Monday, December 3, 2012

Offshore Voluntary Disclosures Update: Where Is IRS Appeals?

As taxpayers and practitioners get ready to start a fourth year of dealing with the IRS in the area of offshore voluntary disclosures, it's fair to ask, where is IRS Appeals in all of this? For those who don't know, the IRS Appeals Division has a proud history dating back to the early 20th century as the settlement arm of the IRS compliance function.It is responsible for keeping well-over 90 % of all tax controversies from going to trial in either the U.S. Tax Court where 95% of all tax litigation takes place in this country or the various U.S. district courts in certain limited circumstances.

In a regular tax examination, if a taxpayer is unable to agree to a resolution of all the issues in an audit, the taxpayer may reach an agreement on some of the issues and elect to take the unresolved issues to an impartial IRS Appeals Officer or settlement officer. As such, the IRS representative is authorized to make an offer of settlement based on the government’s "hazards of litigation" (its chances of losing the case in court). Under existing written protocols, unresolved cases are supposed to go to Appeals because examining agents and their managers are not supposed to "settle cases" even though they do it all the time. That’s because IRS managers get more credit with their bosses for having a high "agreed case" rate. It is illegal to evaluate case managers’ performance based on revenue collected. The IRS is more focused on the number of cases closed out as "agreed," either with "no change" or a taxpayer concession on the amount of income which should have been reported or deductions taken.

Under the OVDI Frequently Asked Questions on the IRS website, the last section, "Case Resolution" which contains the so-called opt out rules (FAQ’s 49 through 53) makes a brief reference in FAQ 49 to unhappy customers having the privilege of appealing a proposed IRS penalty after the "[imposition] of all applicable penalties," but even though offshore voluntary disclosures have been in the IRS pipeline for three years now, there has been scant talk by either the IRS on its website or in public pronouncements, or in practitioner war stories on LinkedIn, about any experience so far with IRS Appeals involving voluntary disclosures.

That’s because there aren’t any OVDI cases in Appeals yet. A highly reliable source recently told me that there are presently no opt outs in Appeals and if any of them manage to work their way there, they likely will be handled as Appeals Coordinated Issues to assure consistency. An Appeals Coordinated Issue (called "ACIs") is IRS-speak for alerting all local managers to not even think about settling the case on their own because the National Office has removed all discretion from local offices on these cases. Any willingness to settle any case under OVDI will be made exclusively by National Office compliance super-managers and their staff, the highest levels the Office of Chief Counsel, and the national director of Appeals.

My source also says that unless there are unique facts, those unable to resolve their matter through the opt out procedures should not anticipate a much different experience in Appeals. He also added that an inherited account is not a unique fact.

It is suggested that the practitioner make a realistic proposal in the opt out process. There is some bad case law emerging in this area on the definition of willfulness so practitioners should be careful about what they wish for.

My source also reminds me that the Department of Justice is no longer following the UBS process of issuing John Doe summonses and waiting to see what happens. They are getting intelligence directly from many sources. Moreover, my friends in the IRS criminal investigation division are telling me they have so many leads in potential substantial criminal matters they feel like kids in a candy store.

As of this writing we are about a year away from the time when all foreign banks are supposed to cough up the names and account numbers of their American depositors under FATCA. By then it could be too late for some who may have waited too long to enter OVDI. That said, the reality is, the government is simply too busy and too preoccupied chasing a cornucopia of real criminal tax guys with offshore shenanigans. Ironically, IRS CID simply has no time to chase after almost all the people who think they are at risk for a life of ankle bracelets or real hard time. The real challenge here for people with secret offshore accounts is to explore their potential civil penalty exposure if the IRS calls first.




Friday, November 9, 2012

Commissioner Shulman Retires After Five Years of Service as Commissioner

Mention retiring Commissioner of Internal Revenue Doug Shulman and some Americans abroad see red and misdirect their anger at him over FATCA and the IRS’s new focus on FBAR-only audits and enforcement. Last week he gave his goodbye speech and listed what he considers to be his accomplishments over his five year tenure. Six of seven items listed by him are soft and gooey government "management-speak"- type things like sensitivity to the work force and the techno-challenges the IRS faces, but front and center was surely the single thing Mr. Shulman wants to be remembered for: the IRS muscle flexing in the international enforcement arena.

During Mr. Shulman’s tenure, the financial world witnessed two developments: the almost complete capitulation of the Swiss banking industry to the IRS, and what has been essentially a world-wide muted objection to FATCA itself, and the fact that for the most part, the international financial community is rolling over by spending billions of dollars to make their IT systems compatible with the reporting requirements of FATCA.

For decades, IRS management has been worried about the Service’s ability to do its job efficiently if everyone was permitted to continue to file paper returns. E-filing has helped here but the IRS still has a long way to go. In this regard, the IRS was surely bluffing when FATCA came on the scene and the agency announced that every bank in the world had to become a withholding agent for the U.S. government and enter into a separate FFI Agreement with the IRS National Office by January 2013. It would be hard to imagine Congress authorizing the IRS to hire the number of people necessary to make that happen at all.  And while that date has been pushed back more than a year, the real action with FATCA is in the area of intergovernmental agreements, or IGA's. Just yesterday, the Treasury Department boasted in a press release that it was engaged with 50 separate countries to negotiate a country by country exchange of information agreement under which there would be an automatic exchange of information between the US and each country so that bureaucrats all over the world could find out which of its respective citizens might be playing fast and loose with undisclosed bank accounts and avoiding US taxes on the one hand or foreign taxes in their own respective countries.

What Mr. Shulman is likely most proud of is the fact that under his watch, the international financial community has taken a giant leap forward to establish a virtual international banking data base available to US law enforcement agencies and "FATCA Partner" countries.




Monday, October 22, 2012

Cal CPA



Mopsick Tax Law is happy to be a co-sponsor again of the

Cal CPA ABC Mixer at the Sutter Club in Sacramento. The "ABC" stands for attorneys, bankers and CPA’s. The event was so successful this past February that our good friend Dave Motes, who has organized this event for years, decided to do it twice a year. I have co-sponsored this event for a number of years and found it to be an excellent opportunity to meet new people as well as re-connect with long standing colleagues in the Sacramento community.


