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.

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. In my opinion, the unreasonable risk factors (e.g. no refunds, US source income) are a big pull back from what was promised.

    Many dual-citizens might have some US sourced income, may be from bank accounts or gifts from parents/grandparents. The expats being punished for investing in the USA (e.g. leaving the money they earned in the USA) and earning interest of few hundred bucks (far less than inflation). Why is it high risk factor? If they move the money and invested in their country, why is it less risk?

    If a person has US sources income of under US$1000 in just one year, how can he suddenly become ‘high risk’, if he doesn’t owe any taxes to IRS all three years?

    The tax liability limit US$1,500 serves no purpose for many tax payers, who are living in high tax countries. Local taxes more than offset US taxes. Many people may accumulate foreign huge tax credits, due to high taxes in their countries.

    For them US$1,500 limit is only useful, in case if they have any small amount of US sourced income. I don’t know, who is writing these rules.

    If one claims refund, IRS can verify his kids outside full audit of six years. It is a crime to claim refund without kids, so he can be prosecuted.

    Considering this kind of unreasonable risk factors, this appears to be huge pull back from what was promised.

     

  2. *RamGopal, I don’t think that the IRS views US investments as being any risk, but I could be wrong.  From what I’ve been told, the IRS has access to US banking data.  The problem is that that statement was made by a person in the US about people outside of the US.  “Foreign” for stateside Americans likely refers to anything non-US.  Yet, for us, “foreign” means US investments.  For stateside Americans, we basically live in the US.  I’ve been getting invitations from politicians to attend barbeques and other local events even after telling them that I don’t live in the US.  Thus, I wouldn’t be surprised if my foreign, offshore bank was viewed by stateside folks as being “no-risk”, while my local account is seen as being a “high-risk” tax evasion since it is not in the US.

  3. *IRS targets Yanks in Canada

    OTTAWA – With his pockets empty and a
    $16-trillion debt looming, Uncle Sam is using the threat of huge fines
    and jail to make Americans living in Canada prove they aren’t hiding
    anything from the IRS.

    Regulations kick in Saturday encouraging the one million or so
    Americans – including those with dual citizenship – to comply with U.S.
    tax laws.

    Many Americans are unaware that even if they owe nothing to the IRS
    and have lived in Canada for years they are required to file U.S.
    returns and a foreign bank and financial accounts form (FBAR) to
    disclose assets outside the U.S. above $10,000.

    Americans could be hit with a fine of $10,000 or more and have assets seized for not filing the proper paperwork.

    Queen’s University tax law professor Art Cockfield says the
    regulations are designed to make it easier and cheaper for Americans to
    comply with complicated tax laws without spending a fortune on
    accountants and tax lawyers.

    Under the changes, Americans who owe less than $1,500 to the U.S.
    government are required to file three years of tax returns and six years
    of FBAR forms.

    “But the problem is if you use the new process it could be a trap for some U.S. citizens living in Canada,” he says.

    Cockfield says the IRS may see something and choose to audit that person.

    The changes allow the IRS to find revenues at a time politicians in Washington are reluctant to hike taxes…

    http://www.torontosun.com/2012/08/31/irs-targets-yanks-in-canada

  4. @swisspinoy,

    Re: “I don’t think that the IRS views US investments as being any risk…”

    There will be further analysis from Roy Berg at Moodys LLP, but here is what was said in a comment on the original post on this subject http://isaacbrocksociety.ca/2012/08/31/from-moodys-llp-breaking-news-irs-releases-details-of-new-procedures-for-non-compliant-taxpayers-living-abroad/comment-page-1/#comments:

    Roy Berg

    August 31, 2012 at 8:13 pm

    We will have full analysis shortly… a few interesting things to note:

    1.To qualify, you must not have resided in the US since 1/1/2009 (questionare clarifies the language from the general announcement);
    2.Amended returns do not qualify, unless submitted per 8891 election (RRSP);

    The following indicia may disqualify you from participation (IRS will make the determination):
    1.Claiming US tax refund… beware of the Making Work Pay Tax Credit in 2009 and 2010;
    2.Bank account outside of country of residence: beware if you have a US bank account if, for example, you have a US vacation home;
    3.Financial interest in an entity outside of country of residence: what if you own Google stock, or Apple, or Facebook (which would compound the problems you already have by owning FB.. just saying)?
    4.US sourced income: beware of US social security, US interest payments, sale of US real estate, US dividends, or alimony from a US person

    The questionaire also has an 8-question section on the individuals who may have given you tax advice…

    More to follow this weekend…

  5. On the questionnaire,  question #19  says  “did you receive  income from  any of the following sources  in your country of residence:  rental income, sales of property, inheritance?”

