Have you all seen the new Statement from John Koskinen? Is the IRS finally doing the right thing?? I am still digesting, but wanted to get this up as a post before I settled into analysis mode.
Statement of IRS Commissioner John Koskinen
June 18, 2014
Today we’re announcing a number of important changes to our offshore account compliance program that we believe will lead to a significant increase in the number of U.S. taxpayers coming forward to report on undisclosed foreign accounts.
The steps we’re outlining today include an expanded streamlined filing compliance process and important modifications to our Offshore Voluntary Disclosure Program, or OVDP. The combined effect of these revisions will be to allow more taxpayers to participate. This reflects a carefully balanced approach. We are providing additional flexibility in key parts of our compliance effort while maintaining central components of the offshore program.
Update I: Media Coverage links provided by Calgary.
IRS eases rules for U.S. expats living abroad to “come clean” on back taxes
IRS Eases Offshore Voluntary Disclosure Program for Non-willful Tax Evasion
IRS eases rules on Canadians filing taxes in the U.S.
Update II: Program details now available. Link provided by Neill
Streamlined Filing Compliance Procedures
Update III: Adding @USCitizenAbroad Posting from his blog. (see below the break)
Update IV: Adding link for IRS Transition Rules: Frequently Asked Questions (FAQs)
#IRS provides penalty relief: Isolates Congress and US tax laws as the problems for #Americansabroad
One June 4, 2014, I wrote a post speculating that that upcoming IRS amendments to theStreamlined and OVDP programs would likely provide relief for Green Card Holders resident in the U.S. This was based on a speech given by the IRS Commissioner of June 3, 2014. As was reported in numerous blogs (and given an enthusiastic review to Mr. Mopsick), the speech included:
Now, while the 2012 OVDP and its predecessors have operated successfully, we are currently considering making further program modifications to accomplish even more. We are considering whether our voluntary programs have been too focused on those willfully evading their tax obligations and are not accommodating enough to others who don’t necessarily need protection from criminal prosecution because their compliance failures have been of the non-willful variety. For example, we are well aware that there are many U.S. citizens who have resided abroad for many years, perhaps even the vast majority of their lives. We have been considering whether these individuals should have an opportunity to come into compliance that doesn’t involve the type of penalties that are appropriate for U.S.-resident taxpayers who were willfully hiding their investments overseas. We are also aware that there may be U.S.-resident taxpayers with unreported offshore accounts whose prior non-compliance clearly did not constitute willful tax evasion but who, to date, have not had a clear way of coming into compliance that doesn’t involve the threat of substantial penalties.
We are close to completing our deliberations on these respects and expect that we will soon put forward modifications to the programs currently in place. Our goal is to ensure we have struck the right balance between emphasis on aggressive enforcement and focus on the law-abiding instincts of most U.S. citizens who, given the proper chance, will voluntarily come into compliance and willingly remedy past mistakes. We believe that re-striking this balance between enforcement and voluntary compliance is particularly important at this point in time, given that we are nearing July 1, the effective date of FATCA. We expect we will have much more to say on these program enhancements in the very near future. So stay tuned.
IRS Newsroom – June 18, 2014
http://www.irs.gov/uac/Newsroom/Statement-of-IRS-Commissioner-John-Koskinen
IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance
Information from the IRS site on OVDP 2014 is here:
http://www.irs.gov/uac/2012-Offshore-Voluntary-Disclosure-Program
Information on non-OVDP disclosure options is here:
Information on the new streamlined process is here:
http://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures
http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States
Obviously you must check the above links to see how the information (as it always does) evolves.
The press release included:
“This opens a new pathway for people with offshore assets to come into tax compliance,” said IRS Commissioner John Koskinen. “The new versions of our offshore programs reflect a carefully balanced approach to ensure everyone pays their fair share of taxes owed. Through the changes we are announcing today, we provide additional flexibility in key respects while maintaining the central components of our voluntary programs.”
As predicted the IRS has announced changes to both the Streamlined and the OVDP programs. The effects (subject to the details) are generally as follows:
Streamlined Program – Opening the program up
1. Participants are not restricted to those who less than $1500 in tax;
2. There is no longer the “detailed questionnaire” to determine “low compliance risk”;
3. Taxpayers loving outside the United States (AKA “Americans abroad) can come into compliance WITHOUT PENALTIES by certifying that the lack of compliance was “non-willful”.
