cross posted from citizenshipsolutions
As I write this post, my mind goes back to one of my very first posts about U.S. compliance issues. This post was called “What you should consider before contacting a lawyer“. Since that time I have written hundreds of post describing the problems faced by Americans abroad.
More recently …
In Dewees 1, I explained the importance of the Canada U.S. tax treaty and how it provides “some protection” to Canadian citizens from U.S. tax debts.
In Dewees 2, I explained some of the characteristics of the OVDP program and how Mr. Dewees got caught in it.
In Dewees 3 (this post), I am suggesting some possible lessons that can be learned from the story of Donald Dewees.
Ten thoughts on U.S. taxation, non-compliance, Americans Abroad and the U.S. taxation of Americans abroad
Thought 1 – Compliance problems vs tax problems – They are not the same thing
I assume that Mr. Dewees was one of the many Americans abroad who (in
2009) had not been filing U.S. taxes. This was and continues to be understandable. Why would anybody know about these rules? Why would anybody anticipate these rules? Why would Mr. Dewees – given that he was paying taxes in Canada – have any reason to believe that the U.S. tax and reporting requirements even existed?
It’s important to understand that Mr. Dewees did NOT have a “tax problem”. (After all he owed no U.S. taxes.) He had a “compliance”
problem. He was NOT in compliance with a set of laws that the United States was applying in an “extra-territorial manner” (without any particular notice) to the residents of other countries.
What the United States calls “citizenship-based taxation” is actually an attempt by the United States to impose U.S. taxation on the residents of other countries.
Since he did NOT have a “tax problem”, but rather had a “compliance problem”, one wonders whether it was wise to seek assistance from a “tax professional”. Remember that “tax professionals” are about filing tax forms. They may NOT be the right person to consult if you have NOT been filing taxes.
Thought 2 – The “nature of OVDP” – who was this program designed for?
It seems clear that when Mr. Dewees consulted the “tax professional” he was introduced to the 2009 OVDP (Offshore Voluntary Disclosure Program).
By its express terms OVDP was a program that was designed for people who had used offshore bank accounts and entities to “avoid or evade”
U.S. taxes.
Clearly Mr. Dewees was not and had not used any Canadian bank accounts or corporations to “avoid or evade” U.S. tax. Why then, did his adviser allow him to enter OVDP?
He entered OVDP in 2009. This was before any of the hysteria about “quite disclosures” and that sort of thing.
In addition, given the speed that he entered OVDP, it seems likely that his entry into OVDP was prior to his U.S. tax returns having been completed and analyzed.
It is likely that Mr. Dewees entered OVDP without any indications that OVDP was an inappropriate way for him to enter U.S. tax compliance.
Why would an innocent person who didn’t know about the unreasonable U.S.
tax filing obligations enter a program designed for criminals? (There was at least one U.S. tax professional who suggested that people seek the required clearance from IRS CI (Criminal Investigations) BEFORE even analyzing the person’s specific situation.)
Thought 3 – OVDP was (and is) a “voluntary” program. Why would somebody enter OVDP?
Everybody understands that (subject to the coercive attempts of certain tax advisers to get people to enter the program) that entry into OVDP is voluntary. Therefore, one would enter OVDP if and only if one saw clear benefits. Given that entering OVDP subjects one to massive penalties, it’s difficult to see what the benefits to entering OVDP would be.
(Unless one is a wilful tax evader which Americans abroad simply are
not.)
Thought 4 – Those who sign up for OVDP are begging for penalties
What I can’t understand is: why those who entered OVDP thought they should not receive penalties. The whole point of the OVDP was to extract penalties from the taxpayer. By entering OVDP, one was “signing up” to pay penalties. Penalties could be avoided only by opting out of OVDP.
But, if one were to “opt out” of OVDP, then why would one enter OVDP in the first place? Is entering OVDP somehow clever?
Thought 5 – OVDP is not prescribed by law. It is/was a program designed by the IRS. Those who entered the program learned that they could not trust how the IRS administered the program.
