Liberty and justice for all United States persons abroad

The Isaac Brock Society

Posted on by Posted in Issues regarding US persons abroad 63 Comments

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

Some ThoughtTweets – ReTweet As You Deem Appopriate:

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. Thanks, renounce, for preparing a separate post. How I wish it were in every US Person’s hands to 1) educate them to what this is if they don’t really know; and 2) to give them some food for thought on how to analyze this latest instruction from the IRS. I think it is not helpful and will further drive people underground. Somehow, with the help of our governments or by our own devices, we must come to something that works for each of us so we can continue our lives without this monkey on our backs. It is no way to live. I think that light of joy has dimmed in the lives of a lot of us, no matter how we try to fight it.

    Upset asked if this is an amnesty. Of course it isn’t. The IRS has NOT offered any kind of amnesty to anyone. They don’t know the meaning of the word.

    I think that Eric’s comment must be re-iterated in our minds — the advice we get from those who have prepared all their own returns from outside the US and have told us there is really nothing hard about it. If people are able to do that, they have to make absolutely sure they are including all of the additional forms required from outside the US — it is not a slam dunk and is not at all the same as filing within the US.

    “Generally, amended returns will not be accepted in this program. Where they are, the amended returns will be considered ‘high risk’ and subject to increased scrutiny.” — in otherwords, all the expats who keep saying “what’s so hard about filing a 1040 and a 2555-EZ, why are all you nutcases whining and renouncing” but never knew they had to tell the IRS about their “foreign” pensions on Form 3520 or mutual funds on Form 8621 or their self-employment on Form 8858 are still screwed.”

    We need the backing of our governments, wherever we live, even stronger than what Canadian Finance Minister Flaherty has so far assured us. We need to have that trust.

    If that doesn’t come to pass, especially with FATCA, we need to be COMPLETELY educated on consequences of our actions in trying to comply with the US tax laws for citizens, including “supposed” citizens (Accidental Americans) and green card holders (past or present).

    Or, we somehow need a very organized effort for class-action suits. Otherwise we will be more collateral damage of the policies of the US government.

    It is all complex, mind boggling and soul sucking.

    Here is another link I just came across to some stories of unsuspecting US Persons Abroad ( not the one I had in mind, but a different aspect, one that could be much too real: http://www.overseas-exile.com/2012/08/the-tragic-story-of-expat-alice-versus.html and http://www.expattaxstory.us/canada/ ). We each have our personalized story. However we obtain all the advice we need, we each have to be completely vigilant for ourselves, our families and the treasuries of the countries we live in. This has been (or will be) a life changer for us all.

  2. Renounce – Good fast useful work. Your review was the first time that “never filed before” snagged my attention. All those nasty little details. Why would any minostrich (cross between minnow and ostrich) ever step into that new minefield? Perhaps to find relief from self-induced psychosis at discovery of the detriments of being one of those so-called U.S. persons. Horrendous costs of compliance even if nothing owing = same old same old. Then all of the ways that the minostrich could have any certainty removed and become subjected to harsher examination. The spider builds yet one more parlour for the flies. The appetite of Moloch will not abate. Eat the children!

  3. The nebulous ‘sophisticated tax planning’ gotcha clause. The inability to enter OVDP if you aren’t accepted into this latest scheme. Can’t the IRS ever do anything without wielding a big club? They want to hold all the cards, and keep everything as vague as possible. 

    What qualifies for sophisticated tax planning, does anyone have any idea? I would think that not having ever filed FBAR’s is a sign of some pretty unsophisticated and stupid tax planning if you knew about the requirement and didn’t do it. I know that I wouldn’t be faced with FBAR penalties today if I’d known about it!

    As far as opting out of OVDI to enter this program goes, it would be ludicrous for a taxpayer filing for 2003-2010 to neglect to file for 2011, which would disqualify them from this process. Gotcha!

  5. I would be surprised if many people enter this program. It seems to me that there are now two categories of U.S. citizens abroad:

    1. Those who are forced to renounce – Those who have doing their best to file, but probably have some sorts of issues of omission (deemed income, FBAR, etc.). These people have to stay in the system and clean up past problems. They are by far the biggest victims of this. They are in the system and on the radar. For them the only rational goal is renunciation.

    2. Those who are likely to go underground – Those who have never filed. Given the behavior of the IRS (as documented by TaxPayer Advocate), I suspect that most of them will go deep, deep, deep underground. In all likelihood, just letting their passports and expire and never go near Form Nation again.

    It’s election time. I would very hard on letting @demsabroad @aaforobama @BarackObama know how you feel. Contrary to what Joe Green says, the election is exactly the right time to raise these issues.

