numbers could possibly be compared, and seeing whether or not it matches up. Under the Paperwork Reduction Act, whenever the IRS creates a form, it has to file a submission with the Office of Management and Budget giving an estimate of the number of responses, the time burden, and the cost burden for their latest piece of red tape. Every IRS form displays an OMB control number (“OCN”) with which you can look up the history of the submissions related to that form.
The OCN on the current version of Form 8854 is 1545-0074. However, if you go over to reginfo.gov, put that OCN in the search field, pick the “ICR” option (for “Information Collections Review”), and find the most recent submission, you’re greeted with an estimate of 152 million filers. Half the country renounced citizenship? Apparently not. As I soon figured out, the IRS now uses a single OCN for most forms relating to individual income tax returns, and lumps them all together in a single estimate of Form 1040 filers. Oddly enough, it was not always this way: old versions of Form 8854 have a dedicated OCN, 1545-1567, but it was discontinued in 2006.
I’d given up on finding these numbers for a while, until today when I came across the above Federal Register notice, almost by accident — I was idly browsing through instances of the word “expatriate” on .gov sites, and landed on the page for that notice. A conspiracy theorist might think the government made a deliberate effort to keep people from finding this number. But I’m a firm believer in Hanlon’s razor: “Never ascribe to malice that which is adequately explained by incompetence”. And indeed, the history of OMB submissions on Form 8854 demonstrates plenty of incompetence, as I’ll describe further below.
How has the estimate changed over time?
As we all remember, back in 1996 Congress had a two-minute hate against renunciants, which resulted not just in the creation of the Reed Amendment, but new taxes as well. After the IRS designed its new procedures for collecting those taxes, they submitted two estimates to OMB. The first was for the “Expatriation Information Statement”, giving an estimate of 11,000 respondents per year and a time burden of 2.5 hours per respondent. The second was for “Guidance For Expatriates”, giving an estimate of 12,300 respondents per year and a time burden of about half an hour per respondent. (I’m not sure how one “responds” to a guidance notice, but anyway …)
The exit tax regime as it stood in 1996 consisted of ten years of taxation on U.S. source income; however, as the old instructions make clear, people losing citizenship would file Form 8854 only once. If they were found to be Evil Unpatriotic Tax Avoiders, they would file other forms in subsequent years, but not Form 8854 itself. That means the IRS was expecting 11,000 people to turn in their passports or green cards every year. I have no idea how the IRS came up with that number. The Federal Register list did not yet exist at that point; the only basis the IRS would have had for their estimate was this Joint Committee on Taxation report listing all the people who relinquished or renounced in 1994. Maybe they had access to some data which is not available to members of the public. Or maybe they were just padding their estimates.
The subsequent IRS submissions to the OMB on the “Expatriation Information Statement” maintained the same estimate of 11,000 respondents per year (November 1998, December 2000, November 2003, February 2004, February 2005, May 2005). Submissions on “Guidance for Expatriates” actually increased the estimated number of respondents slightly to 12,350 (May 1998; April 2000, April 2003, April 2006, June 2009).
They don’t take this OMB paperwork very seriously
The Accountants American Jobs Creation Act of 2004 drastically increased the number of 8854 filers. As the 2007 version of the 8854 instructions points out, “covered expatriates” after June 2004 have to file Form 8854 annually for 10 years. However, the IRS did not adjust their estimate of the number of filers. Similarly, after 2008, the HEART Act switched the system from a 10-year tax on U.S.-source income to a one-time exit tax on worldwide asset appreciation. So the IRS should have decreased their estimated number of filers, as Form 8854 returned to a one-time filing and the number of people filing under the old ten-year regime slowly decreased. It seems that the IRS simply couldn’t be bothered to update their estimates in response to changes in the law.
More amusingly than that, you may have noticed that the 2009 extension was received by OMB one day before the expiration of the 2006 extension. This is part of a larger pattern during Geithner’s reign at Treasury: last-minute or late filings of mandatory paperwork, just like the “name-and-shame” list. Since the IRS apparently waited until the night before the deadline to get their paperwork in, I guess they simply didn’t have any time to update the estimated number of filers. It’s like a bad joke from university days that would fit right into Animal House — the professor changed the assignment, the paper is due tomorrow, but the frat brothers are still handing in some piece of junk they copied from the guys who took the class ten years ago, with the expectation that they’ll keep getting a “Gentleman’s C”.
