If you Decide to Comply, DON’T choose a Homelander Tax Compliance Professional

I was very surprised to receive the following email on Friday evening. I cannot recall ever getting anything like this before. I will not identify the author because it is not proper to publicly share an email without the permission of the sender. It is not anyone I have ever heard of before and I doubt any of you have either. It took me a while to decide if I would answer or not. I tried to put my reaction aside after all, why be surprised that a tax compliance professional would demonstrate so little awareness outside of his/her experience. In the end, I simply could not ignore how I felt. I replied and have decided to publish the email without naming its author and my response.

I wish I had pointed out to this person that technically, due to the Canadian IGA (or likely any Model I agreement), that there are no harsh penalties that have been implemented. A professional who is truly conversant with this situation should have stated this better. Does such a statement show a conscious attempt to confuse the expat, assuming penalties from FBAR, OVDP etc will come to mind? Could it be a reference to the idea that Form 8938 is a harsh penalty all on it’s own? (As a matter of torture, most definitely….) Or is the practitioner just sloppy? (Maybe we could get this person to rule on all the “plain language” misapplications we hear of….retroactive 877A, anyone?).

I also wish I had challenged the statement that “the program is working.” There is nothing to suggest that the majority of non-resident (or resident, for that matter) Americans have become compliant. The numbers quoted in the statistics for the OVDP are nowhere near 9 million and we know some of those who came forward are Homelanders. For some interesting figures regarding compliance please see Professor William Byrnes’ “Is FATCA Much Ado About Nothing“? . Prof. Byrnes states “The IRS War on the FBAR is simply not working.” (“The IRS received 807,040 FUBARS FBARs in 2012; compliance with FBAR filing appears to be declining.”) Every tax compliance professional should be required to read this report. It would go a long way in curtailing the inflammatory language we experience, intended to confuse & frighten and assumes we are all idiots.

I also should have challenged the nonsense about ICE not allowing visas of former citizens being allowed to enter the U.S. This amounts to the usual threat of the Reed Amendment. Does ICE have the power to override the State Department?

I am simply astonished at the arrogance of this person. What to say of the obvious limited exposure of such an “expert.” (I have never heard anyone suggest that there are bank problems in Canada). Mentioning OVDP and not Streamlined. Who on earth does this person think he/she is?

My USC/resident-CPA sister strongly suggests I complain to the appropriate accountancy board.

And the unmitigated gall of implying I should send clients………good gawd………

*******

(emphases are mine)

If this is the Patricia Moon who has given up her US citizenship because of FATCA, then this is for you. I have seen your “protests” regarding FATCA and filing US tax returns. You stated that you were delinquent in your filings, and that you caught yourself up and then renounced your citizenship.

You are one of the very reasons that FATCA with its harsh penalties was implemented. I have been practicing in the international tax area, specializing in US expatriates, for over 31 years. I am the chairman of a state CPA Society’s International Tax Committee, and have an international reputation in this area. Over my 31 years’ time I have prepared and/or reviewed several thousand tax return. I have seen dozens of people such as yourself , people who are American citizens, and enjoy the benefits of being an American citizen, while failing to fulfill the obligations that come with citizenship – namely filing a US tax return and paying any tax due. One cannot enjoy the benefits of American citizenship without complying with the responsibilities.

Since FATCA has been implemented, there have been citizens such as yourself who have renounced their citizenship. I understand from a couple of US Customs & Immigration attorneys that I work with that ICE often won’t allow visas to come back to the US, sometimes even for vacations, to former US citizens. However, a much larger number of persons have come forward and are now filing tax returns and complying with the responsibilities of being a US citizen.

So the law has worked. It is accomplishing its intended goals. I personally have worked with several formerly noncompliant individuals to “get them legal” through the Offshore Voluntary Disclosure Program.

Staying legal is not a difficult process. It requires filing a US tax return every year. Often there is no tax due from it, as the foreign tax credits and the foreign earned income exclusion will reduce or eliminate the tax on all but US-sourced income.

Giving up citizenship is a drastic step when compliance is so easy. It is like amputating your arm because you have a hang nail.

And, from my experience, most larger banks WILL continue to work with Americans abroad. Very few are closing American accounts. In Canada, for example, I know that BMO Harris actually promotes accounts for Americans. I have several clients in Canada who bank with them. RBS Bank, Banque Scotia, TD Mortgage Corporation, Canadian Imperial Bank of Commerce, and many others.

Just my thoughts. Feel free to give my name to any individual who wants to become legal, but does not want to go to the extreme that you did.

Thank you.

*******

My response:

Your email is extremely offensive and demonstrates that you understand this situation from one point of view and one only.

Perhaps you are unaware of the fact that the large majority of expats living outside the US for decades were simply unaware of any requirement to file taxes and information returns. The U.S. made no attempts to educate or notify people of these requirements. Surely you have known people who were “non-willful.” I certainly hope you did not put any persons such as these in the OVDP/OVDI.

Your comment “You are one of the very reasons that FATCA with its harsh penalties was implemented” is curious, given I did not owe any tax. I was a stay-at-home mother with an annual income that never exceeded $11,000 CAD from doing the books for my husband’s company. An annuity inherited from my parents was transferred at a later time and I most certainly paid the tax that was due.

As to “I have seen dozens of people such as yourself, people who are American citizens, and enjoy the benefits of being an American citizen….”

  • I had not lived in the United States for thirty years and was/am a law-abiding, tax compliant citizen/resident of Canada
  • I was not “enjoying the benefits of being an American citizen”
  • If you are referring to having the right of return, there is nothing particularly unique there; the majority of countries on earth allow their citizens to return
  • And I certainly am in no need of the Marines coming to save me in Canada (a “benefit” that one would have to pay for, were it even relevant to those living in first-world countries).

If by “benefit” you mean having access to “the greatest country on earth” I will tell you that a component of renouncing involved my observations about Abu Gharib, Guantanamo, the assassination of American citizens by drone without due process and other actions that frankly made me ashamed to have ever been an American citizen. In other words, your assertion that my renunciation was “like amputating your arm because you have a hang nail” simply does not cover all that was involved. Not the least of which, was my Canadian family and how they felt about the effect of U.S. policy on their lives. My husband resented any account information being turned over to FINCEN (given the fact it was his money)and it was a huge issue in the marriage.

I have remained active in this movement having renounced over 6 years ago. I don’t gain anything personally by volunteering a huge portion of my life to this. I am fully conversant with what is required regarding compliance. It is not always simple and it is very expensive. You fail to mention facts such as:

  • the U.S. would expect capital gains tax on the sale of our personal residence for a gain greater than $250k
  • the U.S. treatment of Canadian mutual funds as PFICs is particularly punitive and would require 8621 every year
  • the U.S. insistence that my country’s tax-deferred vehicles designed to help save for education, disability and non-RRSP uses are foreign trusts requiring 3520 and 3520A every year; all of these plans mirror similar programs in the US (529s, ABLE and Roth IRAs)
  • had I been signed on my husband’s company (I wasn’t) we could have found ourselves subject to an annual 5471 and the particularly abusive Transition Tax

I personally have no desire whatsoever to go to the United States. I don’t care what CBP and ICE do. It doesn’t frighten me at all. A Canadian does not need a visa to visit the U.S. anyway.

None of us have ever claimed that obtaining bank accounts or mortgages is difficult in Canada. This is a situation that primarily affects Europeans and it is very, very real. I know many people who have been severely impacted by it. It was perversely disingenuous for Judge Rose claim in the Bopp FATCA ruling, that this was not due to FATCA but to independent action of the banks.

Over the years I have encountered many people such as yourself, who seem to think they are entitled to inflict their opinions and judgments about character based upon presumptions made about U.S. expectations. I wonder if it could ever occur to you that there are other places and people in the world who do not base the value of their existence upon opinions such as you have expressed. I find it difficult to believe you would end asking me to send you clients. I trust this will be the end of any communication.

