The 14th amendment of the constitution …
The 14th amendment of the U.S. constitution reads as follows:
All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.
Citizenship and equal protection
Does the citizenship penalty paid by powerlessness #americansabroad violate the 14th amendment? Strict scrutiny? http://t.co/IjIhctbx1A
— U.S. Citizen Abroad (@USCitizenAbroad) July 10, 2013
What follows is a quote from Bernard Schneider’s submission to the Ways and Means Committee:
“Generally, U.S. expatriates are treated like U.S. residents and taxed on their worldwide income. However, U.S. expatriates should be compared not to U.S. residents but to nonresident aliens. But for their citizenship or immigration status, U.S. persons abroad would be treated like nonresident aliens, i.e. generally taxed at a flat rate of thirty percent on U.S. source income that is not effectively connected with a U.S. trade or business and at the regular graduated rates on income that is effectively connected with a U.S. trade or business, including on gain from the sale of real property interests in the United States. In addition, net capital gains would not be taxable unless they are fixed or determinable annual periodic income. Needless to say, the foreign source income of nonresident aliens is not taxed by the United States. In most cases expatriates could engage in the same economic activities in the United States as nonresidents without paying the higher taxes for which residents are liable. The difference between the tax imposed on nonresidents and that imposed on expatriates constitutes part of the “citizenship penalty” paid by U.S. persons abroad.”
Note particularly the last sentence that reads:
“The difference between the tax imposed on nonresidents and that imposed on expatriates constitutes part of the “citizenship penalty” paid by U.S. persons abroad.”
I don’t think I have seen this expressed as clearly as in that sentence.
The “Citizenship Penalty”, the 14th Amendment and “Equal Protection”
The “citizenship penalty” deserves consideration. Both US citizens abroad and non-resident aliens are non-residents of the U.S. The fact that the U.S. citizen pays higher taxes, because of U.S. citizenship, is arguably a violation of the “equal protection” clause of the 14th amendment. Furthermore, the U.S. Supreme Court has ruled that “citizenship classifications” are “suspect classifications” and that they can be upheld only if the government can demonstrate a compelling state interest. Why should US citizens abroad pay a penalty because of their citizenship?
You can read the complete posts and argument here.
The implications of the words “Are citizens of the United States …”
#Afroyim, 14th amendment and the forcible destruction of citizenship for #americansabroad http://t.co/Dc3hxqr6mY
— U.S. Citizen Abroad (@USCitizenAbroad) July 10, 2013
Justice Black’s closing directive was:
Citizenship is no light trifle 268*268 to be jeopardized any moment Congress decides to do so under the name of one of its general or implied grants of power. In some instances, loss of citizenship can mean that a man is left without the protection of citizenship in any country in the world—as a man without a country. Citizenship in this Nation is a part of a co-operative affair. Its citizenry is the country and the country is its citizenry. The very nature of our free government makes it completely incongruous to have a rule of law under which a group of citizens temporarily in office can deprive another group of citizens of their citizenship. We hold that the Fourteenth Amendment was designed to, and does, protect every citizen of this Nation against a congressional forcible destruction of his citizenship, whatever his creed, color, or race. Our holding does no more than to give to this citizen that which is his own, a constitutional right to remain a citizen in a free country unless he voluntarily relinquishes that citizenship.
The U.S. Government, U.S. citizens abroad and the forcible destruction of their right to RETAIN U.S. citizenship
U.S. citizens abroad are living under siege. A wonderful express of this comes from Jackie Bugnion in her submission to the House Ways and Means Committee on Tax Reform. She said:
In 1776, the United States declared independence because the mother country on the other side of the ocean was imposing taxes on the colonies for the benefit of England. Resentment started when Britain tried to enforce the Navigation Act after 1763. Resentment increased with the Stamp Act in 1765, a way for Britain to tax the colonies. The British Tea Act of 1773 led to the Tea Party and we all know the outcome – the American Revolution and independence crying out “no taxation without representation”.
Today, the estimated 7 million Americans resident abroad, of whom the majority are long-term overseas residents in high tax OECD countries, face a comparable situation. Their representation in Congress is non-existent in reality. Americans abroad amount to only 1 to 2% of the votes in any particular state; Congressmen and Senators have ignored their tax issues. The unjustified myth that Americans abroad are wealthy and disloyal restricts a rational approach to the problems because of political image issues.