So, is the estimate correct?
The question we’re all wondering about: was that initial estimate correct? Are there really 11,000 filers of Form 8854 per year? The only way I can really think of to approach this problem is to look at the numbers which the IRS provides in its other OMB submissions, and compare those to the actual numbers of filers of the corresponding tax forms.
Form 3520
For Form 3520, the form on which you report your “foreign trusts”, the IRS’ notices give a very low estimated number of responses, even when compared to the IRS’ own statistics about the number of Form 3520 filers. For example, the most recent notice gives an estimate of 1,320 filers. However, the actual number of 3520 filers shown in the Statistics of Income Bulletin (SOI) — as we discussed earlier — is closer to 2,000, and the actual number of people who are supposed to be filing the form is a few orders of magnitude higher. Similarly for Form 3520-A, the most recent submission gives an estimate of 500 filers, while the IRS’ own statistics stated 3,819.
Form 5471
Statistics for other forms turn out to be harder to interpret. Consider the foreign-corporation-related Form 5471. The IRS’ July 2010 OMB submission estimates 86,130 responses (actually a decrease from the December 1982 estimate of 88,000), while the Winter 2006 SOI Bulletin states (at page 208) that 11,873 U.S. corporations controlled a total of 78,249 foreign corporations. One Form 5471 must be filed for each CFC; one entity may thus file multiple 5471s.
Does the OMB notice count each filing of the form as one respondent, or each filer? The time burden estimate in the OMB submission comes out to 50 hours per respondent, about the amount of time you’d expect for filling out a single 5471 — suggesting that they’re counting on the basis of forms filed. But there are other categories of Form 5471 filers too: U.S. corporations with minority stakes in foreign corporations, as well as natural persons (such as every U.S. Person entrepreneur who dares to incorporate where he lives instead of back in the Homeland). So the OMB number is probably an underestimate.
Form 1065
The data for Form 1065 (partnership return) is equally difficult to interpret. The 2008 OMB filing estimates 22 million responses, whereas a July 2010 Comment Request estimates 2.4 million responses. An SOI Bulletin from 2008 states that the IRS received returns from 3 million partnerships with a total of 19 million partners. It’s unclear whether these “estimated numbers of respondents” are referring to the partners or the partnerships. (Form 1065 is supposed to be filed by the partnership itself.)
Perhaps the basis for the number given is just chosen at the whim of whichever IRS employee is filling out the form. I’m sure they didn’t imagine that a member of the public would be so obsessed with the topic as to go around checking their numbers for consistency …
Form 990 and 990-EZ
Finally, a straightforward case, almost! In 2008 there were 192,968 filers of Form 990, and 238,914 filers of Form 990-EZ — for a total of 431,882. The OMB notice in effect for that period gave an estimate of 434,569 filers, almost exactly on the money (presuming that it includes both forms) — except that, oddly enough, the IRS filed an amendment to that notice that same year with a lower estimate of 403,068.
Form 1116
Another relatively straightforward case. The OMB submission estimates about four million filers, while SOI statistics show about three million. So the OMB submission had an overestimate of about 25%. “Close enough for government work”, as the phrase has it …
Conclusions
If I were as careless filling out my Forms 1040, 1116, 2555, 3520, and 5471 as the IRS very clearly is when they fill out these OMB submissions, I’d have been fined 300% of my assets by now. This lackadaisical attitude towards accuracy makes it hard to interpret the data with any confidence. As far as I can tell, the IRS at least got their estimated number of filers in the right ballpark for Forms 990, 1016, and Form 5471, but they may have drastically flubbed Form 1065, and it’s hard to say anything at all about Form 3520 since the actual number of filers is so much smaller than the number of people who are supposed to be filing. And of course, don’t forget that FinCEN estimated 400,000 FBAR filers back in 2011, but then ended up getting more than 600,000.
