This post is from the RenouceUScitizenship blog.
God, grant me the serenity to accept the things I cannot change,
The courage to change the things I can,
And wisdom to know the difference.
We are now more than two years into the Obama/Geithner/Shulman/IRS assault on U.S. Citizens Abroad. It is commonly accepted that the origin of the assault has been – what can now be understood to be – a clear, deliberate, and conscious decision of the Obama administration. That decision is to equate the day-to-day bank accounts of U.S. citizens abroad with the offshore accounts used by Homelander tax cheats. It’s no longer possible to believe the administration and the IRS are unaware of what they have done. There are signs that the IRS is slowly trying to change the rules, change the policies, and change the enforcement. That said, one gets the feeling that the IRS is motivated by considerations of “processing efficiency” and not by considerations of “fairness and justice”.
Two important aspects of the problem are:
1. All bank accounts outside the United States are considered to be “sacred instruments” of tax evasion. Not even the IRS is stupid enough to believe this. Therefore, it’s clear that the IRS is at least threatening (how do like freedom now?) to use the day-to-day bank accounts of U.S. citizens abroad as an “FBAR Fundraiser“. The IRS is using the retirements plans of U.S. citizens in their country of residence, to levy fines for failure to file Form 3520. The IRS is using the fact that middle class U.S. citizens invest in mutual funds to subject them to impossible compliance costs and more threats of penalties. This has been documented by Taxpayer Advocate and ignored by the IRS. We know this. What is different is that in 2011, there was a sense that this “must be some kind of mistake”. It must be “some kind of misunderstanding”. Only a fool would believe that today. The only sane way to view this today is as follows:
The Obama administration is deliberately using penalties and threats of penalties to confiscate the assets of U.S. citizens abroad. Don’t believe it? What’s Form 8938? This is not about taxation. It is about confiscation. But you know that. But, this is not the purpose of this post.
2. The purpose of this post is to explore an aspect of this that has not been adequately discussed. In the same way that it is a mistake to treat all “non-U.S. banks accounts” the same. It is a mistake to think that the impact of all of this is the same on all. In fact, the people who are the hardest hit are those U.S. citizens abroad who have tried the hardest.
Group 1 – Those Who Have Been In The U.S. Tax System
This group has been filing their U.S. tax returns, to the best of their abilities. They are in the system. They are now “low hanging fruit”. The fact that they have been filing all these years means that they are likely very financially responsible, very aware, very law abiding people. That’s the good news. The bad news is that they are also people who by vritue of having tried to save for retirement have assets that the U.S. wants to confiscate. Obviously this includes the PFIC mutual fund problem.
The problem of owning mutual funds is two-fold:
First, mutual funds are not subject to rules of taxation. They are subject to rules of confiscation.
Second, that in order for the IRS to confiscate them, one must first comply with all kinds of reporting requirements that are impossible to understand and are far too expensive for the average person.
Here is a historical analogy to the IRS treatment of U.S. citizens abroad who have mutual funds:
Jesus was forced to carry his own cross (paying the cross-border professionals to complete the forms) to his crucifixion (the confiscation rules will take it all).
Now, I know that at this moment, at least some readers are howling at the last sentence. Really! What that tells me is that you:
A. Have not tried to be U.S. tax compliant;
B. Have not tried to use mutual funds to invest for retirement;
C. Probably do NOT feel strongly that one should be tax compliant;
D. Probably are far enough enough away from retirement age so that you can make up the losses.
Just try living this reality!
The people most hurt by this are the people who have tried the hardest to comply with the law. I remind you that it was not until OVDP started in 2009 that the IRS enough knew now to deal with mutual funds and not until 2010 that the ruling came from an IRS counsel (that the cross-border professionals are using to deem mutual funds as vehicles of confiscation).
Group 2 – Those Who Tried To Fix Any Past Compliance Problems
It has become increasingly clear that those who entered OVDP or OVDI were simply suckered. After the vicious and frightening propaganda of the summer of 2011, many people were terrorized into entering OVDI. The lawyers were there to usher them in. They are now locked into the program (although there is some indication that some will be moved to “Streamlined Compliance”). Those who waited appear to have better compliance options.
Of course, by December 2011, the IRS had issued the infamous FS which made it clear that, one didn’t need a formal program of voluntary disclosure. Of course, that didn’t stop the IRS, with full knowledge that minnow were being terrorized into the program, from resurrecting (another Biblical analogy) the corrupt OVDP program in 2012.
My point is a simple one: those who tried to be compliant, those who tried to become compliant by entering the OVDP programs have been the hardest hit. The main reason has nothing to do with taxes. It has nothing to do with compliance. It is the fact that many of them have heard nothing from the IRS. Reminds of the Steven Miller (a cousin of his perhaps) song:
Those who entered OVDI have been living in fear and anxiety since entering the program. What have they heard from the IRS? In many cases, nothing.