Also, the Cal CPA Education Foundation invited me to speak at their

annual Tax Update & Planning Conference. I will be speaking in Burbank on November 19th, and then in San Francisco on November 20th to participate in a webcast. The topic will be due diligence in the global environment and will cover FBAR compliance, form 8938, (statement of foreign financial assets) and the duty of a return preparer to inquire regarding a client’s offshore holdings.



Friday, October 12, 2012

Published Article On TaxIndiaInternational.com

One of the most common problems we see in our practice is the plight of recent immigrants to the United States who are never told in citizenship class that the United States taxes its citizens and residents on their word-wide income and that they have to file FBAR’s and other forms to register their foreign accounts and assets with the US government. This is an issue immigrants cannot ignore. For many, it is a ticking time bomb which will go off once FATCA kicks in next year and the year after and foreign banks start to reporting their American clients to the IRS.

Please take a look at my article, "Tax Justice For Recent Immigrants To USA- What They Don't Teach In Citizenship Class: FBARS's And Foreign Assets", that was published today on TaxIndiaInternational.com.

Monday, October 1, 2012

Tax Justice For Americans Abroad? Some May Pay 5% Penalty Instead Of The Monster 27.5% Penalty


There is an often over-looked and perhaps little-known IRS rule in the twenty two pages of fine print of the IRS Frequently Asked OVDI Questions which may fit the facts of many thousands of Americans living abroad. If you live abroad and have $10,000 or less in U.S. Source Income each year and can show that you are in full compliance with the tax laws of your adopted country, you may get back in the good graces of the IRS with the payment of back taxes from 2003, and a mere 5% penalty and not even have to include your business interests in the penalty base.

Consider the Adams family described in my August 6, 2012, article in Tax Notes International. [1]The Adams family lives in Vancouver, British Columbia, where Mr. Adams is the president of a small but successful manufacturing company. Mr. Adam’s great-grandfather, a U.S. citizen, settled in Canada in the latter part of the 19th century after moving there to take a job building the transcontinental railroad. Subsequent generations of the Adams family are all citizens of the United States, although they have no economic connection to it. They cannot recall when a family member last filed U.S. tax returns. The current generation has never filed U.S. income tax returns.

You may qualify if you have less than $10,000 in U.S. Source income: Although it was not clear in my article, the Adams family was in trouble with the IRS simply because they had more than $10,000 in dividends from a U.S. based mutual fund. If that single fact were different and they could show the IRS that they never got more than $10,000 from a U.S. source, they could qualify under FAQ 52 category number 3, [2] provided they have been fully compliant with all the requirements of the Canada Revenue Agency during the years in issue.
What makes this provision particularly appealing is the statement in the rule which says,

 For these taxpayers only, the offshore penalty will not apply to non-financial assets, such as real property, business interests, or artworks, purchased with funds for which the taxpayer can establish that all applicable taxes have been paid, either in the U.S. or in the country of residence.

This means that for the Adams family in my article, they can sign up for the IRS’s OVDI program and file the requisite number of back tax returns and delinquent FBAR's, and exclude from the 5% penalty base, any valuation of his manufacturing company in British Columbia, his business bank accounts, his vacation home on Vancouver Island which he rents out, and Grandma’s trust provided it does not earn more than $10,000 from U.S. sources in any given year.

Even more appealing is despite the accounting fees and legal fees the family will need to pay to prove all this to the IRS, the foreign earned income credit and the foreign tax credit is likely to wipe out most or all of any U.S. taxes which might become due from their delinquently filed U.S. forms 1040.

Obviously, FAQ 52 will only apply to a select group of Americans living abroad.  The FAQ makes it clear that examiners have no discretion to negotiate a lesser penalty amount under this FAQ which is the same rule under the entire OVDI program. Query whether some taxpayers who meet all the requirements but for the $10,000 rule, will have any luck under the opt out procedures negotiating a zero or lesser penalty?
Our office is currently presenting to the IRS under OVDI, a large American family which has lived, worked, and prospered  in a Central American country for three generations. Stay tuned to find out how we make out with the IRS.


[1] The same article was published in Tax Notes on July 9, 2012.
[2] FAQ 52:  Under what circumstances would a taxpayer making a voluntary disclosure under this initiative qualify for a reduced 5 percent offshore penalty?
Taxpayers who are foreign residents and who meet all three of the following conditions for all of the years of their voluntary disclosure: (a) taxpayer resides in a foreign country; (b) taxpayer has made a good faith showing that he or she has timely complied with all tax reporting and payment requirements in the country of residency; and (c) taxpayer has $10,000 or less of U.S. source income each year. For these taxpayers only, the offshore penalty will not apply to non-financial assets, such as real property, business interests, or artworks, purchased with funds for which the taxpayer can establish that all applicable taxes have been paid, either in the U.S. or in the country of residence. This exception only applies if the income tax returns filed with the foreign tax authority included the offshore-related taxable income that was not reported on the U.S. tax return.

Monday, September 24, 2012

FACTA II: Intergovernmental Agreements Take FATCA Partners One Step Closer To A Virtual International Banking Data Base


Even before the ink dries on the few agreements foreign banks may have entered into with the IRS to be a withholding agent for the US government, the rules are changing drastically. Major western European countries have already entered into agreements with the United States which would allow their respective banks to avoid the IRS completely and simply provide their respective governments with the names, account balances and other details of suspected Americans for the IRS to go after.

Most of these IGA’s have reciprocal provisions with "automatic exchange" of information provisions which will bring the computerized world even closer to the FATCA goal of developing a virtual international banking data base. Privacy concerns? No problem! Any country which is even thinking about signing up will be given a reasonable amount of time to change their laws and even their constitutions if need be, to come up with a disclosure protocol which meets the IRS checklist for "U.S. indicia" (read: suspected Americans). See our blog post of August 27, 2012 where we discussed the meaning of "U.S. indicia".

