This post was prompted by an article written by a Los Angeles tax law firm.
The background is that there are about nine million or so people living outside the United States who are deemed by the United States to be U.S persons. Most of these persons are IRS non-compliant. Some of these persons believe that it is illogical for them to comply with the IRS.
The article points out (correctly) that many of these IRS non-compliant persons, as they age, will develop in old age some disabling cognitive impairment, and therefore will need another person (e.g., conservator, tax attorney) to handle their financial affairs.
The individual having enduring/continuing power of attorney over the person’s finances could be a spouse, relative, close friend, attorney, or professional company. It is likely that this person will instruct a tax lawyer or accountant to handle the tax filings.
What happens when the tax attorney/Conservator in Canada, UK, Australia, whatever, discovers that their cognitively impaired client has a U.S. taint but is IRS non-compliant?
What is the obligation of the tax attorney to the client — or to the U.S. IRS? Will the attorney be guided primarily by fear of personal liability? What is your guess? Will the attorney pursue a Streamlined or perhaps an OVDP “defence” on your behalf? How will the assessment of your state of mind prior to cognitive impairment re: “willfulness” be conducted? What happens if no evidence can be found “proving” non-willfulness? How much cost will all this entail to the cognitively impaired who must live off their retirement savings in an assisted living or nursing home? Can the tax attorney ethically justify bankrupting the savings of a cognitively impaired client to satisfy a tax law imposed by a foreign country?
Given that there is potential liability (in the eyes of the United States) for BOTH the person having power of attorney over the cognitively impaired person’s finances AND the person doing the tax filings, what is the “REALISTIC” solution to get out of this mess? Readers have suggested:
— Renounce while cognitively intact if you can somehow afford the cost “and just be done with the problem” [USCitizenAbroad]? Free yourself now.
— Instruct the person having enduring power of attorney NOT to pay taxes to a foreign government? [This may be problematic. The Conservator may in future worry about personal liability re: U.S. and it is likely that some (many? most?) tax attorneys/accountants will refuse to participate in the tax filings if they have knowledge that the individual is an IRS non-compliant US person].
— Attach a self-generated CLN to the POA instructions (Rebecca’s interesting suggestion)?
— Every individual in the world takes out an insurance policy modeled on Obamacare which would insure them and their estate against the possibility of their being deemed to be a U.S. citizen [USCitizenAbroad]; and/or
— No person who is suspected of possible “USness” will be entitled to have an executor [or Conservator][USCitizenAbroad].
The only way out of this mess (providing the US ever recognizes there’s a mess) is a complete amnesty with NO penalties – and a switch to RBT.
In wills that I have drafted in the past I always included a clause instructing the executor not to pay foreign (I.e. any other country’s besides the country of the testator) taxes unless in his sole discretion it is in the interest of the estate to do so. I haven’t had occasion to drafts will in some years and none since FATCA but that’s what I included. If the testator has no US person heirs there seems no need to interpret “after payment of debts and taxes” etc to include US tax debts.
The article is disgusting. There’s no detail a U.S. tax lawyer won’t go to in order to apply U.S. law to those living outside the country. More fear-mongering, big-time.
It seems “understood” that the applicability of medical records long after will result in putting the estate in one of the “programs” where once again, it might be wiser to simply file the returns, if that is the choice that is made.
From the article:
“The ability to use the Streamline Procedures or OVDP assumes that the taxpayer or his/her Conservator, Executor or Trustee, has not yet been contacted by the Department of Justice or the IRS. If the taxpayer has been contacted, or has received a FATCA letter from the foreign financial institution, then it may already be too late to come forward. If it is too late to come forward, then the defense of mental impairment must be raised in the IRS administrative proceeding or in the criminal investigative phase with the Department of Justice or U.S. Attorney.”
This is what I tried to emphasize in my letter to our Finance Minister. A notice from the IRS may be the first time when many Canadian citizens and residents learn about their US tax filing obligations. Once a Canadian resident account holder gets a letter from the IRS, it’s apparently too late to enter Streamlined or OVDI, subjecting them to unmitigated tax and FBAR penalties! It is not benign “information gathering”, Canada, when the information creates an entrapment one wouldn’t otherwise be exposed to. That part about not being able to enter an amnesty program after being notified by the bank? Rubbish!
Yesterday I thought about posting a fake client message on taxprotalk.com. Say describe a Tina where they will essentially lose the money they need for retirement. If you stand to lose everything based just on the tax let alone penalties I can’t see how just ignoring it and hoping they never find you isn’t the option. Of course tax pros aren’t going to say that.