IRS Bait and Switch Tactics in OVDP and OVDI
One would think the terms of the OVDP programs were abusive enough. But, the IRS didn’t stop there. In 2009 the IRS changed the terms of the program after people had entered the program. In 2013 the IRS kicked a group of people out of the program after accepting them into the program. It is now certain that:
Any lawyer who advises a client to enter the OVDP program should be disbarred!
The only benefit to the OVDP program was certainty of result and now that certainty has been forever compromised. As a letter from the New York State Bar suggests, who could possibly trust the IRS? The trust issue was recently highlighted by former IRS lawyer Steven Mopsick on this blog. (See also the Mopsick Trilogy – a series of posts about OVDP and its impact on U.S. citizens abroad and Green Card Holders.)
So, what’s a law abiding person who believes he is supposed to be tax compliant supposed to do?
I am writing this post in response to a series of comments at the Isaac Brock Society. The post was about PFICs and it generated a number of comments. The interesting comment stream starts here. We are confronted with a situation of a frightened, confused U.S. citizen abroad, who really wants to be tax compliant, did his best to save for retirement, like the IRS knew nothing about the perils of mutual funds, and must now choose between:
A. Financial ruin – all his money must to to the IRS and compliance costs
B. Non-compliance – but having to live as a “tax cheat”
The problem is that this is exactly the situation of many U.S. citizens abroad who have have lived commendable responsible lives. It is worth noting that neither the IRS nor the U.S. government has ever AND TO THIS DAY DOES NOT make any real effort to educate U.S. citizens about their tax responsibilities! The IRS defines “education” as “threats or penalties”. I feel for the children of Douglass Shulman and Steve Miller (if they have any).
I am going to reproduce this comment stream and invite suggestions on how what people like this should do.
@USCitizenAbroad, @Kalc, @Bubblebustin
“What would you expect a U.S. person with many years of fillings in the system to do?”
That is exactly the issue. This whole PFIC thing makes me SO ANGRY and FRUSTRATED!
I don’t see ANY good answer for such persons. No matter what option you look at it spells financial disaster, especially for people who are at or near retirement age. They cannot afford
to lose all of the money they have invested over many years just to now become “compliant” (i.e.pay big bucks to have some accountant fill dozens of 8621s, pay back taxes, interest, and penalties and more taxes and interest after they sell the PFICs) and they do not have any other regular source of revenue to replace such a loss.
“If you are a Canadian citizen without US assets, you are protected. Don’t tell your FI if you happen to have been born in the US. Don’t have more than 1 million in one account.”
It’s not so simple. If you’ve had a long term relationship with your financial advisor, he likely may already know that you are a USC. Many mutual fund portfolios contain a mixture of US and non- US assets, so you likely may have some in your portfolio already. What should you do? Sell them and then what?
How do you deal with them on the following year’s tax return? FATCA kicks in way below having 1 million in one account.
“I do NOT believe that the Government of Canada understands this problem in its entirety. Would you be willing to collect these comments (including the one about the interaction between PFICs and SubPart F),”
I agree totally. If the government of Canada DID understand all the implications and what a horrendous financial burden this will create for U S persons in Canada, when their financial institutions turn over the data about their TFSAs, RESPs, PFICs, and other investments via FATCA, I think they would not be so ready to sign an IGA. Those persons will be financial bankrupted if the IRS gets their data and goes after them. And when these people are left bankrupted, it will be the Canadian government that will have
to help support them because we all know that the US government won’t do anything for USCs abroad.
So, please, please do everything that you can to inform them (Kevin Schoom and others) of what are all the implications if they go down the FATCA compliance path. I think this PFIC problem has certainly not been given enough visibility with our government. It is incredulous to me that the IRS could make a policy change in 2010 about Canadian mutual funds without a formal regulation and then apply it retroactively. This is just WRONG and the Canadian govenment needs to stand up for us and fight this.
Sorry for the rant, but this issue makes me crazy. Reading what USCitizenAbroad suggested as the only solution for the most financially responsible citizens today just makes me feel more depressed about an already depressing situation. Yes, it does help to be able to talk about it here with others but the reality that is looming in the near future if FATCA kicks in as planned is just too awful.
Here are the solutions:
Solutions From The Government of Canada
Any IGA would exempt from its application lawful residents of Canada regardless of their citizenship. Put it another way, the U.S. can’t both have FATCA and citizenship-based taxation. Is this possible? Not unless this issue is really understood which is not.
Solutions From U.S. Persons Abroad – Take Charge Yourself
You and I agree that the ones with the biggest problems are the ones who are entrenched in the system. Their options are:
1. Do not sell their PFICs. The problems kick in when they are sold. Continue to treat the distributions the way you have always treated them on your tax return. Repeat: It’s the sale that triggers the very worst of the problems.