Regards,

Patricia Moon
Secretary-Treasurer
xxx-xxx-xxxx
Alliance for the Defence of Canadian Sovereignty &
Alliance for the Defeat of Citizenship Taxation

What is Tax Residency? – Episode 1 with John Richardson & Olivier Wagner

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The issue of tax residence has gained so much attention since the “crackdown” on non-resident US Persons began in 2009. It is commonly understood that you pay taxes to the country/state/city-town that you reside in. (For an interesting comparison of differences between countries please see this incredible list compiled by the OECD). It simply does not occur to anyone that they would be required to pay taxes to a foreign government.

However, the United States claims jurisdiction due to citizenship. One does not even have to have touched foot in the U.S., according to U.S. law. Of course, due to the viciousness of the U.S. “FBAR Fundraiser” many people began to resist whether of anger or fear.

Not much has changed* , in spite of all the factors that have contributed to this debacle (and debacle it is, what could one expect when a country tries to take what is someone else’s, based on an idea of fake residence?).

For a detailed discussion concerning the determination of tax residence and related factors, please see here.

In this interview, John Richardson speaks with Olivier Wagner about tax residency and how a seemingly simple concept has become so terribly important in the 21st century.

 

 

It’s Happening Again – Enough is Enough is Enough

 

NB: STAY TUNED – a 7-part video on the Transition Tax, with
John Richardson & Karen Alpert will be posted in the next couple of days.

 
 
NB: For anyone with time to spare/the interest/needing specifics to make the point regarding the “intention” of the law, here are some of the relevant House/Senate hearings and/or documents:

Oct 3, 2017 Full Committee Hearing -Senate Finance

Nov 6 – 9, 2017 H W & M Markup
Nov 13, 2017 Open Executive Session to Consider an Original Bill Entitled the Tax Cuts and Jobs Act Sessions also continued Nov 14, 15, 16 with videos at the page)
Supporting Document Markup – Senate Finance Committee

*******

Another day, another set of articles and comments where the #TransitionTax & #GILTI are being stuffed down the throats of expatriates who have their own small corporations. The proliferation of articles on this issue, all proclaiming the U.S. can now inflict a deeper cut into the retirement savings of non-residents, is infuriating. The first two articles at least expressed the idea that these provisions might affect non-resident U.S. taxpayers.

Max Reed , posted on November 3, 2017:

As part of this transition, the new rules impose a one-time 12% tax on income that was deferred in a foreign corporation. Although perhaps unintentional, since US citizens will not benefit from a territorial model, the new rules impose a 12% tax on any cash that has been deferred since 1986.

Kevyn Nightengale, posted on November 10, 2017 (I have not included the updated comments because this is what we saw at that time):

This provision was not designed to catch individuals (I think), and certainly not Americans abroad – they are collateral damage. it’s incredibly unfair.

When I saw the House version, I expected that individuals would be exempted after a sober second (or third) thought. Or at least individuals living abroad would be exempted. But seeing a parallel provision in the Senate version makes me expect the worst.

Seems fairly obvious that the biggest clue that the #TransitionTax IS NOT meant to apply to small CFC’s is that they are not “transitioned” from a worldwide system to a territorial one. This is so basic it is hard to believe nobody just calls these people out on this. How many tax professionals watched all of the House/Senate hearings? Many of us did, all hoping to hear that the move to territorial would include individuals; or at least some mention of us. There simply was nothing to suggest that this tax applied to anyone except large multi-national corporations.This provides the context in which the law was conceived. It should be considered just as thoroughly as the plain reading that professionals claim catches expats in the net. Just exactly who is really making the law here?

Now, on to the two prominent articles of the week. The Financial Post has U.S. tax reform to bring double taxation to some Canadians by Julius Melnitzer. Mr. Melnitzer is well-known for making huge distortions of reality. Canadians are familiar with the fact that he perpetuated “the biggest personal loan fraud in Canadian banking history.”

The biggest personal loan fraud in Canadian banking history was the work of a wealthy, respectable London, Ontario lawyer, Julius Melnitzer. When he left the board of Vanguard Trust, a small firm with which his law firm had been dealing, he just happened to take a copy of the corporate seal that Vanguard had used, among other purposes, to attest to the validity of certain forms which it issued in lieu of custom-designed share certificates. Melnitzer’s first trick was to create fake shares by simply typing in the share amounts and stamping the certificates with the company seal. He created five certificates representing a total of almost 900,000 shares. Then he used these “shares” as collateral for personal lines of credit. He also forged financial statements of a company that his father had founded, in which Melnitzer owned 20% of the shares, along with a pledge from the company that it would guarantee Melnitzer’s debts. Using the Vanguard shares and the phoney loan guarantees Melnitzer received a total of $5.6 million in lines of credit from five major Canadian banks. The scam went on for years. Each time a bank would start to press him for repayment, he would threaten to take his business elsewhere. He would also request a letter of recommendation from one bank, then use it to obtain funds from its competitors. A few years later, the banks pressed him to either pay up or come up with better collateral. Emboldened by the fact that no one had questioned the veracity of the forged documents, he decided to do the second.

Melnitzer went to a small local printing company that his law firm had done business with for years. He told them he was representing a client charged with using forged stock certificates to get loans at banks. He wanted to prove in court that printing technology had improved so much, even a small shop like theirs could do a credible job. When the company agreed, he ordered single shares of five blue-chip companies in the name of his daughter to avoid suspicion. He then altered them to put in his own name and bumped up the amounts until they had a face value of about $30 million. Not only did the great majority of the financial institutions he dealt with accept these in the place of the initial collateral, but some even significantly increased his line of credit. Alas, when an officer at National became suspicious about how Melnitzer’s personal wealth had risen so quickly, the officer asked bank experts to inspect the stock certificates. Melnitzer was arrested three days later.

Further:

Julius Melnitzer, a London, Ont., lawyer, was brilliant in the courtroom and had a stable of powerful clients, including some of the province’s biggest landlords. Thanks to a tip from an observant middle manager at a bank, the police discovered Melnitzer had printed up more than $100 million worth of stock certificates bearing blue-chip names like Exxon Corp. and used them to secure around $67 million in loans from several banks. He also bilked several friends out of more than $14 million by getting them to invest in a bogus property deal in Singapore. In 1992, Melnitzer pleaded guilty to 43 counts of fraud. He was sentenced to nine years in jail but was out on day parole after a couple of years and full parole in 1995. Melnitzer is now a well-known and respected Canadian legal affairs writer.

For Mr. Melnitzer’s point of view see here.

So why am I making such a big deal out of Mr. Melnitzer’s background? Irony. Hypocrisy. Disgraceful. Despicable. Along with government and the tax compliance community, the media is guilty of presenting only one side of the picture, consistently. We are labelled as “tax cheats” “scofflaws” and so on for not filing pieces of paper we knew nothing about. This man, who cheated banks out of $67 million, his friends out of $14 million, is promoting a questionable point of view that seriously affects the lives of millions of expats. Sorry, I cannot consider him a “well-known and respected Canadian legal affairs writer.”

The article quotes Roy Berg on the Transition Tax issues and Paul Seraganian on estate tax issues. An example of the Transition Tax issue:
 
A doctor who is a dual citizen practising in Canada,
with $2M of accumulated earnings in a private Canadian corporation,
would have a one-time U.S. tax liability of $300,000 this year

Roy Berg, director, U.S. tax law, Moodys Gartner
 

“A one-time tax liability of $300,000.” Incredible. Just a “fact.” Doesn’t matter at all how immoral this tax is in the first place. Doesn’t matter that this likely represents the doctor’s retirement savings. He/she likely worked very hard to earn that.This is a real-life person, not a hugely wealthy individual such as a corporate CEO who makes far more than $2 million a year in bonuses alone. It’s not small potatoes to confiscate that from a non-resident “U.S.” person. A Canadian citizen and resident. It is unbelievable that anyone, in any country would simply accept that U.S law applies outside it’s borders. It seems to me that “tax professionals” need to think carefully about what they are doing, who they are hurting and their role in what is truly an amoral regime at best and an immoral regime at worst. And people affected by this should think long and hard about parting with such amounts. I sincerely hope renunciations will be off the charts next year. One can at least be certain that “unofficial” renunciations, people “just walking with their feet” (as in non-compliance) will continue. There is a limit to the value of anything and U.S. citizenship is quickly becoming something non-residents simply cannot afford to keep.