In a shocker to some, the new proposed rules for IGA’s even scrap the FATCA Proposed Regulations requirement that foreign banks submit their Know Your Customer and Anti-Money Laundering rules to IRS review and scrutiny before they are allowed the privilege of becoming a US withholding agent. Under the new rules, some qualifying foreign banks’ customers will be allowed to "self-certify" that they are not Americans! (Seriously??)

I will be speaking about these controversial proposed Intergovernmental agreements at an international FATCA conference in Miami in January of 2013. Stay tuned for more details.



Wednesday, September 19, 2012

New IRS Streamlined Procedure for Offshore Disclosures

On August 31, 2012, the IRS published the new procedures first announced on June 26 regarding offshore voluntary disclosures.  This is essentially a recognition on the part of the IRS that there are certain “no brainer” fact scenarios which qualify for relief from the more formal, expensive, time consuming and intrusive OVDI procedures which is presently bogged down because of a shortage of  IRS  personnel to work the cases.  We first commented on this new streamlined procedure on July 2.  You can access those comments here. There are no surprises in the August 31 announcement. I still believe it is “too little” because it doesn’t go far enough but not “too late” because it shows the IRS recognizes that the oppressive OVDI “one size fits all” approach simply does not make sense when it is applied to people  who represent the unintended collateral damage of the  FBAR penalties when they are applied literally.

Monday, September 17, 2012

ABA Taxation Section Vents About OVDI Uncertainty

This past weekend, the powerful and influential Taxation Section of the American Bar Association met in Boston and to no one’s surprise, the offshore voluntary disclosure initiative was a front and center focus which practitioners used to voice concern over the issues we have been talking about in these pages for months. One group complained that months or years after a client was successfully closed out of the program, the IRS calls yet again to ask specific questions about a particular bank or banker.

Yet this should be no surprise whatsoever to any experienced practitioner. Remember that one of the collateral benefits to the IRS of agreeing to go easy on OVDI taxpayers has been the continuous receipt of nothing short of a treasure trove of names for agents to work which would hopefully lead to the real bad guys in this arena, the many Swiss and other tax haven bankers who traveled to the US to secretly recruit eager and willing US taxpayers who were more than happy to transfer vast sums of money offshore which they sought to hide from the IRS, even though as a business proposition, their chance of earning substantial dividends and interest was meager compared to what a US investor could earn by keeping his money here in the United States.

Many taxpayers who had been lavishly enjoying luxurious Swiss vacations after a quick visit to check up on their Swiss safe deposit boxes and numbered accounts jumped at the chance to pay a mere 20% tribute to the United States when the 2009 program was opened. A few really laughed up their sleeves at the opportunity to keep all their ill-gotten gains which for some went back to the 60’s. There were more than a few crocodile tears shed for their "good friends" in Lugano, Lucerne and Geneva who entertained them lavishly in both the US and in Europe when they were visited long after their closing agreements were signed by a special agent who reminded them that the quid pro quo for an IRS "get out of jail" pass was the promise to throw their "good friends"—their dear Swiss bankers, under the bus.

IRS special agents, probably the best financial crimes investigators in the federal government, are like kids in a candy store right now running down all the potential targets they have been given by thousands of OVDI customers who gladly served them up to the IRS to save their own skins.

Some of the practitioners who were referenced in today’s Tax Notes article on the Boston meeting


"voiced their fears that the IRS was "throwing the book" at taxpayers who opted out of the OVDI. One audience member said a revenue agent told her that it was the revenue agent's job to prove willfulness once the taxpayer had opted out. "
Voicing fears is one thing and speculation about the possibility of a rogue agent who may not have gotten the memo saying the IRS expects agents to treat "opt out" people fairly is another. This practitioner would rather place his hope in the quote later in the article attributable to John McDougal, SB/SE special trial attorney and division counsel, who said mitigation guidelines aren't binding, but are merely suggestions for an agent to consider.
"I can't tell you what Appeals is going to do . . . but I can tell you that FBAR penalties must be approved by [the chief counsel's office]," he said. "We don't want to set up penalties that we're going to lose in court," McDougal said.

That closing remark speaks volumes about the way the process is supposed to take place. It says two things: (1) we have yet to get a baseline on how Appeals is in fact administering the FBAR mitigation provisions of the Internal Revenue Manual and (2) the Commissioner and the Chief Counsel have wisely put in place, a framework under which the Office of Area Counsel has veto authority on the assertion of any FBAR penalties in opt out cases to make sure nothing  stupid slips through the cracks. When a Chief Counsel attorney says "we don’t want to set up penalties that we’re going to lose in court," the taxpaying public is entitled to read between the lines which really says: "we expect our clients [the revenue agents] to be reasonable in the assertion of their broad discretion to administer FBAR penalties. We are not eager to open the IRS up for a court to slap it down and publish an opinion which says the IRS has failed to act reasonably in the way it administers this program."

Coming next: (1) The Intergovernmental FATCA Agreements give away the store by allowing some taxpayers to "self-certify" their status as a U. S. Person and (2) Is it realistic for the U.S. to expect tax treaty partners to scrap their domestic privacy laws in order to make FATCA work? Good luck with that!




Tuesday, August 28, 2012

Stacking Up Penalties Is Nothing New For The IRS


A reader posted the following on another web site asking for my input, my response is below his post: 

IRC code 6677 title 26

Published on August 28, 2012 by mach73 in Issues regarding US persons abroad.

“Hoping Mr. Mopsick will chime in on this, but it seems every time I read something and begin to understand it, it either changes or I cannot find the text for clarification.”

“My understanding of the Internal Revenue Code 6677, specifically title 26, was that the IRS could not penalize you for more than the account was worth (for failure to file paperwork). In other words, if the gross reportable amount of an account was 1000 dollars, the penalty would be 10k, or 35% of 1000, but in no case would said penalty exceed 1000 ( in this case).”

