From Moodys LLP: Breaking news!! IRS releases details of new procedures for non-compliant taxpayers living abroad

34 thoughts on “From Moodys LLP: Breaking news!! IRS releases details of new procedures for non-compliant taxpayers living abroad”

1. *Glad I get to be the first tax lawyer to thank the IRS for drastically changing my weekend plans…

2. “To qualify, you must be a non-resident US taxpayer who has lived outside of the US since January 1, 2009 and has not filed a US return since.“

   Wow, this is pretty restrictive. Does this mean that if you have lived outside of the US prior to 2009, then the new procedure does not apply.
   This really target recent emigrants. That explains why they only care about 3 years of tax returns.
   Even if this applied to immigrants, this would only apply to recent visa holders (it took me 4 years to get my green card).
   I am losing hope they’ll come up with a reasonable solution for most people… Depressing….

3. *”…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…’;

   All I can say is that I’m so glad I went ahead and amended and resubmitted my several years’ returns LAST year instead of waiting…had i waited, there’s a much higher chance the accountant would have considered it too risky for me to file quietly, given that these announcements are seemingly limiting what’s considered a simple return. I would thus probably have had to enter into the draconian OVDP and would have wound up losing well 75% ofmy assets because of the now 27.5% penalty plus all the related taxes, interest, accounting and obvious attorney fees…  I have lived in the UK for the past 24 years, married to an Englishman so am bewildered how we’re becoming collateral damage. I’d thus done my financial planning like a Brit because I had assumed that the tax treaties would protect me from double taxation. 

   It’s always been my intention to be tax compliant but had had no idea of how extensive all the rules and anomalies are.  I’m just so relieved that I managed to find an expert tax preparer who felt that my situation was innocent enough for a ‘loud’ quiet disclosure but without having to ‘ring the bell’ so to speak…I still have my 2011 tax return to file which is very complicated and will probably be around 250-300 pages long, in contrast to my UK tax return which will be more like 15-20 pages long.  I’m going to have to pay her another four-figure sum for this year and probably next, plus will want to stick with this specialized firm at least till the statutes of limitations have run in mid-2016.

   After that, I will see how things are going in terms of hope of reform; if it’s not looking any better than I will definitely then consider renouncing because I don’t want to be burdened with annual professional costs of $2000-3000 with the risks of draconian penalties for foot faults.  It’s an industry; we’re forced by the artificially complex rules to rely on professional tax preparers so we can be defended if the IRS comes back to me.  It’s almost like protection money; it’s essentially a further tax on tax even though by the 2013 tax year, I should no longer owe any more US tax itself…I agree with everyone here that it’s ludicrous, this whole situation.

   I feel like my hands are tied till the statutes of limitations have run for my amended returns.  I’m scared that if I renounced, say, next year, that it would raise red flags and I might then face a horrible audit for my returns and FBARs.  It’s awful feeling stuck like this but at least I’m ploughing through it bit by bit.  

   It seems to me that this new system will only work for those with very simple situations…I’d imagine that there will be a larger grey area where the IRS will still accept more ‘high risk’ returns but that it could be risky for the filer because going forward there will no doubt be even more scrutiny for expats.  

4. @Christophe

   I am sure ‘To qualify, you must be a non-resident US taxpayer who has lived outside of the U.S. since January 1, 2009 means that date or prior to that date. In other words, anyone having changed his residence from the US from Jan. 02, 2009 onwards does not qualify.

5. *:@Tiger, that’s also how I interpreted it.  I think that actually the IRS will still accept most expats’ returns, especially for those who merely hadn’t filed…I’d imagine it looks worse if someone had under-reported income, especially foreign investment passive income and amended their returns rather than simply not having filed at all, as the latter looks more innocent.  It seems far easier to argue that you simply hadn’t known about the filing requirement than to have been filing all along but  not listing foreign passive income, for instance.

   All I can hope for is that they will appreciate that expats have been honest enough to correct and amend their earlier returns and pay the resultant tax, interest and penalties.  I’d hope the IRS would realize that the filer wanted to put things right and sort it out.  It would be much worse for the IRS to have found that person before they went to them first to amend the returns, especially if done via a qualified CPA, attorney or Enrolled Agent.  After all, the preparer has their reputation on the line too and needs to do the amended returns correctly so that no corners have been cut.

   I understand that a mere under-reporting of  $5000 of income during a particular tax year will now, under the FATCA rules, extend the normal three year statute of limitations to six years.  Such a underreporting could have been innocently done, say, in the case of not having correctly reported dividends or interest paid from a tax-free investment account where the expat lives, or not realizing they had to report phantom mark-to-market gains in a foreign mutual fund (PFIC taxation rules).  This would thus increase their SOL’s to six years by default!

