PARADISE LOST: THE “PARADISE PAPERS LEAK REVEALS MODERN DIGITAL AGE TRUTHS – (1) ALL FINANCIAL RECORD CAN BE HACKED. 92) THERE ARE NO CYBER SECRETS.  AN OVDP SOLUTION FOR OFFSHORE NONCOMPLIANCE

In John Milton’s epic biblical poem “Paradise Lost,” the fall of Man is depicted. The Devil is banished to Hell.   The Modern Wealthy Man has had his own fall.  The morality-play today devolves around tax-evasion and the loss of privacy.  Keeping one’s financial affairs secret from the masses, sometimes for good cause such as to protect personal safety, but often for more shady reasons like the evasion of tax obligations, is no longer a certainty.

After the Panama Papers were disseminated, no one with a sane mind would have continued to believe that offshore financial accounts in Tax Haven jurisdictions could continue to perfectly wall-off one’s financial affairs from public scrutiny.  Now comes the Paradise Papers to reinforce that point for any remaining non-believers.

The Paradise Papers were obtained by the German newspaper Suddeutsche Zeitung which called in the International Consortium of Investigative Journalists to head the inquiry.

Like the Panama Papers the obtained documents reveal financial dealings of many wealthy political leaders, celebrities and other extremely wealthy individuals.  Even the Queen of England’s financial affairs were revealed in the leak.

What is lost in these revelations?   The Paradise Lost is privacy and secrecy.  They simply do not exist anymore for information trusted to computer networks or cloud-based applications.

Very sophisticated hacker-groups are determined to obtain such information, no less governmental tax authorities.   Does this mean we are likely to go back to paper documents stored in rusting file cabinets?  Certainly not for most transactions, although I have read that certain spy agencies are employing typewritten again in their spy-craft.

What this does mean for U.S. non-compliant taxpayers is that their foreign financial accounts long hidden away in some remote tax haven jurisdiction are no longer safely hidden away that they will never be found-out.

If such accounts beneficially owned or controlled by U.S. citizens or resident aliens, are uncovered by the IRS and Department of Justice, the resultant criminal and civil sanctions may well feel like Hell.

So, the question is: What to do?  The options are limited.

One may continue to imitate an ostrich – stick one’s head in the sand and wish for non-discovery, like those poor souls who knew they should have left Europe during World War II but waited too long and fell under Nazi occupation.  The tragic consequences of those indecisions are well known.

The consequences of tax non-compliance today are less tragic but harsh enough: at a minimum severe or draconian amounts to pay for tax, penalty and interest; and, the distinct possibility of incarceration for tax crimes committed, no less, the embarrassment and shame of reputation that goes along with becoming a felon.

The above, sounding not particularly too palatable, the question still sits on the table, “What to do?”

Fortunately, there is a course of action that both caps the adverse financial consequences of one’s tax non-compliance and affords amnesty from criminal prosecution.  This result can be accomplished by entering an IRS / DOJ amnesty program called The Offshore Voluntary Disclosure Program or OVDP.

The OVDP is a special program under which IRS settles all potential criminal and civil tax issues relating to unreported offshore financial accounts under a specified civil penalty regime that is less severe than the maximum civil penalties that could be asserted by IRS outside of the program, were you audited, but in some cases more severe than the lowest level of civil penalties that IRS would assert outside of the program.  In the OVDP, IRS also grants immunity from any criminal charges that otherwise might arise from the non-reporting.

 

The OVDP has several beneficial features, namely:

  • Offers certainty that you will not be charged with a crime and that the civil FBAR penalty will be no more than 27.5% (50% if any account is with certain identified banks or facilitators under investigation) of the highest aggregate value in U.S. dollars of your offshore accounts during the OVDP period discussed below.
  • Allows you to repatriate and use offshore funds remaining after paying the tax and penalties and / or have funds owned by your parents remitted to them.
  • Removes the cloud of fear handing over you about discovery of the non-compliance.
  • Does all of the above without tainting your name, identifying you as a tax-violator and without disclosing to the public that you have entered the program.