    What do you suppose that is all about?  Is getting rental income or selling one’s house, or having a relative die,  suppposed to make one a “high compliance risk”

  6. @swisspinoy, All,

    The IRS Instructions refer to “any financial accounts located outside your country of residence” (i.e., they don’t say outside of the US). My country of residence is Canada. Swisspinoy’s residence is Switzerland. I read this as they want to know if I would have accounts outside of my country of residence, Canada. If I had accounts within the US (I don’t and this newest “amnesty” doesn’t apply to me since I have filed returns from 2005), this tells me I would have to disclose them for this new “amnesty”. Right?

    FINANCIAL ACCOUNTS/ENTITIES
    5. Since January 1, 2006, have you had a financial interest in or signature or other authority over any financial accounts located outside your country of residence?a. If yes, are the accounts held in your name?
    b. If yes, list the countries where the accounts were/are held.

  7. @CanuckDoc,

    It appears the very fact we are drawing breath in countries outside the US is almost enough to make us a high compliance risk. At the least, these are all items the US might like a share of / all might reap big rewards for the IRS, including taxing most of the capital gains in our homes.

  8. *calgary411, residency in the US isn’t clearly defined.  We are considered to be “resident” voters in the States, but I haven’t received an answer yet if we qualify for “resident” sweepstakes and other resident programs,  As far as the US government is concerned or wants to believe, all US citizens are US residents and anything outside of America is “foreign”.

  9. @Swisspiny- In all the time that I lived in the U.S. I never saw a sweepstakes that did not define residency according to U.S. geographical and/or territorial/protectorate status (Guam, American Somoa, Puerto Rico, U.S. Virgin Islands. 

    All the sweepstakes rules use the conventional definition that a government’s judicial powers are defined by its legal geographical limits. 

    I believe that this is an additional evidence that is supportive of our contention that the U.S. law is bound by territorial area.  The U.S. government just wants the right to make up laws on the fly as it suits them.

     

  10. I’ve started placing this on my Facebook every day till the November election.
    Fed up with the crap that the CONUS Americans are whining about while their government commits wholesale THEFT.

    I have no faith that Romney will be any better than Obama. And Obama didn’t inspire me any in 2008. All the Americans see in Expatriate Americans is a great new resource to plunder. They have dehumanized expatriate Americans as tax cheats and off-shore millionaires whom they have no problem in stealing their finances through taxation. I have no faith in America improving and hope to hell they end up in a financial death-spiral from which they never recover.

    Why do I feel this way? An attack on my wife’s finances is an attack on my family’s life. If you attack me, I will attack you. And the U.S. has instigated an attack on my family. I hope that the United States will suffer a country-crushing financial disaster. And that is my viewpoint.

    I’m telling my wife to complete her 5 or 6 years of “quiet filings”, send the FBARs into Detroit and renounce her US citizenship. No sense in keeping those “ball n’ chain” crooks linked to her. I don’t trust those bastards at all. And I seriously feel that she shouldn’t cross the border any longer. That’s how serious this situation is nowadays.

  11. The problem here is that Congress and much of the Federal government are living in the 1950s still when the US was the indisputable and unchallengeable giant in the capitalist world. Taxes were high (for homelanders and expats) and spending was low during that decade, but the American economy could get away without any competitive menace since pretty much the entire competition was bombed out of existence in the 1940s.

    Ultimately, I think the US will be forced to take drastic actions to not only reform and simplify the tax code, but to also make it attractive in the upcoming years, unless the US becomes a fascist expansionist state like Japan during the 1930s which is forced to confiscate wealth and resources abroad. Take Switzerland as an example of an attractive tax system; not only are rates low, but if you overpay, you get refunded at rates that are either no different or higher than many savings accounts or fixed-income investments.

    The reason? FATCA / Citizenship-based taxation and the general policy of the US of reducing exports, keeping homeland taxes low and not cutting expenditures will effectively lead to a debt situation where foreign countries will no longer be selling their goods to the US in exchange for Treasury Bills; they will demand hard assets and products, which the US doesn’t produce sufficiently to trade with the world. They will probably dump their dollar holdings for gold and other precious metals and commodities (e.g. oil, which the US doesn’t produce enough of for itself).

    If the US remains democratic, it will ultimately have to drop its citizenship-based taxation to be able to trade with the world. If the US becomes fascist and a pariah state, then it will definitely be time to renounce the blue book.

  12. @CHF forever,

    Yes, it really is hard to determine how the US will react to these pressures. Good leadership is what the US really needs, but if neither candidate is willing the hard turn it will take to avoid driving off the fiscal cliff, what’s next? Will leadership lead the population to support the government to take what the US feels the world owes them, or will they become introspective and take responsibility for themselves? 

