Liberty and justice for all United States persons abroad

The Isaac Brock Society

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This post is an excerpt from a more detailed  post at RenounceUScitizenship.

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On August 31 the Isaac Brock Society, and Roy Berg of Moodys Tax,  reported that the IRS had issued its long awaited compliance guidelines for U.S. citizens and dual citizens who reside outside the United States. This will be of interest for U.S. citizens residing outside the United States who want to come into compliance with U.S. tax laws. What follows are my thoughts on how the new guidelines might affect  the “compliance question”. This post is  certainly not. and is not intended to be, legal advice (or any other kind of advice). My goal is only to identify considerations that might be worth discussing with your professional advisers. You should begin by reading the IRS announcement which includes a link to the questionnaire.

Some thoughts – How the new “streamlined procedures” – may affect the “compliance question for you” – September 1, 2012

On August 31, 2012 the IRS released some additional guidance for “some non-resident U.S. taxpayers”. The guidance needs to be understood in the context of the previous history of OVDP programs. Here is how I interpret the guidelines. I will update this post over the next few days as the dust continues to settle. Here goes – and remember that none of this is legal advice. For legal advice, you must go to a lawyer.

Q. To Whom Does This Program Apply and What are the guidelines intended to accomplish for the IRS?

A. It appears that the purpose is to encourage U.S. taxpayers living outside the U.S., who have never filed a return during their time living outside the U.S., to enter the U.S. tax system. In order to qualify one must have been living outside the U.S. on January 1, 2009 and not have lived in the U.S. after January 1, 2009. Furthermore, one cannot have filed a U.S. tax return since January 1, 2009. Interestingly the program is available only to those who have never filed during their time outside the United States. (The one exception is if you wish to make the RRSP election on the 8891 form. Those who have previously filed are permitted to do that.) It is not open to a non-resident  just because he is non-compliant.  If you have filed, and not included income that you didn’t know was taxable in the U.S. (and it is very easy to do this), you cannot enter this program.  What if you made a mistake on a previous return? The IRS makes it clear that one cannot use this program to file amended returns. This strikes me as incredibly unjust. Let’s reward those of who have never filed and punish those who have made an effort to comply but have made mistakes. When it comes to the IRS:

“No good deed goes unpunished.” Those interested in getting the word out might consider:

#nogooddeedgoesunpunished

Therefore, I infer that the real purpose of this program is to seduce  people into entering the U.S. tax system. Welcome to “Form Nation”. Welcome to a lifetime of “Forms”. Welcome to the tyranny of “Form Crime”!

Q. Assuming I am eligible to enter the program, what am I required to do?

A. You are required to file three years of tax returns and six years of FBARs. Any required information returns must accompany the three years of tax returns.

Q. Okay, what happens if I file the three years of tax returns and the six years of FBARs?

A. It depends. If you are deemed to be “low compliance risk”, they will likely just accept your returns, and welcome you to the U.S. tax system.  You will then either file forms forever or renounce your U.S. citizenship. If you are not of “low compliance risk” then you may be subjected to a detailed audit and may be required to file more years of tax returns.

Q. What does it mean to be of ” low compliance risk”?

A. Ultimately this will be determined by the IRS. But, here are some of the things that the IRS says it will consider:

– if you owe less than $1500 of tax for each of the three years and you have a “simple return” you will probably be “low compliance risk”. Note that this does NOT say that if you owe more than $1500 each year that you are NOT low compliance risk. In addition. owing less than $1500 of tax is NOT a guarantee of being low compliance risk.

– whether you are claiming a refund (although this seems absurd)

– whether you are tax compliant in Canada

– whether you have bank accounts outside of Canada

– whether you own an “entity” outside of Canada (although this would clearly include a business, would it include mutual funds based outside of Canada?)

– whether you have an economic connection to the United States – Note that although this clearly includes having business or employment income from the U.S., it doesn’t speak to the question of investment income. What if you own a portfolio of dividend paying U.S. stocks? What if you own a rental condo in Arizona? What if you own U.S.mutual funds?