   I am wary of this new announcement and now think it’s imperative to go to a trusted tax preparer before making a decision…at least my accountant seems to think that the IRS are still accepting what we think of as reasonable cause but the point is, they also seem to expect us to do this via the professionals.  What a swine, all this is…

6. *The thing is, I wouldn’t actually be renouncing to avoid taxes per se, but instead to simplify my life and reduce my stress levels…it’s the burden of ongoing compliance record-keeping and annual accounting fees, plus being restricted as to what I can invest in.  It’s heart-breaking and, to be fair to the US, I am still going to give it another four years before I decide what I’m going to do…but if it’s obvious that things are not going to be made any easier for us, then I will definitely have to consider it.  But of course, by then, it may be even more difficult to renounce because they may introduce even more onerous restrictions and exit taxes and lower thresholds of assets, etc.

   The truth of the matter is though that I keep going in circles…I don’t actually think I’d have it in me to renounce…to do so would feel like a major rejection of my family and upbringing..and now that getting on a bit, think I will simply learn to adjust to the ongoing compliance costs though it does cause me a lot of resentment…but I nevertheless see it as my duty as an American to file and pay whatever double taxation I may face, though I will do all I can to minimize this by relying on my financial planner who is familiar with US-compliant investing for expats in the UK.

   Had I been in my early 20s and just starting out, I may have been more willing to sever my ties with the US but now that I’m probably two thirds through my working life, will learn to absorb the new annual compliance costs and restrictions. I don’t have any children and would want to ensure that my siblings’ children would still receive a full inheritance; renouncing would mean heavy taxes for them on any inheritance from a former US citizen. Seems to me that I’m just going to have to play ball and comply though completely understand why those of you without any family out there may want to cut the cord!

7. Some media coverage…

   http://www.queensu.ca/news/media/newsreleases/new-irs-rules-affect-1-million-canadians-sept-1-queens-university-expert

   Queen’s University tax law professor Art Cockfield is available to talk about the new Internal Revenue Service (IRS) procedures related to the U.S. Foreign Account Tax Compliance Act that that will go after the over one million Americans living in Canada.
   The new IRS procedure will take effect on September 1. U.S. citizens residing in Canada (including Canadian-U.S. dual citizens) must file U.S. tax returns and other forms relating to any assets held in Canada, even if they have been living in Canada for decades. If they don’t comply, they could be subject to financial penalties, repayment of back taxes and possible imprisonment.
   In June, the IRS announced new procedures to make it easier for people to file returns and catch up to the new obligations but Professor Cockfield says it is not enough. Professor Cockfield also strongly objects to the FATCA provision that begins on Jan. 1, 2013, forcing Canadian financial institutions to collect account information on Canadian-based taxpayers for eventual remittance to the Internal Revenue Service.
   “The proposed relief provisions do not suffice to protect the privacy of Canadians against illegal access of their personal tax information. The Canadian government should continue to put pressure on the U.S. government and strongly resist the implementation of Foreign Account Tax Compliance Act,” says Professor Cockfield.

   Dr. Cockfield is the editor of Globalization and Its Tax Discontents: Tax Policy and International Investments (University of Toronto Press, 2010). He testified about tax evasion and offshore bank accounts earlier this year before the Parliamentary Standing Committee on Finance.

   http://www.standard-freeholder.com/2012/08/31/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.
   “They’re going broke,” says Cockfield. “They know politically it’s impossible to tax their domestic taxpayers … So now they’re turning to what they consider a politically feasible source of revenue collection.”
   The changes fall under the Foreign Account Tax Compliance Act (FATCA) and also apply to millions of other Americans living abroad.
   Another provision requiring Canadian banks to identify American clients has been delayed until at least January 2014 because of privacy and other concerns.

   NOTE: from Canada’s Finance Minister James Flaherty…

   Quote:

   “…We have also been clear that penalties imposed by the IRS under FBAR will not be collected by the Canada Revenue Agency (CRA) on behalf of the IRS.

   While the Canada‑United States Income Tax Convention contains a provision that allows for the collection of taxes imposed by another country, this does not apply to penalties imposed under laws that impose only a reporting requirement.

   Furthermore, our Government has been clear that CRA does not and will not collect the U.S. tax liability of a Canadian citizen if the individual was a Canadian citizen at the time (whether or not the individual was also a U.S. citizen at that time).

   Many individuals are also concerned that the investment or interest income earned in their Canadian Tax-Free Savings Accounts (TFSAs) and Registered Disability Savings Plans (RDSPs) may be subject to U.S. tax.

   While TFSAs and RDSPs – both introduced by our Government in recent years – do not yet receive an exemption from U.S. income tax under the existing Canada-United States Income Tax Convention, the Government will argue for such an exemption as the Convention is renegotiated with the United States.

   Another piece of U.S. legislation causing concern is FATCA, which is proposed to come into force on January 1, 2014.

   To be clear, Canada respects the sovereign right of the U.S. to determine its own tax laws and combat tax evasion. However, Canada is not a tax haven and people do not flock to Canada to avoid paying taxes. In addition, we have existing ways of addressing these issues with the U.S. through the exchange of information provisions of our bilateral Income Tax Convention.

   That’s why the Government is actively seeking a solution with the U.S. government that both countries will find agreeable. The U.S. has been receptive to the concerns we have raised. This is reflected in the U.S.’s openness to alternative approaches that will minimize the red tape burden, minimize conflicts with privacy and other laws, and improve collaboration between governments.

