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 program. In 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.