Will There or Won’t There be Tax Reform by the End of 2017?

I wrote this introduction for a program to be presented to tax professionals outside of North America back in March 2017. It was only meant as a general guide for those who might have been completely unaware of our grassroots movement as well as several attempts made by Congress to study our situation. It was not meant to be a complete discussion of the entire history of all our efforts but simply to inform them that we exist. To stimulate them to be more than paper-pushers and blind parrots for the IRS.

I still have a hard time believing effective tax reform for our dilemma will happen. Partially because awareness is not “new.” Since Dave Camp and the W&M call for submissions 4 years ago, there have been no less than 9 different studies, drafts etc and up to now, no real progress, no change. In addition, the general dysfunction of Congress (they can’t get health reform right) and the Trump Administration continues. It is now nearly September. There will be a huge effort needed to deal with Hurricane Harvey.

Will we or won’t we see tax reform?
 
Can this situation be tolerated as is for years to come?
 
What do YOU think?
 



INTRODUCTION

THE PROBLEMS

The recent history of tax reform in the United States, as pertaining to American citizens abroad is quite a back-and-forth sort of acknowledgement of the issues with recommendations followed by a complete lack of concrete action to address the problems. A short introduction of the intervening factors is truly necessary in order to evaluate the effectiveness of any tax reform for this unique population of “Americans.”

Once the Swiss bank debacle resulted in successful litigation by the Department of Justice, Americans abroad were swept up in the attempts to gain access to all offshore accounts. The IRS created and tried to steer everyone into the Overseas Voluntary Disclosure Programs/Initiative. (The current 2014 OVDP is derived from the 2012 program). The tax compliance community and the media pushed this avenue of action in spite of the fact that the program was designed for criminals, has no legal basis, and should never have included those who had foreign accounts in order to function where they live. It is despicable that many who had lost U.S. citizenship decades ago and those who were “Accidental Americans,” were told they must enter this “amnesty” program.

2009 OVDP
2011 OVDI
2012 OVDP

Due to serious issues with OVDP, expats became very vocal about their concerns of exhorbitant penalties. Then-US Ambassador to Canada Jacobson had promised relief. Instead, the IRS issued Fact Statement of 2011-13. It outlined how non-compliant expats could file and claim “reasonable cause” for not filing FBARs. (I filed this way with no issues). Some in the compliance community and some expats were disappointed as there was “nothing new” about FS 2011-13. It was simply the way things had always been done. Then Streamlined Program, which appeared on September 1, 2012 was fraught with difficulties. The newer version of Streamlined Streamlined allows filing with strong expectation of no penalties.Based upon direct statements by IRS Commissioner John Koskinen and and then-Acting Assistant Attorney General Caroline Ciraolo, there are some concerns that as more become aware of the requirement to file, the Streamlined Program will be discontinued. This may or may not be a scare tactic, after all, what is required by law is simply to file and reasonable cause (which is what Streamlined uses to mitigate penalties) has always been available to abate penalties. It will likely be impossible to undo the level of fear created by the IRS, the tax compliance community and the media should it become necessary for people to file outside of Streamlined.

The signing of the FATCA IGAs followed by implementing legislation passed in a majority of the world’s countries exacerbated the situation for expatriates. The U.S. government including the IRS and CI departments of Treasury Department, the State Department, the House Ways and Means Committee and the Senate Finance Committee are well aware of these problems. There is now a great deal of pressure on the current Congress to include some relief for Americans living outside the United States. It must take into account an incredibly complicated interplay of U.S. citizenship and taxation law to try and mold into meaningful reform. In addition, non-resident Americans experience different tax laws overall, due to their residence in other countries. Regardless of the U.S. government’s assertion that the tax code “treats all Americans the same” in reality, this cannot be true and is not true.

RESPONSES/DEVELOPMENTS WITHIN THE EXPATRIATE COMMUNITY

Historically, American Citizens Abroad is credited as the primary group lobbying for these non-resident citizens. Of special note are the late Roger Conklin & his testimony before Ways and Means and Jacqueline Bunion and her many excellent submissions & videos. Democrats Abroad , FAWCO and AARO are sister groups located in Europe; all support FATCA as well as a move to Residence-Based-Taxation. A main emphasis has been on the
“Same Country Exception”,which would allow tax-compliant Americans abroad to be exempt from FATCA reporting for accounts located in the country they reside in. The Treasury Department recently denied SCE. These measures would have protected approximately 1 million tax-compliant expats from FATCA but would not address the more complicated problems of the other approximately 7 million living abroad.

Republicans Overseas created a set of Resolutions which they intended to be included in the Party Platform. They are the primary backers of the FATCA Legal Action group, funding the
“Bopp Lawsuit” which is currently preparing for an appeal (and has since been denied).

There has been a huge grassroots resistance originating with the Isaac Brock Society in 2011, from which came Maple Sandbox, Alliance for the Defence of Canadian Sovereignty currently in litigation against the Canadian government; the Alliance for the Defeat of Citizenship Taxation , (anticipating future litigation with the American government).

A few years later came Keith Redmond and the American Expatriates Facebook Group from which came the Accidental Americans Facebook group and the corresponding groups American Accidental.com and Association des Americains Accidentals centered in France.