2. The time has come to recognize that you will never be able to be U.S. tax compliant. Just not possible unless you pay the staggering costs of compliance and all the fines associated with trying to plan for retirement. I would stay away from the lawyers who will scare you to death. Just keep living your life. Don’t do anything that will trigger taxable events. The advice that most accountants and lawyers give is: sell your PFICs. For those who have had them for the long term, that is the worst possible advice. You do NOT sell them. You hold them and simply pay tax on the distributions the way you always have. That’s the best case scenario. Include the income on your taxes.
3. RRSPs – This may be the exception to my suggestion for holding the PFICs. Assuming that because they are in an RRSP that the sale inside the RRSP is NOT a taxable event, then perhaps you get rid of those (but get competent advice for taking that step).
4. Don’t listen to the F_____ cross border professionals. Most of them have really not thought this through plus they have trouble separating their interest from your interest.
5. If all else fails, hide behind the treaty.
6. Become a Canadian citizen if you are not already. Then start lobbying the Cdn government to pass law saying that all naturalized Canadian citizens were Canadian citizens from birth. This will protect their own tax base and their citizens from the U.S. exit tax.
7. Just accept that the US considers you to be a criminal. Hell, people live like that all the time. Of course, you should stay out of the U.S. You might even learn to like it. Dress the part. Pick up the language. Learn to talk that way. It might be fun for you. You might get the respect that you think you are lacking. Pick a criminal to model yourself on – say Barack Obama.
8. If none of these work, and you have Supart F income, then, well you know my suggestion.
Curious what you think of those suggestions?
For those entrenched in the system, surely renouncing is still a better option than continuing to have to deal with this BS year after year. At least that frees you from the ongoing obligation. Yes, I accept that it may leave issues from the past and may not be a great idea for those that have a need or desire to set foot in the US in the future.
Yes, there is still an issue with the 8854 compliance, but there is still a choice on how to play that game, depending on the circumstances and risk tolerance.
Thanks for your comments on my posting. Here are my thoughts on your suggestions. I’ve included a
few questions I have on some points you raised.
Solutions from the Government of Canada
Yes, I agree that this would be a great solution, but I don’t believe they do understand it.
Solutions From U.S. Persons Abroad – Take Charge Yourself
1. Yes, I agree that it makes no sense to sell the PFICs as that will trigger a nightmare.
2. Yes, the lawyers and accountants that I’ve talked to have all said to sell ALL the PFICs, but of course they don’t have to worry about paying the costs associated with doing so. I concur that there is thus NO
way to ever be tax compliant in this scenario, unless of course the tax code changes.
“You hold them and simply pay tax on the distributions the way you always have. That’s the best case scenario. Include the income on your taxes.”
QUESTION: So I infer from your suggestion that one should not bother with now filing 8621′s and the
complicated calculation of “income” derived from them, but just continue to include the actual interest or
dividends or capital gains distributions you receive from the mutual funds on your tax return. Is that what you are suggesting? As soon as you look at filing 8621s for each mutual fund you are talking BIG bucks
to have an accountant prepare it and these forms are way too complex for the average taxpayer to attempt.
QUESTION: What happens when FATCA kicks in and the FFI or CRA turns over the details of these funds to the IRS? Won’t they then identify them as PFICs and come screaming for all they back taxes, 8621 forms, etc? Is that where your suggestion 5 comes in?
3. Don’t know about the RRSPs. This would require more research. For now these are not as
important since the tax is deferred by 8891.
5. “If all else fails, hide behind the treaty” Not sure just how one can hide behind the treaty. Can you
clarify what you mean here?
6. Definitely a Canadian citizen. Ideas how we can get the Canadian government to pass such a law?
7. Yes, definitely safer to stay out of the US. Not really a big hardship on that point for many of us.
8. I didn’t really understand the Subpart F business completely but sure hope it doesn’t apply. I’d hate to think that that would be the only solution.
I’d be interested in your further comments and answers to my questions above. Your comments are always very informative. I appreciate having the means to exchange thoughts with people like you who do understand this complex and horrendous issue.
It is clear that this person is in a situation where he completely compromises his financial security by allowing the cross-border professionals and the IRS to confiscate his assets or he must live with the knowledge that the U.S. considers him to be a “tax cheat”, somebody who is worthy of a “FATCA Hunt” or possibly a Whistle Blower’s Retirement Plan.
It is impossible to live with either scenario.
The first scenario subjects one to a total rape and having to live with the consequences the rest of your life.
The second scenario, if not dealt with properly, has the potential to change your own “self image”. On this point though I would say:
To be considered a criminal by the U.S. government is like being called ugly by a frog. To be a criminal is to have a certain moral stature. In the U.S. there is no correlation between law and morality – in fact, law has become a substitute for morality.
