cross posted from citizenship solutions
In an earlier post I explained why the Canada Revenue Agency assisted the IRS in collecting a $133,000 U.S. dollar penalty on a Canadian resident. The bottom line was that he was presumably NOT a Canadian citizen and therefore did NOT have the benefits of the tax treaty. This post is to explain where the penalty came from in the first place.
Will you walk into my parlour?’ – #Americansabroad and IRS “amnesty” offers in the 2009 #OVDP
It has been widely reported that a U.S. citizen residing in Toronto, Canada since 1971, paid a $133,000 U.S. dollar penalty for failing to file IRS forms disclosing that he was running a business through a Canadian corporation.
How did this fly get caught in the spider’s web?
The Spider and the Fly is a poem by Mary Howitt (1799–1888), published in 1829. The first line of the poem is “‘Will you walk into my parlour?’ said the Spider to the Fly.” The story tells of a cunning Spider who ensnares a naïve Fly through the use of seduction and flattery.
The poem is a cautionary tale against those who use flattery and charm to disguise their true evil intentions.
The Spider and the Fly: Some things never change … https://t.co/GvSvoO7sO5 pic.twitter.com/fZC8pPZGuL
— Citizenship Lawyer (@ExpatriationLaw) August 13, 2017
More here
Very confused! I had been told that the Stream Line program was for Individuals. Just individuals. If an individual had a business, then they were to enter OVDP. Can anyone comment? I know of several people who would go into the Streamline program if it isn’t just for individuals.
@Ann#1
I don’t see how an individual who owns a foreign corporation would be denied entry into Streamlined. We weren’t.
Bubbles,
Did you come in under the first offering of Streamlined? Perhaps they have changed the criteria….
https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures
Page Last Reviewed or Updated: 22-Feb-2017
I am now curious to find the original Sept 1 2012 Streamlined requirements and the IRS page is gone. Remember the 20 Questions and the concerns one could apply, not qualify and then have “outed” oneself to the IRS? And how it was criticized? I know there were other posts about it but particularly remember Moodys caution concerning the program. This suggests perhaps it was not clear at all whether owning a foreign corporation would disqualify or not. See
here
What really bothers me is that Dewees’ lawyer put him in OVDP in the first place. Just because “everyone was doing that” does not make it okay. And claiming that one could not make a “quiet disclosure” doesn’t hold water either.
There was not then (nor now as far as I know) any law that says that one MUST use one of the IRS programs. The law says one has to file.
Streamlined did not exist when I filed and fortunately, the OVDI program was closed. I did not use a program and had no problems. The IRS Fact Sheet is still up on the site and presumably, still applies since it was IRS policy all along. It allows for reasonable cause, even for FBAR. There is no reason to be scared silly of penalties because of filing outside the IRS “programs.” In fact, after looking at Prof. Dewees’ situation, I would think one would seriously question entering anything at all.
IRS Fact Sheet 2011-13
@Patricis, I agree with you, as you’ve already known for years. It was as though my accountant opened up wounds that would leave me permanently scarred. Everything was going to be so complicated and expensive to comply with, so I also renounced.
It was traumatic and broke my heart but it has been a huge relief.
Flasback to 2011. we had taken most of the steps to enter OVDI part 2. hours of work and weeks of anxiety. The deadline was extended because of hurricane Irene. We couldn’t sleep. We were lucky enough to be able to talk to Mark Mathews gratis. in the end we decided no. Good decision.
@DoD, I can relate to all the sleepless nights and terror I also went through…all the angst about not knowing who to trust, etc. Terrified I’d be railroaded into OVDI because of PFIC problems and FBAR…thankfully found somebody who put me into what was essentially one of the very first Steamlined. It was a ‘loud’ quiet disclosure.
Thankfully no major problems with the IRS apart from a bit of ping pong about the tax bills being paid…wound up owing just over $11,000 which was painful but at least didn’t wipe me out…OVDI would have bankrupted me.