After the Isaac Brock Society insistence upon independent research concerning compliance and renunciation, the renunciation numbers began to rise as more and more expatriates realized the true financial risk of remaining American without a matching effort of the U.S. (who cannot seem to find a way to apply procedures that enable discovery of, identification and collection from Homelanders with foreign accounts for the purpose of evading tax versus Americans outside the United States who have legitimate foreign accounts for the purpose of living). The huge amount of non-compliance of this second group, coming to light in 2009 with a much larger wave in 2011, simply speaks to the lack of due diligence on the part of the American government, to educate this population as to their tax obligations and more importantly, their reporting obligations. It is no small thing that FBAR was unenforced for 40 years. Perhaps longer for “regular” filing. There is no excuse for the threatening and punitive campaign pursued by the IRS for this second group.

In addition to the efforts of expatriates, there has been consistent strong support from the Taxpayer Advocate, Nina Olson. She has repeatedly brought attention to the problems in the Annual Reports to Congress .

James Jatras has been against FATCA from the beginning and has joined with Nigel Green in a lobbying effort The Campaign to Repeal FATCA .

Later support has come from Grover Norquist & Americans for Tax Reform ;
the Coalition of 23 Groups letter calling for the repeal of FATCA as part of tax reform and the FATCA Hearing chaired by Congressman Mark Meadows.
 
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PROPOSED TAX REFORMS
 
The first major attempt at tax reform was sponsored by House Ways and Means Chairman Dave Camp (113th Congress (Jan 3, 2013 to Jan 2, 2015) in 2013. Calls for submissions were answered by many expatriates and interestingly enough, are reflected in the Joint Committee of Taxation report of May 6, 2013. You can read submissions
here .

On May 9, 2013 a paper Senate Finance Committee Staff Tax Reform Options for Discussion was released. This report suggested non-resident Americans could be taxed the same as non-resident aliens; that an exit tax could be implemented and advocated repeal of the FEIE.

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Coming quite late in the tenure of the 113th Congress, was The Tax Reform Act of 2014. Regrettably, none of the issues of expats were addressed in this legislation (which failed to pass). For an interesting discussion of the approaches considered that do not necessarily address expat issues see:
here & here .

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In December 2014, a very favorable report was released by the Republican Staff Committee on Finance United States Senate. A primary consideration was to tax non-resident citizens only on U.S. sources.

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On February 2, 2015 the Obama Administration tried to address some of the problems involved for “Accidental Americans. In the “General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals”also called the “Green Book,” it was proposed that certain dual citizens could renounce their US citizenship without the fear of penalization, particularly with regard to being“covered” and liable for the Exit Tax. While not tax reform per sé, it represents awareness on the part of the government. It also, for better or worse, raised the hopes of expats everywhere that something was going to be done. The same proposal was put forward a year later, adjusted for changed dates.

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On March 11, 2015, the Senate Finance Committee established five working groups to address reform one of which was the International Group chaired by Senator Rob Portman (R-Ohio) & Senator Chuck Schumer (D-N.Y.). Expatriate submissions are < href=http://fatca.eu.pn/ ). The committee report was released in July 2015. It contained a mere two paragraphs with no specific recommendations.

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In June 2016, Republican members of the Ways & Means Committee created a working paper
“The Better Way.” It is expected that this will lay the foundation for new legislation. One aspect of this paper is the intent of the GOP to repeal the estate tax and the GST but does not address the gift tax. A concern is that an individual could gift an asset to someone in a lower bracket before a taxable event and have it returned once the income been taxed. It also does not say that a capital gains tax should apply at death (due to no estate tax). The blueprint fails to mention eliminating the step-up basis to FMV that is now available at death nor is there a carry-over provision that would make tax due once an heir sells the property. Whether this is what the Committee intends is not clear.

Unfortunately for expats, this paper has only one sentence pertaining to expats which does not tend to suggest that many of the much-discussed possibilities are likely to find way into actual tax reform legislation

SOME DESCRIPTIONS FROM TAX REFORM PROPOSALS OUTLINING MAJOR NEEDS OF AMERICANS ABROAD

Joint Committee on Taxation May 6 2013
Summary of points applying to U.S. citizens abroad
From Recommendations p 516 –522

3. U.S. citizens residing abroad – Numerous comments were received that relate to the taxation of U.S. citizens living abroad. These comments include the following recommendations:

  • Repeal or revise the Foreign Account Tax Compliance Act (“FATCA”);
  • Provide an unlimited foreign-earned income exclusion for permanent residents of a foreign country;
  • Expand the foreign-earned income exclusion to include passive as well as earned income;
  • Repeal the special rules on passive foreign investment companies;
  • Repeal the provisions imposing tax responsibilities on those who expatriate by relinquishing U.S. citizenship or residency, including the ban on issuance of visas to expatriates who avoid payment of taxes;
  • Adoption of residence-based taxation (see below);

Residence-based taxation should not include a provision for imposing 30 percent withholding tax on U.S.-source pensions;

Any move to residence-based taxation implies the need to eliminate the savings clause from new and existing tax treaties;

Creation of a bipartisan commission responsible for studying the impact of Federal laws and policies on U.S. citizens living abroad, especially those provisions and administrative programs that require disclosure of financial information. The Commission would report to Congress with recommendations and submit a follow-up report on any remedial administrative response to the report.