The OVDP is a process that is completed in phases:

  1. Submit your name or names to the Criminal Investigation Division (CID) of IRS and CID will send notification by fax if your name or names are cleared or if you are already under audit consideration or have already been identified. In the latter instance, you will not be eligible to participate in OVDP and likely will be audited by IRS which could result in civil penalties more severe or less severe than are offered in OVDP and or criminal sanctions for all or some of you.
  2. Assuming your name clears CID, you will then submit a detailed OVDP Letter and Attachment for each foreign account to CID. The information required by this letter and the attachments is quite detailed and may take some time to gather, organize and relate in a coherent, accurate narrative.  The letter must be completely truthful and submitted within 45 days of initial clearance of your name by CID   CID will then notify by mail whether you have been provisionally accepted into the program.
  3. Following provisional acceptance, you will submit within 90 days, a more detailed package of amended returns with supporting documentation. Your case will then be assigned to an examiner by the IRS Philadelphia Service Center for review and certification.  This is not equivalent to a full-blown audit and usually goes smoothly but sometimes requests for clarification or additional information or documentation are made.  Checks for the FBAR penalty and for the income tax, accuracy related penalty and interest due must also be submitted at this time.
  4. The additional package will include amended returns and Amended FBARs (TD Form 90.22-1 or FinCEN 114) for each year of the OVDP period (8 years). The OVDP period is determined by income tax returns delinquent or requiring amendment. If any tax returns have not yet filed, such returns, if required, will be included with the OVDP submission.
  5. Once the OVDP review is complete you will sign a contract with IRS stating the income tax, accuracy related and FBAR penalties and interest owed and paid. This contract called a “Closing Agreement” is binding on IRS unless it is later found that you fraudulently misrepresented facts in your submission. The IRS can still audit your returns on domestic tax issues, but that is not a common occurrence unless controversial domestic issues are raised in the returns.  Thus, the “Closing Agreement” and payment of tax, penalty and interest should end the matter.

In addition to the OVDP penalty, there will be income tax to pay on unreported income, a substantial underpayment or accuracy related penalty of 20% of the additional tax, and a failure to pay penalty of up to 25% applied to the unpaid tax plus accrued interest.

Even if accepted into the OVDP, you have the option of opting-out of the program and seeking a lower FBAR civil penalty while preserving the OVDP criminal immunity.  Opting-out, however, can result in a higher as well as lower civil FBAR penalty and can result in higher income taxes and income tax penalties being asserted by IRS. Thus, opting-out sometimes presents potential monetary benefits but poses additional risks not present if one remains in the OVDP.

 

To be eligible for the OVDP one must act propitiously.  Once IRS or the DOJ has your name as being noncompliant you become ineligible for the program.

Thus, I strongly urge individuals still out of compliance with U.S. tax law regarding foreign financial accounts to consult with a tax attorney experienced in these matters.

I, of course, am available for such representation.  There are other post on this blog-site dealing with various aspects of the OVDP and Streamlined Filing Compliance Procedures, another IRS program, for taxpayers whose noncompliance was not willful.

My credentials, experience and publications may be found on my website www.steinbergtaxlaw.com

© 2017 by Robert S. Steinberg, Esquire
All rights reserved

 

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DEPARTMENT OF JUSTICE ANNOUNCES FBAR GUILTY PLEA OF GREEN CARD HOLDER

On October 26, 2017, Hyung Kwon Kim (Kim), a Greenwich, Connecticut man pleaded guilty to failing to report funds he maintained in foreign bank accounts to the Department of Treasury. The DOJ Press Release was announced Acting Deputy Assistant Attorney General Stuart M. Goldberg of the Justice Department’s Tax Division, U.S. Attorney Dana J. Boente for the Eastern District of Virginia, and Chief Don Fort, IRS Criminal Investigation.