My basic beef with tax pros is that unless you are going to pay them a lot of money (because you have a lot of money) then they are always going to do a substandard job. They can’t spend much time optimizing your taxes because it’s not worth their time and you would pay more than you would save. It’s just a fact of life. You have to do it yourself which is crazy.
What came to mind before reading Andy’s suggestion, which I quite like, is that, in the face of such unjust laws and the legality, morality, and ethics thereof, one who believes in the merit of civil disobedience could be tempted to attach to one’s will, while one is still compos mentis, a self-generated CLN with the advice to any “foreign” lawyers (tax and otherwise), executors, and heirs that any U.S. taint was dealt with long ago.
The article written by this lawyer ranks as one of the all time stupidest articles I have ever seen. He confuses issue after issue after issue.
The two primary areas of confusion are in relation to:
(1) The issue of willfulness; and
(2) The issue of burden of proof
First – willfulness: :
The test for willfulness is NOT (for all practical purposes) the same for a willful FBAR penalty (WHERE WILLFULNESS MUST BE PROVEN BY THE GOVERNMENT) and the test for “non-willfulness” for purposes of using the streamlined program.
FBAR Penalty: He correctly points out the criminal standard for willfulness (which is what an FBAR prosecution is about) requires proving the “intentional disregard of a known legal duty”.
Streamlined: The test for proving non-willfulness for “Streamlined” is different. One is demonstrating non-willfulness NOT in the sense of the absence of criminal “willfulness”, but in the sense of meeting the definition of non-willfulness according to the Streamlined test which is:
Second – burden of proof
In a willful FBAR prosecution the government bears the burden of proof NOT the taxpayer. In the case of meeting the standard of “non-willfulness” to enter streamlined the taxpayer bears the burden of proof.
What is unclear is the standard of proof that is required in each case.
Finally, leaving aside the lawyerly BS, it’s pretty obvious that as people age they can’t understand the requirements of the forms. It also makes a prosecution for the willful FBAR penalty much harder to make out.
But, the threats and posts from the “LA Law Blog” are a good enough reason (INMO) to renounce U.S. citizenship and just be done with the problem.
What problem? Obviously these idiot lawyers. Not only is this an attempt at scaremongering in the extreme, but his analysis is not even correct – demonstrating that the primary problem is not the USG – it’s the lawyers!
Maybe time for a reread of:
and if you want to see the IRS interpretation of FBAR penalties:
A second issue raised by the “LA Law Blog” post is the issue of a lawyer’s ethical obligations to the client (assuming the client is alive).
The lawyer has a duty to the client. Assuming this is happening in Canada and the consultation is with a Canadian lawyer, the lawyer should make clear that there is no Canadian law that requires compliance with foreign laws (as far as I know). That doesn’t mean that they don’t have to comply according to U.S. law (but that is a different issue).
What would a U.S. lawyer say? Is a U.S. lawyer obligated to tell the person that he must obey U.S. laws?
This whole situation is horrible and raises the question of conflicting rules of professional conduct.
The Conscience Of A Lawyer And the FBAR Fundraiser:
@USCitizenAbroad re: “if you can use the word lawyer and ethics in the same sentence”…There are many ethical lawyers. I believe one of them is one of our own plaintiffs (Ginny) and another is John Richardson who has tirelessly supported many of us and our cause. Don’t let the unethical who stand out taint those who are honourable indeed.
Point taken. Perhaps the moderators could change the following paragraph in the above comment:
The lawyer has a duty to the client.
Canadian lawyer – Assuming this is happening in Canada and the consultation is with a Canadian lawyer, the lawyer should make clear that there is no Canadian law that requires compliance with foreign laws (as far as I know). That doesn’t mean that they don’t have to comply according to U.S. law (but that is a different issue).
U.S. lawyer – What would a U.S. lawyer say? Is a U.S. lawyer obligated to tell the person that he must obey U.S. laws?
This whole situation is horrible and raises the question of possible conflicting rules of professional conduct.
Let me a bit more precise in what I suggesting here.
Lawyers are bound by certain rules of professional conduct. This is not the same thing as ethics. Prescribed rules of professional conduct are rules that must be followed regardless of the personal views of the lawyer.
The dilemma that I see in this situation is illustrated by the following fact situation with the following fact pattern:
A Canadian citizen in Canada gets a FATCA letter. The Canadian was born in the United States. That Canadian consults a lawyer about how to respond to the letter. Now the FATCA letter is received pursuant to Canadian law. The letter will necessarily generate questions about U.S. tax compliance.
Canadian lawyer in Canada
The FATCA letter has been sent pursuant to Canadian law. I suspect that the Canadian lawyer could NOT tell the person to NOT obey the Canadian law (not sure if this is the same as saying he must obey Canadian law).