The Working Group also received technical comments related to the computation of income tax when a portion of income is excluded under the foreign-earned income exclusion. Adoption of residence-based taxation. Many comments proposed adopting a residence-based tax system to treat certain U.S. citizens domiciled abroad in the same manner as foreign persons, applying withholding taxes to U.S.-source income earned by such U.S. citizens and taxing effectively connected income as under the present law rules. The proponents of a residence-based tax system suggest the following elements:

U.S. citizens that meet certain requirements could continue to be taxed under the rules of present law or could elect into residence-based taxation.

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INTERNATIONAL COMPETITIVENESS
Senate Finance Committee Staff
Tax Reform Options for Discussion
May 9, 2013

Page 12

IV. NON-RESIDENT U.S. CITIZENS

1. Provide an election to citizens who are long-term nonresident citizens to be taxed as nonresident aliens if they meet certain conditions (Schneider, “The End of Taxation Without End: A New Tax Regime for U.S. Expatriates,” 2013; similar to the law in Canada)

a. Require a minimum period of residence abroad
b. Impose an exit tax on electing taxpayers where deemed to sell all assets at the time of election

2. Repeal the foreign-earned income exclusion (H.R.2 (108th Congress), Jobs and Growth Tax Relief and Reconciliation Act of 2003, sponsored by Rep. Thomas)

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Resolution to Repeal the Foreign Account Tax Compliance Act (FATCA)
Republicans Overseas December 5, 2013

Whereas, In 2010 Congress passed the Foreign Account Tax Compliance Act (FATCA) in an effort to catch tax evaders; but this Act has inadvertently ensnared every United States Citizen living overseas due to its overzealous invasion of privacy and punitive taxation and enforcement;
Whereas, The United States is one of the only two countries in the world that taxes foreign income of its citizens living abroad who already pay taxes where they reside;
Whereas, FATCA creates enormous reporting burdens for American taxpayers living overseas and puts them a great risk for even the slightest innocent mistake;
Whereas, FATCA requires foreign financial institutions, to enter into an agreement with the Internal Revenue Service (IRS) to identify their U.S. account holders and to disclose the account holders’ names, taxpayer IDs, addresses, and the accounts’ balances, receipts, and withdrawals (sometimes in violation of foreign privacy laws);
Whereas, FATCA has resulted in Americans living and working overseas finding themselves, and their companies, shut out from access to banks, insurance loans and investment opportunities, as many foreign financial services providers have concluded that doing business with Americans is simply too much trouble thus decreasing America’s competitiveness overseas;
Whereas, FATCA’s primary mechanism for enforcing compliance of foreign financial institutions is a punitive withholding levy on U.S. assets, creating a strong incentive for foreign financial institutions to divest (or not invest) in U.S. assets, resulting in capital flight, hurting the U.S. economy;
Whereas, Time magazine reported a sevenfold increase in Americans renouncing U.S. citizenship between 2008 and 2011 and has attributed this at least in part to FATCA and another surge in renunciations in 2013 to record levels has been reported in the news media, with FATCA cited as a factor in the decision of many of the renunciants; and
Whereas, FATCA forces Americans living abroad to make a horribly unfair choice between renouncing their citizenship and abandoning their businesses abroad because foreign financial institutions won’t handle their transactions or accounts; therefore be it
RESOLVED, The Republican National Committee hereby presents this Resolution to each Member of Congress and urges the U.S. Congress to repeal FATCA and to allow those U.S. citizens who renounced their citizenship under FATCA to regain their citizenship;
RESOLVED, The Republican National Committee urges the IRS to cease inflicting damage on the United States and on the global financial system in an attempt to vindicate FATCA’s misguided approach to tax enforcement;
RESOLVED, The Republican National Committee by presenting this Resolution to each Member of Congress urges them to increase the competitiveness of Americans overseas and remove inappropriate invasions of American citizens’ privacy; and
RESOLVED, The Republican National Committee hereby presents this Resolution to each Ambassador and Representative from every foreign nation and warns them that the privacy rights of their own citizens are at risk due to reciprocal agreements.

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Comprehensive Tax Reform for 2015 and Beyond
By Republican Staff Committee on Finance United States Senate
December 2014
Pp 282-283
The United States needs to rethink its taxing rules for nonresident U.S. citizens.
If a U.S. citizen is living and working abroad with some permanence, and the primary nexus the individual has to the United States is citizenship, we think it makes sense to tax the individual, as a general rule, only on income from U.S. sources.
A test would need to be developed to determine at what point a U.S. citizen is considered a nonresident of the United States and then at what point the U.S. citizen is considered to be a resident again.
Some factors that may be considered include:

*the permanence and purpose of the stay abroad,
*residential ties to the United States,
*residential ties to the foreign country, and
*regularity and length of visits to the United States.