More significantly, to enter OVDP is to enter a program that is NOT governed by law, but is governed by the whims of the IRS. Much has been written about the infamous “bait and switch” and the fact that the OVDP FAQs could not be relied upon by the taxpayers.
Much has been written about this by Nina Olsen and others.
Thought 6 – Why then did many (but not all) tax advisers promote the OVDP programs to their clients?
I don’t know. It’s as though they didn’t read the reasons for the program. They ignored the penalties that would be paid. Perhaps, it’s because tax advisers deal with tax issues and don’t think primarily about “compliance issues”. It would be interesting to hear their perspectives years later. It would be interesting for them to hear about the number of lives that were irreparably damaged by trying to “do the right thing”.
Thought 7 – Why certain people are more prone to entering OVDP than others
This is a fascinating question.
I have observed that those who are the most affected by their “Oh My God Moments” share one or more of the following characteristics:
They believe in compliance with the law. Certainly when it comes to U.S. tax compliance and FBAR those who have the most difficult time are those who believe they should obey the law. Those who believe that there is a correlation between law and morality. The simple truth is that those who attempted to fix their compliance problems early paid a significant price. Those who waited (say until the 2014
Streamlined) have paid no price. Those who tried the hardest to comply and who tried to comply earlier were treated brutally and unfairly.
They have some other difficulty going on in their lives.
Those who are dealing with some other life problem seem more affected by U.S. tax issues. For example, divorce, death and illness are major factors. I believe that it is very significant that Mr. Dewees was experiencing a serious life tragedy when he made the decision to enter OVDP. Absent that tragedy he might have thought more clearly.
They have an exaggerated “psychological need” for certainty. Okay, okay, okay. The only way to have certainty is to agree to the most “punitive resolution” to your situation. It makes no sense to commit suicide to avoid dying. The only thing that is certain is that you are a U.S. citizen and a member of the world’s premier “Tax, Form and Penalty Club”. Escape is possible only through death or relinquishment.
Remember also that for Americans abroad to enter OVDP may mean bankruptcy. All (or virtually all) of their assets are foreign and therefore subject to penalty.
Thought 8 – How can it ever be wrong to just obey the law?
This is the most fascinating question of all. The law requires Americans abroad to obey the Internal Revenue Code (file taxes) and obey the “Bank Secrecy Act” (file FBARs). Yet many tax advisors told their clients that it was wrong to obey the law. No, you must enter OVDP?
Why not just obey the law? Why not just file the taxes and FBAR? How can this ever be wrong?
Prior to the beginning of the “Revised Streamlined Program” in 2014, the ONLY way that one could avoid penalties was to simply “obey the law”!
Thought 9 – You are NOT solving your problems by coming into U.S. tax compliance – Once a U.S. taxpayer then ALWAYS a U.S.
taxpayer
By coming into U.S. tax compliance, Americans abroad are simply trading one problem for another problem. They are trading a “compliance problem”
(I didn’t know I should be filing U.S. taxes) for a “tax problem”. Once they entered the U.S. tax system they will have to stay in the U.S tax system. They will learn how compliance with U.S.tax laws makes it difficult for them to have a normal life in their country of residence. Don’t believe me? Just try it.
Thought 10 – “When it’s all said and done: All Roads Lead To Renunciation”
The last few weeks have been discouraging for Americans abroad.
The Dewees case confirms the brutality of the U.S. tax system. (There is NO excuse for what happened to Mr. Dewees.) They basically took a significant portion of his retirement assets for not filing a form that he didn’t even know existed. What country would do this to its citizens?
The dismissal of the Bopp lawsuit sends a strong strong message. The message is that the concept of “standing” is now being used to protect the U.S. Government from lawsuits.
It is no longer possible to live outside the United States as a “tax compliant” American. Americans abroad can retain their U.S. citizenship only if the USA amends its tax laws so that the United States no longer imposes taxation on those who are residents of other countries.
Such a change is NOT impossible. That said, we are down to the last few months of hope. It’s the season of tax reform. If change doesn’t happen now, it is unlikely to happen in your lifetimes.