But, this leads to the larger problem of U.S. tax compliance. There is no Canadian law that says that Canadian residents have to obey U.S. tax laws. In fact, it would be the duty of the lawyer to make that point clear. (In fact the Canada/U.S. Tax Treaty specifically says that the Canada Revenue Agency will NOT assist the U.S. with tax enforcement on somebody who was a Canadian citizen at the time the tax debt arose.) Obviously the U.S. law says that the person must pay U.S. tax.
Okay, now let’s shift the scenario and say that the Canadian goes to a U.S. lawyer who is NOT a Canadian lawyer. What is the scenario here? Does the U.S. lawyer have an obligation to tell the person that there is NO Canadian law that requires compliance with U.S. tax laws?
What would be the advice of the U.S. lawyer?
U.S. lawyer who practices before the IRS – Circular 230
Is it possible for a lawyer who practices before the IRS to tell somebody that there is no Canadian law that requires him to pay U.S. taxes?
Lawyers who are BOTH U.S. and Canadian lawyers
The question (it seems to me) is whether the Professional Codes of Responsibility can lead to conflicting results.
I really don’t know the answer to these questions. But, it does seem to me that problems can arise in these situations.
What is the answer to the question posed by Stephen Kish:
I fear that the answer may depend on what rules of professional conduct the adviser is bound by. But, I am simply speculating …
Thanks. I think that’s better. I agree. This is a very uncertain and ridiculous state of affairs.
I had this discussion in a meeting with my accountant (who is my power of attorney and executor or my will) and the lawyer who did my will.
In that meeting, I gave them written directions that under no circumstances should they file anything with the IRS. I also gave them several documents–including a copy of my Canadian citizenship certificate and the copy of my oath witnessed by a Canadian citizenship official in 1973 renouncing American citizenship (I am so glad I have that!).
They both agreed with me that I have no obligation to comply with laws of a foreign government. My sense was they would have agreed with me even if I had not had those documents.
My accountant was aware of my U.S. place of birth because his late wife was a friend.
There are many ethical lawyers. I believe one of them is one of our own plaintiffs (Ginny) and another is John Richardson who has tirelessly supported many of us and our cause. Don’t let the unethical who stand out taint those who are honourable indeed.
Thank you so much for this comment. I confess I actually gasped a little with the over generalized description. It is with no sense of personal pride that I consider myself to be an ethical lawyer. It’s just who I am and how I have always conducted myself.
I had a flash back the other day, as a result of this topic. Early in my career I was assigned a task to interview and prepare a will by one of the senior partners for his former client who resided in some sort of facility. It wasn’t a nursing home, nor a retirement home. This was years ago and I forget what they called the place. I called it awful. I interviewed the man in the way that one does. The terms he wanted incorporated in his will were so bizarre and caused me great misgivings. I spoke briefly to his caregivers to try to ascertain his mental health status.
At the end of the day, I reported to senior partner that I could not prepare this man’s will as I did not feel confident that he was fully competent. Trust me there was a row about my decision but I could not budge.
It would have been simple to dictate his will and have my assistant prepare it and then have it executed. But I value my sleep, my oath and could not do it. That’s just a minor example of issues lawyers grapple with every day.
Again, thank you for your comments. And I certainly agree with you about the energetic John who never stops advocating our cause. He is a great support and inspiration to me.
‘“if you can use the word lawyer and ethics in the same sentence”…There are many ethical lawyers.’
I think the word “many” is an exaggeration. There are some but they are rare.
One lawyer posted publicly an ironic statement something like “We’re not all bad, it’s only 99% who ruin it for the rest of us.”
But sure it’s possible to learn both law and ethics. To travel to both classrooms, the student has a longer commute than mine (1 hour 50 minutes twice a day) but sure it’s possible. Obviously a few rare people accomplish it.
And then think of the risks piled upon them. The IRS and courts penalized me for telling the truth on tax returns but luckily I’m not a lawyer. A lawyer could be disbarred for speaking honestly.
I would imagine Mr. Millar’s fees are pretty high, given his 40 years of experience and designation as a “Super Lawyer.”
I would expect someone to be competent enough to make the distinction between the willfulness in the 2 different situations as USCA describes. This fellow has quite a successful-sounding career, qualifications and so on. So what’s the excuse?It would seem even this man does not truly understand all that is involved.
Voluntary Disclosure: Avoiding Civil And Criminal Liability
I’ve heard professionals claim that the Streamlined program may not be around forever but this is the very first time I have ever heard anyone claim the OVDP program may have a limited life.
