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.
Well, no reading between the lines for us – he quite distinctly said “do nothing” was an option.
Not an option – our FBARs would have red-flagged us.
What’s done is done.
About doing nothing: “Not an option – our FBARs would have red-flagged us.”
You might be amazed. Sometimes the IRS ignores red flags if no one would personally benefit from pursuing a case. If the case reaches a court thern the government and judge will never ignore failings unless the government or a rich powerful party is the one doing the failing, but the IRS by itself sometimes does.
How could the IRS move from information provided on FBARs, to an assessment of US tax due?
“How could the IRS move from information provided on FBARs, to an assessment of US tax due?”
They wouldn’t make an accurate assessment but they don’t necessarily need to. The IRS could contact the financial institution named in the FBAR to ask how much income there was, and the institution might answer. The IRS could ignore the person’s eligibility to claim foreign tax credit unless the person files a US return claiming it. If the financial institution doesn’t answer the IRS, I have a feeling the IRS might be able to pretend that 100% of the contents of the account was unreported income and assess US tax and penalties on all of it.
That would be risky, to assess tax and, especially, to assess penalties, without even knowing whether the accountholder was liable to file a return.
Also pointless, given they’d have little prospect of actually enforcing collection.
“That would be risky, to assess tax and, especially, to assess penalties, without even knowing whether the accountholder was liable to file a return.”
No it wouldn’t. The IRS can assess just about anything they want. To fight it, the victim has to initiate a lawsuit as plaintiff, pay the filing fee, and pay expenses as they go along. The court can rule that it doesn’t have jurisdiction so the victim gets screwed. The court can invent new case law such as that the victim is required to fabricate a social security number for the victim’s non-resident alien spouse (especially after the IRS has rejected ITIN applications) and the victim neglected to do it so the victim gets screwed. In a rare case the court can actually rule that the victim is innocent and order the IRS not to collect, but later when the IRS collects anyway the court can rule that they don’t have jurisdiction to enforce the court’s own order. Etc.
26 USC section 7433 provides damages when any IRS employee violates any section of title 26 USC in connection to collecting taxes. That is statutory law, and therefore subordinate to case law, and not enforced unless the victim is rich and powerful. The only thing a court has to do is rule that they don’t have jurisdiction. Or rule that sovereign immunity even trumps Congress’s explicitly enacted intention to provide for damages. Or do what the 9th Circuit did, and rule that 26 USC section 7433 doesn’t apply to assessments of tax, even when the IRS didn’t even assess tax and the cause of action was IRS employees embezzling, refusing to refund collected tax, and corruptly altering IRS records to cover up the embezzlement.
So there is no risk at all for the IRS, the DOJ, courts, and their employees.
“Also pointless, given they’d have little prospect of actually enforcing collection.”
Could be. But would you like to explain why they still harrass my wife who never was a US citizen or resident or investor or business operator or anything, why they stopped attacking me even though I still have investments in US financial institutions. Could it be because I’ve figured out how to subpoena documents and put an IRS lawyer on the witness stand … that is, if the IRS would ever again put me in a position where a court might not refuse to take jurisdiction.
I figured out that my wife could petition US Tax Court for innocent spouse relief. The latest news is that the IRS has filed administrative transcripts essentially admitting that they destroyed records of collections that they actually made by seizing my payments by withholdings, in a few years where maybe my withholdings weren’t embezzled or maybe the IRS randomly decided to credit me despite the embezzlements. Tax Court hasn’t decided yet whether to accept jurisdiction over the innocent spouse case, but I must have some gratitude for obtaining this proof of malfeasance. But even so, the IRS’s action isn’t at all risky for the IRS. They just make me spend more money to still get no result.
“The IRS can assess just about anything they want. To fight it, the victim has to initiate a lawsuit as plaintiff, pay the filing fee, and pay expenses as they go along.”
The accountholder doesn’t have to do anything.
“The accountholder doesn’t have to do anything.”
Sure, if CRA won’t assist because the account holder is a Canadian citizen, and if the financial institution won’t assist because the financial institution didn’t sign a Qualified Intermediary contract and doesn’t care if the IRS withholds 30% of gross sales proceeds of every US investment that the financial instution sells, and if the person doesn’t want to get the refund that is owing to the account holder of US withholding that anyone deducted from any payment to the person, and if the person doesn’t own any US assets that the IRS might seize, then sure, the person doesn’t have to do anything.
US income/assets are never safe, and as you say, money held in a bank with a QI agreement may not be safe either.
But collecting increases the risk, for the IRS. Here’s a case where the IRS filed “substitute returns” on a resident of the Philippines, helped themselves to the tax/penalties/interest they assessed as “due” by a levy on his US investment account, and then after the person died his lawyer spotted what had happened and did take action on behalf of his estate, and won.