Anyway, the second quarter “name-and-shame” list should be appearing sometime in the next week. Whether you think that list is nearly complete or grossly understated, it’s a safe bet that the data will be full of errors — just like in previous lists which were full of repetitions and misspellings, and just like all the other data I’ve discussed in this post.
It looks like the US could solve its fiscal deficit problem if Congress would enact a law subjecting the IRS to a minimum penalty of $10,000 for each inadvertent error it makes in the reports it releases.
Do you suppose China would be willing to loan the IRS the necessary funds to cover the cost of these penalties?
Imagine the cost will be translating all of this into Mandarin?
Obama enacted (apparently toothless – when it comes to the IRS) ‘plain language’ law:
Plain Language: It’s the law
President Obama signed the Plain Writing Act of 2010
”
on October 13, 2010. The law requires that federal agencies use “clear
Government communication that the public can understand and use.” On
January 18, 2011, he issued a new Executive Order, “E.O. 13563 – Improving Regulation and Regulatory Review.
It states that “[our regulatory system] must ensure that regulations
are accessible, consistent, written in plain language, and easy to
understand.”
Two other executive orders (E.O. 12866
and E.O. 12988
) cover the use of plain language in regulations.“
Maybe if they enforced that as eagerly as they enforce and punish inadvertent errors and confusion about extraterritorial taxation and incomprehensible forms, compliance would be easier.
But they won’t – because there is far more money to be
extortedextracted from draconian penalties for errors and inadvertent omissions by ‘international tax payers’ than from any actual tax owing from ‘abroad’.@eric,
very interesting find – and lots of work to analyze!
@badger, I know that the FBAR penalties are draconian, but has anyone ever been charged an FBAR penalty, outside OVDI, other than big and obvious cases of tax evasion? Has anyone ever been charged a penalty for simply filing a late or amended FBAR?
@ Shadow Raider, I know of no one who is not a whale who outside the OVDP has been hit with big fines. However, the idea of leniency to those outside of OVDP was completely dashed when expat minnows like Just Me started getting draconian fines (his was 173 K before the Tax Advocate took up his case, and they managed to get his fine down to 25K).
The big guns are coming with FATCA. The big fines are coming the fish who haven’t joined the OVDP, according to FAQ 4:
The IRS has made no serious attempt to distinguish the targets of the program and the benign players. To my knowledge, even today a $1500 tax liability, a trivial sum, per annum is the new benign player threshold. Those of us outside the OVDP thus have cause for concern, even if no minnows have been charged or fined. YET.
@shadowraider,
I don’t know about the size or frequency of FBAR fines, only what the IRS says that they can and will do.
It’s not just FBARs that come with the big reporting penalties for errors, omissions or just for not being filed period – out of ignorance.Who knows about the FBARs and size of assessed fines so far? We’ve got limited information – and as the IRS is neither transparent or ethical, we can’t know what they will or will not do. As Petros has said, re the yet to be released guidelines, the line between ‘low risk’ and ‘high risk’ category is set so low re US tax owed (easily possible for those in countries where the US doesn’t recognize their country’s taxes for exclusion, or those who sold a principal residence – taxed by the US, but not where they live, etc. or any number of ordinary legal and non-taxable events where we live that the US insists on taxing us for), (and there has been some speculation by professionals that just merely having registered accounts – ‘trusts’ like RESPs, TFSAs, etc. that require all sorts of complex reporting, will be deemed ‘high’ compliance risk – even though they’re controlled and registered by our country of other citizenship and residence).
With zero US tax actually owed or outstanding for those covered by the FEIE and foreign tax credit, even a few hundreds or thousands per person in FBAR or other reporting penalties (of which there are plenty potentials – ex. 3520s, or the one for mutual funds, etc.) add up to far more than was ever going to be collected via actual US ‘income tax’ – which was 0. The IRS is very fond of calling everything a ‘trust’ – and penalizing them accordingly. Basically, anything that isn’t a simple term deposit or cash requires complex forms and comes with penalties. And it is only recently that they said they’d exclude existing RRSPs retroactively and let Canadians apply to have them retroactively recognized without paying 2000. to get a private letter ruling. Who knows how many people paid for those – which is effectively a tax on something that they’d agreed (after much wrangling for years) was effectively not taxable. I don’t know if / how we can know the totals re the FBAR fines. The IRS isn’t telling – and hasn’t responded to the FOI from the ACA re penalties vs. actual recovered taxes generated in the VD programs. We don’t know what has happened to people in other countries with no, or less ‘favourable’ treaties either.