4. Taxpayers resident in the United States (Green Card Holders are you listening) can come into compliance by paying a 5% penalty on the “offshore account” which was the reason for the non-compliance.
5. The new streamlined program can also be used for “amended returns”. This is huge. It allows people to correct the inevitable mistakes associated with U.S. citizenship abroad. This does include those who have made “quiet disclosures”. Previous penalties assessed will NOT be abated.
Bottom line: Those Americans abroad who are so inclined may enter the U.S. tax system without fear of penalties provided that they certify their lack of compliance was “non-willful”.
Interestingly, Jack Townsend has been writing on “willfulness” here and here.
OVDP (“Offshore Voluntary Disclosure Program”) – making it harder
The changes to the OVDP program are clearly designed to make it attractive ONLY to those whose conduct has clearly been willful. (In my view making it close to obsolete.)
As described here, the changes to the OVDP program reflect that:
… the IRS is reshaping the terms for taxpayers to participate in the OVDP. “This is designed to cover those whose failure to comply with reporting requirements is considered willful in nature, and who therefore don’t qualify for the streamlined procedures,” Koskinen explained. “These changes will help focus this program on people seeking certainty and relief from criminal prosecution. From now on, people who want to participate in this program will have to provide more information than in the past, submit all account statements at the time they apply for the program, and in some cases pay more in penalties than they would have done had they entered this program earlier.”
The basic changes to the OVDP program include:
1. The 5% penalty has been abolished. This reflects the changes to the Streamlined program.
2. More information, more detail and the penalty payment are required at the point of entry into the program.
3. The penalty on offshore assets has been raised from 27.5% to 50% IF THE ASSETS WERE HELD IN A BANK:
A. That was subject to DOJ prosecution; and
B. the OVDP disclosure took place after the prosecution had been announced.
This makes it clear that OVDP is appropriate ONLY for those who risk criminal penalties.
Bottom line for the average American abroad:
A preliminary response suggests that non-compliant and non-willful Americans abroad can come into compliance:
A. Without the payment of penalties.
B. But, they will have to pay the back taxes (presumably for the three years covered by the Streamlined program).
So, what does this all mean? The answer is:
For Americans Abroad there is good news and bad news:
First, the good news:
The IRS will be more “compliance friendly” making it easier for Americans abroad to come into compliance and “clean up” past problems.
Now, the bad news:
Americans abroad who come into compliance will still be subject to the incompatibility of U.S. tax laws and their lives abroad. They will still have the problems which include (but are hardly limited to): PFIC, tax on principal residence, phantom capital gains, TFSA, FBAR, 5471, 8938, 3520, 3520A and other assorted IRS paperwork, etc.
My prediction:
This is likely to fuel the surge in renunciations. With penalties “off the table” people will feel better about coming into compliance for the sole purpose of renouncing U.S. citizenship.
When it comes to the IRS …
The IRS has probably done all it can. It can’t change the tax laws. It can make the decision on penalties. The IRS has signaled that there will be no penalties for Americans abroad.
With penalties “off the table”, the IRS has effectively identified that it is the lawmakers (Congress) which is the problem for Americans abroad.
With the combination of:
– the enforcement of citizenship-based taxation via FATCA;
– and a tax regime that no American abroad can life under
more Americans abroad are likely to consider formally renouncing U.S. citizenship.
Epilogue:
I have following these developments since 2011. The history of this unprincipled, unprovoked, unjustified and unparalled assault on Americans abroad is as follows:
2009 – The Reign of Terror Begins:
Obama, Geithner and Shulman equate the offshore accounts of Americans abroad with the offshore accounts of Homeland tax cheats. The “reign of terror” begins.
The attack on #Offshore accounts held by #Americansabroad begins http://t.co/7EotsE0tL7 – #FATCA and the #FBAR Fundraiser
— U.S. Citizen Abroad (@USCitizenAbroad) June 18, 2014
2009 – IRS creates the OVDP program of 2009. Half way through the program, they engaged in the “bait and switch”. Tax lawyers had believed that people could enter program and argue “reasonable cause”. IRS “shuts” down “reasonable cause arguments. Also, IRS discovers PFICs giving them a new vehicle to terrorize Americans abroad.