Citizenship-based taxation (CBT) has existed ever since the federal income tax was adopted. Despite CBT being an anomaly involving double taxation, taxation of phantom gains and explicit tax code discrimination, it was grudgingly tolerated by Americans abroad because it was essentially voluntary, most often involved little tax or no U.S. tax liability and basically was not enforced. In particular, the FBAR filing requirement was so obscure that even the big four accounting firms were not aware of the filing obligation dating from 1970 and failed to inform Americans abroad of the need to file the FBAR.
Since 2001, a series of legislative events have radically changed the situation:
In 2001, the Patriot Act made anything foreign suspect, including Americans residing overseas.
In 2004, Congress, under the Jobs Act, drastically increased the FBAR civil and criminal penalties to confiscatory levels, creating a disguised form of taxation on assets held overseas.
In 2006 administration of the FBAR reports was transferred to the IRS for enforcement.
In 2006 the Tax Increase Prevention and Reconciliation Act (TIPRA) extended the Bush tax cuts and included a compensatory revenue raising provision that reduced the benefit of the foreign earned income exclusion, limited the foreign housing allowance and pushed Americans overseas into higher tax brackets, thereby increasing U.S. tax liabilities for many Americans abroad.
In 2008 the law relating to renunciation of U.S. citizenship was revised under Section 877A and introduced an Exit Tax on wealthy individuals (defined as “covered”). The law also provided that Americans who inherit from estates of former “covered” U.S. citizens are subject to U.S.
inheritance tax with no exclusion. This outrageous discriminatory provision aims to discourage renunciation of citizenship, but in fact penalizes children of former U.S. citizens for an act they did not commit. In practice, it encourages the children to also renounce their U.S. citizenship. In 2009 the IRS launched its initiative against tax evasion linked to foreign assets through the Overseas Voluntary Disclosure Programs and a threatening public relations campaign. While it justifiably targeted U.S. resident tax evaders, it simultaneously trapped Americans abroad who necessarily have foreign assets. The IRS’s one size fits all policy and bait and switch tactics led to abuses of Americans abroad which inspired sharp criticism from the National Taxpayer Advocate.
In 2010 FATCA was slipped into the HIRE bill with no debate in Congress and no cost/benefit
analysis. FATCA aims to provide the door that closes the fiscal trap by requiring foreign financial institutions to report to the IRS on assets held overseas by U.S. persons. It effectively cuts off many Americans from foreign financial institutions which find it too onerous to maintain American clients. FATCA creates a barrier to free movement of capital and people. In 2012 S.3457 proposed to grant the IRS the authority to have a U.S. passport cancelled or not issued if the IRS determined that the individual owed $50,000 or more U.S. tax.
In 2012 the Ex-patriot Act, S.3205, proposed to deny any “covered” expatriate re-entry into the United States, with retroactive effect for ten years prior to enactment of the law. The Reed
Amendment of the 1996 Illegal Immigration Reform and Immigrant Responsibility Act already
allows the United States to deny entry of former citizens into the United States. In 2013, S.268 was introduced; it compounds difficulties created by FATCA.
In 2013 the Senate Finance Committee included in its tax reform recommendations a provision which would grant the IRS authority to cancel a U.S. passport for tax collection purposes.
This stream of legislation and proposals categorizes Americans abroad as suspected criminals seeking to escape U.S. taxes. Congress has outdone George III and has turned the United States into a fiscal prison, including legislation which is deemed anti-constitutional under the Fifth Amendment1 and is contrary to Articles of the Universal Declaration of Human Rights.2
The foundation of the U.S. fiscal prison is citizenship-based taxation. Americans working and living abroad carry a ball and chain of dual taxation throughout their entire lives up to and including death.Americans abroad already pay taxes in the country where they reside and receive governmental services.
The additional U.S. tax obligation creates inevitable incompatibilities and discrimination and even requires Americans abroad to break foreign exchange control laws to pay U.S. taxes.