An excellent comment by Karen Alpert on this article:

It is patently clear that Congress was not thinking about the impact of tax reform on non-resident US citizens. None of the discussion in the lead-up to tax reform, or in the committee hearings, indicated that Congress intended to punish the citizens and residents of other countries who happen to be claimed by the US as citizens. Nothing written by the IRS so far has indicated that they believe this applies to non-resident individuals – every example in the IRS notices has specifically looked at corporate shareholders. The only indication that this might apply to non-resident individual shareholders is from the tax compliance industry that stands to earn a large amount of fees on attempts to comply with this extra-territorial over-reach by the US.

If applied to non-resident individuals, the “transition” tax would be a pre-emptive grab at the tax base of Canada and every other country where US emigrants and Accidental Americans are living. The “deferred foreign income” that would be confiscated is money that was never subject to US tax, and is only claimed by the US because of a fictional “deemed repatriation”. Think about what that really means – the US is pretending that US emigrants are “repatriating” funds back to a country where they don’t live, and that they may no longer really identify with. The only good that could possibly come from this is the long overdue realisation that US taxation of the citizens and residents of other countries is contrary to the national interests of those countries and contrary to normal international practice.

The comments section is still open; please go over and make your views known.

**********

The other major article this week is at the Financial Times.

You can see the article on the

citizenshiptaxation facebook group

 
Financial Times
Americans abroad hit by Trump’s new repatriation tax rules
by Andrew Edgecliffe-Johnson in New York – FEBRUARY 4, 2018

John Richardson comments:

(A previous comment of John’s is here . )

@Mitchell @WBY @Brian Lillis @Monte

@Mitchell gives us an excellent description of the reality of this situation.

We are dealing with a situation where the “tax compliance community” says: “Resistance is futile” and the reality is “compliance is impossible”.

What will be people do? Those who have long term relationships with “tax compliance people” are probably in the worst situation. They will be under enormous pressure to transfer their pensions (in reality this is how these corps are often used) to the IRS. These people will be confused, frightened and “easy prey”for the amoral individuals who populate the industry. I saw one explanation of the “transition tax” from a highly regarded tax firm that noted that they must search their client base for “victims”.

Notably, this is also taking place against a backdrop where VERY FEW “tax professionals” even understand how this (so called) tax works and how to work with it (or against it).

It is laughable that the only way any individual could even know that this exists is because of the combined efforts of the media and the “tax compliance industry” (frankly the last group of people I would trust).

I would also like to stress that members of the tax compliance community do NOT know more about this than the individuals impacted. Sure, they may be able to calculate the tax better (assuming that it applies to Americans abroad at all.) But their insight into this is limited by the thought (if you want to call it a thought):

The law is the law – the intent of the law was irrelevant – the unintended consequences are irrelevant.

The unfortunate truth is this:

People are going to have to choose between following the advice from their tax professional that “the law is the law” and retaining their life savings.

It will be interesting to see what happens.

 
 

Why the proposed transition tax, if applied to individual U.S. shareholders living abroad, is analogous to the “Offshore Voluntary Disclosure Program

 

 
The following was written by John Richardson and is a section of a larger piece yet to be published. I will provide the link at the time it is available and of course, have permission to publish this.

When I first read this, two things occurred to me. The OVDP/OVDI process represented a penalty for a failure to report. A failure to report is not a transaction to be recorded or that can be measured in relation to tax that is owed. The “in lieu of FBAR” penalty. The percentage was a figure set by the Treasury Dept with no clear connection to anything other than the value of an asset. So one agreed to allow a certain level of confiscation not based upon any amount of tax owed. The other issue with OVDP/OVDI was that it was an incredible deal for “whales”-that percentage represented far less than what they would have paid all-told. The transition tax is a gift for multi-nationals; moving to a territorial system, they will not pay what they would have been required to pay were they to repatriate the income that they will now, never be required to do.

Notably the Transition Tax is part of reforms to international taxation. The centerpiece of the reforms is that for US corporate shareholders of foreign companies there will no longer be US taxation of foreign earnings. (In other words, the US has forced corporations to move in the direction of territorial taxation). The transition tax is imposed as a mechanism to fund territorial taxation. Corporate shareholders are subject to the Transition tax and receive the benefits of territorial taxation. Individual shareholders (including possibly Americans Abroad) are subject to the Transition tax but do not receive the benefits of territorial taxation. Americans Abroad, who carry on business through non US corporations may be required to fund the move to territorial taxation (unlike corporate shareholders) and will continue to be taxed and taxed in an even more punitive way.

Of course, referring to OVDP/OVDI &/or the Transition Tax as a “gift refers only to multi-national corporations or people of wealth. For “minnows” OVDP/OVDI was an absolute abomination. The Transition Tax, should it apply to small CFC’s ( read “individuals”), will provoke the largest number of renunciations whether official or via “feet”.

This is an absolute breaking point in our process. Now that the rate on liquid assets is highter (15%), once the calculations are done, the effective rate applied to individuals will be over 18%. It will not be a matter of refusal as much as the simple inability to pay it. No one can continue to contribute to financial suicide, law or not.

**************

Why the proposed transition tax, if applied to individual U.S. shareholders living abroad, is analogous to the “Offshore Voluntary Disclosure Program (OVDP)”


by John Richardson

Significantly, the “transition tax” is NOT based on any income realization event. It is based only on the fact of legally earned retained earnings, which are subject to taxation in the country where they were earned.

The transition tax is a calculation based on an “account balance” – specifically the “retained earnings” account balance on the greater of two dates.

It is a mandatory payment which is based on the value of a “foreign asset”.

Therefore, the “transition tax” as applied to Americans abroad has characteristics that are more like “OVDP” than an income tax (which would be based on a realization event).

In any case, the “transition tax” is nothing more than an asset confiscation with nothing in return.

The application of the “transition tax” to Americans abroad would raise U.S. “citizenship-based taxation” to a new and UNPRECEDENTED level of unfairness and obscenity

NO Evidence of Intent to apply the “”Transition Tax” to Small Business Corporations of #AmericansAbroad

 

It appears that we are very likely at a breaking point in this intolerable situation faced by expatriates as regards U.S. application of citizenship-based taxation. Tax reform does not happen often. It is critical that relief for expats occur in the current legislation. Many of us simply will not be around in 30 years for the next shift. It will be completely unacceptable if there is no transition (at the very least) to territorial taxation for individuals. Some people may be forced at this point to renounce if only to put a stop on future tax liability. Some will not choose to become compliant simply because it is expensive, they have no ties to the U.S., no intent to go there, etc.

In addition, there is a very dangerous aspect (the “transition tax”) that appears in both the House and Senate bills; it is arguable that it does NOT apply to small corporations owned by US citizens residing outside the United States. The biggest danger here, is that it may remain unclear. We have seen what has happened in a number of situations when this is the case. Some examples are:

1) People who relinquished citizenship decades ago (and who do not have a CLN) have been told they are still U.S citizens. Not by the State Department, not even by the IRS. And not even by the banks per sé. It is the position of many members of the tax compliance community. This is completely unacceptable and no expat should accept such a conclusion without investigating the citizenship aspects of the situation.

2) Accidentals have been told the same thing; they are Americans and must become tax compliant. Again, not directly by the US government (as in “coming after them) but by members of the tax compliance community. This is also unacceptable and no one should become compliant without a complete examination of whether it is in his/her best interests (or not).

3) People who did NOT belong in the OVDP/OVDI programs were put there by tax professionals with hideous and tragic results. The law says one has to file, nowhere does the law say one had to enter one of those programs. If anybody should have known that, it would be the tax compliance community.

4)The IRS has not given a ruling on whether or not 877A is to be applied retroactively. This is another area where tax compliance professionals have decided it is the law. This is definitely NOT in the best interest of anyone renouncing their citizenship and most definitely should not be applied to anyone who renounced/relinquished before it became law.

5)One of the most egregious and limiting situations involves owning foreign mutual funds. There is nothing to support the practice of treating non-US mutual funds as PFICs. Again, guess who insists on this treatment?

All of the above points are as unacceptable as is a lack of change for Americans abroad in tax reform. We have had enough.
 