I don’t know what the issue is here. What does an individual reporting controlling interest in a foreign corporation have to do with corporations being allowed to enter OVDI?
“Question 6: Since January 1, 2006, did you have a financial interest in any entities located outside your country of residence?”
Yes.
“If yes, do these entities control U.S. investments?”
Yes.
“If yes, list the countries where the entities were/are located.”
1. The world’s biggest tax haven.
2. A country adjacent to the world’s biggest tax haven, where crossing the street used to be legal.
“it is unclear how to answer this question if the taxpayer owns a Canadian company that has foreign subsidiaries.”
It seems perfectly clear to me. Even though I don’t own TD, I still have a chequing account there, and TD controls TD. (I also have a checking account, at another bank that I don’t own, and that bank controls investments in its own country the tax haven.)
“so I also renounced.
It was traumatic and broke my heart but it has been a huge relief.”
Hear, hear.
Just for the record a “quiet disclosure” is not merely filing outside of an IRS program. That is following the law.
A “quiet disclosure” is filing an amended (updated) return with information that was previously omitted. The IRS dislikes this because they are unlikely to catch it and miss out on penalties. Thus their emphasis on the programs. I believe it is fair to say that many people were confused about it thinking it meant filing for the first time after finding out they were supposed to. Add the never-ending threat of penalties and voila, you got people entering the programs. I also believe it is fair to say the compliance community, in general, was happy to let this confusion go on.
I remember reading comments from one compliance guy on some blog here in Vancouver back in 2011 saying not to rush in until he realized he was going to miss the goldrush and quickly changed his tune.
@Bubblebustin, re compliancers, US extraterritorial tax compliance, OVD/I/P and the gold rush;
“..saying not to rush in until he realized he was going to miss the goldrush and quickly changed his tune.”
The OVDI and compliance gold rush was followed by the related offshoot; the US extraterritorial Tax compliance and Renunciation industry gold rush – ex. advertisements of travelling road shows of ‘free’ seminars selling offshoot services – such as having a lawyer from a US tax firm accompany people to attend their renunciation/relinquishment appointments at the embassy/consulate (which is not allowed, at least in Canada as of the date of these posts ex. see “While you may choose to seek legal advice in preparing your forms, attorneys are not permitted to accompany an applicant to the Consulate” http://www.citizenshipsolutions.ca/2016/02/17/new-instructions-to-book-canada-appointments-to-relinquish-or-renounce-us-citizenship/ and http://isaacbrocksociety.ca/renunciation/comment-page-251/#comment-7571686 ), and and continuing to emphasize the series of so far failed and impotent attempts by Reed and Schumer to punish people (for discussion of why Reed/Schumer should not be used to scare people who are considering renunciation/relinquishment, see ex. http://citizenshiptaxation.ca/the-reed-amendment/ ).
I don’t fault those offering ethical, competent, thoughtful and informed assistance and counselling to people considering or moving towards achieving successful US citizenship renunciation/relinquishment – which should include exploring alternatives or different paths to the goal of being free of the US extraterritorially imposed burdens – and first robustly establishing whether the person is ACTUALLY a US citizen.
I do however condemn cynical commercial changes in position re assisting with renunciations, and misleading marketing which appears to me to be designed to use fear and anxiety in order to sell very expensive (and some possibly unnecessary services).
How do we know that this is now an industry? Ex. I recently read a claim to a specific market share of worldwide US renunciations; “…. represents approximately 9% of all worldwide renouncers annually ….”. (Note, no source or method cited to support that statistic ).