“Taxpayer Granted Refund where IRS Substitute Returns Failed to Account for Foreign Taxes Paid.”
http://www.parkertaxpublishing.com/public/tax-refund-foreign-taxes-paid.html
Apart from the FEIE, there are exemptions for which reporting is waived (see 8833). It would obviously be risky for the IRS to create imaginary tax returns if all they had to go on was a report of a non-US bank account.
That lawyer in the Herrick case ought to get a medal.
The Herrick judgment:
http://cases.justia.com/federal/district-courts/utah/utdce/2:2012cv00671/85299/35/0.pdf?ts=1459005561
“It would obviously be risky for the IRS to create imaginary tax returns if all they had to go on was a report of a non-US bank account.”
It still wasn’t risky. The IRS only had to pay the refund that it owed anyway. If I could afford a lawyer then maybe the IRS would have to pay the refund that it owes me too. Meanwhile, the IRS didn’t have to pay any damages, even if IRS abuse of an innocent taxpayer gave him a heart attack and led to his estate getting the refund that the IRS owed it anyway. The IRS’s undeserved profit went down to zero, but didn’t go down to a loss of money. Government employees didn’t have to pay a cent. The IRS had no risk.
“The IRS had no risk.”
The IRS risk is the risk of adverse US court judgments.
Sometimes it’s not about what you can get away with, but making the best effort to preserve what you already have. If one has an easily discoverable tax liability (think Boris Johnson) and your livelihood is dependent on the transfer of funds through the US (think SWIFT) you think long and hard about your options.
It’s not what US citizens outside the US can or can’t “get away with,” it’s about what the US can or can’t get away with.
If an individual depends on the US in any way, or has US income/assets, or wants to be able to continue using the little blue book, then it may be in their interest to comply with US tax law.
If none of those things apply, it’s much harder for the US to get away with double taxing the person.
All indications are that Boris Johnson was a dual citizen at birth. I think it’s more likely that he complied with U.S tax laws so that he could certify five years of compliance and use the “dual citizen” exemption to the Exit Tax.
Question for Norman Diamond: out of interest, did you consider complaining under the Mutual Agreement treaty article?
” Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic law of those States, present his case in writing to the competent authority of the Contracting State of which he is a resident or, if he is a resident of neither Contracting State, or which he is a national.”
“Question for Norman Diamond: out of interest, did you consider complaining under the Mutual Agreement treaty article?”
I don’t see how that would have any connection to my case.
“The IRS risk is the risk of adverse US court judgments.”
The “risk” is still that they only have to return ill-gotten gains that they had no right to in the first place. They still get off scot-free, not punished or penalized at all, while they still inflict enormous expense and stress and injury on the innocent victim.
Speaking hypothetically, if a bank in Canada wrongly (i.e. not in accordance with the treaty) withheld US tax on Canadian-source payments into the account of a Canadian resident, the accountholder could complain to the Competent Authority of Canada, according to the Mutual Agreement Article.
“if a bank in Canada wrongly (i.e. not in accordance with the treaty) withheld US tax on Canadian-source payments into the account of a Canadian resident”
I was a Japanese resident dual Canadian – US citizen. (Now I’m a Japanese resident single Canadian citizen.)
Even if I were a Canadian resident, I’m not sure if the treaty would override the financial institution’s Qualified Intermediary contract.
If the IRS had treated the withholding properly instead of protecting embezzlers who work in the IRS (maybe doing the bidding of ring leaders in the US Department of Justice), it would have been no trouble to get the US withholding refunded when I filed my US tax return.
A Japanese resident would be able to “present his case in writing to the competent authority of the Contracting State of which he is a resident or, if he is a resident of neither Contracting State, or which he is a national.”
“Even if I were a Canadian resident, I’m not sure if the treaty would override the financial institution’s Qualified Intermediary contract.”
It appears to me that the question before the Competent Authorities would be whether the receiving tax authority (the IRS) should have refunded the money.
An OECD document about Mutual Agreement Procedures says (p.12):
https://www.oecd.org/ctp/dispute/36249394.pdf
“It appears to me that the question before the Competent Authorities would be whether the receiving tax authority (the IRS) should have refunded the money.”
IRS regulations and US statutes already say the IRS should refund the money. The reason why the IRS delayed some refunds, confiscated some refunds, refused to credit some amounts, and deleted IRS administrative records of some confiscations of refunds, is that the IRS needs to continue protecting embezzlers other than the ones who have been caught. To figure out what the IRS should do in my cases, Competent Authorities are not needed.
Competent Authorities might have been meaningful in deciding if TD should have paid US withholding to the IRS from Canadian sourced income in the first place, but for me that’s moot now because the IRS credited that particular amount to me about 3 years late.