Monday, May 21, 2012

Compliance Dilemma For Americans Abroad With No Tax Liability To The United States



This comment is not legal advice nor is it the recommendation of Mopsick Tax Law.

There is a pink elephant in the room and it is time we talked about it. Everyone knows that no one in Washington was thinking about Americans abroad when FATCA and the Bank Secrecy Act were passed by Congress.

Question: What if Americans abroad were to file the following letter with the
Internal Revenue Service Center, in Austin, Texas, along with a current good faith, detailed, and honest tax return showing no tax due and simultaneously file a current or six years of FBARs with the Detroit Data Center?

     "Dear Internal Revenue Service:

My name, address, and social security number are as follows: [xxx-xx-xxxx]

I have lived in [country] for the past [x years] , [brief paragraph detailing taxpayer’s history and statement of why he has no real economic connection to the united states ].

I have recently learned about FBARs and that Americans abroad are required to file annual income tax returns with the IRS. I cannot afford to pay the fees I have been told it would cost if I were to engage a tax professional to advise me what to do, and there is no IRS office anywhere close to where I live. Nevertheless, I have learned that with the foreign earned income credit and the foreign tax credit, it is highly unlikely that I would owe any taxes at all to the USA.

I also now know that under US law, my bank account here would be considered an interest in a foreign financial account, but to me it is simply my local bank from which I pay my bills, transact my business, and keep my savings.

Also, from what I have read, the FBAR rules were enacted to catch tax cheats who are trying to hide money offshore and evade their obligations. I honestly believe these rules and penalties were not enacted to be applied to people like me or with facts like mine. 

Finally, I have also read that the internal IRS Manual on FBARs urges IRS employees to use common sense in administering the FBAR rules and I have every expectation that they do use common sense and good judgment as they administer this law.

I also know that some Americans are renouncing their US citizenship because of this issue. While I fully respect their right to do so, this is not an acceptable option for me for a number of reasons and I would certainly never do so based on the hysterical or imagined fear that the US government would devote one penny of its law enforcement budget to pursue me.

To summarize, I have no intention of renouncing my US citizenship. I now fully understand my obligation to file FBARs and annual income and information tax returns. I sincerely believe that if you were to audit me, all of the reasonable cause rules would apply and the result would be no taxes or penalties due.

I believe with the filing of the attached current return and FBARs I am compliant with my federal tax obligations.

     Yours truly,

     American Abroad"

 

What's Wrong With This Approach?:
While chances are the IRS response to a letter like this might be, "Thanks, nice to hear from you after so long and welcome back!" There is another chance the IRS may never respond, simply file the current return and delinquent FBARs, and do the same with a similar letter next year and the one after that. Another possible scenario which would be perfectly permissible under the law, would be for the IRS to write back and say, "thanks for your letter. You have now admitted in writing that you are in willful non-compliance with your federal income tax and FBAR filing obligations for the past six years. Accordingly, we are assigning a special agent to deal with your flagrant abuse and he will be in touch in due course.




2 comments:

  1. Mr Mopstick,

    I learned from Jack Townsend's blog that the IRS announces some penalty mitigation for "Super Minnow" US Taxpayers Living Abroad.
    http://federaltaxcrimes.blogspot.com/2012/06/irs-announces-penalty-mitigation-for.html

    Is there any way you could find out if this relief would also apply to US immigrants (living in the US)?

    Thank you very much!

    ReplyDelete
    Replies
    1. The IRS June 26 announcement says nothing about recent immigrants to the United States however, reading between the lines, it seems to open the door for what we have been advising many of our clients with benign, relatively simple tax situations involving immigrants. And that is to file a noisy disclosure outside of the program with a detailed letter explaining why it makes no sense to punish recent immigrants with penalties which were never intended to cover their innocent factual scenarios.”

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