The test could be adopted, in some part, from the existing rules that are used to determine residency of alien individuals, i.e., those individuals who are not U.S citizens.
In addition, an exit tax could be applied when the U.S. citizen is considered a nonresident and no longer subject to U.S. worldwide taxing jurisdiction

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General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals
pp 282-283

Proposal Under the proposal, an individual will not be subject to tax as a U.S. citizen and will not be a covered expatriate subject to the mark-to-market exit tax under section 877A if the individual:
1. became at birth a citizen of the United States and a citizen of another country,
2. at all times, up to and including the individual’s expatriation date, has been a citizen of a country other than the United States,
3. has not been a resident of the United States (as defined in section 7701(b)) since attaining age 18½,
4. has never held a U.S. passport or has held a U.S. passport for the sole purpose of departing from the United States in compliance with 22 CFR §53.1,
5. relinquishes his or her U.S. citizenship within two years after the later of January 1, 2016, or the date on which the individual learns that he or she is a U.S. citizen, and
6. certifies under penalty of perjury his or her compliance with all U.S. Federal tax obligations that would have applied during the five years preceding the year of expatriation if the individual had been a nonresident alien during that period.

The proposal would be effective January 1, 2016.

This same proposal appeared in the 2017 Revenue Proposals with the same conditions and minor date adjustments. Outlined on pp 254-555

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The International Tax Bipartisan Tax Working Group Report
United States Senate Committee on Finance July 7, 2015

pp 80-81
F. Overseas Americans
According to working group submissions, there are currently 7.6 million American citizens living outside of the United States. Of the 347 submissions made to the international working
group, nearly three-quarters dealt with the international taxation of individuals, mainly focusing on citizenship-based taxation, the Foreign Account Tax Compliance Act (FATCA), and the Report of Foreign Bank and Financial Accounts (FBAR). While the co-chairs were not able to produce a comprehensive plan to overhaul the taxation of individual Americans living overseas within the time-constraints placed on the working group, the co-chairs urge the Chairman and Ranking Member to carefully consider the concerns articulated in the submissions moving forward.

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We Believe in America
The GOP Party Platform July 2016

Section 3 A Rebirth of Constitutional Government

The Foreign Account Tax Compliance Act (FATCA) and the Foreign Bank and Asset Reporting Requirements result in government’s warrantless seizure of personal financial information without reasonable suspicion or probable cause. Americans overseas should enjoy the same rights as Americans residing in the United States, whose private financial information is not subject to disclosure to the government except as to interest earned. The requirement for all banks around the world to provide detailed information to the IRS about American account holders outside the United States has resulted in banks refusing service to them. Thus, FATCA not only allows “unreasonable search and seizures” but also threatens the ability of overseas Americans to lead normal lives. We call for its repeal and for a change to residency-based taxation for U.S. citizens overseas.

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A Better Way Forward on Tax Reform
Republicans of the Ways & Means Committee June 2016

p. 29

In addition to these important reforms that will create a modern international tax system for businesses, the Committee on Ways and Means will consider the appropriate treatment of individuals living and working abroad in today’s globally integrated economy

Dewees 3: Lessons about the “Oh My God Moment” and dealing with the problems of U.S. citizenship

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

Continue reading Dewees 3: Lessons about the “Oh My God Moment” and dealing with the problems of U.S. citizenship

Vulnerable Americans Abroad: Legal Weight of IRS Pubs, Info, FAQs = ZILCH!

An article by Virginia La Torre
Jeker JD, at the
angloinfo blog

This is an excellent post. It clarifies how one can determine what the IRS really can (and can’t) do and in particular, points out how the OVDP program is NOT rooted in law. This is important for those who do not/never did belong in OVDP in the first place. OVDP is for criminals. Simply failing to file with no tax due when one is unaware of the requirements does not equate to being a criminal. And don’t forget, once OVDP is entered, there is no “reasonable cause” option available. Instead, one commits to a penalty, pretending to be guilty when likely one is not.

What’s a taxpayer to do? As if the US tax rules are not confusing enough, it’s a sad situation when taxpayers cannot rely on information supplied by the Internal Revenue Service (IRS) in the most commonly accessed and user-friendly formats – such as IRS Publications, “Frequently Asked Questions” (FAQs), news releases, videos and the like. On May 18, 2017 IRS issued a memorandum to all of its examiners reminding them that FAQs and other items posted on the IRS website www.IRS.gov that have not been published in the Internal Revenue Bulletin (IRB) are not legal authority.

The five types of guidance published in the IRB are:

Treasury Regulations
IRS Revenue Rulings
IRS Revenue Procedures
IRS Notices, and
IRS Announcements

Be Careful What You Rely On! Case in Point: OVDP

A good example of how serious the problem of “unofficial” IRS guidance can be is evidenced by the IRS “Offshore Voluntary Disclosure Program” (OVDP), which was accused of IRS “bait and switch” tactics. Taxpayers with offshore assets and those living abroad are likely very familiar with the OVDP. Even with the critical importance of the OVDP and its monumental impact on thousands of taxpayers, the OVDP is governed only by a long series of FAQs (and much agency secrecy). Taxpayers must be reminded these FAQs are not binding authority, even though the FAQs themselves do not indicate any warning to taxpayers or their advisors of this fact.