U.S. citizens, resident aliens, and permanent legal residents with a foreign financial interest in or signatory authority over a foreign financial account worth more than $10,000 are required to file a Report of Foreign Bank and Financial Accounts, commonly known as an FBAR, disclosing the account.  Kim did not obey the law.

Acting Deputy Assistant Attorney General Goldberg discussed the plea:

For more than a decade … Kim concealed his wealth in secret offshore accounts, evading reporting requirements and the payment of income taxes due,” With his guilty plea, he is now held to account for his criminal conduct.  Offshore tax evasion is a top priority for the Tax Division, and we will continue to work with our partners at IRS to follow the money and actively pursue those who persist in thinking that they can safely hide their income and assets offshore.  

Court documents and information provided in court, reveal the actions that got Kim into trouble and resulted in his guilty plea:

  • Kim is a citizen of South Korea and, since 1998, a legal permanent resident (Green Card Holder) of the United States.
  • Kim resided in Massachusetts and later in Connecticut.
  •   Around 1998, Kim traveled to Switzerland to identify financial institutions at which to open accounts for the purpose of receiving transfers of funds from another individual in Hong Kong.
  • Over the next few years, Kim opened accounts at several banks, including Credit Suisse, UBS, Bank Leu, Clariden Leu, and Bank Hofmann.  In 2004, the value of the funds in Kim’s accounts exceeded $28 million.
  • Kim conspired with several bankers, including Dr. Edgar H. Paltzer, to conceal the funds from U.S. authorities.
  • Paltzer, who was convicted in 2013 in the Southern District of New York for conspiring to defraud the United States, and the other bankers assisted Kim in opening accounts in the names of sham entities organized in Liechtenstein, Panama and the British Virgin Islands.
  • Paltzer and the other bankers facilitated financial transactions for Kim, so that Kim could use the funds in the United States.  For example, between 2003 and 2004, Kim directed Paltzer and another banker to issue nearly $3 million in checks payable to third parties in the United States for the purchase of a residence in Greenwich, Connecticut.  In 2005,
  • Kim created a nominee entity to hold title for the purchase of another home on Stage Harbor in Chatham, Massachusetts, for nearly $5 million.  Kim and Paltzer communicated about the purchase in a manner that created the appearance that Kim was renting the property from a fictitious owner.
  • Between 2000 and 2008, Kim took multiple trips to Zurich, Switzerland and withdrew more than $600,000 in cash during these visits.
  • Kim also brought his offshore assets back to the United States by purchasing millions of dollars’ worth of jewelry and loose gems.  For example, in 2008, Kim purchased an 8.6 carat ruby ring from a jeweler in Greenwich, Connecticut, which he financed by causing Bank Leu to issue three checks totaling $2.2 million to the jeweler.
  • In 2008, during a trip to Zurich, Kim’s banker at Clariden Leu informed Kim that due to ongoing investigations in the United States, Kim could either disclose the accounts to the U.S. government, spend the funds, or move the funds to another institution.
  • Kim moved the funds into nominee accounts at another bank. In 2011, Kim liquidated the accounts by, among other things, withdrawing tens of thousands of dollars in cash and purchasing three loose diamonds for about $1.7 million from the Greenwich jeweler.
  • Kim also admitted that from 2000 through 2011, he filed false income tax returns for 1999 through 2010, on which he failed to report income from the assets held in the foreign financial accounts that he owned and controlled in Switzerland.

As part of his plea agreement, Kim will pay a civil penalty of over $14 million dollars to the United States Treasury for failing to file, and filing false, FBARs, which is separate from any restitution the Court may order.

Don Fort, Chief of IRS Criminal Investigation commented on the plea:

Mr. Kim’s plea is another example of what happens to those who dodge their tax obligations by utilizing offshore tax havens. We owe it to the vast majority of honest U.S. taxpayers to tirelessly search for and prosecute those who avoid paying their fair share, regardless of how they may try to disguise their income.