At a minimum, leaving aside the financial issues, the emotional stress and damage is more than a person who was financially responsible can bear. So, those U.S. citizens abroad who are nearing their retirement years and have most of their wealth in mutual funds must choose one of two options. Tax compliance is possible only in a logical sense. In a practical sense, for many U.S. citizens abroad, tax compliance is not possible. This is perfectly understandable when issues of “taxation” are confused with “confiscation”.
The current U.S. Canada Tax Treaty, as I understand it, does NOT require Canada to assist the U.S. in the collection of taxes on Canadian residents, if the person was a Canadian citizen at the time the “debt” arose. This is information of possible relevance. It doesn’t mean you don’t owe the money. It just means Canada won’t help the U.S. collect it. I presume that that those renouncing U.S. citizenship would be able to use the treaty to shield them from possible Exit Tax Enforcement. But, to use the treaty is to live with another layer of worry!
The best solution is always to renounce. At this point the only reason to NOT renounce is because you think the U.S. will move to Residence Based Taxation. Who knows? Tax reform is on the agenda. U.S. citizens abroad made a number of excellent submissions to the Ways and Means Committee. I don’t know about you. But, there are NO circumstances under which I would want to be a U.S. citizen.
I am writing this post at time when:
1. Canada is considering a FATCA IGA with the U.S. I hope Canada understands what it will do to one million Canadians by turning them over to the IRS.
2. Generalized IRS abuse of taxpayers is under way in Washington. It is possible that this post has relevance to that issue.
3. Congress is considering moving to Residence Based Taxation. That would solve ALL of these problems.
In closing, to all U.S. citizens abroad who worked so hard to save for your retirement …
God, grant me the serenity to accept the things I cannot change,
The courage to change the things I can,
And wisdom to know the difference.
This is for real. You must accept that the U.S. government is not what you thought it was. It has made a conscious decision to attack you, your families and your assets.
Courage is the willingness to proceed in the face of fear. In this case it requires you to face up to a decision with no good outcome. You must choose between being destitute or being tax compliant. “American exeptionalism” means you cannot have both.
Wisdom means finding a way to move beyond this frightening chapter in your life. Look at it this way: there are parts of the world where people have never experienced life without U.S. tyranny. The good news is that you do NOT live in the United States.
On that note, I will conclude with a thought from Winston Churchill. His wife did not approve of his drinking. One night he came home and she said:
Winston, you are drunk.
Winston thought about it a minute and said:
Yes, I am drunk. But you are ugly and tomorrow I will be sober.
Put it this way, you can renounce your U.S. citizenship. Every day, for the rest of their lives, Homelanders will wake up in the Homeland!
9. For those of you who are already Canadian citizens and have the ability to vote. Vote Harper out of the 24 Sussex Drive before he sells this country down the river to the United States. We need to get a Prime Minister who believes in the sovereignty of this nation and is willing to fight for it.
This is very moving. The situation that many USP’s living abroad find themselves in is a klausterfokken, which is defined by the Urban Dictionary as “A situation so confusing and chaotic that the American-English “cluster fuck,” is not adequate to describe it. The German compound word is used to create a deep and profound sense of cluster fuck.”
Just as extreme Clusterfuck becomes Klausterfokken outside the American vernacular, FBAR becomes FUBAR to US persons abroad once it’s applied to our every day bank accounts where we live.
More for Mr. Schoon.
Damned if we do, damned if we don’t. As someone who has never ‘been in the system’, (born in US and left as a toddler) but always tax compliant in Canada, my initial reaction (as a law-abiding, honest Canadian citizen) when I first found out about US citizenship-based taxation, FATCA and FBARs was to figure out how to become ‘compliant’. Being not too far away from retirement, having most of my RRSPs and RESPs in mutual funds for years, plus being damned angry over the in-justness of it all, quickly persuaded me NOT to go down the compliance route.
I would dearly love to renounce, but think I would be crazy to crawl out of the woodwork with a ‘kick me’ sign taped on my butt. Instead, I will take my chances with FATCA. The headache, expense, and risk of penalties related to back filing of returns and FBARS is worth the risk of detection via FATCA in my opinion – at least for my particular situation.
Although ignorance is bliss, to be forewarned is to be forearmed. There are ways to play the FATCA game with the banks, and to remain undetected for some time, maybe for long enough that citizenship based taxation and FATCA to become history.
I personally think that the ‘shit has yet to hit the fan’, with most ‘US persons’ in Canada not having a clue about FATCA yet. The eventual backlash ( if USA has its way and FATCA operates as planned) will be so strong (Canadian government knows this too and I think this is the main reason an IGA has not yet been signed) that Canada will NOT dare hand over the details of Canadian accounts to the IRS. If it even tries, I will be first in line to sign on to a class action lawsuit.