More here

Citizenship showdown coming: Has Australia ceded control of its sovereignty to foreign countries?

cross-posted from citizenship solutions

Shades of Larissa Waters

Oh My God! Think of it:

My sources in Australia tell me …

This time it’s the –
Deputy Prime Minister
– and the first member of the lower house to be tainted by dual citizenship. This is significant. With the Senate they usually go to the next person on that party’s ticket from the last Senate election. With the House of Reps they have to have a by-election – and Turnbull’s government is hanging on by a single vote. So, if the High Court rules that Barnaby Joyce must vacate his seat, it could topple the government!

And I thought that Politics in Canada was dirty. And we all revel in the daily stench of the toxic partisanship in the USA. But, hey at least these two countries do NOT have constitutional provisions that (as they have been interpreted) allow other countries to interfere in who the elected representatives are! (We let them interfere in covert ways – think “From Russia With Love” ….)

But Australia. This really is unique. Think of it. Once a person is accused of being a dual citizen – AS DEFINED BY THE LAWS OF ANOTHER COUNTRY – then the person is disqualified from serving in the Senate or the Lower House. I had always thought of Australia as a sovereign country. Can it really be true that Australia allows eligibility for service in the Senate or the lower house to be determined by another country’s citizenship laws? Does it matter whether these “foreign laws” confer citizenship by force rather than citizenship by consent?

Think of the possibilities here. There have always been suggestions that “The USA via the CIA” had been (wonderful melody) instrumental in the dismissal of Australian Prime Minister Gough Whitlam. Why go to so much trouble? The way Australia is interpreting its own constitution, all a future U.S. Government would have to do is confer U.S. citizenship on the Prime Minister of Australia and he would be forced to resign. But this would be the intentional “weaponization of citizenship”. (But, the FATCA is that: the USA would NEVER use citizenship as a weapon now, would it?) Australia has already surrendered much of its sovereignty to the United States through a combination of the FATCA IGA and the “savings clause” in the Australia U.S. Tax Treaty.

It’s worse than you think. The problem extends to the ongoing changes in the citizenship laws of other nations

What about the change in one country’s citizenship laws conferring citizenship on an Australian citizen without his/her knowing about it?
For example, Canada has made significant amendments to its citizenship laws in 2009 and 2016. In both cases Canadian citizenship was conferred on people who did NOT have Canadian citizenship. One example is that prior to 1977, a person born abroad to a married couple where the father was NOT Canadian (say Australian) and the mother was Canadian would NOT have become Canadian by descent. In 2009 people in these circumstances were given Canadian citizenship. What if a person affected by this was in the Australian Senate in 2009 when the Canadian law was changed.
Would that person be forced to resign?

Can the citizenship of country A be forcibly imposed on a resident of country B who has NEITHER ACCEPTED NOR ACKNOWLEDGED THAT CITIZENSHIP?


Continue reading Citizenship showdown coming: Has Australia ceded control of its sovereignty to foreign countries?

Dewees 2: Why did he participate in the 2009 #OVDP Horror Show?

cross posted from citizenship solutions

In an earlier post I explained why the Canada Revenue Agency assisted the IRS in collecting a $133,000 U.S. dollar penalty on a Canadian resident. The bottom line was that he was presumably NOT a Canadian citizen and therefore did NOT have the benefits of the tax treaty. This post is to explain where the penalty came from in the first place.

Will you walk into my parlour?’ – #Americansabroad and IRS “amnesty” offers in the 2009 #OVDP

It has been widely reported that a U.S. citizen residing in Toronto, Canada since 1971, paid a $133,000 U.S. dollar penalty for failing to file IRS forms disclosing that he was running a business through a Canadian corporation. How did this fly get caught in the spider’s web?

The Spider and the Fly is a poem by Mary Howitt (1799–1888), published in 1829. The first line of the poem is “‘Will you walk into my parlour?’ said the Spider to the Fly.” The story tells of a cunning Spider who ensnares a naïve Fly through the use of seduction and flattery. The poem is a
cautionary tale against those who use
flattery and charm to disguise their true evil intentions.

More here

The Canada U.S. tax treaty does NOT protect Canadians from U.S. tax liability but does mean that Canada will NOT assist the U.S. in collection!

cross posted from citizenship solutions

Can the common law “revenue rule” be used to stop the enforcement of U.S. “citizenship taxation” on non-U.S. residents?
What the United States calls “citizenship taxation” is actually U.S. taxation of certain citizens and residents of other countries. The U.S. claims the right to impose full U.S. taxation on the “world income” of certain people who do NOT even live in the United States
.

Prologue: In August of 2017 it was widely reported that the Canada Revenue Agency had assisted the IRS in enforcing a massive penalty ON A CANADIAN RESIDENT levied under the U.S. Internal Revenue Code. The penalty was imposed on that Canadian resident was for failing to report to the IRS, that he had been carrying on a Canadian business, through a Canadian Controlled Private Corporation. At the time of collection, the penalty was for approximately $133,000 U.S. dollars!

Q. How did this happen? A. He entered the 2009 IRS OVDP (“Offshore Voluntary Disclosure Program”). Those who entered #OVDP were basically “signing up” to pay penalties to the IRS. Those interested in reading about the horrific treatment of another Canadian resident, who tried to “do the right thing” by entering OVDP should read this.

For the rest of the story, please see here .

Relinquished before 2004? Applying for CLN now? What are the IRS consequences?

reposted from Maple Sandbox .