THIS HAS TO STOP
 
We, as a community, have to make a conscious decision that what they say does not apply to us, is not in our best interests. The application of U.S. law outside of its borders is highly questionable, and should not override the laws of the countries we are residents of. (The IGAs do not represent approval/acceptance of US policy; they are merely proof of what happens when the US threatens to destroy the economies of other nations). “It’s U.S. law.” This is always the argument used to justify application of these ridiculous actions, often with absurd results. Penalties, FATCA “outing” us, application of the Reed Amendment (or worse, the ExPatriot Act if it ever passes)- all can be quite frightening if applied as the tax community claims. Yet there is nothing to suggest that these things are realities. The only people who have been harmed by these things are the ones who are/or tried to comply.

It is time to resist not only the idea that U.S. law should run our lives but also, that the tax community should determine what courses of action we should take. We need to be consistent in our message on this, on FB, in tweets, blogs etc. No more. No more. No more…………

**********

Shortly before the House of Representatives released the Markup for H.R. 1 a Canadian tax lawyer Max Reed authored an article (also here ) claiming that:

New punitive rules that apply to US citizens who own a business. Currently, most US citizens who own a Canadian corporation that is an active business don’t pay tax on the company’s profits until they take the money out. The House plan changes this. It imposes a new, very complicated, set of rules on US citizens that own the majority of a foreign corporation. The proposal would tax the US citizen owner personally on 50% of the entire income of the Canadian corporation that is above the amount set by an extremely complex formula. At best, this will make the compliance requirements for US citizens that own a business extremely complicated and expensive. At worst, this will cause double tax exposure for US citizens who own a Canadian business on 50% of the profits of that business.
Imposition of a 12% one-time tax on deferred profits. Under the new rules, the US corporate tax system is transitioning to a territorial model. As part of this transition, the new rules impose a one-time 12% tax on income that was deferred in a foreign corporation. Although perhaps unintentional, since US citizens will not benefit from a territorial model, the new rules impose a 12% tax on any cash that has been deferred since 1986. Take a simple example to illustrate the enormity of the problem. A US citizen doctor moved to Canada in 1987. She has been deferring income from personal tax in her medical corporation and investing it. Now, 12% of the total deferred income since 1986 would be subject to a one-time tax in the US. That may be a significant US tax bill.
It is unclear what, if anything, will be enacted. However, US citizens in Canada – particularly those that own a business – should pay close attention as their tax situation could get significantly worse. Renouncing US citizenship may become an increasingly attractive option.

There has been much discussion of whether or not this is going to happen (assuming a tax reform bill containing these measures actually is passed).
A very good argument for why this should NOT apply to #AmericansAbroad is
here.

The following comment appeared today on Brock. It reiterates the position that the “transition tax” cannot be viewed as applying to Americans abroad who own small corporations. We can expect that tax professionals are going to claim it does. Start now to learn why it doesn’t make sense and why no one should listen to the notion they owe a tax to the US based upon this new “tax reform.”
 
USCitizenAbroad
November 14, 2017 at 7:16 pm
 
@ Patricia Moon

With respect to the discussion of whether there is a tax on the retained earnings of Canadian Controlled Private Corporations:

First, pick this discussion of the changes to the territorial tax system for corporations at the 35 minute mark here:

https://www.finance.senate.gov/hearings/continuation-of-the-open-executive-session-to-consider-an-original-bill-entitled-the-tax-cuts-and-jobs-act

There is NO evidence of any intention to apply the “transition tax” to anything other than large corporations and certainly not to small business corporations owned by Americans abroad.

Second, an interesting summary was published by the Toronto law firm Oslers which talks about U.S. tax reform and makes NO reference to a possible tax on the retained earnings of CCPCs.

TaxAuthorities/US Tax Reform for Busy Canadians

Note no mention that this could affect CCPCs owned by Canadians:

” Foreign minimum tax – Current taxation of “Foreign high returns”:

Under this provision, a U.S. parent corporation would be subject to
current U.S. taxation (at the new 20% rate) on 50% of its controlled
foreign corporations’ (CFCs’) “high returns.” Tax would be required
to be paid on these imputed income streams regardless of whether the
corresponding earnings were actually distributed to the U.S. parent.
“Foreign high returns” are the excess of the CFC’s net income over a
baseline return (7% plus the federal short-term rate) on the CFC’s
adjusted tax bases in depreciable tangible property, reduced by
interest expense included in the CFC’s net income. “Foreign high
returns” would be defined to exclude certain types of income (including
“effectively connected income,” income from the disposition of
commodities produced or extracted by the taxpayer, and income subject
to tax at an effective rate of at least 18%). This provision, which
cuts against the theory of a “pure” territorial tax system, was
designed to counterbalance incentives that may otherwise linger for
U.S. companies to locate high return generating assets/activities (like
intangible property) in offshore locations.”

My feeling is that regardless of the language that this was not intended to apply to Americans abroad.

What should be done:

The danger is that the compliance community will make the law by interpreting this to apply beyond its obvious intention. The obvious solution is to NOT use the services of any tax firm who interprets the law as applying to CCPCs. After all, it was the compliance firms who created the notion that Canadian mutual funds are PFICs.

When government turns predator

 

This was the very first post at the Isaac Brock Society, published there on December 10, 2011 by the founder of Brock, Petros. At the time, there was outright terror in the expat community. Horror stories from the 2009 OVDP were coming out. Threats from Shulman (then IRS Commissioner), the media and primarily, the tax compliance industry were non-stop. Confusion and fear reigned and it was like being in a perpetual OMG moment……….

Over 5 years later there is little to suggest much has changed. It would take a major shift, such as passing tax reform that included a switch to RBT for me to even consider the U.S. government has anything less than outright malice for Americans living outside the country. The year is half-over and health care reform is still the focus. There will be no hope for change in 2018 due to the midterm elections.

There have been a few minor concessions-Streamlined was improved and offers foreign filers penalty-free filing as long as there is “reasonable cause.” However, we now have passport revocation for unpaid taxes of $50k and over; extended OVDP with the in-lieu of penalty of 27.5% of the highest aggregate value of OVDP assets (50% if the foreign financial institution is already under investigation by the IRS); attempts to pass the EXPATRIOT ACT; adjustment resulting in increase of FBAR penalties to reflect inflation (without similar treatment for the $10k threshold); two years of FATCA reporting have taken place; threats that the Streamlined Program will be discontinued; collection agencies are coming after us, the list goes on and on.

Though this comment will provoke the compliance community, one thing apparent now, is the IRS seems to have no real way to collect unless one comes forward. And we can see those who have done so, are the ones hurt the most. It is obvious that the majority of expatriates are NOT filing (out of a total of 9 million, approximately 1 million are). There are situations where some can remain hidden, depending to a point on one’s risk-tolerance. Outward resistance remains; the Canadian IGA suit is moving toward the second trial; the Bopp suit will be refiled; ADCT is on hold until we see whether there is RBT or not. And the Accidental Americans in France have begun their fight to bring forth litigation there and/or in the EU courts.

At any rate, I have always considered the post below to be a sort of rallying cry, a call to wake up to the fact that the U.S. government is indeed a predator to be dealt with…..

UPDATE

This recent comment of Andrew over at Brock says it all:

This entire story is and continues to be sickening. I too am so grateful to have renounced several years ago and to have been able to completely extricate myself from this web of nightmares. Sadly, friends and business contacts haven’t been so lucky and many of them are now embroiled in protracted legal cases, with demands that they pay millions, even though they, in two cases, have never lived in the United States and were total “accidentals” one having spent twelve days there after birth and never returned, the other only five days! Still, the corrupt system has gone after them both and they are fighting it as hard as they can. One thing both of them have said is that thy won’t pay anything, no matter what the threats. One, who has business interests in no less than sixteen countries will cut off all activity with the U.S. and stop all investment from his associates into the U.S. arm of their business.
If I didn’t witness all of this for myself I wouldn’t believe that it could be possible, but then, look at the U.S. today and the state of how it is governed. Who could believe that is possible? The best advice, stay away from that place and advise others to do the same.