Kim’s sentencing is scheduled for Jan. 26, 2018 before U.S. District Court Judge T.S. Ellis III.  Kim faces a statutory maximum sentence of five years in prison.  He also faces a period of supervised release, restitution, and monetary penalties, in addition to the FBAR penalty.

RSS COMMENTS

  1. Kim’s case provides examples of the sort of overt acts that will provide evidence of criminal intent.
  2. Kim’s downfall is a classic example of a taxpayer who could have averted criminal sanctions by entering the Offshore Voluntary Disclosure Program (OVDP).
  3. The OVDP is still open but IRS and the DOJ have indicated it may soon be coming to an end.

Those of a mind to avoid the fate of Hyung Kwon Kim should consult with an experienced offshore tax attorney to consider alternatives for comming into compliance with the minimum of risk and cost.

 

© 2017 Robert S. Steinberg, Esquire
All rights reserved
www.steinbergtaxlaw.com

 

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THE HOUSE TAX REFORM BILL WOULD REPEAL THE ALIMONY DEDUCTION

The House of Representatives has revealed its Tax Reform Plan encapsulated in The Tax Cuts and Jobs Act (HR 1)

The House Committee on Ways and Means Section by Section Summary describes the provision on Alimony as follows:

Sec. 1309. Repeal of deduction for alimony payments.

Current law: Under current law, alimony payments generally are an above-the line deduction for the payor and included in the income of the payee. However, alimony payments are no deductible by the payor or includible in the income of the payee if designated as such by the divorce decree or separation agreement.

Provision: Under the provision, alimony payments would not be deductible by the payor or includible in the income of the payee. The provision would be effective for any divorce decree or separation agreement executed after 2017 and to any modification after 2017 of any such instrument executed before such date if expressly provided for by such modification.

Considerations:

  • The provision would eliminate what is effectively a “divorce subsidy” under current law, in that a divorced couple can often achieve a better tax result for payments between them than a married couple can.
  • The provision recognizes that the provision of spousal support as a consequence of a divorce or separation should have the same tax treatment as the provision of spousal support within the context of a married couple, as well as the provision of child support.

 JCT estimate: According to JCT, the provision would increase revenues by $8.3 billion over 2018-2027.

RSS COMMENTS:

  1. The alimony deduction is not really a divorce subsidy. Rather, the deduction reflects that a portion of the payor spouse’s gross income has been shifted to the payee spouse. Absent a deduction the payor spouse will be required to pay tax on income he or she will not have available for his or her own support. To say that this situation is the same as the payment of spousal support during the marriage is inaccurate. During the marriage the spouses live under one roof. After the divorce the spouses must maintain two separate households.   The only present tax revenue impact of alimony payments is a rate arbitrage benefit if the payee spouse is in a lower tax bracket than the payor spouse.
  2. The Joint Committee on Taxation (JCT) estimate of tax savings from the Bill also seems questionable. Should this provision become law, alimony payments will simply be reduced to reflect the fact that the payor spouse is paying the income tax on the payee spouse’s alimony payments. Negotiations over support will become more complicated.

Copyright 2017 by Robert S. Steinberg, Esquire
All rights reserved
www.steinbergtaxlaw.com

 

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WHEN IS A JOINT RETURN DEEMED TO HAVE BEEN FILED?

The Tax Court decision in Victor A. Edwards v. Commissioner, TC Summary Opinion 2017-52 contains an instructive discussion of the rules applicable to determining whether a valid joint return has been filed. Bear in mind that this is a summary opinion and therefore may not be cited as precedent.  The case analysis may, nonetheless, be helpful.

Victor and Sharon Edwards divorced in 2014, although they lived together until divorced on September 5, 2014. They had adopted two minor children who lived with them while they remained married. Their divorce decree did not address whether they would file a joint income tax return or separate returns. They had e-filed joint returns for past years, both Sharon and Victor having signed the e-file authorizations, presumably on Form 8879, although the form number is not mentioned in the Tax Courts statement of facts. In the past Victor had delivered their tax information to the return preparer who never met or had spoken to Sharon.