   We continue to work with our U.S. counterparts towards a fair and reasonable solution that will address the concerns of Canadians and protect their interests.”

   Jim Flaherty

   Minister of Finance of Canada

   Unquote

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9. *@Calgary, I agree that it will be interesting to see if the new announcement results in substantial increases in expats (and accidental Americans) (and Greencard holders, etc.) deciding to start filing and getting compliant…or if it will be interpreted as more fear tactics.  Since I learned of my issues, I’ve told every American and US person I can think of but none of them share my fears or concerns…they’re taking the ostrich approach and still seem to think that even with FATCA coming that it isn’t going to directly affect them.  They think I’m being hysterical. :P.  It’s a decision that each person will have to make for himself/herself.  

   I feel I did the prudent thing to become compliant but others seem to think I’m a sucker.  Perhaps it’s one of those things that we won’t know for at least a few more years as things become finalized and implemented.  I suppose I felt that the wisest thing to do in my situation was to hedge my bets by losing out now with the extra taxes and professional costs rather than risking losing all my assets to various fines for not reporting and complying. Others who haven’t been filing at all may be more inclined to stay below the radar but as I’d already been filing, I was already in the system so saw no way around it really.  Classic case of being frozen in the headlights!

10. *@everyone

    Is this an amnesty? What happens if an american has an account in another country besides there country of residence because their spouse is from another country and has family there. The IRS consideres this a high risk? – crazy.

     

11. @monalisa,

    At least we are working on it for ourselves and keeping our own insanity at bay.

12. *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 outdide 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…

     

13. @Roy and others, Thanks for clarifying #1.
    #2 of your second paragraph might disqualify a lot of people! I wonder how many US expats did not close their US bank account before moving. When you move abroad, not knowing how long you will stay and if you might come back, you don’t close your account. Then you forget about it, or not close it because it might be convenient to use it when you visit.
    That’s what happens to me, and it seems like it might be a very common situation for expats, wether they move from or to the US.

14. “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.

15. *Calgary411

    Arthur Cockfield I suspect is really getting on the nerves of some people in Washington. It almost appears he intends to make it his life work to defeat FATCA which is a bit of problem because Cockfield isn’t a crank and in the past has been allowed into inner sanctum of tax policy at bodies such as the OECD.

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18. Useless procedures. Only more fodder pushing US persons resident abroad in the direction of renouncing.

    Three points not previously mentioned:

    1. OVDP/OVDI participants are purposely excluded. OVDP 2009 and OVDI 2011 participants have likely filed US tax returns in 2010 and 2011.  This means the new procedures do not apply to them even if they had “simple” returns.  The IRS obviously wants to keep these hapless souls in the OVD programs.
    2. Not all countries have the same tax filing schedule as the US, thus necessitating an amended return.  For example, in Sweden, if you do not file an electronic return, you will receive the final decision as to how much tax you have paid, how much refund will be received or if tax is owed, on 15 December.  As IRS Form 4898 only allows you to extend to 15 October, you may have to file an amended return to show the IRS that you owe 0 tax.
    3. It is quite common in Europe for a person to work in a “third” country (from the US point of view) for a year. Not all countries use the Euro, e.g., UK, Sweden, Denmark.  In order to avoid ATM charges of around USD 5 per transaction each time cash is desired and/or to receive local salary, an account may be opened in this “third” country.  As the person fully intends to return to the country  he or she previously resided in, it would be foolish  to close out his or her entire financial life in that country.

19. @monalisa

    “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”

    You are obviously a realist.

20. I keep getting an error alert when I try to access Brock’s link to the new procedures.

21. The Moody’s link doesn’t work either, obviously due to the IRS website renovations.

    This is the NEW IRS link:

    http://www.irs.gov/uac/Instructions-for-New-Streamlined-Filing-Compliance-Procedures-for-Non-Resident-Non-Filer-US-Taxpayers

22. *@everyone

    Does anyone know if the banks are going to look back a previous clients closed accounts? Is anyone expected a letter/phone call from a bank where you used to have and account?

     

23. @upset  If such a bank calls you, I suppose you could just say “I don’t know who the hell you are, I do not have an account at your bank”. 

    I am somewhat amazed about the 2009 cut-off.  One would think that people who have moved abroad since 2009 would be even more ignorant about FATCA, FBAR, Double Taxation as they haven’t had long enough time to hear about it it or figure it out. 

    How long is this new program going to be open?

24. Very inflexible. The US still wants to maintain tight screws on people overseas no matter what.

25. @ Roy

    A person inherited a U. S. 457 plan several years ago and has been receiving annual payments since then from the U.S. 

    The payments will cease after 5 years under the terms of the plan. The person receiving the payments has some control over the type of investments held in the plan ranging from basically money market funds to 100% equity funds. This person also has some control over how much to receive annually, except they must withdraw the RMD and collapse the plan by the end of the 5th year.

    Does receipt of the payments from the 457 plan disqualify a person from the streamlined retroactive filing rules just announced.

    This is the only U.S. based account for this person.

    I also am interested in your comment about owing U.S. stocks, Like the reference to Facebook shares.