I am wondering how the IRS can bind people who sought to transition out of the OVDI/Ps of 2009 and afterwards if their FAQs and guidance was not published in the IRB and taxpayer’s can’t rely on them;
As per ( thanks Tricia for posting that link elsewhere on IBS http://isaacbrocksociety.ca/media-and-blog-articles-open-for-comments-part-4-of-4/comment-page-43/#comment-7964788 );
“…….Prior to the OVDP settlement procedures which commenced in 2009, the IRS had published its settlement programs in the IRB after incorporating comments from stakeholders and obtaining approval from the Treasury Department. With the first OVDP in 2009, however, the IRS played a different game and issued an internal memorandum and a series of FAQs to promulgate the OVDP terms. These were not vetted by internal or external stakeholders nor were they approved by the Treasury Department. All subsequent OVDPs have been governed by FAQs posted to the IRS website, rather than published in the IRB. According to the National Taxpayer Advocate, Nina Olsen, the OVDP FAQs were “issued in such haste and so poorly drafted” that the IRS had to clarify them repeatedly. On account of the various reiterations of the FAQs, similarly-situated taxpayers were treated not only inconsistently, but unfairly…..”
https://www.angloinfo.com/blogs/global/us-tax/legal-weight-of-irs-pubs-info-faqs-zilch/
Worth reading the whole article at that link.
And how is the treatment of Dewees – a Canadian resident with legal local accounts, and legal local earnings consistent with this much later June 2014 statement by Koskinen;
“…On June 3, 2014, in remarks at the OECD International Tax Conference (available here), IRS Commissioner John A. Koskinen revealed that the IRS was considering modifications to the terms of the current OVDP in order to make them more fair and equitable. In particular, Commissioner Koskinen stated as follows:
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.”….
https://www.lexology.com/library/detail.aspx?g=fc3a0e30-e578-46e7-aad2-76eb6b2a5538
How could Koskinen acknowledge after the fact “…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….” and still impose the penalty they imposed in this case, and pursue it via the CRA?
And as for whether the CRA seized a refund large enough to cover the IRS penalty imposed, on behalf of the US, or whether it took the money from an existing bank account, I don’t know the answer, but note this re the CRA seizing or freezing bank account money;
https://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/the-story-of-the-cra-the-bank-and-the-lost-1234921/article32461926/
http://globalnews.ca/news/1097684/woman-whose-bank-account-was-frozen-gets-5k-refund/ http://globalnews.ca/news/1023012/toronto-womans-account-frozen-over-back-taxes-just-before-christmas/
Ann #1 re your question: “Very confused! I had been told that the Stream Line program was for Individuals. Just individuals. If an individual had a business, then they were to enter OVDP. Can anyone comment? I know of several people who would go into the Streamline program if it isn’t just for individuals”
My response – First — this is not legal advice of any kind and comes w. the usual disclaimers — you need to find a tax professional to guide you with your particular facts & I can certainly do so if formally retained. Now, to answer your question — a US person owning a business (say, a foreign corporation or member of a foreign partnership) can certainly join Streamlined. The litmus test is that his tax noncompliance was nonwillful and he can certify this with good facts under penalty of perjury. When entities are involved, the tax ramifications are typically on the US person having an interest in the entity (e.g., he is a shareholder); if there is no immediate tax impact to him there will most likely be information returns that should have been filed by the individual regarding that ownership interest (e.g., Form 5471, 8621, 8938). Penalties apply for not filing these forms and Streamlined is one method of alleviating the penalties.
My US tax blog covers a lot of this…..
https://www.angloinfo.com/blogs/global/us-tax/
@badger
I think the article is exceptionally important. People have to continue, as Brock always has, to force these issues out in the open. Right now there is something “off” on Virginia’s blog and comments aren’t going through but maybe some thoughts could be posted here. This was mine; still not up.
@Patricia Moon Thank you for your comment regarding my blog post https://www.angloinfo.com/blogs/global/us-tax/legal-weight-of-irs-pubs-info-faqs-zilch/ . At the moment, the blog is having a technical problem with comments. Once this is sorted out, we will let you know so you can post your comment (Or I can post it for you). I think your idea to check out IRS information in the IRB before acting on it is a good one. At a minimum, Brock can at least post whether the IRS information in question is in the IRB and remind readers of the risks when it is not! I am certain that a significant number of tax professionals (let alone lay persons) are not really aware of this. What this means of course, is that the professionals are not fully advising their clients of the risks.