A revolution among long-term overseas residents is now underway. Five years ago, Americans abroad never talked about renunciation of citizenship. Today, it is a common topic in the press and among the community abroad. For more and more individuals, renunciation is the only solution to an intolerable situation created by the U.S. imposing its laws beyond its borders. The United States is literally destroying the community of Americans abroad, which plays an essential role in representing U.S. interests and goodwill overseas. The United States is shooting itself in the foot.
While the absolute number of renunciations, currently around 2,000 a year, is insignificant compared to the average annual U.S. citizenship naturalizations of 680,000, renunciations have multiplied seven times over the last four years. So far we have seen only the tip of the iceberg if CBT remains in force.
Today’s situation leads to serious hidden prejudice for the United States. U.S. exports are far below where they should to be because citizenship-based discourages U.S. companies from deploying U.S. citizens overseas to sell U.S. products; the law makes them too expensive. U.S. tax law and FATCA create insurmountable barriers for small and medium-sized companies to establish beachheads abroad to develop exports. The loss represents millions of U.S. jobs, hundreds of billions of dollars of exports, billions of dollars of U.S. tax revenue, and an unsustainable trade and budget deficit. Americans married to a foreign spouse, who represent about a third of the Americans resident abroad, now hesitate to register their children born abroad with the U.S. Embassy. The hot thing among young adults in their twenties is to renounce U.S. citizenship; they are aware of the impossible web of U.S. regulations that restrict job opportunities and personal freedom. Pushing away the young generation of Americans abroad is an immense loss to the United States. In prior generations, many highly educated multi-lingual American children returned to the United States, founded companies and created jobs in the U.S.
Adopting RBT will stop this revolution immediately. RBT law needs to be drafted in the spirit to allow free movement of individuals to leave and return to the United States, to reinforce the competitiveness of Americans and the United States overseas, to provide a simple, non-penalizing transition to RBT for the community of Americans already overseas, to ensure that Americans abroad are not subject to FATCA and FBAR, to adapt existing bilateral tax treaties and enter into new tax treaties so that withholding tax rates on U.S. source income are reasonable and to ensure that Americans abroad who have the majority of their assets in the United States (retirement funds, pension funds, real estate) are not disadvantaged under RBT with regard to either income or estate taxes.
I thank you for the opportunity to comment and hold high hopes that your bi-partisan efforts will lead to the constructive tax reform so necessary for Americans residing abroad.
Sincerely yours,
Jacqueline BugnionTo quote again:
The United States is literally destroying the community of Americans abroad, which plays an essential role in representing U.S. interests and goodwill overseas. The United States is shooting itself in the foot.
While the absolute number of renunciations, currently around 2,000 a year, is insignificant compared to the average annual U.S. citizenship naturalizations of 680,000, renunciations have multiplied seven times over the last four years. So far we have seen only the tip of the iceberg if CBT remains in force.
The forcible destruction of U.S. citizenship
The decision of Justice Black in Afroyim v. Rusk states that the forcible destruction of U.S. citizenship is unconstitutional. Jackie Bugnion’s “plea” to the Ways and Means Committee is as clear a statement of the destruction of U.S. citizenship that there could be.
You can read the complete post and argument here.
An added reason to switch to RBT
It would take years to get this issue before the Supreme Court. That said, I believe that certain aspects of “so called” citizenship-based taxation may be in violation of the 14th amendment. It is possible that this could, influence the consideration of whether to switch to RBT.
Acts of Congress mentioned by Buignon, particularly HEROES, are the unstated reason that I relinquished my US citizenship, and therefore, Congress has forced me to deprive myself of United States citizenship. Thus, my rights under the 14th Amendment have been violated. But that makes little difference to the Feds. The US government today hasn’t a clue about constitutional rights and human rights. If you make an appeal to natural law, which was an important consideration to the early framers of the United States government (i.e., unalienable rights endowed by the Creator that governments only illegitimately remove), the current government looks at you as a terrorist or a tax evader. This is how far we have come down the path towards despotism and totalitarianism.
Natural law, I think, argues that I have a right to return to the land of my birth and not be treated like a foreigner because I wanted to escape the tyranny of citizenship-based oppression.
I come here often and find your information of great value. Can I ask a favor of you guys though?