2010 – In March of 2010 Mr. Obama signs FATCA legislation in law. The stage is set for “FATCA Hunt” – the hunt for Americans abroad.
2011 – IRS remakes OVDP as OVDI making it clear there is no “agent discretion” in calculating penalties without an “opt out”.
Tax lawyers, accountants and media encourage innocent Americans abroad to enter OVDP.
OVDI ends in September 2011.
December 2011 – IRS release the infamous December 2011 FS. For the first time since 2009, the IRS notes that “reasonable cause” arguments are available. A Christmas present from the IRS that was ignored by the “cross border professionals”. At this point, it was difficult to know what to do. Americans abroad had a compliance problem and not a tax problem.
January 2012 – IRS brings back the OVDP. Basically the same as the 2011 OVDP with higher penalties (25% to 27.5%). Isaac Brock Society writes press release warning Americans abroad to stay away from this program. “Just Me” write the OVDI Classic: “OVDI Drudgery for Minnows“. In January of 2012, desperate Americans abroad wrote about how “their lives had been stoled from them by the IRS“.
September 2012 – IRS introduces the “Streamlined Compliance” program for ONLY Americans abroad. People were and continue to be wary of the program.
June 2014 – IRS introduces modifications to both Streamlined Compliance and OVDP. The bottom line appears to the that penalties but not tax will be waived.
@GwEvil
It looks like ACA got a case of Stockholm Syndrome when it relocated to Washington.
@FromTheWilderness – on Twitter I responded “too little, too late” to their “fair”
“The IRS isn’t doing Democratic congresscritters any favors, nor are they doing any for the IRS. They are just making the IRS look more like a partisan agency, which could cripple tax administration for years.”
http://rothcpa.com/2014/06/tax-roundup-62414-koskinens-political-gifts-and-in-case-you-didnt-think-hitler-was-bad-already/
This is NOT an isolated incident. The question is, under which administration did the IRS first become a partisan agency?
i just saw this on Twitter and cannot help myself:
@fromthewilderness
Sad to say, the District of Corruption captures EVERYONE. Read “This Town”. It is BIGGER than any one Entity or Person.
“…Like the eminent archaeologist Indiana Jones who had to choose between the real grail and the fake grail with the latter resulting in a gruesome death (i.e., decaying into dust), those taxpayers who do not fall at the ends of the bell curve on willfulness must proceed with extreme caution:
• Quoting the esteemed tax practitioner, Elmer Fudd, willfulness is a “wascally” little word. How one views the facts significantly impacts the conclusion that one draws about culpability. The rule, “Intentional violation of a known legal obligation,” is easier to state than to apply to the myriad of circumstances one encounters in the offshore arena.
• Taxpayers will not be able to go it alone. Very simply, those who think that they can certify on their own that they have been non-willful are playing with fire. Instead, they should seek assistance from an experienced tax attorney to make that determination.
• What burden of proof will the IRS apply in deciding whether a taxpayer has truthfully certified non-willful conduct: Preponderance of the evidence, or, clear and convincing proof? That remains to be seen.
• The non-willful certification process appears to place the burden of proving non-willfulness on the taxpayer. However, one should not forget that the IRS bears the burden of proving willfulness in an FBAR civil penalty suit.”
http://taxconnections.com/taxblog/new-streamlined-filing-procedures-a-trap-for-the-unwary/
Call me naive but would assume that the vast bulk of minnows would be safe in this updated streamlined programme. It’s the IRS’s way of encouraging compliance whilst making it clearer that the revised OVDP is for tax criminals. Naturally tax attorneys will try to frighten people into thinking that they need to continue relying on their legal expertise.
However, of course the average accidental/expat living in Canada won’t be aware of confiscatory PFIC taxation on their locally-owned mutual funds or aware that the US taxes capital gains above $250,000 on the sale of one’s primary residence. So it could still be a case of ‘Welcome to my parlour said the spider to the fly’….
@monalisa1776
Call me naive as well. Seems to me if a person can truthfully answer ‘no’ to the question ‘were you aware of your filing obligations’, then that person is good to go (at least as far as SFOP vs OVDP is concerned).