  13. @CHF forever: Norbert Walter, the former chief economist at the Deutsche Bank, is quoted in the “Die Welt” last week (translated):

    “The problems in the USA are greater than in Europe. Walter: “The Americans continue to be addicted to their debt drug, as the jobs programme shows. The readiness of the Asians to finance the American mess with money is declining. The question is not whether but when the USA will collapse.””

    “In den USA seien die Probleme größer als in Europa. “Die Amerikaner
    hängen weiter an ihrer Droge Schulden, wie das neue Job-Programm zeigt.
    Die Bereitschaft der Asiaten, mit Geld den amerikanischen Schlendrian zu
    finanzieren, nimmt ab. Die Frage ist nicht ob, sondern wann die USA
    abstürzen”, sagte Walter.””

    http://www.welt.de/wirtschaft/article108902688/Ex-Chefvolkswirt-Norbert-Walter-ist-tot.html

  14. @bubblebustin,

    The next few years will be crucial for the United States. As Winston Churchill once said: “You can always count on Americans to do the right thing – after they’ve tried everything else”. The US may have an ample supply of natural and human resources, but this does not guarantee solid and secure economics (e.g., Russia, OPEC countries, China, maybe post-Olympic Brazil, etc…), stable political and social organizations are key.

    @Innocente,

    Very true. Europe may be sick, but it is aware of its disease and is undertaking a challenging effort to treat it. The US, on the other hand, is even sicker (Europe’s overall debt situation is superior to the US when we compare ratios), but is unaware of its disease and nothing is being done to bring attention to the fact that treatment is badly needed.

    The last time the US faced such a debt to GDP ratio was during the 1940s and 1950s; back then the culture, mentality and way of life was completely different. Multi-million dollar compensation packages were almost unheard of back then as any income past the top-bracket threshhold was taxed at circa 90-95%; it took little more than a decade of this until the country was able to bring its debt to GDP ratio down to the 30-40% range.

    I’m not quite sure the US is ready for such tough medicine with a very large and politically important constituency (baby boomers) about to go into (unprepared) retirement with a stronger feeling of entitlement than probably any past generation.

    Flat US Treasury Yields are also not helping; it is ironic that the US debt situation is far worse than Europe, yet borrowing costs in the US are virtually nil, ensuring the US will keep borrowing and borrowing.

  15. @CHF Forever- Once inflation is factored in you come to see that borrowing costs are actually negative. 

  16. Pingback: The Isaac Brock Society - Form 3520, “foreign trusts”, and the Streamlined Filing Compliance Procedure

  17. Pingback: New Filing Compliance Procedures for Non-Resident U.S. Taxpayers – Effective September 1, 2012 « Freedom from the tyranny of U.S. citizenship-based taxation for U.S. and dual citizens outside the U.S.

  19. It’s like my US tax lawyer said yesterday comparing these new procedures to the definition of a banker. A banker is someone who won’t lend you money unless you don’t need it.

  20. Is this statement true below .. how many past years of 8891s for RRSP treaty election are required, is it only the last 3 years or for all years RRSP has been in existence? .. fyi 8938 and FBAR filed already for all years

    “One of the new procedures applies only to Canadian residents: a Canadian non-resident who failed to make a timely election on IRS Form 8891 (to defer income earned in an RRSP) can retroactively cure the failure by filing a late election under the new procedures. Even though, as noted above, the streamlined compliance procedure is generally available only for taxpayers who failed to file returns altogether, the special relief for late-filed RRSP elections is available even for taxpayers who did file original returns (regardless of whether they meet the tests for low compliance risk or the $1,500 tax threshold), but failed to make the RRSP election on their original returns.”

  21. Interesting development here. Most know that I am in OVDI. It was not a given when these streamlined procedures came out that those in OVDI would receive the same treatment when it came to fixing RRSP’s. There are indications now are that those within OVDI may be given the same consideration. Today I received a response from the US Treasury to our request for a Private Letter Ruling to extend the time to elect to defer US tax on our RRSP’s. In their letter they state that, ‘the request now involves an issue now being addressed within the 2011 OVDI’. According to my lawyer, the IRS is absolutely swamped in paper and are looking for expedient ways move taxpayers through the system, and I imagine this includes the many minnows who should not be in OVDI. In short, Treasury is bumping the RRSP issue over to OVDI and suggests that it will be dealt with in a manner consistent with that which is being offered under the 2012 OVD program (FAQ 54) Also promised is a refund from Treasury of our ‘user fee’ related to the PLR. 

    BTW, my lawyer advises against renouncing US citizenship before being tax compliant, as it is akin to ‘waving a red flag’.

  23. Pingback: The Isaac Brock Society - Why US citizens in Canada should NOT invest in TFSAs or any other “Foreign Trust” (RRSPs excepted)

  24. Whoopee! Treasury has reimbursed us our PLR fees because our RRSP’s are being dealt with in OVDI. We’ll keep it in USD’s to apply toward our renunciation fees.

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