– whether there is evidence of sophisticated tax planning (whatever that means). Would a Canadian TFSA account constitute tax planning? (There are many kinds of investments that U.S. citizens should not own under any circumstances.)

Evidence of one or more of these factors could mean that THE IRS WILL DETERMINE THAT YOU DO  NOT meet the requirements of “low compliance risk”. See a comment from Roy Berg on what might disqualify you . In other words, tell us who you are, and we will decide the status of your “compliance risk”.

Q. What if you are NOT “low compliance risk”?

A. The IRS says that you will be treated in a manner that is analagous to an “opt out” under OVDP. At a minimum this means “heightened scrutiny” and a possible audit for more than the three years. Yes, this does sound risky. Interestingly, the IRS says that they may, at this point, ask for “reasonable cause” submissions. This suggests that, even with “heightened scrutiny”, that penalties are NOT inevitable.

Q. What if all I want to do is fix my RRSP problem with the election on form 8891 but I have been filing my tax returns?

A. In this case, even though you have filed tax returns, you ARE  allowed to fix your 8891 problem.

Q. What if I fear criminal prosecution?

A. First, you need to make sure that it is a “rational fear” of criminal prosecution. As Jack Townsend notes,  you need a consultation with a criminal lawyer on this issue. If there is a “material risk” of criminal prosecution, then OVDP is the only rational way to go. Note the guidelines which appear to say that you can’t enter OVDP after trying to use these streamlined procedures.

Evaluating or Re-Evaluating The Compliance In Light of the Compliance Procedures for Non-U.S. Residents – September 1, 2012

Some thoughts on how to proceed:

Preliminary: Your job is to determine the best way to come into compliance. This new program may or may not make sense for you. You just don’t know. Although I hate lawyers as much as the next person, by using a lawyer you will get the benefits of “lawyer client privilege”.  The accountant can then work for the lawyer, rather than for you.

Step 1 – Determine Your Citizenship Status: The first step is to make sure that you are a U.S. citizen or Green Card holder. There are many people in Canada who became Canadians before 1986 (this is the magic year). By becoming Canadian they may have lost their U.S. citizenship. Therefore, the first step is to confirm your citizenship status.

Step 2 – Make sure that you are completely tax compliant in Canada. All returns filed. All taxes paid. Collect your notices of assessment.

Step 3 – Sit down and begin to complete your FBARs for the last six years. This will help you organize your information. It will also help you to see how the the IRS might see you. The IRS is clearly obsessed with “offshore” bank accounts.  Yes,  from the perspective of the IRS, there are only banks located in the U.S. and banks that are “offshore”. Note that participants in this program are required to send their FBARs to the IRS and NOT to Detroit. Do you have any bank or financial accounts outside of Canada? Do you have any bank accounts in the U.S.? (Although bank accounts in the U.S. could not go on the FBAR, their existence matters for other reasons).

Step 4 – Determine Your  U.S. Tax Liability: If you are satisfied that you are a U.S. person for tax purposes, then you need to get an accurate assessment of your tax liability. Begin by determining your tax liability for the most recent three years. If it exceeds $1500 for any one year, it decreases the chances (and may exclude you) that you are eligible. Next, if you think you might be eligible, determine your tax liability for the next five years. The reason is that the IRS might not deem you to   be “low compliance risk”.   If you are NOT “low compliance risk”, you need to anticipate the possibility of more than three years of filing. This implies the use of another compliance option. Although it should only be a last resort, participation in OVDP would require eight years of returns. Hence, if you have reason to believe that you may not be “low compliance risk”, it might be worth investing in up to eight years of tax returns. Do NOT make any assumptions about your U.S. tax liability based on your Canadian tax liability. Your U.S. tax liability will be determined as though you were a U.S. resident (subject to the earned income exclusion and foreign tax credits). There are many things that are taxed differently in the U.S. For example, pay special attention to the sale of a principal residence or the sales and distributions from Canadian mutual funds. PFICs anyone? What about a Foreign Trust that requires the filing of a form 3520? (A “Foreign Trust” is not what you might think.) Do you own a CCPC? There may be Subpart F income issues. In other words, it is not as simple as you might imagine. Make sure that you disclose all relevant information to your adviser. On this point, I suggest that if you have either sold a principal residence or have sold a Canadian mutual fund, you are unlikely to meet the $1500 guideline!