On February 8, 2014 Sharon sent Victor a text message proposing that they file a joint return for 2013 and split the anticipated tax refund. They agreed to discuss that possibility when she returned to their shared home that evening.  There is no mention in the opinion whether they ever had that discussion.

On February 12, 2014 Victor filed a joint return for 2013. Sharon did not give her tax information (W-2) to Victor and authorize him to deliver it to the return preparer. Rather, Victor delivered the W-2, which had been mailed to the house, along with his tax information to the return preparer and had her prepare a joint return. Sharon did not sign an e-file authorization for 2013. It is not stated whether Victor forged her signature on the Form 8879, or, if not, how the return preparer submitted the return to IRS without an authorization for Sharon.

The joint return reported wages of $26,777 for Sharon and $3,937 for Victor. IRS issued a joint refund check in the amount of $6,240 which Victor cashed even though most of the tax paid had been withheld from Sharon’s wages.

Victor did not immediately tell Sharon that he had filed a joint return for both of them or that he’d received and cashed the refund. He did not share any of the refund with Sharon.

On April 5, 2014 Sharon sent Victor an additional text message inquiring about whether they should file a joint return for 2013. Victor responded with a cryptic message, “talk to the judge about it.”

On April 15, 2014 Sharon e-filed Form 4868 to automatically extend her 2013 return due date to October 15, 2014.

Throughout the summer divorced attorneys for Victor and Sharon were exchanging messages regarding the divorce proceedings. During that time Sharon believed that Victor had filed a married filing separately return on his own behalf for 2013 on which he had claimed both of the couple’s children as his dependents.

The parties were finally divorced on September 5, 2014.

On October 6, 2014, Sharon filed a married filing separately return for 2013 reporting her W-2 wages and claiming a refund. IRS rejected the return. Sharon wrote to IRS stating that she now believed her former husband had filed a 2013 joint return for her.

She also sent Victor a text message asking whether he’d file a return using her Social Security Number. Victor responded, “you don’t need to file.’

On October 18, 2014 the IRS received a married filing separately return from Sharon in which she claimed both children as dependents. IRS asked Sharon to explain whether she’d filed two returns for 2013 and to indicate her filing status.   She replied to IRS that she’d filed only one return using the filing status of married filing separately but that her former husband, without her knowledge, had filed a joint return using her Social Security number. At the time, she’d also submitted Form 14039, ID Theft Affidavit, to IRS.

IRS then issued a Notice of Deficiency to Victor changing his filing status to married filing separately, removing the children as dependents and removing Sharon’s wages.  The Notice indicated a deficiency of $6,244 and proposed to assess the accuracy related penalty.

Victor petitioned the Tax Court for a redetermination of the deficiency and penalty.

The Court’s decision summarizes the law on determining whether a joint return has been filed. The general rule is that filing of a joint return is an election made by both spouses. Section 6103(a).

A return will be accepted by IRS as a joint return only if both spouses had intended to make the joint return election. Although both spouse must generally sign the joint return, the failure of one spouse to sign does not necessary mean that the return will not be treated as a joint return if IRS, or, the court finds that both spouses intended to make a joint return. A joint return is considered desirable in most cases since rate-splitting results generally in a lower tax liability for the couple. The other side of the coin, however, is that filing a joint return imposes joint and several liability on the spouses, unless one qualifies for relief from joint and several liability under Section 6015 (commonly called “the innocent spouse” rules). Thus, whether a return filed is treated as a joint or separate return is a matter of great consequence and one of the most frequently litigated tax disputes.

Whether a filed return will be treated as a joint return is a question of fact. The Tax Court considers the following factors in deciding these cases:

  • Was the return in question prepared in accordance with an established practice of preparing and filing a joint return?
  • Did the non-signing spouse fail to object to filing of the purported joint return?
  • Did the non-signing spouse perform an affirmative act indicating an intention to file a joint return?
  • Was only one spouse historically relied upon to prepare and see to the filing of the return and, if so, did that spouse handled the filing in question?
  • Did the non-signing spouse examine the return before it was filed?
  • Did the non-signing spouse file a separate return?
  • Did the return include the income and deductions of the non-singing spouse?
  • Was the non-signing spouse aware of the content of the purported joint return?