Spare a thought for an immigrant and his wife that entered the US 16 years ago. We had UK ISAs that we didn’t know were PFIC’s. We didn’t know they were not protected by the tax treaty as retirement accounts. We didn’t know that later we would be subject to an exit tax if we wanted to give up our green cards. We didn’t know that pensions, insurance, bonds and a huge number of other account types needed FBAR so we just filed it for our bank accounts.
Luckily we now know we must file 3520 or risk losing 20% of a foreign inheritance even if no taxes are due (though we can’t help feeling that’s criminal). The IRS was unsure what year to file 3520 and helpfully suggested filling it twice, once in each year!
Our accounts are trapped in a foreign country that we can’t do anything with until we are 55. We have to file FBAR and 8938 each year and the turbo-tax interfaces are terrible. Some accounts like our life insurance they refuse to talk to us and claim they will just send us a letter when it matures. My CPA wanted $1.5k to do my taxes if I wanted a pro because of FATCA and FBAR.
I had to pay $500 just to make sure out life insurance was tax exempt and hence not a PFIC. $8k to do 8 years of tax returns for OVDP. $36k of tax/penalties/interest on tax/interest on penalties on $150k of retirement savings. Of course this tax was on fictitious mark to market gains projected with interest through years they owned us money and high marginal tax rates. I await to see if they will try and take an addition $75k in maximal balance penalties.
We could become citizens in a few years but then the savings clause will take away our lump sum retirement options but at least we could vote.
When you say Americans abroad think also of immigrants in your homeland as well please.
Pingback: Taxation of Americans Abroad versus the 14th Amendment | The Freedom Watch
Neill, you make very good points, and ones which are not as often addressed here because most of our experience is with the injustices of the burdens the US imposed on us who were born, or who live outside the US.
A few participants here (and at the Jack Townsend blog) like ij, have the experience of being an immigrant to the US, and being unfairly and unjustly penalized for the accounts they had which predated their move to the US. This is frequently the case for Canadians who moved to the US, but who left behind pre-existing Canadian accounts AND registered retirement savings (RRSPs) or other registered government savings instruments as well as other types of accounts which could not be dissolved prior to immigrating, or cannot be dissolved or accessed until well into the future (like life insurance, or private workplace pension plans, etc.).
We know that in some cases, the accounts left behind were due to mandatory participation in the country of origin and nothing can be done to dissolve them and may not be protected by any tax treaty with the US.
We know that immigrants to the US were not notified or educated by the US on the ‘foreign account’ reporting obligations or what that might mean for their US ‘compliance’.
The IRS Taxpayer Advocate has been trying to help in that situation (ex. trying to get the ‘Streamlined filing compliance process’ available for US resident immigrants), but so far, US immigrants are getting even less help than we are. There is also a significant problem for US citizens who left to work abroad, and recently returned, only to find that their financial accounts and FBAR reporting from outside the US were not ‘in compliance’, like this participant ‘David’ here; http://federaltaxcrimes.blogspot.ca/2013/06/new-taxpayer-advocate-discussion-of.html#comment-956864899
Many of us cannot vote either, ever, unless we were to move to the US. The state by state rules for registering often do not allow those who have never lived in the US to register or vote absentee. Only a few will allow for registration and voting on the strength of a US parent’s last US address.
sorry that you have landed in the same boat; nice to have new folks with same issues. In every communication to my politicians I state both emigrants and immigrants.
@Neill, it seems like you haven’t signed the 906 for OVDI. You should consider opting out and involving the Tax Payer Advocate. Maybe they’ll even allow you to opt out in the streamline process, where the taxes, interest and penalties are only on 3 years.
Best of luck.
Just to clarify @Neill, what I meant to say was that most of us seem to be living OUTSIDE the US and so that is the situation we know best; whether we were duals born outside the US, but inherited US status via parentage, or naturalized outside the US, or are longterm permanent residents of another country like Canada, or expired greencard holders who have returned home to Canada or another non-US country of origin.