*******
When Government Turns Predator by Petros

Honest US citizens are being turned into prey by the IRS, the victims a hunt for tax evaders. It is the natural, if lamentable, product of the urge to power our Founders warned us against.

More than two centuries ago, George Washington stated:

Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.

Over the years, General Washington’s prescience has been demonstrated as government usurped and abused power. The myth that government serves the people should be shattered by now. Increasingly, government behaves as the master, not as the intended servant.

Oppression abounds, but nowhere is the raw abuse of power and coercion more possible and evident than in the Internal Revenue Service. They are the most dangerous member of the government gang. Now they have another tool to bully and expropriate wealth from innocents — US citizens living abroad.

Early in his presidency, Barack Obama pledged to add 800 new IRS agents to punish tax evaders with overseas accounts. In an effort, presumably designed to curtail and punish tax evasion on the part of wealthy Americans, legislation aimed at criminals now threatens the income and savings of the law-abiding.

Background

The Bank Secrecy Act became law in 1970 and implemented the Foreign Bank Accounts Report (FBAR) to monitor money laundering. The FBAR law required that US persons owning or having signing authority over foreign bank accounts report this information to the US Treasury Department. It was not much enforced for the obvious reason that a criminal does not willingly divulge incriminating information. During the first three decades of FBAR, there was widespread ignorance and disregard for the law.

In 2003, the Treasury Department handed over enforcement to the IRS. In 2004 non-willful non-compliance increased to a $10,000 fine per account per annum. Willful non-compliance allows criminal charges, a prison sentence, and fines of $100,000 or 50% of bank account’s contents, whichever is more (see Shepherd, p. 10).

The IRS has implemented two Voluntary Disclosure Programs I (2009) and II (2011), in which they waive criminal charges provided that all back taxes and penalties have been paid, along with an FBAR penalty of 20% (in 2009) or 25% (in 2011) of the account’s highest balance over the last six years. The penalty is lower (12.5%) for balances under $75,000. Persons who were unknowingly US citizens face a 5% penalty (see FAQ 52).

In 2010, Congress passed FATCA (Foreign Account Tax Compliance Act) which forces foreign banks to report on American clients, even if doing so would violate the banking and privacy laws of their country. Implementation of FACTA will be coerced by withholding 30% of US income from banks not in compliance.

The arrogance and brutality of the legislation is apparent. The penalties are severe and disproportionate. Economic blackmail of foreign banks is disgraceful. All of these actions will have repercussions, probably not intended.

US Citizens Abroad

US citizens living abroad must open a foreign bank account because commerce is done in the local currency. All who do are potentially in violation of the FBAR law. Most were unaware of the FBAR requirements; but now that the IRS has rattled its FBAR saber, taxpayers abroad are in a quandary.

Wealthier citizens spend thousands of dollars on accountants and tax lawyers to try to put themselves into compliance with the least financial damage. The average citizen not in compliance has limited options. His choices include:

  1. Do Nothing The IRS doesn’t know about you, so continuing to keep a low profile and ignore the law might be the best route. This option may become impossible once FACTA comes into force.
  2. File FBAR Forms IRS FAQ 17 of the 2011 Voluntary Disclosure Program states that filers who have complied with all taxes and filing requirements except FBAR should not enter the program but simply file the delinquent forms by August 31, 2011 with a letter of explanation. They promise that no penalties will apply to such persons. But given the severe threats of punishment issued to anyone failing to comply, many wonder whether the IRS will accept the excuse of ignorance of the FBAR requirement.
  3. Enter 2011 Voluntary Disclosure Program: Some US citizens who entered the 2009 Voluntary Disclosure Program and were otherwise in compliance with US tax laws, found that the IRS intended to apply to them the full 20% penalty (see, e.g., hereand here).
  4. Renounce Citizenship Many US citizens living overseas have lives fully integrated into their new country. They comply with the local tax laws and often possess dual citizenship. Compliance with US tax laws and FBAR are a nuisance and liability that they may be able to live without.

Renunciation of citizenship is not riskless. Such a decision will set citizens free from future liability, but may subject them to IRS penalties for prior non-compliance. In addition, for covered expatriates, those having two million in assets or $145,000 in average annual tax liability over the last five years, an exit tax is also required.

To appreciate the uncertainty and duress faced by US citizens living abroad, a couple of hypothetical situations are useful. International tax lawyer Phil Hodgen partly inspired the following hypothetical cases:

Hypothetical Case 1: Jim lives in a foreign country and has dutifully filed a US income tax return each year, but was unaware of FBAR filing retirements. Jim operates eight accounts: four retirement accounts (which he reported on his annual tax returns), two trading accounts, a checking account and a high interest savings account. The highest balance in these accounts is $1,000,000 over the last six years. His current balance is $800,000 after the market dip.

Jim doesn’t know what to do. After great worry, he enters the Voluntary Disclosure Program. The IRS assesses Jim a $250,000 FBAR penalty. In order to pay the penalty, Jim must withdraw funds from his retirement accounts forcing an additional tax liability of $100,000 on the income. Jim is no longer able to retire because his $800,000 has been reduced to $450,000, solely as a result of IRS capriciousness.

Hypothetical case 2: Nancy is a teacher and mother of three, married to a citizen of the foreign country where she has lived for fifteen years. She dutifully filed her taxes in the US, but never knew about FBAR. A friend entered the Voluntary Disclosure Program and was assessed $14,000. She contemplates the renunciation of American citizen, because her foreign husband owns a successful business and Nancy is a signer on business accounts. She fears exposing her husband’s business to the IRS and also fears that upon her death, the IRS will seek its pound of flesh from her estate. She renounces citizenship, though it breaks her heart.

Abuse Of the Law

FBAR was initially a harmless and little known embarrassment for the United States. It began as an ineffective attempt to stop money laundering. Like so many other laws (RICO, Homeland Security, etc.), it began with what some believed noble purposes, only to morph into a tyranny imposed upon law-abiding citizens. It is now a tool capable of arbitrary and oppressive expropriation of the wealth of millions of US citizens living abroad.

An insolvent government is a dangerous government. It is akin to a wounded and cornered animal. When conditions become really difficult, it is likely to do anything to survive. Arbitrariness in the interpretation of any law is dangerous to freedom, but especially so when government’s primary concern is survival rather than justice.

There are many reasons to be critical of FBAR. The following two will illustrate:

  1. Excessive fines: Ayn Rand said “The severity of the punishment must match the gravity of the crime.” This basic principle of human rights, enshrined in the Eighth Amendment, forbids excessive fines. It is immoral for the IRS to intimidate innocent citizens. Any law so uncertain that it could result in a loss of 50% of your wealth, depending upon the whims of the IRS, is not a law. It is government-sanctioned extortion.
  2. Guilt Presumed: The Fourth Amendment protects (or was supposed to) citizens against arbitrary fishing expeditions by government. Probable cause is required. The FBAR requirements circumvent this Fourth Amendment right, in effect saying: “You will volunteer to open the door to your house and let us look inside. If you don’t, we will fine and/or imprison you.” The IRS demands bank information based on a presumption of guilt even though holding funds in a foreign bank account is no crime.

Unintended Consequences

The term unintended consequences, a convenient euphemism for stupid policy or law, is appropriate. Some of the foreseeable outcomes are the following:

  1. An avalanche of US persons will renounce their citizenship. In July 2010, the State Department implemented a $450 fee for making a renunciation before a consular officer, presumably to exact additional income and possibly (highly unlikely) deter some from making the decision.
  2. Foreign banks and investors may decide doing business with the US is not worth the trouble of compliance with FACTA, particularly as the US economy collapses and the global economy shifts to the East.
  3. US Citizens abroad already find it challenging to open bank accounts both in US and in their countries of residence. This annoyance makes it more difficult for American companies and their employees to engage in foreign missions, business and trade.
  4. US citizens are already shunned from positions in foreign companies which do not want their banking details revealed to the United States Treasury Department.

Conclusion

The Bank Secrecy Act, passed in 1970, is an example of law designed for one purpose being expanded to be used against innocent citizens. Regardless of its good intentions, it is now a tyranny used to extort wealth from otherwise legal, law-abiding US citizens living abroad.