“OVDP is not prescribed by law. It is/was a program designed by the IRS.”
The law permits the IRS to make programs like that. I’m not sure if the law permits the IRS to “bait and switch” in programs like that, but so what, because courts don’t make the IRS obey court orders or statutes either.
“Escape is possible only through death or relinquishment.”
Wrong about death:
https://scholar.google.co.jp/scholar?q=estate&btnG=&hl=en&as_sdt=4%2C192
Wrong about relinquishment:
me
“The Dewees case confirms the brutality of the U.S. tax system.”
Maybe not. The Dewees case confirms the brutality of how US courts treat honest people. We don’t know if the US tax system might have left him alone if he’d taken a different route.
Certainly agree with your well written article. Summary is well written also. Today I asked another dual citizen friend of mine that has residency now in upstate New York to accompany me to our Congresswoman;s office, and he will come with me to express our disdain for FATCA,also to urge congress for a motion for real tax reform. Will ask my friend to share his experience with his former bank in Switzerland, as he has felt the sting of harm from these IGA’s. Although FATCA has not affected me up to this point, it may soon become harmful to me as I am planning on returning to Montreal.
With today’s news, dismissal of the Bopp lawsuit including Sen Rand Paul, the government included him in the dismissal. That may turn out to be a good thing eventually if the Supreme Court will hear the case. Otherwise with the long standing dysfunctional congress, party politics, the only hope is for the Canadian Lawsuit or French to succeed. One domino falls, the others follow.
Finally, how could we organize the approximately 9 or so Million US Persons to take action? Instead of spending those few thousands every year on compliance forms and professionals (cpa & financial services) let’s own this problem and take control of it ourselves. Can we focus on a solution, a way to send a strong message to our government representatives that this FATCA thing will not do.
I believe it is possible.
Boycott. Encourage non-compliance as the best course of action for anyone without significant US ties. Yell it loudly from the rooftops so every accidental knows what to say and not say to their bank, and to stay as far away as possible from the IRS.
Thought 10 – “When it’s all said and done: All Roads Lead To Renunciation”
Best thought of the day. I would like to think that tax reform in the US is possible but somehow just can’t fathom it at this point. Hope to be mistaken here but somehow don’t think so.
Renunciation has allowed me to lead a more peaceful life and enjoy being a Canadian citizen. Sure it would have been great if Canadian government had stood up to US extraterritorial over reach. But the US is a rather large bully and with Trump in office the situation isn’t getting much better.
Had my OMG moment, set about gathering all the information I could gather, emailed with Patricia, then I took myself off to the mountains (Jasper) to hike. I refused to think about FATCA for those ten days. I came home and formulated a plan. I had lived almost my entire life as a Canadian, believed I was only a Canadian! I could have made a case for relinquishing, but decide to comply and renounce because of signing authority issues with my employment. I wanted to exit as quickly as possible and I did. My first trip to Calgary was February 2015 and by December 2015, I renounced. The minute I walked out of the Consulate, I headed to the James Joyce Pub for a drink to celebrate! I agree with Thought 10. Renunciation is the only way to slam that door shut.
Nononymous: I’m boycotting as we speak. I refuse to pay the US government a damned dime … for ANYTHING! Of course I have sacrificed many aspects of my freedom in order to follow this path but my situation does not allow me to choose any other, including official renunciation.
We have never been so close, but is it enough when the US has yet to exhaust all other options to doing the right thing?
The US can enforce US tax laws on banks because the banks are dependent on the US financial system.
The US does not have the power, and can’t risk trying, to enforce US tax laws on an individual who doesn’t live in the US and has no US income or assets.
So the US has not won this CBT battle, and in my opinion never will.
US citizenship law, on the other hand, is enforceable internationally. For many, it’s citizenship, not citizenship based taxation, that is the problem presented by FATCA.
“The US does not have the power, and can’t risk trying, to enforce US tax laws on an individual who doesn’t live in the US and has no US income or assets.”