    Remember that when it comes to the IRS:

    #nogooddeedgoesunpunished

  6. Forbes, September 1, 2012

    Newest Offshore IRS Amnesty Not for Everyone 

    Robert W. Wood Comment on High Risk Definition:

    If you owe less than $1,500 in tax each year and don’t have high risk factors you should be fine. What’s high risk? Any of these:

    • If you claim a refund!
    • You have “material economic activity” in the U.S.
    • You haven’t declared all your income in your country of residence.
    • You are under audit or investigation by the IRS.
    • You had prior FBAR penalties or an FBAR warning letter.
    • You have an interest or authority over an account outside your country of residence.
    • You have a financial interest in an entity outside your country of residence.
    • You have U.S. source income.

    It’s not clear (at least to me) if you could have one of these and still be judged low risk. But if you make a submission but are judged to be high risk, you don’t qualify and will be examined. That could include more than three years, like opting out of the OVDP.There are indications of sophisticated tax planning or avoidance.

     

  7. or stop working, and ensure that your income is lower than that necessary to be required to file a 1040 at all.  Dig a hole and jump in it.

  8. @all- I see it as being basically pointless.  Basically you are still living under U.S. tax law and not the tax laws of your country of residence.  Successfull extrication from this “rigged” game is extremely difficult.

  9. *usxcanada, likewise, renounce’s post enabled me to see the “never filed” line, meaning that this does not apply to me. I have a US account which, according to these guidelines, would could rank me into “high risk”. I’m sure that such is not the intent, but that’s how it is written.

  10. *renounce, a letter recommending for one to renounce US citizenship is the only thing that US representation can or is willing to do for Americans living abroad.  In response to the campaign, I mentioned this with the following:

    I realize that you may feel that you are busy with your campaign in
    dealing with local issues, but campaigns are excellent opportunities to
    demonstrate that one recognizes everyone whom one is fighting to
    represent and that one is also willing, capable and active in fighting
    for their rights even prior to being elected.
    http://expatami.wordpress.com/2012/08/30/requesting-letter-of-recommendation-to-renounce-us-citizenship-from-state-house-candidate-liz-alpert/

    Of course, the candidate didn’t respond since Americans abroad have no representation, but I’ll call just to clarify this.

  11. Many thanks for this excellent analysis, Renounce.  It’s a good reference as well as the commentary to it.

    Nina Olson’s criticism and chastising of the IRS’s OVDI & OVDP is proving prescient.  The tax system relies on fairness and trust.  Fairness is not offered to USPA’s as it is, and OVDI, OVDP, and Commissioner Shulman’s refusal to answer to the Taxpayer Advocate as required by law, have fundamentally destroyed trust. “Fool me once…”

  12. Also posted at maple sandbox

    Do you remember some old adventure movies when unsuspecting adventurers get stuck in quicksand and disappear? The new guidelines from the IRS reminds me of those movies.

    The IRS not only has leaden shoes, but also a leaden brain and a leaden soul.

    And that’s being charitable.

    I’m also reminded of the many excellent FATCA comments made by financial institutions and organizations at great cost to them in both time and money that have barely budged the geniuses at work at the IRS.

  13. @Usxcanada

    @Swisspinoy

    When I say “never filed” I mean during the time of living outside the United States. I believe that somebody could enter this program (if they wanted to) if they had filed while residing in the U.S. prior to moving abroad. The purpose seems to be to allow non-residents who didn’t know they had to file returns while they they were non-residents, who suddenly learned that they had to file, to get into the U.S. tax system.

    That said, the comments to this post illuminate how difficult “IRSSpeak” (NewsPeak anyone) is to understand.

  14. @Calgary 411

    Thanks for posting the link to Robert Wood. Mr. Wood never identifies compliance options that go beyond OVDP. This is strange. Even the announcement of the new program acknowledges and assumes the existence and continuation of the procedures in the December 2011 FS which is a clear acknowledgement that OVDP is NOT the only compliance option.

    https://renounceuscitizenship.wordpress.com/2011/12/18/update-on-the-irs-fs-for-u-s-citizens-and-dual-citizens-living-outside-the-united-states-no-additional-relief-for-canadians/

  15. Here’s a post on Jack’s blog that is worth sharing here:
    IRS Data-Mining Program re Offshore Accounts; with a Diversion to the Real Golden Rule

    And here is part of Jack’s comment:
    “I do think the IRS has learned its lesson — well, has to sometimes re-learn — and will not allocate material resources chasing down minnows in the offshore account area.  Now, what I think the IRS does is create the specter that it might chase down minnows which horrific consequences to the minnows chased down.  This is just a threat to encourage a lot of minnows to open the kimono voluntarily in the various programs it offers, so that it collects revenue in the aggregate that may be significant with little relative IRS resources.  But, when it does allocate major resources, I can’t imagine that the IRS is really going to devote them to minnows and leave the fat cat whales alone.“

    I don’t think the IRS has learned any lesson. The new program really shows that they’re not interesting in providing relief, but catching more fishes in their net, to continue the fish analogy.