It represents a classic case of how government usurps freedom. What level of morality must government have to think they are entitled to shake-down hard-working citizens?

Monty Pelerin has never lived abroad or had a foreign bank account. He has friends who do and hopes that exposing this State plunder will cause it to cease in this and other parts of our lives.

NB: The preceding article appeared first at the American Thinker on April 5, 2011, then at Monty Pelerin’s World. Monty Pelerin is a retired economist who writes under a pen name. In March, I approached Monty asking if he would publish under his pen name an article on FBAR. He agreed and then we co-wrote the article and he kindly gave me no credit because I feared the long arm of the IRS. Then, Monty submitted it to the American Thinker. Now that I am out in the open with my IRS concerns, I’ve decided I can reproduce it here. So I want to thank Monty for his extraordinary help when nearly no one in the mainstream media or even conservative blogs were talking about this injustice which the IRS has afflicted upon millions of Americans – Petros

FBAR In The Homeland: The Willful FBAR Penalty Requires Proof

 

Published by Tax Connections Blog 21 Jun 2017 Posted in FBAR
Written by John Richardson
 

This is one more in a series of posts discussing the FBAR rules. The FBAR rules were born in 1970, laid virtually dormant until the 2000s and then were then unleashed in their full “ferocity” on U.S. persons.

Mr. FBAR has not visited Canada, but he has visited Canadian citizens
 

Readers of this blog (particularly those in Canada) may recall that I have previously written about the adventure of Mr. Jeffrey P. Pomerantz, currently of Vancouver, Canada, with Mr. FBAR. At that point—March 2017—it was clear that the U.S. Department of Justice planned to sue Mr. Pomerantz to collect the FBAR penalties to which it felt entitled. It is worth noting that FBAR penalties are assessed under the Bank Secrecy Act (Title 31 of U.S. laws) which is different from the Internal Revenue Code (Title 26 of U.S. laws.) In order to collect FBAR penalties, the U.S. Government must sue, and sue it did. The purpose of this post is to tell the story of what happened when the U.S. Government sued Mr. Pomerantz in U.S. District Court in Seattle.

But, before we begin our story, this post is more about “Civil Procedure” than it is about Mr. FBAR……………here

In four years, about 1% of diaspora non-filers chose to come into compliance through Streamlined: IRS

This is cross-posted from Brock. The author, Eric is a long-time writer there who composes excellent analytical posts, particularly concerning the inaccurate numbers of expatriations.

There was a discussion today that made me think of putting this particular post up. This post clearly demonstrates that in spite of all the scares – the FBAR Fundraiser aka OVDP 2009, & the FAQ 35 Bait & Switch, OVDI 2011, OVDP 2012, , OVDP 2014 the FATCA Hunt; the endless clamoring of condors, the media and folks like Shulman and Koskinen going on about The Reed Amendment, the Expatriot Act, “Quiet” Disclosures, 877A is retroactive and last but not least, if you don’t have a CLN you haven’t lost your US citizenship – none of it has made a particularly huge dent on non-compliance of Americans abroad. It is literally making me physically ill to reference all this – a vicious cycle of fines, penalties, interest, scaremongering, & whatever else can be thought of to persecute those who are simply presumed to be guilty i.e., Americans abroad. There can be no doubt whatsoever, that this is intentional. Even with the more-or-less guarantee of no penalties via Streamlined, only a very small number are choosing to become compliant. There are likely many reasons; people have begun to see what the IRS can/cannot do in terms of collection (or even detection); people are no longer willing to enter the U.S., etc. I like to think that some of our efforts to help educate people outside the bubble of American exceptionalism, U.S. Law über alles etc has contributed to opeople making up their minds based upon reason rather than reaction. If I had thought I could avoid filing/renouncing perhaps I would have chosen that too. Yet, large numbers of people remain who were literally destroyed by this shameless persecution and there will be more people who will ruin their lives out of ignorance based upon the falsehood that filing is in their best interests. It is for them that we need to continue…….

Sora Fon The tragedy of “self assessment”, self-enforcement and draconian penalties created to enforce honesty while leaving loopholes for those with influence and wealth. It is all I can do to tell the many indigent US Persons abroad I see, who could never face enforcement or confrontation abroad by an IRS interested only in collections, that (apologies to FDR) the only thing they have to fear is fear itself.

TM Yes and should one publicly caution anyone about coming into the system, there is an immediate swooping of threatening condors always quick to claim one doesn’t know what one is speaking about, what a terrible person you are to advise breaking the law, they will find everybody and blah blah blah.

Sora Fon Just saw this quote which I have to repeat: “A nation of sheep will beget a government of wolves.” — Edward R. Murrow

TM Agreed. It is why we MUST NOT remain silent.

Some of you may be aware of the nonsense Keith Redmond has endured by emphasizing on Twitter that if one is not in the tax system, it may be best not to enter it.
Excerpted from a post on Brock:

I was very surprised to see some of the Tweets on Twitter when Keith Redmond tried to warn Accidentals not to put themselves into the US tax system. It is interesting that without any proof as to the ability of IRS able to collect via QI, he presumes it and treats Keith in a manner I found inappropriate and unprofessional. I believe the point of contention was to prove that actual Accidental Americans had been “outed” due to QI. This was not provided, nor has it been since that time. There were others that ganged up in more “attacks” that I will not put up here. Brock/Wed Rally Tweeps will remember this extremely unpleasant incident.

If there is no repeal of #FATCA and a move to RBT, it will be clear that resistance will become more and more prevalent. I personally would love to see massive, visible civil disobedience. At the very least, the government can count on seeing the low numbers discussed in the post below.
*************************
Posted on February 18, 2017

On Thursday, the IRS released their “Dirty Dozen Tax Scams” for 2017, among which they listed “unreported offshore accounts”. They go into more detail in IR-2017-35:

Since the first Offshore Voluntary Disclosure Program (OVDP) opened in 2009, there have been more than 55,800 disclosures and the IRS has collected more than $9.9 billion from this initiative alone.

In addition, another 48,000 taxpayers have made use of separate streamlined procedures to correct prior non-willful omissions and meet their federal tax obligations, paying approximately $450 million in taxes, interest and penalties. The IRS conducted thousands of offshore-related civil audits that resulted in the payment of tens of millions of dollars in unpaid taxes. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

Works of the U.S. government are not objects of copyright, which is a boon for stenographers who mislabel themselves as “journalists”: they can just cut-and-paste the U.S. government’s viewpoint on the issues into their magazines without thinking about it, or attempting any analysis.

Anyway, US$450 million is an average of about US$9,400 per Streamlined participant. Not as big as the $13,000 per head they extracted from minnows with two-digit annual tax deficiencies under the 2009 OVDP, but still a sizeable sum from the perspective of the individual.

I’m sure there’s some poor deluded souls in the IRS and the Joint Committee on Taxation staff who are salivating at the thought of getting nine grand per head out of the rest of the millions of diaspora non-filers too — that might help them turn those mythical FATCA revenue estimates into reality. If that’s their aim, however, then forty-eight thousand over four years is a rather slow start.

Continue reading In four years, about 1% of diaspora non-filers chose to come into compliance through Streamlined: IRS

#IRS abuse of Americans Abroad – The greater the effort! The greater the punishment!

This post is from the RenouceUScitizenship blog.

serenity

 God, grant me the serenity to accept the things I cannot change,
The courage to change the things I can,
And wisdom to know the difference.

We are now more than two years into the Obama/Geithner/Shulman/IRS assault on U.S. Citizens Abroad. It is commonly accepted that the origin of the assault has been – what can now be understood to be – a clear, deliberate, and conscious decision of the Obama administration. That decision is  to equate the day-to-day bank accounts of U.S. citizens abroad with the offshore accounts used by Homelander tax cheats. It’s no longer possible to believe the administration and the IRS are unaware of what they have done. There are  signs that the IRS is slowly trying to change the  rules, change the policies, and change the enforcement. That said, one gets the feeling that the IRS is motivated by considerations of “processing efficiency” and not by considerations of “fairness and justice”.