The US still tries to enforce US tax law on my wife, who is an individual, who never lived in the US, who never had US income or assets, and never had US citizenship.
“Still trying to enforce” is not the same as enforcing. The attempt is outrageous, and can cause terrible damage, but if the attempt succeeded, that would be worse.
It’s very important for people who suddenly find themselves embroiled in this quagmire, to understand that the US does not have the power to enforce US tax law extraterritorially on an individual with no US income or assets. Fear that the US might somehow have that power causes people nightmares, and can lead them into disastrous paths such as seeking advice from an accountant or lawyer who reinforces their fear and frightens them into filing US tax returns, or even entering the OVDI as happened to Donald Dewees and has happened to others.
US tax advisors, and many US citizens within the US and beyond, live in a mental world in which it’s taken for granted that the US can do what it likes. It’s not true. That has to keep being said, to oneself and others.
“The US does not have the power, and can’t risk trying, to enforce US tax laws on an individual who doesn’t live in the US and has no US income or assets.”
Of course the US can issue repeated demands, but they can’t enforce collection, and they can’t risk suing in the US courts because of the questions about the constitutionality of FATCA, FBAR, and extraterritorial taxation itself.
A striking instance of the tendency of American tax professionals to see the whole world in American terms: the writer of the “Federal Tax Crimes” blog headlines his latest piece “HMRC Enlists Financial and Other Professionals to Warn UK Citizen Clients About Offshore Accounts.”
This sounds strange, to normal readers. Why “UK citizen clients?” What does citizenship have to do with taxation?
Answer: nothing. The article referred to only mentions taxpayers. The headline writer has transmuted “taxpayers” into “citizens” because he assumes the two words are synonymous.
http://federaltaxcrimes.blogspot.co.uk/2017/08/hmrc-enlists-financial-and-other.html#disqus_thread
Plaxy actually you are incorrect about your assumptions. As per US tax attorneys and offshore bank officers any low level govt US govt officer of the IRS can fax over to your offshore bank and get all your funds wired to the accounts owned by US govt and you will not see a penny again. They have already done it in UBS and other bank cases. Please google for this info. I remember seeing this on the web in 2010 Swiss bankers were asking all with dual nationalities to drop their US citizenship as it would be a big nightmare for them in the future. Maybe I should have explored it further but I was not living overseas at the time and as a homelander did not know a thing about my US compatriots nightmares overseas. Plus I never had anything offshore to deal with.
Plaxy, Yes this was something I personally discussed with many offshore bank officers who told me they have all signed up for any tax collection on behalf of US govt whether you are complying or not as it is not their business to judge and it is up to US govt to decide. They have to comply or else face withholding or fines. I am not trying to scare you but unfortunately it’s a reality that I had to face personally. Please don’t think of me as a compliance condor as I am very much against these condors myself. My best advice all roads lead to renounciation.
Harrison.super: that’s not the way it is, fortunately. Yes, the US has tax treaties with many countries. None of them give the IRS the power to “get all your funds wired to the US govt.”
They do have the power to withhold or threaten to withhold money that passes through the US system. Keep well clear and have nothing to do with them, and there’s very little they can do.
“It’s very important for people who suddenly find themselves embroiled in this quagmire, to understand that the US does not have the power to enforce US tax law extraterritorially on an individual with no US income or assets.”
The subject of this thread is that the US DID get the CRA to seize Canadian assets of Mr. Dewees.
Because he entered OVDP following the advice of the tax accountant.
“Because he entered OVDP following the advice of the tax accountant.”
Yes, but his entry into OVDP only revealed himself to one of his enemies. The reason CRA seized his Canadian assets is that his second enemy colluded with his first one.
No doubt. Once an individual has identified himself as subject to US tax law, and has provided the IRS with all the information they need, and has signed forms acknowledging failure to do this and failure to do that, and failure to do the other, most of the major obstacles to extraterritorial enforcement have been removed.
A very sad story, and unfortunately Dewees is not the only one to have suffered in this way, though most don’t end up in court.