“It seems that an individual on one of the tax forms has been penalized 10k for a 1000 dollar account. Now…this individual does go on to mention that, when confirmed he did send a reasonable cause letter for his late filing of a 3520 form, the IRS agent told him on the phone to ignore the fine.”

“I have re-read the code…but find myself more confused than before as i cannot find the language that says ‘at no time shall the penalty exceed the gross reportable amount’….and it is driving me crazy because i DO remember reading that.”

“If this is not the case…does it not seem that the punishment does not fit the crime if the IRS is able to hand out 10k penalties for accounts with a reportable amount of 1, 100, or even 1000 dollars??”


Response from 30 Year IRS Vet:


@Mach73 your reading of Internal Revenue Code section 6677 is absolutely correct. This is the Code section which authorized the IRS to generate form 3520 pertaining to foreign trusts.  It provides for a 35% penalty of the gross reportable amount but the very last sentence of paragraph 6677(a) says, “in no event shall the penalty under this subsection  [6677(a)] with respect to any failure exceed the gross reportable amount.”

But the problem to which you allude really stems from the fact that the IRS may stack up penalties with respect to the same transaction or set of facts based on multiple other Code sections.  For example, take a look at FAQ number 5 under the OVDI guidelines.  It asks,  “what are some of the civil penalties that might apply if I don’t come in under voluntary disclosure and the IRS examines me? How do they work?”  The answer fills a whole column on the next page where we learn that a person is at risk for multiple penalties and there is absolutely nothing in the Internal Revenue Code which prohibits the IRS from stacking up multiple penalties with respect to the same transaction even if the total exceeds the amount under reported or which was not reported at all. 

This whole area is called “Penalty Administration,” and it is a topic which has been addressed by the National Taxpayer Advocate repeatedly over the years. It’s not fair and it makes no sense but it happens over and over again.  A lot of the problem stems from the fact that most IRS notices are computer generated  and once the IRS computer gets cranked up, it is pretty hard to stop it without a lot of effort and personal input.
 
 

Monday, August 27, 2012

Phasing in FATCA: How Will Foreign Banks Determine Which Of Their Customers Have To Be Reported To The IRS?


FATCA was enacted over two years ago but apart from the requirement to register all “specified foreign financial assets” with the IRS on last year’s (2011) tax returns, the punishing 30% withholding provisions have yet to kick in for nonparticipating foreign financial institutions and “recalcitrant” Americans.
According to a Treasury Department attorney, the IRS has made all the concessions it is going to make on implementation dates, and the first big FATCA date coming up is four months from now on January 1, 2013 when the deadline will pass for foreign banks to sign up to be a withholding agent for the US government by filing an electronic Foreign Financial Institution (FFI) Agreement with the IRS. That is separate and apart from the alternative government-to-government framework outlined in the February 2012 joint statement by the United States, and France, Germany, Italy, Spain and the UK for banks in those countries.

Beginning next year, foreign banks who wish to participate in FATCA will have to navigate a rigorous IRS due diligence obstacle course which lists different rules for pre-existing accounts and for new accounts.
Due Diligence Required to Identify U.S. Accounts
FATCA  requires participating banks  to identify “U.S. accounts,” which include both accounts held by U.S. individuals and certain U.S. entities, and accounts held by foreign entities with substantial U.S. owners (generally, owners with a greater than ten percent interest).  The preamble to the proposed FATCA regulations says the IRS will not hold the banks to a strict liability standard. In other words, the banks are not in trouble with the IRS if an occasional American slips through.  If they can show the IRS that they followed the diligence guidelines outlined in the proposed regulations, they will be treated as compliant with the requirement to identify U.S. accounts.
Preexisting Individual Accounts
Preexisting accounts with a balance or value that does not exceed $50,000 are exempt from review, unless the FFI elects otherwise.
Certain cash value insurance and annuity contracts held by individual account holders that are preexisting accounts with a value or balance of $250,000 or less are exempt from review, unless the FFI elects otherwise.

Accounts that are offshore obligations with a balance or value that exceeds $50,000 ($250,000 for a cash value insurance or annuity contract) but does not exceed $1,000,000 are subject only to review of electronically searchable data for indicia of U.S. status.

How the banks are  to Identify Suspected Americans
For this purpose, the FATCA Regulations define  “U.S. indicia” to include: (1) identification of an account holder as a U.S. person, in other words, they already know for sure that the account holder is a U.S. person; (2) the bank somehow already knows the account holder has  a U.S. place of birth; (3) the account holder has a  U.S. address; (4) or  a U.S. telephone number; (5) Anyone who has issued standing instructions to the bank to transfer funds to an account maintained in the United States; or  (6), an account with  a power of attorney or signatory authority granted to a person with a U.S. address; or (7) a U.S. “in-care-of” or “hold mail” address that is the sole address the FFI has identified for the account holder will be treated as “no brainers.”
The Regulations do not require the banks to further search their records for under $1,000,000 accounts, or contact with the account holder unless U.S. indicia are found through the electronic search.  FFIs will not be required to distinguish between private banking accounts and other accounts.
For Accounts Over $1,000,000
American high rollers who have had their heads in the sand until now with foreign account balances that exceeds $1,000,000 are subject to review of electronic and non-electronic files for U.S. indicia.  In addition, the banks are on the hook for grilling their private bankers about their actual knowledge of any American high rollers with whom they have an existing relationship.
New Individual Accounts
For individual accounts opened after the effective date of an FFI’s agreement, the FFI will be required to review the information provided at the opening of the account, including identification and any documentation collected under anti-money laundering and Know Your Customer rules which have been in place for some time. (Referred to as AML/KYC rules) If U.S. indicia are identified as part of that review, the FFI must obtain additional documentation or treat the account as held by a recalcitrant account holder.  The IRS believes that if a foreign bank has been diligent about following the AML/KYC rules these new FATCA rules should not be a big burden.
Rumors from Panama
We have learned from our contacts in Panama that one large national bank there has already started dumping its US customers unless they are receiveing a Panamanian pension or can show a consistent stream of income sourced in Panama with duly authenticated documents through a Panamanian Consluate. 