    The IRS’s attitude is just despicable. Yes, this is a police state. I just don’t understand why they don’t get that by adopting this attitude, the threat of prison, and financial ruin, people will not be encouraged but just continue to hide.
    It doesn’t make any sense. I think a lot of people would just file amended returns if they weren’t afraid of the possible life altering consequences. It’s a lose-lose situation. Not only people affected are disgusted by the government, and no money is generated. Why won’t they listen to the IRS Tax Advocate? It is sad to see that they don’t have much power.
    Now that much noise has been made about it, it would actually be a good time to switch a real way to provide a painless compliance path. But they would need to restore trust fisrt. Maybe they realize that since trust is now gone, they don’t have any other choice than using threat. This is just sad.

  16. This announcement looks another bait-and-switch for people who don’t owe any taxes. If one has a US bank account and gets couple of hundreds of dollars interest income, it could be treated as “US source income” and pushed into ‘high risk’ category, even if he never visited the USA for a decade. If an expat family income is under 20K and has kids, the family is prevented from getting child tax credit as refund. The IRS accepted US$1,500 tax due is a limit. Why can’t they give such limits for interest earned? As in OVDI, income of US$10K (or 20K for married couple) is reasonable, since if the income is over US$10K one must file US taxes. How can IRS treat a person with couple of hundred dollars interest income from US ‘high risk’ even if don’t owe any taxes?

  17. My son is 22 years old has a US account, which was opened 15 years ago and has interest of bout US$25 each year. He was born in the USA and we returned to India 15 years ago. He never visited the USA in past 15 years. Since he has US sourced income of US$25, is he audited as high risk tax payer? He has about US$12K income for two years in India from rental property inherited from grand parents but has no US tax liability due to taxes he paid in India.

  18. @RamGopal- How does the IRS prevent Canadians from getting the child tax credit? I had not heard about this.

  19. @recalcitrantexpat

    Please see one of the above posts by calgary411. One of the high risk factors is:

     “If you claim a refund!”.

    I don’t get it: How claiming a refund by a poor family having children is a high risk factor?

  20. @recalcitrant, RamGopal,

    Thanks.

    Which then begs the question:

    Explain to me again, Department of State — Why can’t a Parent / Guardian / Trustee renounce US citizenship on our children’s (or another person represented with a debilitating brain disability) behalf when we deem it in their best interests? Their best interests are not with the USA!

    This is certainly yet another trap for the tangled web that is that scenario. It appears the US is not saying they will prevent Canadians (or any someone from any other country) getting a child tax credit — they will ONLY punish them for doing so (if using this new “amnesty” vehicle to come into compliance, which you aren’t). They are nuts.

  22. @swisspinoy,

    That seems to refer to illegal aliens; not us, US citizens who don’t want to be. Perhaps if we could be reclassified as illegal aliens, our renunciations and resultant US income tax compliance would be not necessary as the US would then be only too happy to see us gone. Seems more evidence of the stupidity of the IRS in their sending refunds for fraudulent claims. Stop the leakage there before going after us, IRS Commissioner Douglas Shulman, in your continual “bait and switch” which YOU do not think YOU have to answer to.

    Re the Parent / Guardian / Trustee being responsible for the adult disabled child (or similar), that comes under COMMON SENSE, which we see none of.

  23. @recalitrant, RamGopal,

    Guess it needs to be determined — does the IRS consider a child tax credit a refund? I don’t know; I don’t get one as I have never registered my son with the US. (We need such information in plain English!)

    Compliance Risk Determination

    The IRS will determine the level of compliance risk presented by the submission based on information provided on the returns filed and based on additional information provided in response to a Questionnaire required as part of the submission. Low risk will be predicated on simple returns with little or no U.S. tax due. Absent any high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk and processed in a streamlined manner.

    The risk level may rise if any of the following are present:
    •If any of the returns submitted through this program claim a refund;    ETC.

  24. @Christophe

    This new program is NOT a program that provides any real opportunity for tax compliance. I think the IRS really doesn’t want U.S. citizens abroad to be compliant. There is no money in taxes from U.S. citizens abroad. But, the FBAR Fundraiser – well that’s another story!

    I agree with you that the IRS has completely eroded any remaining trust. Their failure to follow through – i.e. issue guidelines that would assist U.S. citizens abroad to become tax compliant – is a breach of their undertaking on January 9, 2012.

    It will take a generation to recover this trust (if is even possible).

    I agree with you that people will now be far less likely to come forward than they ever would have before.

  25. @RamGopal- I am sorry.  I thought that since you were using the same terminology that you were referring to the Canadian Child Tax credit.  I am aware that because of some fals claims that were made by Israeli dual citizens that the U.S. is now suspicious of any expats who are claiming the U.S. child credit.

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