The US has been very short sighted to punish US immigrants for having pre-existing non-US accounts that originated from BEFORE US residence – particularly when those accounts could not possibly have been opened for the purposes of US tax evasion – since they predated US immigration and residence. And, some of those accounts cannot be dissolved, or dissolution would cause a punitive result, and hardship – despite being entirely legal, and most probably either post-tax, or tax exempt where they originated. Some US immigrants just go back and surrender their greencards before becoming entangled, or, after they find out how punitive a process it would be to come forward and try to resolve their foreign account/asset issues. This is just stupidity on the part of the US, to alienate people who seek to live there and contribute to the US. But, then they are so stupid as to alienate those of us living outside the US as well.
IJ – an immigrant to the US, is mentioned here: http://isaacbrocksociety.ca/2012/09/16/a-minnow-opts-out-of-the-irss-ovdi-and-gets-the-correct-result-a-simple-warning-letter/ and here http://federaltaxcrimes.blogspot.ca/2012/09/a-great-opt-out-result-irs-gets-good.html
Badger,
Thanks for your response. I didn’t want to make out we had it worse than you guys. It’s a mixed bag. I just thought it might help to have people talk a bit more about immigrants facing very similar problems to yourselves or at least not word everything in terms of Americans abroad.
I live in fear of the UK trying to bring in some kind of citizenship taxation. At least they leave me alone so far.
We know (well most of us have no idea what the FBAR is based on my conversations with others) about most of your issues and understand why you feel so abused.
@USCitizenAbroad,
Low/zero odds, but I just sent a request to ACLU of my home state (where I continue to vote) asking for opinion on, and help in pursuing, your 14th amendment argument–and referenced your posting for details.
I emphasized that we are seven million.
Will let you know the response.
@Neill, in my view, more people like you need to blog more about such stateside experiences so that it can become better known and discussed. It is difficult for non-Americans or expats living outside of America to understand the situation of people living in the US without it being explained more. Combined, both angles could have a much greater impact and you certainly have a much greater ability to influence US politics than us ghosts.
@Chris,
On opting out. My lawyer factored out all out retirement accounts and the ISA’s with a statement that prior tax preparers didn’t warn us of issues despite us disclosing the accounts to them. With this we have some inflation protected bonds that are tax exempt in the UK but taxable here and a few other accounts. All told that gives us a penalty of $4k (I think). My lawyer thinks the chances they will accept this is about 1%. If they reject this (I think the rules suggest they have no latitude) then I am looking at $75k penalties if they allow me to factor out all accounts where no tax was due. I am using the Fisher case the IRS lost to say I have no taxes due on shares I received from a bank demutualization for a bank account I didn’t know I had opened by my mother when I was 4 to teach me about saving. What a lesson that was. All this I researched myself as it’s pretty much a gravy train for lawyers and CPA’s.
If they want this I am unsure what I will do. We have been doing this for a couple of years now and so there is huge value to just being done with it. That said I feel its completely wrong to add another penalty on top of the 3 or 4 penalties already build into the PFIC and OVDI. They will effectively take 75% of the money we earned when we lived in the UK having never earned anything in the US. We haven’t even moved money out of the US except for I guess a couple of $k for buying presents and expenses when we go back to visit.
@Neill, There is 0% chance that they’ll accept anything within the structure of OVDI. In the end, you’ll receive a 906 asking for 27.5% of your max balance of all non-compliant accounts over the last 8 years (the in-lieu of FBAR penalty).
Some lawyers make their client pay that up front, some not.
Compare that to the penalties you’ll be getting if they were to assert penalties on these accounts outside of the OVDI. But you won’t have to pay both if that makes sense (these penalties and the 27.5%)
If she’s reading, another participant (Not that Lisa), could advise you when it would be best to contact the National Tax Payer Advocate, and give you some contact information.
It seems your situation is relatively complex with the type of accounts you have. I still think your best bet is to get in touch with the TAS.
@Chris,
I understand the FBAR penalties are a stick to drive me to OVDI. We have a lot of accounts (about 20) with many accounts having very small balances. FBAR penalties would be much worse even at $10k each/year. I hadn’t considered the tax payer advocate but did see the last two reports.
I am quite happy at this point to let the clock run. We have been waiting for the IRS agent for many months already and they have only asked for duplicates of what we already sent and for us to sign away our rights to be audited.
@Neill, except in very rare cases of obvious tax evasion, FBAR penalties outside of OVDI have never been asserted on a per account basis.