It is very hard to make an intelligent decision without seeing the “big picture” may involve more than three years.

Unless your life is very very simple you will require the assistance of an accountant with experience in U.S. tax. This is likely to  be expensive. In addition, I hate to say it, but: the more years of tax returns the more expensive it will be.

Step 5 – Complete the IRS Questionnaire: You are now in a position to complete the IRS questionnaire (see below).  This will be used to determine your compliance risk. I strongly recommend the use of a competent lawyer with experience in compliance issues. You should also be asking the question:

If I were required to submit a “reasonable cause” letter, what would that letter say?

Step 6 – Decide Whether To Enter The Streamlined Program or Not: This is a question of deciding the degree of your “compliance risk”. If your “compliance risk” is high, then you might consider other options for coming into compliance.

Step 7 – Use this as an opportunity to decide whether you want to renounce U.S. citizenship or remain a U.S. citizen. It is very difficult for U.S. citizens to live outside the United States. If you don’t renounce you will need very specialized financial planning. Certainly, any young people in your life, should be educated about the opportunities, obligations and liabilities of U.S. citizenship. A great benefit to dealing with the “compliance issue” is that by becoming compliant, you have created conditions to renounce U.S. citizenship!

Important – The Compliance Option Outlined in The December 2011 FS Is Still Applicable – OVDP Is Not The Only Other Compliance Option

A lack of eligibility for this program does NOT mean that OVDP is the only other option. There seem to be a large number of lawyers who believe that OVDP is the only option to bring yourself into compliance. This has been the subject of much discussion on this blog. Even the IRS makes reference to the December 2011 FS. My point: OVDP is and should always be a last resort. Furthermore, one should have very clear reason for exercising that particular compliance option.

Last Dance – It’s been almost a year since the IRS promised guidelines for U.S. Citizens Abroad – The IRS has not delivered!

As was well documented by USXCanada, the IRS programs have been subject to diminishing returns. On January 9, 2012 the IRS promised guidelines for U.S. citizens abroad to come into tax compliance. They have not delivered. Americans Abroad simply have to move on.

There is no point in investing any more of your hopes and dreams in what you were taught was the:

“Land of the free and the home of the brave”.

Very, very disappointing!

Renouncing U.S. citizenship may now be an act of good citizenship!

“Get out while the getting is semi-good.  Don’t wait for more time.  More time means more laws.”

– Phil Hodgen – “Why people expatriate”

 

 

 

 

 

 

 

 

63 thoughts on “Last Dance: New Filing Compliance Procedures for Non-Resident U.S. Taxpayers – Effective September 1, 2012 – A Preliminary Analysis”

  1. Wonderful @bubblebustin. Now just hoping that you’ll be able to get that First Time Penalty Relief on your principal residence/house sale capital gains penalty assessed, as well.

  2. *@Bubble, looks like things are finally falling into place for you and I’m so pleased for you.  I’m sure it hasn’t been an easy choice to have to make.  At the moment, I still want to keep my US citizenship but if over the next four or five years it becomes obvious that I won’t be able to afford to be compliant (say, more than $5,000 as an absolute max and thinking more in terms of annual accounting fees of $2,000 to $3,000).  Still onerous but if I can keep it below three thousand dollars I feel that it’s probably still worth keeping it, but understand why people want to cut loose.

  3. @bubblebustin,

    Congratulations on getting some movement on your case. We’ll all cheer when penalty is overturned for gain on your Canadian (no capital gains!) principal home sale.