Posted on March 6, 2013 by Pacifica777 .

There’s no question with renunciation (Immigration and Nationalities Act, s. 349(a)(5)).  You are relinquishing your citizenship and notifying the US government of it at the same time, and that’s the date your US citizenship ends.

But what if you relinquished your citizenship by a different method of INS, s. 349(a), such as taking citizenship in another country with the intent to relinquish your US citizenship (349(a)(1))?

The State Department is clear.  No matter when you notify the US govt of your relinquishment, once your CLN application is approved, your US citizenship ended on the date you actually relinquished it (that is the date your performed the relinquishing act, eg. naturalised as a citizen of another country — this date is indicated as your expatriation date on the the CLN.)

The IRS, however, according to s. 877A(g)(4) of the US Tax Code, considers the date of your relinquishment for IRS purposes is not the date of your actual relinquishment but the date you notified the US government of it (your consulate meeting).  This was not the case prior to 2004, however [the relevant section was 7701(n) in 2004 and it was replaced by 877A in 2008].

So, what if you relinquished your US citizenship long ago, but only recently learned of US law and policy changes which make it important to be able to prove you are not a US citizen, and wish to obtain Certificate of Loss of Nationality (a document you probably never even heard of before)?  What if the current law regarding IRS and citizenship termination did not exist at the time you relinquished?  Logic  leads one to the conclusion that laws passed after a person ceases to be a citizen are irrelevant.  The IRS has never made a definitive statement on this issue, however their instructions for the 8854 (expatriation tax form) are only directed at people with expatriation dates “after June 3, 2004.”

Tax lawyers Michael J. Miller and Ellen Brody have just published an excellent article on this matter, Expats Live in Fear of the Malevolant Time Machine, in which they point out the legal, as well as common sense, absurdity of a retroactive application position.  It’s very clear reading with useful references to legislation and case law as well.

One Couple’s Experience

reposted from Maple Sandbox

Posted on August 14, 2012 by johnnb

We moved to Canada from the United States in 1968 and received what was then called Landed Immigrant Status.  My wife was with me and I was a draft dodger.

It became obvious to us after only a couple of years that we wanted to stay in Canada so we looked into getting Canadian citizenship.  At that time there was a mandatory five year waiting period before you could apply so we just continued to gather information.  We were told that becoming a Canadian citizen would, by US law, mean we lost out US citizenship and we were told that at the citizenship ceremony we would be required to sign a renunciation of our US citizenship. Continue reading One Couple’s Experience

August 3, 2017 Canadian FATCA IGA Legislation Federal Court Lawsuit Update: Plaintiffs have complied with Court Order; Examination of Plaintiffs to begin


The Court ordered (May 31, 2017) that Plaintiffs provide:

This is an update on our FATCA IGA legislation lawsuit in Canada Federal Court.

Additional personal, detailed documents related to their financial affairs. [Our litigators felt that this request was not relevant to the lawsuit or of tenuous relevance to the issues raised in the action, but Court disagreed.] Plaintiffs have now provided to the Defendants the financial documents and the Court has ruled that these documents will be kept confidential.; and

A list of harms that the Plaintiffs know and allege have already occurred or certainly will occur. [Description of harms that might occur will be provided in a later submission.}

The harms listed in the submission are generally those detailed by the Witnesses. I am not going to provide the names of the Witnesses associated with their particular situations, but show below a brief summary of some of their harms without names disclosed.

SELECTED HARMS:

Harm associated with sharing of account information with United States. Plaintiffs allege that financial accounts of Canadians have been shared with United States and that this constitutes a harm. However, with one exception (name of person who received confirmation of turnover from Revenue Minister listed in document) Plaintiffs have no direct knowledge whether their own account information has been turned over nor do they know names of those who have had their accounts turned over — that information is in Canada’s possession.

To the extent that these financial documents have been turned over, Plaintiffs allege that this violates their right to the security of person shrined in section 7 of Charter and the protection of Canadian sovereignty, and is a violation of section 15 of Charter.

Other Witness and Plaintiff harms (not all Witnesses or harms are listed below):

Business Person who is Canadian and U.S. citizen. Would-be Canadian partners are unwilling to have potential financial and shareholder information disclosed to U.S.

Canadian and U.S. citizen harmed by U.S. IRS PFIC costs taxing away gains. To eliminate harm she had to spend monies to renounce U.S. tax citizenship. Suffered psychological harm when filing forms with FINCEN, knowing possibility of large fines if there were ever to be an erroneous mistake. She feels as if she is guilty of a crime she has not committed until proven innocent.

Canadian and U.S. citizen on disability harmed by U.S. person-hood. On disability benefits, can’t afford to become IRS compliant or renounce U.S. tax citizenship. Not being compliant with IRS exacerbated psychological harm associated with precarious financial situation. This has created conflict within family as he is unable to speak to family member about situation without family member becoming upset.

Canadian citizen mother trying to protect incapacitated son deemed only by the U.S. to be U.S. tax citizen. She has suffered psychological harm insofar as she has had her peace of mind taken away and has difficulty carrying on with normal life because she is unsure of her son’s well-being in future after she passes away. Has resulted in breakdown of relations within family.