Even a thousand or a few thousand per person is a big amount per household depending on your income and assets. Or with more than one US person per household, plus whatever was spent on accountants and lawyers – even just to get opinions.
@Shadow Raider and Petros
I am glad to hear that we know of no one so far outside of OVDI who has actually been hit with the FBAR fines. Just Me, as I recall was not “outside OVDI”, although he was obviously a minnow and would not have “jumped into the net” if he’d known then what we all know now.
They are certainly continuing on with, and ramping up, the threats, but I am guessing (and hoping) that they won’t try to go after foreign minnows with fines, because if they did it would a) give them horrible publicity, and they would have trouble maintaining the fiction that they are after the whales, and b) since foreign minnows are not so easy to get at, it might land them in a legal battle that is not worth their while to fight, and they would have trouble winning..
Seeing all the “bad facts” of the cases that have been publicized, I can’t imagine they would have any luck going after the typical overseas minnow, without the minnows cooperation. Unfortunately the onshore minnows, who are already in the IRS reach, may not be so lucky.
Anyway, that is how I sleep at night!
@Eric what I find particularly interesting about the page you posted, besides the numbers you managed to extract, is all the pretense at wanting to know what we think, and how long it takes, and whether we think it is useful. I’m not sure exactly what it is that this particular request is asking for feedback about. Does it have anything to do with us? Does anybody in the US government really believe all this “paperwork reduction” nonsense. When I see the “paperwork reduction” garbage at the end of every IRS form, it strikes me as worthy of a Monty Python skit.
As far as penalty abatement goes:
“it is interesting that the IRS will (sometimes) consider a lack of awareness to be reasonable cause. Most times they would say ignorance is no excuse. The IRS now says: “You may have reasonable cause for noncompliance due to ignorance of the law is a reasonable and good faith effort was made to comply with the law or you were unaware of the requirement and could not reasonably be expected to know of the requirement”.”
http://www.mnp.ca/en/media-centre/blog/2011/12/9/irs-relief-for-americans-in-canada-isnt-what-we-hoped-for-or-what-we-were-promised
It’s my hope that one can be deemed ‘high risk’ and still plead ignorance of the law, but then, it appears that the IRS still holds all the cards. We are one of the sad unfortunates who paid for PLR’s on our RRSP’s. Also, as far as assessing tax and FBAR penalties go on our submission, eliminating them through the IRM will alone reduce what Schulman claims to have taken in by $85K on a capital gain tax of $65K. That’s a real life example set at a ‘only’ a 5% FBAR penalty rate! There are those who may have their 25% penalties abated! However, by the time all of this washes out, our present commissioner will be well placed in the private sector, won’t he?
*@CanuckDoc, there hasn’t been anything in the news over here in England about US expats being hit with FBAR fines so far. However, I suspect that this could change after FATCA is fully underway, as the IRS will have the means to more easily find minnows abroad and enough time will have passed so that pleading ignorance of the rules will have become much harder.
But I also agree that with limited resources, the IRS will still have to focus on major cases with bad facts instead of blindly going after minnows living abroad, especially those without any assets in the USA. Agree that it would create bad publicity if the IRS tried to go after expats here through the UK courts.
Being a politician, it’s difficult to know if Boris Johnson would be helpful to little people like myself but I’d like to think they wouldn’t want to risk making him turn even more anti-American.
Also agree that it’s the immigrants who could be facing the worst problems from all this, as they have their assets in the USA and thus more easily within reach of the IRS.
But I also agree that with limited resources, the IRS will still have to
focus on major cases with bad facts instead of blindly going after
minnows living abroad, especially those without any assets in the USA.
Agree that it would create bad publicity if the IRS tried to go after
expats here through the UK courts.
The IRS as a matter of policy doesn’t use foreign courts. (This seems to have to do with a decision that went against them in BC years ago – I forget the details.)