@Tdott, I feel that this updated streamlined will be of benefit compared to the earlier version, and certainly the OVDP, for expats with similar messes to myself. I could have been a prime candidate for the 2011 OVDI, due to my unreported accounts and passive income.
I would have thought it an understandable mistake for a dual in the UK to have assumed they didn’t have to report ISA income on their 1040, especially since they don’t even have to declare it on their UK tax return; the average person would have assumed that the tax treaties protected them from double taxation.
Someone like myself, upon learning of the problems and immediately having taken steps to correct the past omissions should to my mind be treated mercifully. Of course, I had to pay back substantial double taxes because of the non-US mutual funds, which seems plenty punishment itself, not to mention the huge accounting fees in the tens of thousands and, even worse, all the terrifying uncertainty that accompanied a quiet disclosure. At least this updated streamlined should benefit people similar to myself who’d created non-compliant situations unintentionally.
Granted, I could well be accused of having been negligent up to my OMG, but was certainly NOT willfully non-compliant; had I known of all the complexities, would have never invested in mutual funds, etc. I also believe that this new program will give those who choose it a clearer path to expatriation.
My accountant actually followed virtually the same procedure that’s now being prescribed in the new streamlined: amending three back years and filing the then current year with six years’ FBARs, all in one package, enclosed with a lengthy letter pleading an abatement of penalties based on reasonable cause and good faith efforts to get back into compliance. In other words, a ‘loud’ quiet disclosure. It’s just making what was already being successfully done by many accountants more out into the open.
I’d imagine that many tax attorneys will be gutted but will hopefully go back to focussing on wealthier egregious cases, as they should be, instead of preying on terrified minnows.
It’s all still such a stupid game. I don’t begrudge any of you considering entering the program, but good lord, “compliance” is a far cry from the “freedom” that I consider my right. No sale!
Could self certification be problematic unless prepared by professionals in cases that are not simple? Some readers may have clear current circumstances but possibly more complex looking back over the required period. There may Brockers caught unawares of how the world changed underneath and now find the new offering insufficiently broad and that is why these posts continue. Trying to help an elderly friend caught in dilemma and is upside down not knowing what to do…could one submit based on records to hand hopeful of obtaining a CLN and if granted is that the end of the matter for good? Are risks higher for those who continue to receive some US income and have been filing?
My dear friend has filed 1040s using a friends (mail forwarding) US address as that is where her (trail)commissions are paid (now retired), and claims to having paid 98%+ of all tax due without disclosure for several years. She likely would have little difficulty with the foreign residence (abode) and time requirements-but there could be a red flag in differing addresses. Reporting issues may be more vexing than amounts actually owed.
For anyone who has resided (and banked) in a third country during the look back period complexity rises to the surface immediately. What are we calling ‘minnows’? What if she did nothing for several more years?
In proper perspective she wasn’t aware of reporting obligations and was making a good faith effort. But that is in the eye of the beholder.
Simply put…..It a “Buyer Beware” world when you enter the New simplified process. The IRS may or may not be fair NOW. It is hard to find a reason to Trust them, and for those Looking for an easier route to Compliance , I don’t want to discourage you. It is like purchasing that new car, don’t be disappointed if you don’t get that sticker promised 35 mpg. Just keep your eyes wide open when you sign that certification Letter!
arctic raven,
What a predicament for many elderly people to now be in. Is she a US citizen Canadian resident who has been living in Canada and filing her US taxes using a US address? To help her, do you fully understand the terms of the “new and improved” simplified compliance option? There are warnings.
What I can tell you that a CLN (which is a Certificate of Loss of Nationality) has nothing to do with tax compliance. It will be obtained with a successful claim to relinquishment or renunciation of US citizenship at a US Consulate (Department of State). Expatriation / renunciation is not contingent upon tax compliance — they should not ask anything about that. A CLN may be required to show her bank that she is no longer a US citizen — if they have information on record that she IS a US citizen. The tax compliance component (which would have to be dealt with the following year) is separate but related in that renunciation without being deemed a “covered expatriate subject to US Exit Tax, requires certification on IRS Form 8854 of one’s requisite number of years tax compliance. Some choose not to complete this step.