Pure Canadian spouse of Canadian citizen who is deemed to be a U.S. person only by the U.S. Spouse received bank letter asking citizenship question on account with U.S.-tainted wife. This places spouse at disadvantage compared to those not married to persons deemed to be U.S. citizens.

Canadian citizen and formerly person deemed to be a U.S. citizen. Business partners expressed feelings that she compromised their business by sharing financial information with U.S. To escape harm she paid the costs to renounce U.S. citizenship. Feels that Canada has treated her as second class citizen.

Canadian citizen deemed ONLY by U.S. to be U.S. citizen having entity account. As part of the roundup in Canada of all Canadian citizen “entity” account holders who have U.S. taint, she received letter from bank asking for information on citizenship…

No CLN, we freeze your account Canadian citizen – deemed by U.S. to be U.S. citizen. It is sometimes claimed that Canadian financial institutions do not freeze accounts if there is a FATCA problem. Not true. This unfortunate Canadian citizen had her account frozen because her proof of no U.S. taint was not good enough: She lacked a CLN (Certificate of Loss of Nationality) that her bank required.

Infant receives request from bank to provide information on birth place and U.S. citizenship in order to continue holding account. [Self-explanatory.]

Other: Psychological harms are mentioned including feeling betrayed by the Canadian government, stress and frustration associated with the financial harm, and harm by simply not knowing whether or when their financial account information will be shared with the United States.

—– The brave Plaintiffs and Witnesses are my heroes for standing up for Canada and its sovereignty. I thank the other Canadians who also bravely volunteered, but were not selected.

—– NEXT STEP: In oral testimony Plaintiffs will be examined by Government attorneys, beginning with Gwen at the end of this month…

The biggest cost of being a “dual Canada/U.S. tax filer” is the “lost opportunity” available to pure Canadians

Cross-posted from citizenshipsolutions

by John Richardson

The biggest cost of being a “dual Canada/U.S. tax filer” is the “lost opportunity” available to pure Canadians
 

 
The reality of being a “DUAL” Canada U.S. tax filer is that you are a “DUEL” tax filer

“It’s not the taxes they take from you. It’s that the U.S. tax system leaves you with few opportunities for financial planning”.

I was recently asked “what exactly are the issues facing “Canada U.S.
dual tax filers?” This is my attempt to condense this topic into a short answer. There are a number of “obvious issues facing U.S. citizens living in Canada.” There are a number of issues that are less obvious. Here goes …

There are (at least) five obvious issues facing “dual Canada U.S. tax filers in Canada”.

At the very least the issues include:

1. The requirement to pay taxes to both the U.S. and Canada

– Double Taxation: for example, the 3.8% Obamacare surtax on Investment Income

– U.S. taxation on things that are NOT taxed in Canada (example: sale of principal residence and investment income earned inside Canadian Controlled Private Corporations) and phantom capital gains caused only by exchange rate fluctuations

– U.S. punishment/deferral penalties (Interest on tax deferral) on Canadian mutual funds – have you ever heard of a PFIC?

In many cases, the “foreign tax credit rules” will mitigate the impact of potential double taxation. That said, it is very common for “dual filers” living in Canada to be required to pay taxes to the United States. Furthermore, double taxation (because of the “savings clause“) is generally NOT eliminated by the Canada U.S. Tax Treaty. U.S. citizens are NOT generally allowed to benefit from the treaty.

2. The reporting requirements

The United States requires its “citizens” to file detailed reports disclosing financial assets. While a “dual filer” living in Canada is required to report very little information to the Government of Canada, the USA requires a massive amount of information about Canadian assets to be reported to the IRS on an annual basis. There are severe penalties for the failure to report on these assets. You may have heard of FBAR, FATCA form 8398, Form 8621, Form 3520 and 3520A and more. Those who have a Canadian Controlled Private Corporation are required to file Form 5471 (a form that requires more disclosure about their Canadian Controlled Private corporation than is required on A CANADIAN tax return!). Note also that there are circumstances where income earned by the company is attributed to the U.S. citizen individual (and must be reported as income on the U.S. return)!

By the way, forms 8621 and Form 5471 have to be filed even if a tax return is not otherwise required!

U.S. citizens have ZERO financial privacy!

3. The direct costs of U.S. tax compliance

U.S. tax returns (including satisfying the “reporting requirements”) can easily exceed 100 pages and can cost thousands of dollars to prepare. Of course, the costs are significantly less for those who have “simple lives” and few assets. U.S. tax returns are NOT simply an extension of a Canadian tax return. Those who complete their U.S. tax returns based ONLY on their Canadian tax returns are making a mistake. U.S. tax returns need to be considered separately and must take into account items that are “taxable or reportable events” in the USA but are not reportable or taxable in Canada.

4. U.S. tax rules that directly impact the marriage between a U.S. citizen and non-citizen

With a bit of advance planning you can “work around” these areas. That said, a “non-U.S. citizen spouse” is considered to be an “alien” and an opportunity for income and assets to slip away from the U.S. tax system.
It is common for U.S. citizens living in Canada to use the “married filing separately” category which is extremely punitive. Interestingly, this is a “built in tax” on the marriage between a U.S. citizen and an “alien”.