Someday, when all this is behind us, I will renounce OUT OF PRINCIPLE, not to avoid taxes. I am ashamed to have been born in the USA.
I would bet that every US person in Canada who has been an effort to be compliant regrets it. The US operates on a principle or penalty and a presumption of guilt.
No good deed goes unpunished!
I would think ‘US persons’ in Canada who were previously non-compliant, but young or with few assets, made the right decision to become compliant, followed up by renunciation. Now, they can go forward and live their lives as Canadian only.
It is the older people who have lived their lives fully entrenched as Canadians ignorant of US tax policy that have more to lose by becoming compliant. These are the people who I think should be hiding. These are the people that the banks will soon inquire as to their place of birth – hopefully they will be ‘FATCA aware’ beforehand.
Imagine how awful it would be to have your OMG moment sitting across from ‘the nice lady at the bank’!
“It is the older people who have lived their lives fully entrenched as Canadians ignorant of US tax policy that have more to lose by becoming compliant. These are the people who I think should be hiding. These are the people that the banks will soon inquire as to their place of birth – hopefully they will be ‘FATCA aware’ beforehand.”
Yes, it’s the older people who really cannot become compliant. For them it is simply not an option. It would be like committing suicide to avoid dying.
I think that as part of any IGA Canada needs to at least the following things:
1. Negotiate an agreement that any Canadian citizen can renounce and not be subject to any exit tax (or other tax));
2. Get any investment vehicle deemed by Canada to be a retirement planning vehicle to be exempt from US taxation and FATCA reporting.
Then, and this would be the best thing:
Pass a law deeming all naturalized Canadians citizens, Canadian citizens from birth – thus avoiding the exit tax.
It’s funny, I met a US citizen the other night, woman probably mid 50s, married to a Canadian. I could tell she had no knowledge of any of this. That would probably make her Canadian husband around the same age. Can you imagine what will happen when they find out about this?
Yes, I can imagine. That person would have been me, if I had not accidentally stumbled upon the truth several months ago. I still shake my head in disbelief that this is happening. My spouse thought I was nuts and exaggerating when I first described FATCA and US citizenship based taxation to him. Most people look at me funny when I try describe my situation, so mostly I no longer talk about it.
It is ridiculous, asinine, immoral, and so unbelievable that no wonder people think you are paranoid and nuts if you try to explain it!
I so feel sorry for anyone who finds this out from their bank. I can just see the stunned, unbelieving look now.
Like many on IBS, I’ve gone through hell the last few years after discovering this mess back in summer 2011. I’ve done my level best to try to get compliant, get the ball rolling finally applying for Canadian citizenship after some 40 odd years of permanent residence, and educate myself on the complexities of US tax, citizenship and FATCA. I finally got that Canadian passport last December and figured I was ahead of schedule on my five year plan of becoming compliant, becoming an official Canadian, relinquishing US citizenship and filing my final tax return, FBAR and 8854.
Now the jerks at the Vancouver consulate have totally stonewalled me; they won’t even book me for an appointment to present the relevant paperwork. At first I figured I’d just go to Calgary and get it done, but decided it was unreasonable to expect me to travel to another province wasting my time and money to do what could be done in ten minutes only 30 miles from where I live. I’ve done my damnedest but they have made it an impossibility. If they really wanted this system to work they would make it easy, not hard. So the other night I came to a bit of an epiphany (much to the delight of my solely Canadian spouse who has suffered my rantings on this bizarre situation for a couple of years now).
I’ve now decided the US government can go screw itself. I’m not filing any more tax returns, no more FBARs, no 8938s and no 8854. I’m not subjecting myself to the stupid paranoid security at any US consulate and I’m not waiting hat in hand for a CLN. In short, I’m not going to be a victim any more. I am a Canadian citizen, period. I don’t give a damn what the US government says. It’s a foreign government and a pretty disfunctional one at that. They don’t obey their own laws; why should I?
I’ve come to realise this whole mess is really a product of the unholy alliance of a fear-mongering mainstream media, IRS scare tactics and the accounting industry. In fact I now believe that the actual risk is very minimal. I don’t think I’m any more at risk than I was when I first came to Canada in the Vietnam era. (Funny how all this brings out the refusnik in me that I haven’t thought about in years.) Whatever risk that does exist is pretty much self-inflicted by filling out things like FBAR and 8938. Really, the IRS has virtually no way of knowing about our Canadian assets unless we tell them all about them. They don’t even have the resources to adequately audit suspicious Homelanders; they sure as hell aren’t going after Canadians unless we give ’em the info they need to do it. I’m not going down like a sacrificial lamb.
In short, “I’m mad as hell and I’m not going to take it any more”! So now there’s a new spring in my 68 year old step. This is my therapy, my route to regaining my sanity. It feels good.
