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.
“Norman Diamond has a strange story that I don’t fully understand, nor need to”
TD Waterhouse decided to deduct US withholding from Canadian sourced income under the Qualified Intermediary program. There was not yet any allegation of illegal activity or attempt to seize penalties etc.
“See in particular the laughable IRS attempts to serve papers to Pomerantz, the guy in Vancouver.)”
Pomerantz was being pursued for FBAR penalties. If he had been assessed as owing US tax (or 5471 penalties), the IRS would have been able to request collection through the treaty as they did with Dewees.
Pomerantz is dual, so the IRS can’t do a thing.
Except that Pomerantz was a Canadian citizen, so he would have been safe even under the mutual assistance in collection article.
Nononymous: yes, thanks, I remembered that after I posted.
Dewees was vulnerable to the 5471 penalties, but not the FBAR penalties.
How many US citizens in Canada and elsewhere have been panicked into US tax compliance by the fear of FBAR penalties which can’t be enforced.
I wonder how many people were panicked into US tax compliance with just the mere mention of the IRS.
The frightening part to me in the Dewees case is that by telling the IRS to come and get him, he actually provoked the IRS into using its full force to collect from their property.
Citizenship is nine-tenths of the law for the IRS.
The IRS only has that full force if a person has US source income or assets, or makes the mistake of identifying himself to the IRS as a person subject to US tax law.
Even with FATCA, there hasn’t yet been a reported case of a non-filing individual with no US income/assets being assessed for US taxes. Without an assessment, they can’t request collection under the mutual assistance in collection article.
I’d like to know just what the IRS is doing with the account info they’re getting through FATCA. Any decision not to follow up on non-residents would have to be political, because surely the IRS would want its pound of flesh.
The report from a bank doesn’t give enough information for an assessment of a non-filer. The person could just be under the threshold and not required to file.
But the bank report would show the IRS which 1040 filers didn’t file FBARs, and could be assessed for penalties. Maybe that’s what they’re doing with it.
Don’t forget that RRSP, RESP, TFSA etc. accounts – all those things duals are “not allowed” to invest in – are not reported by FATCA, under the IGA. So the IRS won’t know about them if unreported.
What’s funny, at least under the Canada IGA is that the bank is only required to report the year end bank balance, not the highest.
That might reflect the different origins and (stated) aims of FBAR and FATCA.
Yes, or maybe the right hand doesn’t know what the left hand is doing – but both are being used to slap non-residents.
BB In most cases they will do nothing. They are run as a business ( a dirty business) and have profit centres. There is no profit in going after those who will owe little or nothing or have no other US connection. I realise DeWees is an exception. But he volunteered through bad advice.
I wrote my congressman’s legislative director this morning to see if she or Congressman Posey could find out from the IRS what they are doing with the info they get from FATCA. She wrote back:
“Thanks for your email. Yes, I can make an inquiry to the agency and they will be forced to provide at least some information about heir data collection. I will share their response with you.”
She also promised another FATCA letter from Posey to the Treasury Secretary in follow up to the previous one he wrote to the previous Treasury Secretary, this one:
http://freedomandprosperity.org/files/fatca/07-2013_PoseyFATCAltrLew.pdf
We’ll see.
Read Canada’s Global News take on Mr. Dewees committing an IRS form “crime”.
The article states that Mr. Dewees “plans to appeal” the U.S. court ruling.
http://globalnews.ca/news/3719486/irs-fines-toronto-man-165000/
Feigenbaum is the Chair of Republicans Overseas Canada. He has delivered to the IRS a victim of the law Republicans Overseas is challenging in court. I wonder how much he charged Dewees for enrolling him in OVDI.
https://en.m.wikipedia.org/wiki/Mark_Feigenbaum
Surely Feigenbaum isn’t going to be handling the appeal?
@plaxy
Pre-streamlined, our lawyer offered us the option of entering OVDI, filing going forward or doing nothing. We chose OVDI. Perhaps Feigenbaum did the same?
Feigenbaum seems to have been Dewees’s advisor all the way through: when he entered OVDI three weeks after losing his son; when he withdrew from OVDI to avoid the FBAR penalties; when he paid the 5471 penalties + interest; when he launched, and lost, the suit for refund.
Was Dewees well-advised? I dn’t think so.
‘The article states that Mr. Dewees “plans to appeal” the U.S. court ruling.’
It will not matter.
When Russian courts refuse to provide due process, the US president and secretary of state denounce Russia’s lack of due process, and even the Russian judge can make facial expressions showing disgust for the verdict that the government forced upon him.
When US courts refuse to provide due process, US politicians do not care and US judges jump for joy.
@Bubblebustin
“Pre-streamlined, our lawyer offered us the option of entering OVDI, filing going forward or doing nothing.”
I’m impressed that you had a lawyer shrewd enough to advise doing nothing.
He came highly recommended, but unfortunately has now retired (probably quite comfortably after OVDI, Streamlined).
We had the same guy. The option to do nothing was by reading between the lines. We chose to do nothing . That was in 2011. Since then we’ve done a quiet disclosure.