5. The Opportunity Cost – by far the biggest cost

U.S. citizens resident, are deprived of many of the “normal” financial and retirement planning opportunities available to other Canadians. This is NOT immediately obvious. That said: it is the single biggest cost of being a “dual Canada/U.S.filer”.

Why this so – Let me explain …

Canada is a country with very high tax rates. It’s very hard to “save and get ahead” in a country with a high marginal tax rate that “kicks in” at a relatively low level of income. Canada has a brutally efficient system of tax collection. In addition to paying taxes on income that are (in general) higher than in the United States, Canada has a VAT (which is NOT recognized for purposes of the U.S. “Foreign Tax Credit” rules).
Furthermore, Canada does NOT have generous “Social Security Type”
programs. Canada Pension Plan and Old Age Security are NOT income replacements but are supplements to income. Therefore, (and financial literacy should be a required skill) it is ESSENTIAL that Canadian residents engage in intelligent, purposeful and effective retirement planning. Much of financial planning is based on the tax consequences of various transactions.

Intelligent, purposeful and effective retirement planning for Canadian residents

At the risk of oversimplification most Canadians employ some or all of the following …

Employee pension plans:

Examples include the pension plans offered by teachers, public employees, etc. Fewer and fewer Canadians have access to these kinds of plans. Fewer and fewer Canadians have access to these lucrative arrangements.

Availability to U.S. citizens in Canada: The U.S./Canada tax treaty does allow for favorable treatment of Company pension plans for U.S. citizens in Canada. The U.S. Canada tax treaty is particularly favorable in this regard. In contrast, consider the U.S.
Australia tax treaty which does NOT afford similar U.S. tax treatment to Australian pensions.

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Individual Tax Deferral Opportunities in Government registered plans:

Examples include: RRSP, TFSA, RESP, etc.

Availability to U.S. citizens in Canada:

RRSP – yes
TFSA – no tax deferral and fully taxable RESP – no tax deferral and fully taxable

The income earned inside the TFSA and RESP will be taxed directly to the U.S. citizen. There may also be additional (expensive) “reporting requirements” with respect to these investments.

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The Use of a Canadian Controlled Private Corporation (an opportunity that may be coming to an end FOR ALL PEOPLE with the current Liberal Government):

Availability to U.S. citizens in Canada:

  1. Clearly No. The growth of investment income inside the
    corporation is attributed to the shareholder and subjected to
    punitive taxation. This destroys the opportunity to use the
    Canadian Controlled Private Corporation as a retirement planning
    vehicle.
  2. Clearly No. The “reporting requirements”
    reflected in Form 5471 are tremendously expensive and penalty
    laden.
  3. Clearly No. U.S. citizen shareholders of
    Canadian Controlled Private Corporations are NOT entitled to the
    Canadian “lifetime” capital gains exemption on the sale of the
    shares of the CCPC.
  4. Possibly No. Canadian tax planners plan the
    payment of dividends to shareholders in a way that results in
    minimization of taxes paid at the Shareholder level. This is the
    direct result of Canada’s system of giving shareholders tax
    credits for certain taxes paid by the corporation. The dividends
    are subject to full U.S. taxation on the U.S. return.
  5. Possibly No. In theory dividends from a
    Canadian Controlled Private Corporation are possibly (depending
    on your interpretation of the Canada U.S. tax treaty) subject to
    the 3.8% Obamacare surtax.

There is no “Clearly Yes”. It’s complicated! I have seen very knowledgeable and competent advisors argue over whether U.S. citizens in Canada should make use of Canadian Controlled Private Corporations.

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Individual stock and investment portfolios:

Generally, this would include individual “debt” (think GICs) and “equity” (think individual stocks).

Availability to U.S. citizens in Canada:

Yes absolutely available. The dividends, interest and capital gains are subject to “normal U.S. taxation”. The U.S. tax owed will be reduced by the tax paid in Canada.

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Canadian Pooled stock and investment portfolios:

In general, this means “Canadian mutual funds”.

Availability to U.S. citizens in Canada:

No. Canadian Mutual funds are considered to be PFICs under U.S. law and are subject to taxation at rates that can approach 100%.

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Principal residence AKA The tax free sale on a principal residence (very popular in larger Canadian cities):

Availability to U.S. citizens in Canada:

Yes and No. U.S. citizens in Canada are required to pay capital gains taxes on the sale of their principal residence. (There is currently a $250,000 USD exclusion).

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Conclusion:

U.S. citizens in Canada are simply NOT able to take advantage of the retirement and planning opportunities available to their neighbors. The problem of the U.S. tax system for U.S living in Canada should be characterized as:

“It’s not the taxes they take from you. It’s that the U.S. tax system leaves you with few opportunities for financial planning”.

This is the primary reason why for U.S. citizens living in Canada:

All Roads Lead To Renunciation!

John Richardson

The biggest cost of being a “dual Canada/U.S. tax filer” is the “lost opportunity” available to pure Canadians

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Some additional reading:

How To Live Outside the United States in an FBAR and FATCA world – The 10 Commandments

How To Live Outside The United States In An FBAR And FATCA World

Life in The “Penalty Box”: U.S. Citizens and Green Card Holders Living Outside The United States

Part 1 – Life In The “Penalty Box” – U.S. Citizens And Green Card Holders Living Outside The US