Two important aspects of the problem are:

1. All bank accounts outside the United States are considered to be “sacred instruments” of tax evasion. Not even the IRS is stupid enough to believe this. Therefore, it’s clear that the IRS is at least threatening (how do you like your freedom now?) to use the day-to-day bank accounts of  U.S. citizens abroad as an  “FBAR Fundraiser“. The IRS is using the  retirements plans of U.S. citizens in their country of residence, to levy fines for failure to file Form 3520. The IRS is using the fact that middle class U.S. citizens invest in mutual funds to subject them to impossible compliance costs and more threats of penalties. This has been documented by Taxpayer Advocate and ignored by the IRS.  We know this. What is different is that in 2011, there was a sense that this “must be some kind of mistake”. It must be “some kind of misunderstanding”. Only a fool would believe that today. The only sane way to view this today is as follows:

The Obama administration is deliberately using penalties and threats of penalties to confiscate the assets of U.S. citizens abroad. Don’t believe it? What’s Form 8938? This is not about taxation. It is about confiscation. But you know that. But, this is not the purpose of this post.

2. The purpose of this post is to explore an aspect of  this that has not been adequately discussed. In the same way that it is a mistake to treat all “non-U.S. banks accounts” the same. It is a mistake to think that the impact of all of this is the same on all. In fact, the people who are the hardest hit  are those U.S. citizens abroad who have tried the hardest.

Group 1 – Those Who Have Been In The U.S. Tax System

This group has  been filing their U.S. tax returns, to the best of their abilities. They are in the system. They are now “low hanging fruit”.  The fact that they have been filing all these years means that they are likely very financially responsible, very aware, very law abiding people. That’s the good news. The bad news is that they are also people who by vritue of having tried to save for retirement have assets that the U.S. wants to confiscate. Obviously this includes the PFIC mutual fund problem.

The problem of owning mutual funds is two-fold:

First, mutual funds are not subject to rules of taxation. They are subject to rules of confiscation.

Second, that in order for the IRS to confiscate them, one must first comply with all kinds of reporting requirements that are impossible to understand and are far too expensive for the average person.

Here is a historical analogy to the IRS treatment of U.S. citizens abroad who have mutual funds:

Jesus was forced to carry his own cross (paying the cross-border professionals to complete the forms) to his crucifixion (the confiscation rules will take it all).

Now, I know that at this moment, at least some readers are howling at the last sentence.  Really! What that tells me is that you:

A. Have not tried to be U.S. tax compliant;

B. Have not tried to use mutual funds to invest for retirement;

C. Probably do NOT feel strongly that one should be tax compliant;

D. Probably are far enough enough away from retirement age so that you can make up the losses.

Just try living this reality!

The people most hurt by this are the people who have tried the hardest to comply with the law. I remind you that it was not until OVDP started in 2009 that the IRS enough knew now to deal with mutual funds and not until 2010 that the ruling came from an IRS counsel (that the cross-border professionals are using to deem mutual funds as vehicles of confiscation).

Group 2 – Those Who Tried To Fix Any Past Compliance Problems

It has become increasingly clear that those who entered OVDP or OVDI were simply suckered. After the vicious and frightening propaganda of the summer of 2011, many people were terrorized into entering OVDI. The lawyers were there to usher them in. They are now locked into the program (although there is some indication that some will be moved to “Streamlined Compliance”). Those who waited appear to have better compliance options.

Of course, by December 2011, the IRS had issued the infamous FS which made it clear that, one didn’t need a formal program of voluntary disclosure. Of course, that didn’t stop the IRS, with full knowledge that minnow were being terrorized into the program,  from resurrecting (another Biblical analogy) the corrupt OVDP program in 2012.

My point is a simple one: those who tried to become compliant by entering the OVDP programs have been the hardest hit. The main reason has nothing to do with taxes. It has nothing to do with compliance. It is the fact that many of them have heard nothing from the IRS. Reminds of the Steven Miller (a cousin of his perhaps) song:

Those who entered OVDI have been living in fear and anxiety since entering the program. What have they heard from the IRS? In many cases, nothing.

IRS Bait and Switch Tactics in OVDP and OVDI

One would think the terms of the OVDP programs were abusive enough. But, the IRS didn’t stop there. In 2009 the IRS changed the terms of the program after people had entered the programIn 2013 the IRS kicked a group of people out of the program after accepting them into the program. It is now certain that:

Any lawyer who advises a client to enter the OVDP program should be disbarred!

The only benefit to the OVDP program was certainty of result and now that certainty has been forever compromised. As a letter from the New York State Bar suggests, who could possibly trust the IRS? The trust issue was recently highlighted by former IRS lawyer Steven Mopsick on this blog. (See also the Mopsick Trilogy – a series of posts about OVDP and its impact on U.S. citizens abroad and Green Card Holders.)

So, what’s a law abiding person who believes he is supposed to be tax compliant supposed to do?

I am writing this post in response to a series of comments at the Isaac Brock Society. The post was about PFICs and it generated a number of comments. The interesting comment stream starts here. We are confronted with a situation of a frightened, confused U.S. citizen abroad, who really wants to be tax compliant, did his best to save for retirement, like the IRS knew nothing about the perils of mutual funds, and must now choose between:

A. Financial ruin – all his money must to to the IRS and compliance costs

B. Non-compliance – but having to live as a “tax cheat”

The problem is that this is exactly the situation of many U.S. citizens abroad who have have lived commendable responsible lives. It is worth noting that neither the IRS nor the U.S. government has ever AND TO THIS DAY DOES NOT make any real effort to educate U.S. citizens about their tax responsibilities! The IRS defines “education” as “threats or penalties”. I feel for the children of Douglas Shulman and Steve Miller (if they have any).

I am going to reproduce this comment stream and invite suggestions on how what people like this should do.

  1. @USCitizenAbroad, @Kalc, @Bubblebustin

    “What would you expect a U.S. person with many years of fillings in the system to do?”

    That is exactly the issue. This whole PFIC thing makes me SO ANGRY and FRUSTRATED!
    I don’t see ANY good answer for such persons. No matter what option you look at it spells financial disaster, especially for people who are at or near retirement age. They cannot afford
    to lose all of the money they have invested over many years just to now become “compliant” (i.e.pay big bucks to have some accountant fill dozens of 8621s, pay back taxes, interest, and penalties and more taxes and interest after they sell the PFICs) and they do not have any other regular source of revenue to replace such a loss.

    “If you are a Canadian citizen without US assets, you are protected. Don’t tell your FI if you happen to have been born in the US. Don’t have more than 1 million in one account.”

    It’s not so simple. If you’ve had a long term relationship with your financial advisor, he likely may already know that you are a USC. Many mutual fund portfolios contain a mixture of US and non- US assets, so you likely may have some in your portfolio already. What should you do? Sell them and then what?
    How do you deal with them on the following year’s tax return? FATCA kicks in way below having 1 million in one account.

    “I do NOT believe that the Government of Canada understands this problem in its entirety. Would you be willing to collect these comments (including the one about the interaction between PFICs and SubPart F),”

    I agree totally. If the government of Canada DID understand all the implications and what a horrendous financial burden this will create for U S persons in Canada, when their financial institutions turn over the data about their TFSAs, RESPs, PFICs, and other investments via FATCA, I think they would not be so ready to sign an IGA. Those persons will be financial bankrupted if the IRS gets their data and goes after them. And when these people are left bankrupted, it will be the Canadian government that will have
    to help support them because we all know that the US government won’t do anything for USCs abroad.

    So, please, please do everything that you can to inform them (Kevin Schoom and others) of what are all the implications if they go down the FATCA compliance path. I think this PFIC problem has certainly not been given enough visibility with our government. It is incredulous to me that the IRS could make a policy change in 2010 about Canadian mutual funds without a formal regulation and then apply it retroactively. This is just WRONG and the Canadian govenment needs to stand up for us and fight this.

    Sorry for the rant, but this issue makes me crazy. Reading what USCitizenAbroad suggested as the only solution for the most financially responsible citizens today just makes me feel more depressed about an already depressing situation. Yes, it does help to be able to talk about it here with others but the reality that is looming in the near future if FATCA kicks in as planned is just too awful.