 

Monday, August 13, 2012

Understanding The FATCA Regulations: The Search For Suspected Americans With Offshore Accounts

Recently, a for profit promoter in London was able to convince the IRS Office of Chief Counsel to allow two of its very qualified senior attorneys to speak via satellite link to a withholding congress group about the new FATCA Regulations. This presentation has been released on YouTube and is made available to those who follow my blog here.

A few words of caution. In my experience, a lot of the blather on the internet (particularly from the more strident, hysterical websites) is published by people who have never read the FATCA Regulations and have no working knowledge about the concepts involved, namely exactly what it is going to take for a foreign financial institution ("FFI") like a Canadian bank for example, to fulfill its duties as a withholding agent for the US government. So for those readers who attempt to watch this video, it would be best to actually read the Regulations before attempting to understand what is being presented here. That said, this video is actually pretty scary! For all the complaints about US overreaching with FATCA, the dead seriousness of the presenters here shows that the US government is proceeding full steam ahead, as if foreign banks were forming a long line to submit their FATCA registration applications to the IRS in 2013 so that they can remain in the good graces of the IRS while they themselves cash in on FATCA and make it part of their business models. If there is any movement at all in mitigating the reach of FATCA, it is not present here. The FATCA train has long left the station and foreign financial institutions have quite a big job ahead of them before they are allowed to continue to play with the big boys.


                         




www.mopsicktaxlaw.com


 


Wednesday, August 8, 2012

The Unintended Consequences Of FATCA And The Bank Secrecy Act

How To Make The Government Listen To The Plight Of Americans Abroad And Recent Immigrants To The United States- What Works; What Doesnt

One of the hottest issues in tax compliance today is how to make the U.S. government address the unintended consequences of the IRS’s relatively new emphasis on FBAR compliance under the Bank Secrecy Act, and FATCA for Americans abroad and recent immigrants to the United States. There is a rising ground swell of protest throughout the world among Americans abroad who have no real economic connection to the United States who have established permanent roots in foreign countries and believe there must be some mistake if the U.S. government intends to lump them together with stateside tax cheats who are using offshore accounts to hide their money.

Recent immigrants who are simply happy to be here and consider themselves to be the luckiest people on earth having attained US citizenship, are now terrorized at the thought that the U.S. government may have set a trap for them by not telling them at their naturalization ceremonies that any family money they may have left back home is now subject to annual reporting, penalties, and worse once FATCA kicks in as their banks in India and England are scrambling to get on the FATCA band wagon and report all suspected Americans to the IRS for having bank accounts in a foreign country.

Web-based rabble rousers in some locations are whipping up a frenzy of suspicion and alarm by claiming the U.S. government has purposefully targeted Americans abroad for special abuse when the truth is, there is absolutely no support in the legislative history of FATCA or the Bank Secrecy Act for the proposition that Congress or Treasury ever thought about Americans abroad when the legislation was passed. In fact, it was the furthest thing from anyone’s mind when these two laws were enacted. 

It is now becoming obvious to good-willed people at the IRS and on Capitol Hill, that the requirement to file FBAR's was never intended to apply to Americans abroad with little or no economic connection to the U.S. and the once popular but now despised offshore voluntary disclosure programs are nothing short of a malicious compliance slow torture requiring thousands of people to spend a small fortune on lawyers and accountants just to prove that tax avoidance was the furthest thing from their minds in the conduct of their financial affairs.

All that said, the democratic process still works as organizations such as Americans Citizens Abroad and Democrats Abroad work within the system by letter writing, appearances at IRS hearings, communication with the IRS National Taxpayer Advocate, meetings with key Congressional staff and members, and crafting well-reasoned, respectful and well-researched papers which are appearing on web sites, blogs and elsewhere to get the message out: tax compliance is enhanced when the people see tax administration as fair, responsive, and proportionate. I for one believe the IRS, for all its muscle-bound faults, is run by people who genuinely believe this is the way to run the organization.

Undermining this whole process is a rabidly strident internet group which claims to speak for Americans abroad which is doing nothing but damaging the tax justice movement for Americans abroad by promoting misinformation and irrational fears by the use of race baiting, hyperbolic screeds, and plain mean-spiritedness. We are told that Americans citizens in droves are flocking to renounce their citizenship when the record shows that 576 ten thousandths of one percent of the US population of 310,500,000 renounced their citizenship in 2011. We hear from self-anointed leaders who apparently are experts on God, natural law, the Fifth Amendment, and the IRS that any minute now, the United States is going to collapse economically and as a last gasp effort to save itself, is about to attack and annex Canada so that the IRS can get its hands on all the tax protestors and other tax cheaters up there and teach them a thing or two about flaunting their tax obligations.

We are told that FATCA is nothing more than another iteration of American hegemony which is being resisted by governments and bankers all over the world who are about to rise up in protest. The reality is the international banking community is falling all over itself to invest billions of dollars to reinvent its computer infrastructure as dozens of European and other governments scramble to get on the FATCA bandwagon to help create an international banking data base which they can’t wait to get their hands on.

Why bother to spend any time at all on this message? The answer is we all need to stand up to the bullies of the world and in this age of instant information sharing, expose crack pots and those who hate this country and wish us ill for what they are.

Some years ago, Congress passed a law which said that the IRS could no longer refer to certain crack pots as "tax protestors." This was met with howls of laughter among the IRS rank and file who quickly came up with other code words for the people I am describing here: whack jobs, wing nuts, kooks and weirdos. Back at the IRS when we used to get letters and screeds about natural law, the unconstitutionality of the Internal Revenue Code, and comparisons of the IRS to the Gestapo, we used to howl with laughter before we placed them in a circular file on the floor where they were kept until the end of the day before they were hauled off to a huge trash dumpster in the basement of the building.

The tax justice movement for recent immigrants and Americans abroad is alive and well in spite of the efforts of those who seek to malign and tear down this country, its government and citizens. People of good will cannot remain silent in the face of crass bigotry and small mindedness.