Also, they’re not necessary $10,000. The IRM calls for a gradual schedule based on the amount in the account.
Look at the non-willfull table (Normal FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004 – Per Person Per Year)
at this link: http://www.irs.gov/irm/part4/irm_04-026-016.html
However, if they choose to assess them, it’s likely to be per year.
Just Me, an early OVDI participant got asserted 25K of FBAR penalties ($5K per year), if I remember well.
The TAS intervened. Have you read his story?
http://isaacbrocksociety.ca/2012/02/04/letters-to-shulman-or-a-case-study-of-ovdp-communication-attempts-with-the-irs/
Just Me, I think you and Not that Lisa have each other’s contact information, would you mind asking her to chime in?
Running the clock might not be a bad course of action, until you receive the 906. By then, maybe some procedure for immigrants will be in place and it will be possible to opt out for those.
I still think that if you’re not willing to pay the in lieu of FBAR penalties at the end of OVDI, contacting the TAS might be a good course of action. This is an injustice, and that’s what they’re helping with.
@Neill, another blog post from a friendly lawyer that might be of interest to you:
http://hodgen.com/ovdi-opt-out-get-ou/
@Neill – Please read the story of my opt out at http://isaacbrocksociety.ca/2013/06/16/an-irs-ovdi-ordeal-with-a-happy-ending-an-opt-out-success-story-as-told-by-not-that-lisa/ Perhaps an opt out is appropriate for you.
I would recommend that you take a look the narrative, the reasonable cause arguments and the Mitigated Non-Willful penalties document. Do the reasonable cause arguments look like something you can to cast your story in? Apply them to your situation. None of them are specifically for people who live abroad.
There is virtually no known case law on FBAR reasonable cause arguments. One can get a sense for the exercise from reasonable cause tax cases. However, reasonable cause is intensely factual and facts almost always vary, perhaps in key nuance from case to case. So you should focus on the specifics of your cases. Also focus on the IRM. The IRM is the IRS’s marching orders and will generally trump any case authority unless that case authority is right on point (which it almost always is not).
As for penalties, are you really at Level III-NW? Since you have lots of small accounts, maybe you are Level II-NW? Take Chris’ advice and look at the chart and the document I provided as an example of how these penalties are calculated.
Then don’t forget IRM 4.26.16.4.7(4) which basically says if you are not egregious, you should only get one FBAR penalty a year.
One thing to be wary of is if you opt out, your PFICs will need to be calculated using the 1291 method instead of the 1296 Modified MTM method. This may or may not be advantageous to you. Due to my behavior with my accounts and the fact that I had lots of tax credits, I owed next to nothing on them when I opted out. In the OVDI program, because tax credits are not allowed, I would have owed $30,000 on the PFICs under the modified MTM calculation. If yours are tax free savings accounts, you might not have the tax credits so make sure you do this calculation before you opt out.
Moby and ij are immigrants who opted out. ij was resident in the US for twelve years. Their arguments are incorporated in my reasonable cause arguments. You can find their opt out stories on this IBS blog. Search for Moby and ij.
I can’t really tell you the optimal time to contact the TAS. Certainly, if the proffered 906 is in too high a range for what you think is reasonable you can contact the TAS. You will be in an emergency situation as you will be given a short time for payment. However, the TAS will likely want to communicate with your attorney so you may run up additional lawyer’s fees because of an opt out.
What we’re witnessing is a battle between liberty and tyranny. Lawmakers and institutions like the IRS seem to be unsure of which values to uphold in their desperation to raise revenue and maintain power.
I have this recurring thought that there will be those lawmakers in the US who would thank us for bringing our current situation to light and promptly proceed to allow RBT only for US citizens working for US companies abroad. They may just consider all other Americans abroad as competition especially if they work for foreign companies that are in direct competition with the US. This policy would give US companies an advantage over foreign ones that doesn’t exist today, and allow the US to continue punishing foreign companies for hiring USP’s. At the same time it would allow the US of A to block USP’s abroad from using what they”gave us” to compete against American companies.
I think many of us wouldn’t put it past certain legislators we know of to believe it would be traitorous to allow us our liberty if it means that the US and US companies don’t gain an edge by doing so. I don’t expect much in the way of magnanimous behaviour from the US, but we’ll see.