  2. @Albatross

    Here are the solutions:

    Solutions From The Government of Canada

    Any IGA would exempt from its application lawful residents of Canada regardless of their citizenship. Put it another way, the U.S. can’t both have FATCA and citizenship-based taxation. Is this possible? Not unless this issue is really understood which is not.

    Solutions From U.S. Persons Abroad – Take Charge Yourself

    You and I agree that the ones with the biggest problems are the ones who are entrenched in the system. Their options are:

    1. Do not sell their PFICs. The problems kick in when they are sold. Continue to treat the distributions the way you have always treated them on your tax return. Repeat: It’s the sale that triggers the very worst of the problems.

    2. The time has come to recognize that you will never be able to be U.S. tax compliant. Just not possible unless you pay the staggering costs of compliance and all the fines associated with trying to plan for retirement. I would stay away from the lawyers who will scare you to death. Just keep living your life. Don’t do anything that will trigger taxable events. The advice that most accountants and lawyers give is: sell your PFICs. For those who have had them for the long term, that is the worst possible advice. You do NOT sell them. You hold them and simply pay tax on the distributions the way you always have. That’s the best case scenario. Include the income on your taxes.

    3. RRSPs – This may be the exception to my suggestion for holding the PFICs. Assuming that because they are in an RRSP that the sale inside the RRSP is NOT a taxable event, then perhaps you get rid of those (but get competent advice for taking that step).

    4. Don’t listen to the F_____ cross border professionals. Most of them have really not thought this through plus they have trouble separating their interest from your interest.

    5. If all else fails, hide behind the treaty.

    6. Become a Canadian citizen if you are not already. Then start lobbying the Cdn government to pass law saying that all naturalized Canadian citizens were Canadian citizens from birth. This will protect their own tax base and their citizens from the U.S. exit tax.

    7. Just accept that the US considers you to be a criminal. Hell, people live like that all the time. Of course, you should stay out of the U.S. You might even learn to like it. Dress the part. Pick up the language. Learn to talk that way. It might be fun for you. You might get the respect that you think you are lacking. Pick a criminal to model yourself on – say Barack Obama.

    8. If none of these work, and you have Supart F income, then, well you know my suggestion.

    Curious what you think of those suggestions?

  3. @USCitizenAbroad

    For those entrenched in the system, surely renouncing is still a better option than continuing to have to deal with this BS year after year. At least that frees you from the ongoing obligation. Yes, I accept that it may leave issues from the past and may not be a great idea for those that have a need or desire to set foot in the US in the future.

    Yes, there is still an issue with the 8854 compliance, but there is still a choice on how to play that game, depending on the circumstances and risk tolerance.

  4. @USCitizenAbroad,
    Thanks for your comments on my posting. Here are my thoughts on your suggestions. I’ve included a
    few questions I have on some points you raised.

    Solutions from the Government of Canada
    Yes, I agree that this would be a great solution, but I don’t believe they do understand it.

    Solutions From U.S. Persons Abroad – Take Charge Yourself
    1. Yes, I agree that it makes no sense to sell the PFICs as that will trigger a nightmare.

    2. Yes, the lawyers and accountants that I’ve talked to have all said to sell ALL the PFICs, but of course they don’t have to worry about paying the costs associated with doing so. I concur that there is thus NO
    way to ever be tax compliant in this scenario, unless of course the tax code changes.

    “You hold them and simply pay tax on the distributions the way you always have. That’s the best case scenario. Include the income on your taxes.”
    QUESTION: So I infer from your suggestion that one should not bother with now filing 8621′s and the
    complicated calculation of “income” derived from them, but just continue to include the actual interest or
    dividends or capital gains distributions you receive from the mutual funds on your tax return. Is that what you are suggesting? As soon as you look at filing 8621s for each mutual fund you are talking BIG bucks
    to have an accountant prepare it and these forms are way too complex for the average taxpayer to attempt.
    QUESTION: What happens when FATCA kicks in and the FFI or CRA turns over the details of these funds to the IRS? Won’t they then identify them as PFICs and come screaming for all they back taxes, 8621 forms, etc? Is that where your suggestion 5 comes in?

    3. Don’t know about the RRSPs. This would require more research. For now these are not as
    important since the tax is deferred by 8891.

    4. Agreed.

    5. “If all else fails, hide behind the treaty” Not sure just how one can hide behind the treaty. Can you
    clarify what you mean here?

    6. Definitely a Canadian citizen. Ideas how we can get the Canadian government to pass such a law?

    7. Yes, definitely safer to stay out of the US. Not really a big hardship on that point for many of us.

    8. I didn’t really understand the Subpart F business completely but sure hope it doesn’t apply. I’d hate to think that that would be the only solution.

    I’d be interested in your further comments and answers to my questions above. Your comments are always very informative. I appreciate having the means to exchange thoughts with people like you who do understand this complex and horrendous issue.

    It is clear that this person is in a situation where he completely compromises his financial security by allowing the cross-border professionals and the IRS to confiscate his assets or he must live with the knowledge that the U.S. considers him to be a “tax cheat”, somebody who is worthy of a “FATCA Hunt” or possibly a Whistle Blower’s Retirement Plan.

    It is impossible to live with either scenario.

    The first scenario subjects one to a total rape and having to live with the consequences the rest of your life.

    The second scenario, if not dealt with properly, has the potential to change your own “self image”. On this point though I would say:

    To be considered a criminal by the U.S. government is like being called ugly by a frog. To be a criminal is to have a certain moral stature. In the U.S. there is no correlation between law and morality – in fact, law has become a substitute for morality.

    At a minimum, leaving aside the financial issues, the emotional stress and damage is more than a person who was financially responsible can bear. So, those U.S. citizens abroad who are nearing their retirement years and have most of their wealth in mutual funds must choose one of two options. Tax compliance is possible only in a logical sense. In a practical sense, for many U.S. citizens abroad, tax compliance is not possible.  This is perfectly understandable when issues of “taxation” are confused with “confiscation”.

    The current U.S. Canada Tax Treaty, as I understand it, does NOT require Canada to assist the U.S. in the collection of taxes on Canadian residents, if the person was a Canadian citizen at the time the “debt” arose. This is information  of possible relevance. It doesn’t mean you don’t owe the money. It just means Canada won’t help the U.S. collect it. I presume that that those renouncing U.S. citizenship would be able to use the treaty to shield them from possible Exit Tax Enforcement. But, to use the treaty is to live with another layer of worry!

    The best solution is always to renounce. At this point the only reason to NOT renounce is because you think the U.S. will move to Residence Based Taxation.  Who knows? Tax reform is on the agenda. U.S. citizens abroad made a number of excellent submissions to the Ways and Means Committee. I don’t know about you. But, there are NO circumstances under which I would want to be a U.S. citizen.

    I am writing this post at time when:

    1. Canada is considering a FATCA IGA with the U.S. I hope Canada understands what it will do to one million Canadians by turning them over to the IRS.

    2. Generalized IRS abuse of taxpayers is under way in Washington. It is possible that this post has relevance to that issue.

    3. Congress is considering moving to Residence Based Taxation. That would solve ALL of these problems.

    In closing, to all U.S. citizens abroad who worked so hard to save for your retirement …

    God, grant me the serenity to accept the things I cannot change,
    The courage to change the things I can,
    And wisdom to know the difference.

    This is for real. You must accept that the U.S. government is not what you thought it was. It has made a conscious decision to attack you, your families and your assets.

    Courage is the willingness to proceed in the face of fear. In this case it requires you to face up to a decision with no good outcome. You must choose between being destitute or being tax compliant. “American  exeptionalism” means you cannot have both.

    Wisdom means finding a way to move beyond this frightening chapter in your life. Look at it this way: there are parts of the world where people have never experienced life without U.S. tyranny. The good news is that you do NOT live in the United States.

    On that note, I will conclude with a thought from Winston Churchill. His wife did not approve of his drinking. One night he came home and she said:

    Winston, you are drunk.

    Winston thought about it a minute and said:

    Yes, I am drunk. But you are ugly and tomorrow I will be sober.

    Put it this way, you can renounce your U.S. citizenship. Every day, for the rest of their lives, Homelanders will wake up in the Homeland!