Good for you for standing up to the bully! And congratulations on receiving your Canadian citizenship.
I agree, there is something very therapeutic about telling IRS and USA to screw itself! Its a hell of a lot easier than filling out endless forms, jumping through tax compliance hoops, and enduring endless sleepless nights. Who needs that, especially as one gets older. Life is too short for that BS.
Your comment made me think of Twisted Sisters song (no I am not too old to remember…lol) titled ‘We’re not going to take it’.
We’re not gonna take it
No, we ain’t gonna take it
We’re not gonna take it anymore
We’ve got the right to choose and
There ain’t no way we’ll lose it
This is our life, this is our song
We’ll fight a 1000 legions
Don’t pick our destiny ’cause
You don’t know us, you don’t belong
We’re not gonna take it
No, we ain’t gonna take it
We’re not gonna take it anymore
Oh you’re so condescending
Your goal is never ending
We don’t want nothin’, not a thing from you
Your life is trite and jaded
Boring and confiscated
If that’s your best, your best won’t do
My comment regarding renouncing and the 8854 was quoted above. The original thread here was related to those that had been filing US returns for many years but had recently discovered that they had a problem with PFICs, Subpart F (5471), 3520, FBAR or whatever.
What are the options for these people? As @USCitizenAbroad has so eloquently described, they appear to have a choice between (A) Financial ruin in compliance cost and the resulting asset confiscation or (B) continued non-compliance, but continuing to file US returns on their previous understanding.
Neither of these options is attractive. The 3rd option here is to go ahead and renounce to get the monkey off your back regardless. At the very least, there is no ongoing requirement to file or pay any taxes from that day forward.
That then leaves the problem of the 8854 and exit procedures from the US tax system. You could choose to simply ignore them. You would become a “covered expatriate” in their eyes, if they ever figured out you had renounced, and you might get some letters at some point down the track, but so what? Can they really harm you?
Alternatively, go ahead and file the 8854 paperwork stating you were compliant. If you thought you were compliant when you filed your returns and/or knew nothing about FBAR, surely that’s good enough. If they don’t like it, let them try and prove it. That would be very expensive and if they have no record of your assets, the chances of them challenging it are close to zero.
I agree that is not for everyone, and it leaves loose ends, but is it not a better option than (A) Financial ruin or (B) continued wilful non-compliance?
As @petros has stated, “don’t feed the beast”. Sauve qui peut.
The problem with cheating, at least for me, is that you do a disservice to those who’ve done things legitimately. To each his own, however!
I don’t understand why you think St George’s approach could be called ‘cheating’. What USA is doing to citizens abroad is immoral, and as such I think it is an act of defense to do whatever it takes to protect yourself. That is what StGeorge is describing – a possible approach to protecting one’s self from an aggressive, unfair, confiscatory, fear-mongering, bullying organization (the IRS).
I can imagine the frustration trying to deal with the IRS beast directly and realize many ‘US persons’ have tried to be sincere and honest by doing things ‘legitimately’ according to US terms.
However the approach to refuse to do things exactly the way the IRS wants (if you can figure out what that is), is just as legitimate, and does not do those who attempted absolute compliance a disservice, in my opinion.
I rather avoid the US than file false paperwork.
I would also prefer to avoid US then file false paperwork, if only because I would likely be the one to get ‘caught’, and I would not be able to sleep at night for fear of it.
Just because I wouldn’t do it though, doesn’t mean I don’t think someone is not justified to. All is fair in love and war – and this is war.
Ooops…way too many negatives: ‘doesn’t mean I don’t think someone is not justified’. I have no idea what I just wrote!
There is something absolutely wonky about a US outpost aka Vancouver consulate that flatly denies your right to exit from the hellish oppressions of a failing state. In that context, your resolve to resist any further compliance looks like perfect logic. Bravo! Thanks for sharing the salvo.
I understood what you meant 🙂
I did say to each his own. There is no easy solution, in fact, there’s NO solution. Is doing nothing or maintaining the status quo a solution? Not likely when it means that through a conscious error of omission you then become a wilful tax evader. It’s like living in purgatory, I know. That’s why I took the steps I did to escape it, and the steps I took to become tax compliant have become a ‘cleansing by fire’ I didn’t necessarily have to take. I’d like to think that things can only get better, but knowing what I know, I’m not deluding myself.
Let’s keep the discussion focused on solving these problems in compliance with the law. For any homelanders, IRS types or Obama supporters (“AKA Americans Abroad abusers) please understand that this issue has nothing to do with taxation. It has to do with trying to keep the assets you have worked so responsibly and so hard for from being confiscated. In the case of mutual funds – the US justification for confiscation appears to be rooted in a 2010 opinion by an IRS lawyer. There is no moral justification for the retroactive confiscation of assets built over a lifetime because in 2010 some IRS lawyer decides these were PFICs. Furthermore, I would point out that (as St. George reminds us) this thread is really about people who have made every effort they could to be tax compliant over a large number of years (including prior to 2010). So, not only is this thread NOT about somehow cheating on taxes, it is about how to be compliant. That said, here are some thoughts to consider.