@Not That Lisa
My PFIC issue is complex. Money was paid into the accounts as a lump sum before we ever entered the US. Then the accounts reinvested dividends and paid close to zero taxes. So I have 86 different purchases of 11 different mutual funds in my completely reconstructed basis. Funds split, changed names, repriced, issued extra shares. You name it they did it.
My lawyer told me he had run the default PFIC calculation on my data and found the costs to be about $4k more that way than the modified MTM calc offered. I read the “CODE” and discovered that the mutual funds could not be PFICs until we entered the country and my lawyer didn’t have this date. So he can’t have done the calculation. To my horror I am informed that even doing the calculations would be very costly if I can find somebody willing to do it. I can fight with him to get him to redo a calculation he got wrong but every mail they read or reply to costs me a lot of money. In the end he may well be right. It’s not clear to me that doing the default PFIC calc will save much if anything. I bet I have spend $10k so far on lawyer fees.
For me these PFIC taxes are everything. They are the major source of our tax shortfall. They are the major source of our temporary large account balance. They are the source of compliance costs both in money and time.
I’ll read the FBAR penalty stuff. This is new to me.
@Not that Lisa!, How long did it take for the TAS to accept your case and you being given a case number.
If I understand correctly, they won’t help until that happens.
@Neill – I forgot to say that it is important to figure out which years are closed for FBARs and tax when you make your opt out decision.
You will not likely be paying FBAR penalties for 2003 and 2004 as they are closed. So you are looking at max 6 years of FBAR penalties. If you are a Level II-NW taxpayer, then using the rule 4.26.16.4.7 (4) I told you about, your max penalty would be USD 5000 a year. You may even be able to argue for one year of FBAR penalties in total, or even no penalties if you have reasonable cause.
As for taxes, you may get some of that USD 36k you paid in taxes on your PFICs back if your tax years are closed. Ask your agent which tax years would be closed if you opt out. Maybe all tax years will be closed and you will owe nothing in taxes. The question is if the 1291 method makes sense for the future. You could end up paying a lot of taxes under this method when you eventually take a distribution.
@Chris – I did my application by phone. You will know by the end of the phone call if you are accepted and you will be given a case number.
@Not that Lisa,
We closed all our ISA’s in 2010 and one straggler in 2011. I did this when I first became aware of their existence (they are not my accounts but my wife’s). I just wanted the money in the US where I understand the financial instruments. It wasn’t till Dec of 2011 that I started to fully grasp the nature of PFIC. Why would you think that the government would set such a trap for you. Of course that’s before I started to understand the FBAR and 2520 penalties!
This among other reasons is why I like to have the clock tick on.
@Neill – then opt out might make sense. Do you understand what open and closed tax years are?
Open – bascially, you file and wait 3 years for the SoL to run out. After the 3 years, the IRS cannot come back to you and claim taxes on these accounts as they are “closed”.
With that said, the years could possibly still be “open” for taxation because under section 6501(e) of the Tax Code and section 301.6501(e)-1 of the Tax Regulations the statute of limitations is 6 years if the taxpayer omits additional gross income in excess of 25% of the amount of gross income stated in the tax return filed with the IRS. Additionally, as of 2010, FATCA extends the Statute of Limitations for six years if there is a $5000 omission or more of income related to a foreign account.
Your situation with PFICs sounds like mine. I closed a lot in 2010 as I realized how punitive US taxation made it to own anything but a US based mutual fund.
In OVDI, as I was a filer like you were, almost all of my tax years prior to 2010 were closed and hence no taxes could be taken on my PFICs under any method. The tax years were closed. The SoL had run out. For the years that were open, I could apply tax credits to them. So an opt out made a lot of sense in my case. Mostly because I had reasonable cause and second the math (e.g. level of willfulness and closed years) showed that both the FBAR and tax penalties were either less or non-existent outside of the program.
@Not That Lisa,
Looking at the table and remembering the numbers I think you may be right and I would be Level II-NW. Aggregate balance of all accounts exceeds the limit in at least one year by a bit but not any individual account.
@Not that Lisa!, Neill, That’s unfortunate that most lawyers don’t perform that type of analysis prior to advising people to enter of not the program. That is just wrong.