They may in fact intend to blindly go after minnows living abroad demanding penalties – see Badger’s post above -with the expectation that they’d collect in only a small number of cases and quietly settle for less money in other cases. If I could send demands for $10,000 to 500 people, two of whom would pay up, it might be a good use of my time, all things considered.
From here: http://www.theglobeandmail.com/globe-investor/personal-finance/taxes/tax-amnesty-offered-to-americans-in-canada/article4372266/
But U.S. officials have struggled internally over whether people who haven’t filed for years deserve any special leniency.
Which implies an internal struggle in the IRS between hawks and doves.
*@ABrokenMan, I see what you mean. But I still think it could create bad publicity if the IRS were to start blindly hitting expats including minnows with huge fines for benign foot faults. I’m sure it’s also true that there’s currently an internal struggle in the IRS between hawks (Douglas Shulman) and doves (Nina Olson).
It essentially forces us to use professionals because I could well have to rely on my accountant to request future penalty abatement in case there were to be disagreements in how my employer’s pension scheme or my investment account is defined by the IRS. They could argue that I need to be filing 3520, etc. even though my accountant doesn’t think I need to in my case. But I feel safer having had their backing than to file the returns myself and risk more headaches over these ambiguities.
Well, maybe. It’s an open question whether the IRS cares all that much about its popularity abroad. (The State Department, which has to deal with the damage created, will, but the IRS may not care all that much about that either.)
Think of the US’s revenue shortages like peak oil. As conventional sources run out, or fall short of demands, the IRS turns to more difficult and unconventional sources, which may offer a lower EROI. These overseas collection efforts are sort of the tax equivalent of fracking.
(Unlike peak oil, it’s an artificial problem – if they returned to the tax rates of the 1950s, and a simpler tax code which would be in effect more progressive, they wouldn’t have these issues. But that’s a subject for another day.)
@Broken man, Fracking can actually be profitable. A better analogy from a EROI point of view would be ethanol, which may actually take more energy to produce than it yields. Likewise, trying to collect taxes from an US citizen abroad is a waste and not likely profitable.
Consider that I spent 12 mins on the phone with an IRS employee for my 2009 taxes. I owe nothing, as the vast majority of expats because of FEIE. My FEIE was not allowed. So wasted paperwork and time talking to the IRS must have a cost in the hundreds of dollars. Yet I will end up paying nothing but I’ve use their resources trying to collect it. Zero return on investment=ethanol, not fracking.
@petros and halifax,
the $450 renunciation fees and exit taxes will do wonders for the nation’s coffers. Aka the “fleece ‘n free” program has only just started to pick up steam.
As more and more duals realize what is happening, those who haven’t yet started families may very well decide (like some of the participants on expat forums abroad in Europe) to renounce before they marry and have children who would inherit the US citizenship tax-burden.
By sharing what we know with as many of those affected as possible, we contribute to the reduction in numbers who will inherit or choose to keep US citizenship abroad. If we make sure that any minor children who inherit the burden from us, know exactly what the US has done to our family households – the psychological and other health effects, the family money that went to expensive specialist crossborder accountants and lawyers, and detail the estimates of what the annual compliance costs will be over a lifetime – which will not be available to spend on their university education, their first house, their children, our retirement, or what will be available for them to inherit from our estates – it will be much more likely that they’ll choose to renounce as soon as they can – before they have taxable assets for the US to extort and penalize. It is not likely that any nebulous potential opportunities in the US can offset the picture of the concrete costs and jeopardies that continue to be built into the reporting and draconian penalties – which are only getting exponentially worse. Explaining factually why they can’t have or benefit from an RESP to fund post-secondary studies – like other Canadians, and why we have to report their juvenile birthday bank accounts to the IRS, is probably not going to be conducive to them choosing to keep US status when they’re older.
The fewer US duals abroad, the fewer who can pass on the US taxable status to offspring, and the fewer US duals there will be to continue to fleece abroad. I know some people think that children should be free to make their own objective choice when they come of age, but realistically, how many of us are ever going to sugarcoat what we’re experiencing right now?
As expatriation numbers shoot upwards (I can’t wait to see how many in this next report), that’s fewer and fewer who can pass on the taxable burden to their children – if they haven’t already.
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