This is a horrible problem. You are caught on the horns of a dillemma. As St. George defines the options:
“they appear to have a choice between (A) Financial ruin in compliance cost and the resulting asset confiscation or (B) continued non-compliance, but continuing to file US returns on their previous understanding.
Neither of these options is attractive. The 3rd option here is to go ahead and renounce to get the monkey off your back regardless. At the very least, there is no ongoing requirement to file or pay any taxes from that day forward.”
@StGeorge there are people who for whatever reason do not want to renounce. But …
This problem won’t go away. You must do something or this will consume you the rest of your life. It is hard for people to decide on a clear plan of attack. So, let’s prioritize.
1. It is clear to me (but some may not agree) that U.S. citizens abroad today have only two choices. You return to the U.S. or you relinquish your U.S. citizenship (or recognize that you have relinquished your citizenship in the past). If you don’t know whether you want to relinquish, then stop reading now. Even if you you think the U.S. may move to RBT I suggest you that you begin the process of relinquishment now. You will know in the next 18 months and you can abort if you want – but why would you want to? The issue of the move to RBT is of more relevance to covered expats but either way, I think your goal is clear.
2. Next please separate the idea of relinquishment from the tax issues. Relinquishment is done through the State Department. They have nothing do do with tax. You do NOT have to certify 5 years of tax compliance to renounce. If you don’t certify the 5 years, you become a covered expatriate. What does this mean? You are subject to the exit tax nonsense. But remember that you do get an exemption for around 700,000. (Maybe somebody can clarify the significance of the CLN as it relates to this.)
3. What you next do is figure out what your possible exit tax liability might be. Remember that you can gift a certain amount to an alien spouse. You should begin doing this in any event (if for no other reason than to protect your spouse).
You must then actually sit down, complete the relevant forms, and see what it actually looks like. With the exemption you may not owe any tax anyway. I strongly suspect that this will be true for most Americans abroad. Some specific points to remember here:
A. People on this blog misread the provisions about “pension plans”. I don’t believe that the U.S. considers RRSPs to be pensions plans. In the world of the great narcissist, only U.S. plans are pension plans.
B. The treatment of the principal residence is (I believe unclear). Remember the following:
– under Ontario law your spouse owns half anyway;
– you get a 250,000 exemption
Some may want to consider selling prior to renouncing to guarantee they get the benefit of the exemption. It could be a lot in tax. This is to say: if you sell prior to relinquishment it is clearly subject to the principal residence rules and NOT to the Exit tax rules. Hey, you may have wanted to move anyway.
C. I urge you to do this exercise under the supervision of somebody who knows what they are doing!
D. Do remember that the PFIC problem in relation to relinquishment and the Exit Tax rules.. I don’t know exactly how that works, but you DO need to anticipate this as a possible problem.
What happens if you don’t certify 5 years? Will the IRS do something? Will they come after you? Who knows. Remember at this point that you have the benefit of the tax treaty.
I do believe that you your tax returns should be accurate. So far, most US citizens abroad can still argue reasonable cause for past mistakes. As time goes on, will this be true? At some point, it will be easier for them to argue that mistakes are willful (but I suspect it would have to be very blatant for them to do this.)
So, my feeling is get out and just do it legally. Whether a covered expat or not most can probably escape without too much damage. Those with more money will have to pay and probably pay a lot. Just see it as a divorce! Oh so expensive, but oh so worth it.
I really think this would be a good exercise for you to do. FYI starting in the near future the 8938 form will require listing PFICs. At that point it seems to me that you will have a bigger problem.
You need a goal. Make your goal relinquishment of U.S. citizenship!
I don’t consider the approach I described as ‘cheating’. When one has discovered a past PFIC/5471/3520/FBAR “problem”, the first step is to figure out the cost to come into compliance (both accountants/lawyers and possible tax/asset seizure) both in financial and emotional terms.
If that cost is deemed unacceptable, then personally I would prefer to renounce and get out of the tax system by whatever seems to present the lowest possible risk to me and my family.
As @whitekat says, it is an act of self defence. It is the US who are the ‘cheats’ by passing so-called ‘laws’ that rob non residents of their legitimate post-tax paid savings and retirement funds in their country of residence. When faced with a thief pointing a gun at you, is attempted escape ‘cheating’?