Thursday, August 2, 2012

Tax Justice II: No FBAR Penalties For Otherwise Compliant Recent Immigrants To The United States

We recently blogged and published an article about Tax Justice for Americans abroad with little or no economic connection to the United States. In our article, we argued that paying a 27.5% tribute to the IRS under the voluntary disclosure program made no sense for Americans abroad who simply want to be compliant in light of the new IRS emphasis on international compliance. Moreover, squeezing compliant-hopeful people into a one-size-fits all funnel with the end closed off is probably an excessive fine or penalty under the Eighth Amendment if not a cruel and unusual punishment.

OVDI Is Not Working:The OVDI program must be an embarrassment to the current IRS leadership. Originally conceived as a great way to offer stateside American tax cheaters with offshore accounts, a way back into the system with a relatively light slap on the wrist, the IRS has seemed to have gone radio silent. We have heard rumors that the original idea of centralizing everything in Philadelphia (and Austin?) has resulted in a massive choke hold on the IRS’s ability to do its job under OVDI. We understand the IRS now has a plan to decentralize everything yet again. Hopefully this new reorganization will come with a new directive allowing local exam bosses and Appeals Officers to use common sense and good judgment instead of a "malicious compliance" approach and apply the mitigation provisions of the FBAR Manual. This seems like the right thing to do, especially when eight years of back tax returns produce nothing but chump change in delinquent taxes and the imposition of six figure penalties just doesn’t seem to be what Congress could have had in mind when it passed the Bank Secrecy Act and FATCA.

People Who Joined the Program Feel Stuck: In the meantime, thousands of people who acted in good faith to join the program and spent a small fortune in legal and accounting fees hunting for moldy bank records are caught in a cruel limbo wondering when the IRS is ever going to respond to their so-called OVDI packages.

The OVDI program has now proven to be a huge "turn off" for these would-be-compliant taxpayers many of whom are embittered and remorseful about having entered the program in the first place not to mention the financial uncertainty and anxiety over whether the IRS will treat them fairly under the program.

These people cannot do any meaningful financial planning but perhaps more importantly, the slowdown and the one-size-fits all 27.5% tribute seems to be having a reverse effect: anecdotal evidence suggests more and more people are going underground and the whole thing is further undermining the entire voluntary compliance self-reporting system.

The Plight of Recent Immigrants to the US: On top of all this, we are seeing an increasingly large number of a new class of people who are wondering how to be compliant with their taxes: recent immigrants to the United States who are otherwise squeaky clean tax compliant citizens who are only now learning that that bank account back home on which they have signing authority, may now be putting them at risk for confiscatory FBAR penalties.

Meet Rahul and Kavita Patel: Here is a typical "composite" scenario: although this example presents a family in India, it represents people from dozens of countries whose citizens have grabbed the golden ring: a US green card and citizenship. Rahul and Kavita Patel are both computer engineers with degrees from the Indian Institute of Technology in New Delhi. They come from prosperous middle class families in Mumbai. Their respective families have put their names on a multitude of bank accounts in India for a variety of reasons. The laws and procedures of India are very complex and the rules for succession and inheritance are even more so. Rather than go through the US equivalent of probate, the common practice in India is simply to put children’s names on family bank accounts and partnerships so that in the event of death, a son or a daughter can access their inheritance immediately rather than wait years for such matters to weave their way through the Indian court system. In the case of Rahul Patel, his father put his name on a business bank account as a way to settle an intra-family dispute between other siblings.

The Patels were recruited for work eight years ago by a leading Silicon Valley high tech company and they have been living happily in San Jose, CA since then where they are raising a family. They started with Green Card and happily attained their US citizenship after eight years.

During the eight years in which they lived in the US, their families in Mumbai added and deleted their names, sometimes without their knowledge, on a half dozen bank accounts. Kavita and Rahul had no real interest in their parents’ money in India and even though some of them had balances in excess of five figures, they never really considered those accounts as their money. With their new life and prosperity in the United States, they sincerely hoped that their parents and siblings would use that money for their own well-being with no expectation of receiving any of it.
Rahul and Kavita have been model American citizens. They file their forms 1040 on time and usually get a small refund. Their return preparer in San Jose asked them the first year they hired him whether they did any offshore banking to which they replied in the negative not even thinking that the accounts their families had were even remotely relevant. Since they have been here, they have been dutifully filing their returns until they read an article in the Wall Street Journal which tells them they should be registering all foreign bank accounts over $10,000 on which they can sign with the US Treasury Department even if they never use the accounts, have not opened the accounts, have no idea how much money they contain, how much they earn in interest if anything, when they were opened, or even if they were closed during the year.

Immigrants Receive Conflicting and Erroneous Advice:Many immigrants who have come here recently are now thoroughly confused. In the first place, many are wondering why some kind of tax orientation was not part of their immigration process? The Patels are wondering, what use was it to learn all about the Constitution and the names of all the US Presidents if the government they were making application to was setting a trap for them by not even advising them that they were likely to be in great danger. The immigration process was filled with warm and fuzzy flag waving exercises but no one ever mentioned that one of the screwy aspects of becoming an American was, unlike any other civilized nation on the planet, the US government didn’t say it had the power to ruin them economically and embarrass them in front of their employer if they failed to cough up an annual accounting of everything of value at home in India.
The Patels have been all over the internet and have come away even more confused and frightened: some tax professionals advise them not to worry about it and just do nothing. Some "what-me-worry" tax lawyers with a long string of initials after their names advise them to "quietly" fix the problem by just starting to file something next year. They discover lively web sites with some information which seems useful and accurate but then question the credibility of the entire web site when they see crack pots posting weird enactments of Adolf Hitler who is presented as symbolizing American government officials while others gleefully post shameful and embarrassing comments designed to bait Jewish people to egg them on.