  4. Thank you everybody. It’s downright historical if you think about the fact that we may very well be the last generation of American taxpayers to believe that we were free to leave the US without constraint. If the US won’t do it, Canada in an act of self-preservation should make it a priority to advise any US persons seeking permanent residency here of their US tax obligations. Anything less seems like negligence leading to entrapment, imo.

  5. Absolutely, bubblebustin!!!! Once again, negligence on the part of the United States is what has gotten us to where we’re at. Especially, immigrants to the US are not made absolutely aware of tax responsibilities with a green card = entrapment in the US with foreign accounts still in the countries they left.

    The US has not done their job; other countries have to step in to make sure their US residents and dual citizens know what the US should have continually made them aware of.

    Re: hiring company — my example is oil & gas companies of Alberta, etc. They are looking for workers of all categories. All of them, especially those they are looking for to work in the field, need this information before coming to Alberta, Canada. They should not be expected to know about this very complex US tax compliance they will be responsible for when coming to Canada for a good job / good pay.

    Banks / Investment Companies: Advice needs to be given each time a registered Canadian (or other country) account is opened the if there is any US presence for the person or the beneficiary of a registered product, this is not an advisable product for them!

    First responsibility: USA
    Second responsibility: Canada and/or Provinces / other countries
    Third responsibility: Hiring Company
    and importantly: Banks and Investment Companies

  6. @Calgary411

    The ramifications are incomprehensible to the average person, especially USP’s who believe they are the freest beings on the face of the earth. I made the request to the Canadian government to pick up the slack for the US in my budget submission. All of these education efforts cost money, and unfortunately all Canadian taxpayers will have to contribute.

    Lately I’ve been making more of an education effort. Just today I wrote a letter to our condominium management company and my building’s council making them aware of a US person’s obligation to report to the USG all accounts to which they have signing authority. They should be aware that USP’s should not have this kind of authority on private Canadian accounts held by such entities. Citizenship based taxation puts a glass ceiling on all USP’s abroad leaving them unable to fully contribute to their societies.

  7. *In terms of US Citizens immigrating to Canada in the present I would say they don’t run into problems early on for the most part. Take someone for example who makes a Canadian salary under the FEIE cap and who has less than 10,000USD in any Canadian accounts they don’t have that much of a problem early on. Its when someone three or four years into living in Canada starts to accumulate substantial Canadian assets. I do know there have been some people from the US who have come to Canada recently and are dropping their US citizenship as soon as they obtain Canadian citizenship. Right now “temporary” workers can apply for permanent residency after one year and then it is three years to apply for citizenship however, once they get to the three year mark their is a 21 month backlog. This last issue needs to be fixed.

  8. @monalisa1776

    For me it’s not just the yearly costs of filing US taxes, it’s my concern for those I may burden should I become incapacitated and dealing in with my estate, which far outweighs any affection I have for my US citizenship. The choice for me has been removed, thanks to the US’s persecution of its citizens abroad.

  9. *@Bubblebustin, I realise that I could be making things burdensome for anyone having to take care of my estate if I become demented, for instance. I’m planning to have a heart-to-heart discussion with my niece when she’s a little bit older because I think she’d be the most approplriate person to look after my affairs when I become elderly. Something tells me that she has a head on her shoulders and would quickly grasp the complexities…but also bear in mind that by the time I’m 60, I will have propabaly moved all my assets into more straightforward savings accounts with a ceetificate of deposit for a savings bond, etc. As I want her and her brother and my other nephew to inherit my estate, I only feel it’s right for them to understand the situation…if they realise they have a stake in the funds, I’m optimistic they’ll want to get involved and step in if I can no longer manage.

    If I renounced, they’d face heavy taxes on any inheritance so, in spite of the burdens, I still feel that it’s more appropriate for me to make sacrifices now to ensure a legacy for them. If they didn’t exist, then I’d have felt much freer to renounce for my own self-interest but as things are, I have other people to consider.

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