I’m in my 40s. I have a wife and 4 kids. I’m fully Canadian. The problem lies with my spouse being from that “lovely country that taxes its expatriates to hell and back”. My wife and I have come to the realization that we will never own a house thanks to the extraterritorial grasp of the (U)niformly (S)tupid (A)**holes. And my home in Canada (which would have been my birthright thanks to the efforts of my 100% Canadian (Japanese) father) would be taxed by Obama and the money grubbing USA because they feel that they can get at my holdings through my wife and through my kids? Like hell they’re going to get their hands on it. And frankly, I will put my middle finger up and tell ’em, “Try and take it from me. You don’t have any right to take any of MY finances, whether my wife uses it or not!”
No, I’m not sticking my head up to get it cut off through FATCA. I will not file. Just like WhiteKat, I’m of the opinion that my wife needs to obtain her Canadian citizenship. My kids are protected through me through their Canadian citizenship after being born in Canada.
I may not have a lot of assets to lose but why should my wife expose herself to the US’s extraterritorial grasp and by virtue of that, open up all my family’s financial dealings to the USA. Three words. NO F*NG WAY!!!
USC abroad. Whitekat is right. Finally some of you have come to understand that not playing by their rules is the right answer. It’s not cheating to defend what is yours’ your spouse’s and your children’s.
To try and understand and be compliant with PFICs retroactively is impossible. RRSPs ARE regarded as pension plans by the US as far as the exit tax is concerned. So- in many cases it is best to do nothing. NOTHING BAD will happen.
I think that for a lot of people, ‘doing nothing’, although it sounds easy, is in fact a difficult thing to do because it feels one is not taking control of his/her own destiny. To relinquish or renounce or become tax compliant despite all the hoops one has to jump through, is an action one can take which gives a sense of control over the situation. Just me 2 cents. I think we are all control freaks; it’s human nature.
When your adversary has a missile launcher and you only have an umbrella, what is ‘fair’?
When your adversary is a government with endless power and avenues at its disposal, and who is effectively bound by no ethics, no morality, no justice, no transparency or accountability, who seeks to harm you and your family, and confiscate or extort your legally earned and saved and already taxed assets, after you have already paid in full to the country where you actually live and enjoy services, then what is ‘fair’?
When the US refuses to make things right, even when taken to task in public, and Congress is repeatedly and formally notified in reports from the IRS’s own Taxpayer Advocate, then what is ‘fair’?
When having tried to do this the way in which the IRS and Treasury directed, what results have we seen and experienced in terms of outcomes? Of those who tried to solve this problem as advised by the only public advice that the IRS offered, vs. those who did not listen to their manipulative threats: who lost thousands and tens of thousands in professional fees and in some cases in penalties, or in US taxes that should never have been owed to begin with?
There is no good answer to this dilemma, but at this point, personally, I see no moral or ethical reason for going along with what the US wants. That approach has not worked for many in terms of a just result. The US, the IRS, Treasury, and the whole apparatus as applied to us abroad is completely and utterly morally bankrupt. It is about extorting the most amount of revenue from us as possible. If there are any constraints based on justice or ethics, they are invisible to us. If constraints exist, they may only be the result of negative public or international relations, or other pressures.
The US has not even seen fit to demonstrate goodwill or good intent by assisting those who have formally shown the requisite compliance, or those who have not been US taxpayers for decades the courtesy of clarifying the renunciation/relinquishment and CLN process and making it easier to complete. It has not seen fit to clarify the many opaque issues that have been raised here, about who is a citizen, or the confusion with the reporting forms and content that they demand for the exit process.
There may be practical reasons for some approaches to compliance, in order to finally check out of the US system before it get worse or in light of other considerations, but I personally would not condemn anyone does not. The US has signaled that it seeks to stop even quiet and going forward approaches, yet has not provided any other really workable avenues. All approaches have risk and costs. The Streamlined process – in terms of the only public details the IRS and Treasury have seen fit to provide, is very narrow and only allows for certain limited applicants to pass through the eye of the needle. All discretion is theirs. They have not codified ‘low risk’ and made the criteria transparent, as the Taxpayer Advocate has repeatedly advised them to do. They still hold those who took their earlier advice and threats to heart in thrall in the OVD programs – despite their tacit acknowledgement of the injustice of the ‘one size fits all’ approach – with its draconian conditions and process. Even if moving some out of OVD, they still are using all years disclosed against them – and have caused them significant harm over an unconscionable period of delay, forcing them to incur substantial costs to their health and wellbeing as well as economic harms via incredible professional fees. Why? Because those in the OVD programs complied using the only method the US advised – for minnows and krill as well as whales. And all indications are that the US has not really learned its lesson – it has not helped new immigrants with pre-existing accounts, and many people are still excluded from the ‘commonsense’ ‘Streamlined process’.
I will not ever condemn anyone or criticize them for the choices they made or may make in this situation. None of the options are/were good and without potential for needless and unjust harm.