There is an Easy Fix to the FBAR Problems of Recent American Immigrants:  The tax problems of the Patels can be easily addressed and the IRS presently has the ability to address it now without another Act of Congress: an IRS announcement and Revenue Procedure should be carefully crafted to provide an expedited procedure for recent immigrants to the United States. If they are otherwise fully compliant with their filing and reporting requirements, they should be able to show, without having to do a net worth analysis of their entire family in Mumbai, that they had no reason to know about FBAR's, that now they do, and that they agree to continue to be law abiding, tax paying, prosperous, contributing members of society. The Patels and thousands of others like them from a dozen other countries just want to be free from fear of a government which says it wants to do the right thing but is often its own worst enemy.

This is a chance for the government to show the world that there really is a reason why America is the only country on the planet from which no one is trying to escape and so many are trying to get in.

Monday, July 16, 2012

Tax Justice for Americans Abroad

My recently published article in Tax Notes Today





The potential for IRS overreaching in its enforcement of the Bank Secrecy Act (FBAR's) and FATCA has created a firestorm of fear and anxiety in the world-wide American expatriate community.  The IRS has done a good job with its various offshore voluntary disclosure initiatives since 2009 by presenting an opportunity for people with real reason to fear an IRS criminal investigation to get right with the IRS. But it just makes no sense for Americans in name only, who have been living abroad, with no real economic connection to the United States, to be required to come up with eight years of financial statements, “delinquent” tax returns and delinquent FBARs, a whopping 27.5% tribute payment to what expatriates consider a “foreign government”, and a small fortune in attorneys and accounting fees, to spend three or more years maneuvering through an IRS administrative maze, to “opt out” of the program. Our office has been waiting for the assignment of a revenue agent for too long in some cases after receiving the preliminary clearance letter.

The IRS has warned everyone to avoid quiet disclosures but it has forced  practitioners into a huge funnel under OVDI apparently with the end closed off. We can only assume the IRS bit off more than it can chew after frightening the whole world about “what it could do” to anyone who thought it was just joking about causing almost everyone “to go through the program” with the exception of a very narrow range of cases. (see the June 26 IRS pronouncement regarding low risk cases.)

The practitioner community has been quick to point out that the “one size fits all” approach of the OVDI program simply makes no sense in a large number of cases simply to allow us to get to the point of arguing  before an IRS Compliance manager or an IRS Appeals Officer, that the FBAR  mitigation provisions of the Internal Revenue Manual should be applied instead the almost extortionist 27.5% tribute program under OVDI.

This article does not attempt to cover all the factual scenarios which do not fit into OVDI, but the facts of  Adams family in the article should be a “no brainer” for the IRS. The purpose of the article is to suggest a common sense facts and circumstances approach for front line IRS troops to free Americans abroad from the fear of enforcement of statutes which were never intended to punish and destroy them economically.  For these Americans abroad, the United States is about as far away from their lives and minds as anything could be.



Monday, July 2, 2012

Whoever Said The IRS Lacked Common Sense?

New Filing Procedure For Americans Abroad; Too Little, But Not Too Late

On June 26, 2012, the IRS announced a new filing compliance procedure for non-resident U.S taxpayers. The procedure provides that current non-residents including dual citizens, who have not filed U.S. income tax and information returns, may file three years of delinquent tax returns and six years of delinquent FBAR's without fear of IRS punishment. Provided the delinquent returns are (a) "simple returns," (b) the IRS determines that the taxpayer’s package presents a "low level of compliance risk" (c) and the returns show less than $1,500 of tax due for each year, the taxpayer can expect an expedited review process possibly resulting in no assertion of penalties or further follow up procedures. The notice makes it clear that this new procedure is not a substitute for a voluntary disclosure nor the more formal OVDI 27.5% tribute program and that if a taxpayer has a well-founded worry about the risk of criminal prosecution he better consult a lawyer.
The new program is a good idea and is perhaps more notable for what it says between the lines rather than in its explicit details: the program says to me that the IRS has the ability to use common sense and good judgment in culling out the "no brainer" situations where the "one size fits all" approach of the OVDI program just doesn’t make sense. Also, it is an admission on the part of the IRS that they didn’t think the OVDI program through carefully enough to anticipate what must be an overwhelming flood of OVDI applications which are now clogging the system, many of which really do not belong in the program in the first place.

There is clearly good news here because it is a great chance for some people with simple returns to get an almost free pass to the world of future compliance assuming they really care about their status with the IRS.

The problem is the new program will only apply to a tiny fraction of the Americans abroad with real tax issues. Moreover, many of the folks who qualify to file "simple returns" with little tax due already have one foot out the door when it comes to American tax compliance and could care less about what the IRS thinks. Also many should feel some sense of vindication because (1) it is an IRS admission that its menacing public pronouncements notwithstanding, its OVDI "bluff" has been called and (2) it is a public acknowledgement that the IRS has known all along that it "just had to do something" to tell the world that there should be, and can be a mechanism available for low level IRS workers to use common sense and good judgment when they process simple cases.

But the IRS is fooling itself if it thinks that many people are going to jump on the band wagon as a result of the June 26 announcement. Many Americans abroad will read the new program as a better chance to argue "reasonable cause" or "no tax avoidance motive" at some time in the future, if and when the IRS ever catches up with them. The reason is, the IRS will find it hard to argue that the publication of an obscure announcement in tiny print on its web site is sufficient notice to the entire world-wide expatriate community that they are now on notice that they better act now to get into compliance or risk a heavy hammer if they don’t develop a healthy fear of what the IRS could possibly do to them.

It should be clear to even the most paranoid expatriates that ignoring the new program will in no way increase their chances of the IRS opening a criminal investigation against them, nor should anyone believe that the failure to elect the "simple returns" procedure or the draconian 27.5% tribute program will result in the IRS throwing the penalty book at them in the face of the remote possibility that they will get caught by the IRS at some time in the future.