@US Citizen Abroad
Perhaps this is where we have a nuanced difference of opinion. IMO, The Tax Treaty is such a document. It represents Canadian Law. It does not specifically say that Canadians must pay US tax. However, it says where US tax may apply and not apply and where Canadian tax may apply and not apply all with an “objective” of mitigating double taxation.
It says where US tax may not apply in cases where Canadian tax applies such as for a Canadian resident.
The tax treaty covers all maters tax between the two countries. IMO it is by omission of exemption from US taxation that implies consent by Canada under Canadian law that yes indeed US tax may apply to them (through tax treaty gaps).
A nice provision – as you note it says Canada will not help the US collect tax from Canadian citizens (yet IMO, the FATCA IGA constitutes such help). Such provision in the tax treaty does not represent exemption from US tax.
I think that if I follow your reasoning that it may be said that the tax treaty is ok, it is not broke, it does not need fixing (or it is all a matter for the US).
The argument that the tax treaty is broke is a very good one as it refutes claims by Canadian officials (plus officials of the governments of the world) that tax treaty gaps are a matter for the US government in the first instance. No Canadian government, not so easy for you, your tax treaty is broke, it represents malpractice in that it incorporates greater respect for US tax laws on Canadian soil then it does for Canadian citizenship and sovereignty, while protection of Canadians should be the priority.
I borrowed this term ‘tax treaty gaps’ from Allison Christians. The implication of the language is that what is in place is insufficient and needs remedy.
I have now read the referenced Millarlaw article and most of the comments and I have some comments of my own to make. (It could be that others have made one or more of these points but I don’t have time to read through everything.)
1. Nowhere does Mr. Millar suggest that a tax attorney would be appointed conservator for a metally-failing individual. Indeed to do so might create an ethical conflict. By and large a conservator (or “committee” as they, or “he” because often a committee of one, used to be called) will be a close relative or, these days, an elder-law attorney.
2. Unfortunately, in real life the appointee is often a crony of the judge, and this despite any trusts, will, or arrangement of entities (family limited partnership and the like) set up precisely in anticipation of the situation. I refer to the case of the late Mollie Orshansky, inventor as it happens of the Social Security Administration poverty index: https://encrypted.google.com/search?ie=UTF-8&q=mollie+orshansky+site%3Awashingtonpost.com (Ultimately Orshansky’s family rescued her from the Wahington DC hospital where she was confined and took her to New York where she had long before made arrangements, including buying an apartment next to that of her relatives. It became a conflict-of-laws case and a jurisdictional struggle between to court of protection systems, one of them arguably corrupt.)
3. David Treitel has pointed to ICAEW Code of Ethics http://www.icaew.com/en/technical/ethics/icaew-code-of-ethics/icaew-code-of-ethics and, as I understand his meaning (from him and one of his potential clients), claimed that any UK professional is charged in UK law and practice with seeing to it that any client is compliant with foreign as well as UK tax obligations. How that obligation is impacted by a client’s denial of US person status (as when s/he claims either not to be a US citizen by reason of parental nonresidence/non-presence in the USA prior to the client’s birth or resiliation of US citizenship without a CLN, is open to question.
4. Many US tax lawyers will lack the expertise or have the funds available from the client or the conservator to arrange an interpretation of foreign property law, pension law, trust law, company law and tax law that would be needed if, say, the name of the client appeared in the so-called Panama Papers. (Many of clients of the Mossack Fonseca firm will have been totally compliant, but that’s another story.)
5. I was peripherally involved (usually charged with answering a single coflict-of-laws question) in a few decedents’ estate and/or foreign succession (the civil-law equivalent) cases where an American absconder or tax exile had US resident heirs. In those pre FATCA days, potential PFIC issues were also ignored and relatively cheap (compared to what I perceive happening today) solutions were worked out, perhaps, between a white-shoe law firm, a Big-4 accounting firm and the heirs. An alternative would have been disclaimer, a variant of Prof. Adam J. Hirsch’s work on “Disclaimer and the Insolvent Heir” http://uniset.ca/other/art/74CornLRev587.html (The IRS has powerful tools to attack conveyances in fraud of the IRS as creditor, including avoiding certain time bars and the principle of “transferee liability”.
6. The concept of the Lord Mansfield dictum (non-enforcement of other countries’ tax laws) still exists (United States v. Harden https://scc-csc.lexum.com/scc-csc/scc-csc/en/item/7322/index.do ) in the absence of tax-treaty abrogation, and the principle is even stronger with respect to foreign fines and penalties. Bruce Zagaris has written on extradition law and tax offenses http://digitalcommons.lmu.edu/cgi/viewcontent.cgi?article=1553&context=ilr Nationality and, arguably (pending addressing the issue by the Court of Ju stice of the European Communities and perhaps the European Court of Human Rights) nationality of an EU/EEA/Swiss member state by (non-)taxpayer and heirs is relevant too.