@ Virginia Thanks for the clarifying! I wasn’t asking for myself, but for individuals I know. I renounced in 2015. One of my friend’s husband was part of a group who bought an old mall. He made her a shareholder of the numbered company who bought and leased an old mall to merchants. She is born in Ohio. Loblaws bought the mall from the numbered company. Before this happened, she had been a stay ay home mom. Later when her children were grown, she worked (3) days a week in a grocery store. Her tax situation was very simple till up until the purchase of the mall.
@Ann#1 Responding to:
It’s important to remember that Streamlined has evolved. When it first appeared in 2012, the IRS specifically said that it was only for people of “low compliance risk”. There was some suggestion that if a person had an entity (including a corporation) that they could not of “low compliance risk”.
See the following post from 2012:
http://isaacbrocksociety.ca/2012/09/01/new-filing-compliance-procedures-for-non-resident-u-s-taxpayers-effective-september-1-2012-a-preliminary-analysis/
@Ann#1 your friend should get some appropriate advice and learn as much as possible so she can make an informed decision. For example did her husband name her on the shares simply as a nominee rather than truly making a gift of the shares to her? Where did the sales proceeds go when the mall was sold? (Don’t answer these Q’s on the site — it’s not a good idea). She needs to explore all of these issues w a tax professional who has a solid understanding of Streamlined and the kinds of cases that “fit” into that procedure.
USCitizenAbroad is absolutely correct – the 2012 Streamlined is now history. Its parameters were too narrowly prepared; it has been fully replaced by the 2014 Streamlined initiative. I’ve got a number of posts on Streamlined in this category on my blog https://www.angloinfo.com/blogs/global/us-tax/category/offshore-voluntary-disclosure/
@Virginia La Torre Jeker
Thank you! I think this post is so important I put excerpts up at citizenshiptaxation.ca as well as on all our FB sites.
I am presuming the IRB is not conveniently located in one place but that one must look to each of the five components separately?
@Patricia Moon IRB is published by the IRS weekly…. yes, weekly. You can access it here for the weekly postings https://apps.irs.gov/app/picklist/list/internalRevenueBulletins.html or here https://www.irs.gov/irb/
Happy Reading 🙁
@Patricia Moon Forgive me – I meant to thank you for posting excerpts of my blog. Also, you can subscribe to IRS e-news and if you look on the left corner of the news IRS sends you there is a menu containing a link to the IRB. That might remind you to look for it weekly. To subscribe please go to the e-News Subscriptions page on the IRS Web site. Subscribe also to IRS Guidewire here https://www.irs.gov/uac/subscribe-to-irs-guidewire
“a US person owning a business (say, a foreign corporation or member of a foreign partnership) can certainly join Streamlined. The litmus test is that his tax noncompliance was nonwillful”
That sounds sensible to me.
“and he can certify this with good facts under penalty of perjury.”
The IRS penalizes good facts. He needs to commit perjury under penalty of perjury. The IRS needs it to be processable not honest. 26 USC sections 7206(1) and 7207 punish wilful perjury but say nothing about coerced perjury, and the IRS provides the coercion. When the IRS’s coercion isn’t enough, courts add more.
“I am appalled at the fact that FAQ could be changed with no repercussions for the IRS.”
It doesn’t matter if the IRS alters the FAQ or not. The IRS doesn’t have to obey court orders, statutes, or regulations, so who would ever expect it to obey a FAQ?
“Did Congress suddenly indicate that failure to file a 1040 when no tax was owing was a criminal offence?”
Exemption from filing a return depends on the amount of INCOME being below some level. The amount of TAX is irrelevant, even when the tax is zero.
We’re here because the US enforces its law extraterritorially with help from governments of Canada and other countries, not because Congress passed a law suddenly or not.