Some may say your elderly friend’s best option would be to do nothing more than she is already doing regarding her US tax returns. I am not able to weigh in on that, but others might be able to provide possible alternatives with more information as they see it. Does she have Canadian children that may be deemed US citizens? Will she be leaving an estate to them? So many things to look at.
Here was an earlier comment on another thread today of some things that should at least be recognized and possibly taken into account before any decisions on how to approach this problem of US citizenship and all its requirements for someone living abroad: http://isaacbrocksociety.ca/2011/12/14/about-the-isaac-brock-society/comment-page-9/#comment-2096396.
YYC 411…You and Blaze are like the shepherd. I for one trust your perspective and feel badly for your son’s predicament. wish I could put my 2 cents into your situation. This may be infeasible given everyone wants to remain anonymous but would you be willing to meet at a neutral YYC spot to discuss options (not advice)? I’d make the long drive. This can be a very lonely and frightening world to navigate yet we face similar challenges and can help each other where safe and feasible. Professionals likely only stampede (sorry for the pun). Blood allies?
arctic raven,
I’ll be in touch with you by email. Thanks for the kind words. Would love to meet with you in YYC. PS: I’m no longer anonymous, but I will respect yours.
Problem with inbox. How else can I confidentially and securely contact you?
arctic raven, Let’s continue this tomorrow; after you comment I’ll give you another email address to use (and then delete that after you get it). Thanks.
I’ve sent you a PM.
@To All, I just also wanted to say that I am NOT happy about any of these turns of events; in my situation, I was essentially stuck because I’d already been filing and was thus already in the system. I concluded that I really had no other realistic option but to get into compliance, and this was even more vital to be able to cleanly expatriate.
However, I can also see how this revised Streamlined is a Venus flytrap for minnows, especially as it will make it much harder for them to claim reasonable cause and non-wilfulness if they continued to choose to lie low, especially for non-filers…it thus shows that the IRS definitely expect full compliance whereas they used to have a de facto ‘don’t ask don’t tell’ policy for expats, at least before crackdown on FBAR via the 2009 OVDP.
It looks as though CBT is here to stay, but what I still can’t determine is whether their revised streamlined is a genuine way for them to officially ease off minnows, especially as they’re going to be overwhelmed with data once the FATCA data starts coming through in 2015. On the other hand, it suggests that they mean business about enforcing CBT and could thus be much harsher later on towards those who didn’t willingly enter the streamlined.
I still suspect though that they are acknowledging more nuance though and will probably save most of their auditing and fine assessment for the harsher revised OVDP. I’m just so relieved that I went ahead and renounced last year instead of waiting for all my statutes of limitation to close for my QD. If nothing else, the numbers renouncing will surge and the waiting times for both appointments and CLNs.
@monalisa
Like I said- I know a lot of people who have renounced without doing their taxes. They figure they`ll just hand the banks their CLN and be done with it. I have no idea what will become of them.
@Polly, indeed. Especially if their banks subsequently threaten them with closure or even freezing their accounts if they don’t show certified copies of several years’ tax returns, FBARs, 8854, etc. What particularly bugs me is how the IRS never send written confirmation that officially released from US-personhood for tax purposes….I suppose the problem is that they simply can’t because there will inevitably be cases of fraud that would re-open closed statutes of limitation, plus the fact that a former citizen/greencard holder might spend too many days in the US and thus make themselves US persons once again!!
As I see it, there can thus never be absolute certainty. This is why I feel it’s tremendously dangerous to be outspokenly critical of the USG, especially in the worsening climate. I doubt if they’ll go after the bulk of former citizens though could see them making examples against those they deem enemies of the state. Sorry if that sounds grim, but this is how I see it; I doubt if I’ll ever cross the border again after my parents have passed on…
@arctic raven
I also know someone who is in a similar situation as your friend. I will be curious as to what she decides is the best path forward. This is just so very complicated.
“This is where I make the following disclaimer: taxpayers must tread very carefully. To the extent that your non-willful certification turns out to be a bad judgment call, there are serious consequences. Indeed, if the IRS challenges your certification, all that you have succeeded in doing is exacerbating the very problem that you sought to solve by certifying non-willfulness.”
Read more:
http://taxconnections.com/taxblog/overcoming-the-pitfalls-of-certifying-non-willfulness-when-applying-to-the-streamlined-compliance-program/