Just some things to be thinking about.
You raise a very interesting point/question in your above comment:
It seems to me that :
1. By agreeing to the Savings Clause Canada has :
– acknowledged that the Treaty cannot be interpreted in a way to allow a U.S. citizen to escape U.S. taxation because of the Treaty
– probably agreed to NOT pass a Canadian law saying that any attempt by the USA to impose taxation on Canadian residents who are also U.S. citizens is void
– in totality acknowledged the right of the U.S. to impose taxation on U.S. citizens in Canada as a general principle
– carved out certain exceptions (See. Article 29 of the Treaty)
This is a country to country agreement. It is an agreement that Canada as a sovereign nation has with the U.S. which is also a sovereign nation.
2. Canada has not agreed in the Treaty that Canadian residents are required to obey U.S. tax laws
There is no domestic Canadian law requiring Canadian residents – subject to laws of Canada – to obey U.S. tax laws. Obviously that does NOT mean that, from a U.S. perspective, that U.S. citizens in Canada are not subject to U.S. taxation.
I think it’s like:
Well, our Canadian Government certainly won’t force you to obey U.S. tax laws. No problem. Deal with your U.S. tax obligations any way you choose. Oh and by the way, it may be of some comfort for you to know that as long as you are a Canadian citizen, the Government of Canada won’t help the USA collect any taxes that the USA thinks you owe them.
Isn’t that what’s going on here?
You’re welcome. I think over-generalization like this is a huge problem of our time and is even at the base of our problem. It “supposedly” started out trying to capture wealthy U.S. Citizens hiding money overseas but has painted all of us as criminals and tax cheats unless we can prove otherwise and very few think there’s anything wrong with that.
The tax treaty doesn’t “prevent” double taxation, when it can’t even ‘cure’ it without intense lobbying from groups such as this:
Does anyone have any theories as to why “dual” citizens at birth are granted an exemption from the US exit tax? Why would a “tie-breaker” rule apply here and not with taxation in general?
The “dual citizen at birth” exemption from the Exit Tax is arbitrary, capricious and totally unfair.
Compare these two scenarios:
1. Person born in the USA as a US citizen only. Moves to Canada as a child. Becomes a Canadian citizen without relinquishing U.S. citizenship. Never works or lives a day in the U.S.
This person is subject to the Exit Tax
2. Person born in USA as a dual Canada/US citizen. Lives his whole life in the USA. Retires to Canada for the sole purpose of avoiding the Exit Tax. Lives in Canada for 10 years prior to renouncing. This person escapes the Exit Tax entirely.
The United States would regard this as completely just. Why? Because as we all know, the United States is a very just country, right?
I agree. It’s kind of like allowing only some types of accidentals to escape under the Obama proposal. Capricious and totally unfair – but saves some. Not at the expense of other individuals, but at the expense of justice for all.
I haven’t read the full report, but folks in the GAO wonder if $1.23 trillion in tax expenditures receive much if any agency oversight. May be an opportunity here to promote a regulatory change for RBT in lieu of the FEIE and tax credits.
With respect to your update where you write under possible solutions:
It’s not a question of whether “you can somehow afford the cost”. It’s a question of whether you can afford to NOT pay the cost.
I think the major issue is what an executor of a will would do. The executor is the one on the hook for any liabilities of the estate. As such, it’s in his/her interest to make sure that there’s no blowback after the estate is settled. If that means ensuring the deceased is up to date with his/her US tax filings, well why wouldn’t he/she – nothing is gained by not doing this (unless perhaps the executor is also a beneficiary), and there is the potential of loss of some kind should the US one day press the point (likelihood of this is left to the imagination).
And, FWIW, a family friend who is an accountant told me of a case where an executor put a deceased USC thru Streamlined. So, my guess is that any executor who is a professional of any kind (lawyer, accountant, etc) would do the same. And that’s even if the will has explicit instructions to do no such thing – Canada recognizes the right of the US to tax its citizens (although it won’t enforce (for now?)), and the US sure as hell recognizes it; so what lawyer,accountant,etc would put his/her neck on the line for zero gain? I imagine the executor who is a professional would view the pay-no-US-taxes provision the same way he/she would view a provision that said don’t pay off the line of credit from the “thieving, money sucking” Canadian bank – having no validity.