cross posted from citizenship solutions
Can the common law “revenue rule” be used to stop the enforcement of U.S. “citizenship taxation” on non-U.S. residents?
What the United States calls “citizenship taxation” is actually U.S. taxation of certain citizens and residents of other countries. The U.S. claims the right to impose full U.S. taxation on the “world income” of certain people who do NOT even live in the United States.
Prologue: In August of 2017 it was widely reported that the Canada Revenue Agency had assisted the IRS in enforcing a massive penalty ON A CANADIAN RESIDENT levied under the U.S. Internal Revenue Code. The penalty was imposed on that Canadian resident was for failing to report to the IRS, that he had been carrying on a Canadian business, through a Canadian Controlled Private Corporation. At the time of collection, the penalty was for approximately $133,000 U.S. dollars!
Q. How did this happen? A. He entered the 2009 IRS OVDP (“Offshore Voluntary Disclosure Program”). Those who entered #OVDP were basically “signing up” to pay penalties to the IRS. Those interested in reading about the horrific treatment of another Canadian resident, who tried to “do the right thing” by entering OVDP should read this.
Federal Tax Crimes: Court Sustains $10,000 Per Year § 6038(b) Penalty https://t.co/cx26P98rDV – imposed on U.S. citizen residing in Canada
— Citizenship Lawyer (@ExpatriationLaw) August 12, 2017
For the rest of the story, please see here .
US non-residents don’t have to read Brock to decide whether to renounce, they only need to read Townsend.
How far did the CRA go to assist the IRS in collecting that outrageous OVDP assessment? Did it send Mr. Deewee’s Canadian tax refund to the IRS or did it go even further by confiscating his savings which were legally earned in Canada? The poor man has good reason to hate both tax agencies now.
Expect more cases like the Dewees one, as the IRS has committed to look into more OVDI withdrawals:
“WHAT TIGTA RECOMMENDED
TIGTA recommended that the IRS: 1) review all denied or withdrawn offshore voluntary disclosure requests identified in this report for potential FBAR penalty assessments and criminal investigation; 2) develop procedures for reviewing denied and withdrawn cases for further compliance actions; 3) centrally track and control OVDP requests; 4) establish one mailing address for taxpayer correspondence; 5) ensure that employees adhere to timeliness guidelines throughout the entire OVDP process; and
6) classify OVDP certifications so that some can be worked by lower-graded revenue agents.
IRS management agreed with all six recommendations and has taken or plans to take corrective action on five of them. Although the IRS agreed with the potential value of establishing one mailing address for taxpayer correspondence, this recommendation has been put on hold until a decision is made about the future status of the OVDP.”
https://www.treasury.gov/tigta/auditreports/2016reports/201630030fr.pdf
According to the article you linked to, there’s a very important caveat based on Article 22 of the September 21, 2007 Protocol to the Canada U.S. Tax Treaty: Canada will not assist the U.S. in enforcing a U.S. tax debt on any Canadian citizen who became a Canadian citizen before November 9, 1995.
In other words, the Canadian government will indeed help the IRS collect for anyone who became a Canadian citizen after November 9, 1995.
@West Coaster,
Interesting. I’m picking up the opposite interpretation, though. Seems to me Article 22 of the Protocol is protecting persons who were Cdn citizens and whose alleged US tax debt arose prior to 1995 but not excluding those who became Canadian citizens after and incurred US tax debt after that date.
The Tax Treaty would have taken effect going forward. It sounds to me like that article of the Protocol was added to expand coverage of the protection retrospectively, or to clarify it, that if the tax debt arose prior to adoption of the Tax Treaty in 1995, the Cdn citizen is still protected by the Treaty (as long as they were a Cdn citizen when the tax debt arose and are one at the time the IRS applies for collection), but it did not delete the general wording “a taxable period in which the taxpayer was a citizen of the requested State,” which appears in the relevant articles of both the 1995 Treaty and the 2007 Protocol.
Tax Treaty (1995) s. XVIII(a)(8)(A) [bolding mine]
Protocol (2007) s. 22(1) [bolding mine]
The 2007 Protocol corrected a problem with the 1995 Protocol, as discussed in the Chua case http://www.uniset.ca/other/css/20011FC608.html
The analysis of this case contains some interesting comments on the exemption of citizens from collection, and how the Charter Section 15 might or might not be violated in this connection. A surprise to me: it was the US which insisted on exempting its citizens from the collection agreement, and Canada which then insisted on reciprocal exemption for Canadian citizens.
@pacifica777
Most legalese is about as clear as mud to me, so it’s entirely possible you’re right!
@plaxy
Like I admitted to pacifica777, my brain tends to shut off when it comes to all these clauses and subsections. (I found doing the 8854 and final filing onerous beyond the telling, especially since the accountant helping me didn’t have any experience with that. Touch wood, that’s all behind me now. Afterwards, I actually took a few months off from checking this site just to give myself a break because I was so burned out.)
I hope both of you are right, for the sake of those Brockers who’d be affected!
@Westcoaster – there’s a book “Human Rights and Taxation in Europe and the World” which gives a summary of the effect of the Chua case if you’re interested.
Unfortunately it also says that the Chua cae is the only successful tax-related Charter Section 15 challenge (except for one other) and that it sets no precedent.
https://books.google.co.uk/books?id=SitYiopxW1sC&pg=PA316&lpg=PA316&dq=chua+mckeown+canada+citizen&source=bl&ots=ouD_qnGIQs&sig=9As5AnnXMUWVfvDG1pljQIKmA7I&hl=en&sa=X&ved=0ahUKEwjK3dirodfVAhXGLlAKHVyIA74Q6AEIJzAA#v=onepage&q=chua%20mckeown%20canada%20citizen&f=false
@plaxy
Thanks for book recommendation, but I think it would make my head explode to read about the impact of taxation — over the last six years, I have learned more than I ever wanted on the topic 🙁
Hopefully, the FATCA IGA lawsuit succeeds.
@plaxy
Thanks for linking to the excerpt — two pages I can handle, that’s much better than plowing through the whole book! (By the way, it initially showed blank pages so I refreshed the search and the first result was the right one.)
“The Tax Treaty would have taken effect going forward.”
The 1936 treaty took effect retroactively from 1931. As far as I can tell, that benefitted people so no one complained.
I think the effect of the 2007 protocol is that if a landed immigrant had a US tax debt from 1982, for example owing the US $0.00 of actual tax but illegally writing an honest declaration on their 1982 US return, then if the landed immigrant took Canadian citizenship in 1986 then Canada would not help the US collect the penalty, but if the landed immigrant took Canadian citizenship in 1996 then Canada would help the US collect the penalty. Canada’s assistance would take effect going forward but the debt still looks back. (Penalties for illegal honesty are additions to tax under Title 26 US Code, not like FBAR under Title 31 US Code.)
What is unbelievable is once again, the fact that Prof. Dewees was obviously NOT a criminal. So why does a tax lawyer put him in the OVDI? Why did ANY of the lawyers put clients like this in the OVDI?
They must realize these clients are not criminals. Is it due to some weird idea about “duty”? Are they really so crass as to only be in it for the money?
What kind of person does this to clients?
It is debatable whether he made a bigger mistake by dropping out .
Did he do this also on the advice of a accountant or lawyer?
Hindsight’s 20/20.