The new procedure is "too little" because my guess is when the IRS announces the details, "simple returns" are likely to include those with only a schedule A and B and not much more. If there is a small amount of "economic activity" in the United States, if a taxpayer is doing business abroad through a corporation or partnership, if there is a relatively small amount of US source income, a legitimate trust or foundation to support an elderly relative, a foreign mutual fund or PFIC, a residency or filing status issue, or any complication at all which would cause a return to require a regular revenue agent’s attention (as opposed to a lower level office auditor) those taxpayers will have to go through the rigors of the OVDI 27.5% tribute program or a noisy disclosure outside the program if the practitioner has the guts to stand fast and look the IRS straight in the eye.

The new notice is also a fresh reminder to all the "back door" professionals who have been suborning the use of quiet disclosures to knock it off now because there is simply no excuse for a quiet disclosure in light of the notice’s invitation to just write the IRS a letter and explain where the client has been for the past several years.

The new program is not "too late" because it says finally, that (1) there is in fact a de minimus amount of unreported income which will be excused contrary to the OVDI FAQ’s, (2) a noisy disclosure outside the 27.5% tribute program will be ok to show reasonable cause for failure to file income and information returns AND FBAR's, and (3) legitimate retirement and savings plans are not at risk for IRS abuse or confiscation.

The new program is a good start. We hope that in the future the IRS will continue to issue further guidance and be a bit more broad-minded when defining "no brainers."




Friday, June 15, 2012

Another FATCA Red Herring: A Good Way To Defeat FATCA Is To Defeat Obama In November








This past week, the Isaac Brock Society published another interesting thread which basically asked if Obama deserves to be re-elected in light of FATCA, OVDI, and FBAR's.

Here are some slightly edited comments I posted: (You can see the origional post here)

The title to this “debate” reminds me of some cranky old fart law professors who delight in playing mind games with their terrorized first year students around the theme and variation of, “let me frame the question and I’ll have you giving me the answer I want.” One would have us think that Obama (or worse, the Democratic Party) is single-handedly responsible for FATCA, FBARs, and the muscle-bound perceived insensitivity of the IRS. Even a superficial reading of history from the time of the enactment of the Bank Secrecy Act in the 70′s through the Reagan Bush era will show that the Republicans share the blame equally with the Democrats for the failure of government we are now experiencing.

Let’s change the question a bit to read, “Given the disaster we are now experiencing with FATCA and an unworkable Internal Revenue Code, shouldn’t we vote for “Mitt ” Romney who we all know has the will and the way to make all our problems go away”? Sounds stupid doesn’t it??

In response to a Brocker who raised the question of why US homelanders don’t seem to care, I wrote:
It is not that homelanders don’t care, rather they are consumed by their own economic problems. The issues facing Americans abroad need to be well-articulated and organized. That’s why organizations like American Citizens Abroad and Democrats Abroad are so important. Politicians everywhere respond to money and where the votes are. If there really are seven million expatriate votes out there, that  would make a difference. The problem is there is only a tiny fraction of people who are vocal and getting organized. The real truth is the vast majority of Americans abroad don’t really care either because they are so far off the radar, and so completely underground, they figure it is highly unlikely that they will get caught. That said, the Isaac Brock Society is playing a critical role as a lightning rod and is getting plenty of attention. You need to keep up the good work. There are some politicians in Washington who really care (can’t think of any at the moment) but it is going to be a long hard fight to turn things around. One thing is for sure though: Obama as an issue is a “red herring.” If anyone thinks that a changing of the guard at the White House is going to matter at all, you are setting yourself up for a big disappointment.
Another blogger raised the issue of arguing about FATCA’s negative impact on Americans seeking work abroad: I wrote:

I totally agree with Phil Hodgen that the argument needs to be expressed in terms of the economic effect on Americans inside the US and their ability to compete for jobs abroad, but don’t fool yourself into thinking that the answer is the repeal of FATCA. That’s not going to happen.
The FATCA train has already left the station and if you read the international banking journals and other business publications, apart from some worn-out, “heard it before” griping, no one in any position of authority in or out of governments abroad or in the international banking/brokerage community are singing that tune. The Big Four accounting firms can’t hire FATCA experts and computer people fast enough to keep up with the demands of their mega-clients who see FATCA as a sure fire way to make more money.
The talk in the bank board rooms and at the secret meetings at the fancy international resorts is how to implement FATCA so as to avoid any interruption at all of the billions of dollars in profits which continue to pour into the banks and the brokerage houses all over the world. In fact the big boys are using FATCA as an excuse to completely modernize their computer infrastructures to get ready for the planned shared international banking customer data base which will be the cornerstone of international banking for the rest of the twenty first century.
The banks and brokerage houses abroad are spending billions, not to thwart FATCA but rather to figure out how to make it work smoothly while they pass the cost of compliance on to all their depositors, big and small. The official IRS response to the FATCA pitfalls which deny Americans the freedom and opportunity to take jobs whereever they choose is probably going to be, “shut up and just comply. The earned income exclusion and the foreign tax credit is all you get unless Congress says otherwise.” I know that my comment here is going to absolutely infuriate many Brockers who read this but please don’t kill the messenger. Unless I am living on another planet, what am I missing?
My further response to another Brocker was,
As I wrote earlier regarding a canned White House response to a Brocker which generated an interesting thread, a good idea might be to target attainable issues first rather than for example, lobby for a revision to world-based taxation, or some larger goal. An attainable goal would be something simple: a no brainer like real amnesty for Americans born abroad with little or no economic connection to the USA or a simple IRS announcement which says if you are an American living in a foreign country and you have thought about the Internal Revenue Code about as often as you think about moving to a fishing village north of the Arctic Circle, then forget about FBARs, FATCA, OVDI, or flooding the over-worked, underappreciated employees of the IRS with a bunch of delinquent tax returns which show you don’t owe the IRS anything.
I have written an article about the first one–amnesty for foreign born Americans– which is slated for publication in the July 9 edition of Tax Notes and Tax Notes Today. I cannot circulate it until it is published by TaxAnalysts but I will get permission to do so once it is.
The point is the Isaac Brock Society is not going to change the world but you have considerable clout and credibility if you choose your Queenston Heights carefully. (Queenston Heights was the hill Isaac Brock died on in the War of 1812 between the United States, Canada, and Britain.)