@Norman
CRA did not seize assets. Dewees paid the penalty in order to contest it.
It doesn’t affect me, as a Canadian dual the IRS can’t touch me, but for those with only US citizenship it might be useful to know whether CRA would actually touch assets, or only keep a refund.
Plaxy, US govt has the power to freeze the money held by any bank in the world in its correspondence USD accounts therefore it could just threaten the bank to hand over your funds. The banks would have no choice in this matter as several Carribean banks lost their correspondence accounts due to this fact. Between the withholding they have to pay for every account for just denying them access to your account funds what would they rather do. That is the reason some of the world’s most leading banks and brokerages now don’t want US citizens even if resident overseas as they are under threat by US govt. I went to several banks and brokerages overseas and was denied based on my nationality. I was told to loose it for us to open up an account for you.
For CRS they just have to inform the govts of the jurisdiction you are tax resident of but not allowed to seize funds or wire the account funds to your govt. US is the only exception to this rule as per the bank officers. Maybe in Canada it works differently.
Dewees suffered from the timing of his disclosure and how he chose to disclose. He also lived many years outside the US and had his life set up as a professional Canadian resident would. He was advised on how to structure his affairs by Canadian tax professionals that didn’t have a clue about US tax laws. Even my own UK accountant that I dealt with for years didn’t have a clue about this stuff. I was never advised as a dual citizen just as a UK resident.
His mistake was entering the OVDP. Did he even understand what he was signing up for? Had he just done an assessment of his tax and seen it was zero owing, he could have just back filed and probably never heard from the IRS. After that taken up Canadian citizenship and renounced if he didn’t want to go forward filing. People have been amending returns or correcting errors for years without a program.
Dewees story is an example of what can go wrong when an unsuspecting honest person enters the US tax system and identifies themselves as a US taxpayer. You also imperil your family’s economic future too and in his case, Canadian family. This is something every person with US citizenship has to decide, the best course of action for themselves and family. Sometimes it’s staying under the radar and sometimes it’s paying the ransom to get out.
Identified / identifiable US citizens can indeed have banking problems because of their citizenship. To avoid these problems, get rid of the citizenship.
Bank customers in countries with robust financial regulatory systems are protected from the kind of embezzlement you describe. Even in countries without such protection, the American IRS does not have the power to force a banker to embezzle money from US customers’ accounts on pain of the threat of losing correspondence arrangements.
You may be thinking of the liability which the US bank in a corresponding arrangement may have, when a customer of the non-US partner bank owes or has been assessed as owing US taxes.
The loss of correspondence agreements is a problem for banks, and for the economies of small countries that depend heavily on access to the international banking system. It’s not a problem for individual bank customers in Canada or elsewhere. That’s nonsense. Even tax advisors don’t try to use such phony threats to terrify their clients into compliance with US tax law.
“CRA did not seize assets.”
That is a relief. I’m glad to see I misunderstood that part of it.
“Dewees paid the penalty in order to contest it.”
So he made two big mistakes. Even after his first big mistake, and even though courts don’t let him contest a penalty before paying it, he shouldn’t have paid it. If the IRS decides to file a notice of lien and/or intent to levy then he could contest it in US Tax Court without paying the penalty first. He would likely lose in US Tax Court but still wouldn’t have to pay the penalty unless CRA decided to participate.
I hope he petitions for certeorari. Even though there’s a 0.1% chance that the US Supreme Court would take the case, every 0.1% helps.
@UK Rose
Dewees “is an example of what can go wrong when an unsuspecting honest person enters the US tax system.” Indeed. That is why I am very grateful to be a suspecting dishonest person.
@Harrison
We have no evidence of the US government touching Canadian bank accounts. (Yes, Norman Diamond has a strange story that I don’t fully understand, nor need to. It’s an exception or edge case or something different. In more recent years we’ve heard of nobody having Canadian assets seized. See in particular the laughable IRS attempts to serve papers to Pomerantz, the guy in Vancouver.)