Generally, the IRS Notice of Deficiency is presumed correct and the taxpayer carries the burden of proving that it is incorrect. Tax Court Rule 142. Thus, the presumption is against the court finding that Sharon intended to file a joint return. Moreover, the petitioner, in this case Victor,  had the overall burden of proof with regard to the above facts. IRC Section 7491 (a). That burden may, however be shifted to IRS, if petitioner introduces credible evidence with regard to an issue.

The Court found that no joint return had been filed as Sharon did not intend to file jointly with Victor for the following reasons:

  • There was no credible testimony from either party, and Victor, not having adduced credible evidence, retained the burden of proof on the issue.
  • The preparer had interfaced only with Victor and never met or spoke to Sharon in earlier years or before e-filing the 2013 purported joint return.
  • Normal practice was not followed in 2013 as Sharon did not sign the e-file authorization form.
  • Sharon did not review the return prior to filing.
  • Sharon continued to message Victor about possibility filing a joint return after Victor had already submitted the purported joint return.
  • Sharon requested her own extension of time to file on April 15, 2014.
  • Sharon was therefore unaware that Victor had filed a purported joint return and likely believed that he had filed a married filing separately return.
  • Finally, Sharon, after the divorce was final, filed her own married filing separately return.

The court did not discuss whether a signature purporting to be Sharon’s appeared on the Form 8879. If a signature had been affixed to the return, the question of a forged signature would be the natural relevant inquiry. If Victor had forged Sharon’s signature, the return could not have been a valid joint return. If there was no spouse’s signature on the Form 8879, then the return preparer was not legally authorized to submit the return, and would have a potential problem with both the IRS Practice Office and malpractice liability or even fraud liability to Sharon, depending on additional facts being found.

RSS ADDITIONAL COMMENTS

  1. Noteworthy, is that the court found that Victor had established reasonable cause for filing the joint return and claiming the kids as dependents and therefore reduced the 20% accuracy related penalty to zero. Victor had argued that he’d informed Sharon of the joint return and had kept the refund of $6,240 to compensate him for her alleged failure to contribute to the joint housing expenses. The court did not find his argument tenable. I find it disingenuous. I believe Victor was pulling a fast-one: filing an early joint return, while the attorneys were still discussing the case, and, telling Sharon, “Go ask the judge,” than later, “You don’t have to file.” In both instances when she’d inquired about filing a joint return, he did not directly respond to her question, but gave her a cute cryptic answer.
  2. Divorce attorneys should make clear early in the proceedings to both clients and opposing counsel that no joint return is to be filed without the express written agreement of the other spouse.
  3. Spouses should be mindful that filing a joint return is a double-edged sword. While some tax may be saved, the non-income producing spouse is subjecting his or her separate assets (even non-marital assets) to possible adverse collection procedures by IRS in the event that tax due on the joint return is not paid or a later audit produces a deficiency. Relying on the innocent spouse escape-hatch can be an expensive mistake. Remember, when you are divorcing your spouse, from in whole or part, a lack of trust, why in the world would you trust a now former spouse, to file a return for you? Be cautious and do not sign a joint return without having the matter reviewed by a divorce-tax attorney who will know how to protect you.

 

© 2017 by Robert S. Steinberg, Esquire
All rights reserved
www.steinbergtaxlaw.com

 

 

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U.S. EXPATRIATES FEEL ABUSED BY FATCA AND OPPRESSIVE TAX REPORTING REGIME

I receive calls every day from U.S. Citizens living abroad who have recently learned that they are not compliant with U.S. tax filing and reporting obligations. They are angry, confused and frustrated. They’ve never heard of these requirements before getting the bad news that they could be subject to draconian penalties for not filing an obscure FBAR form. They are incredulous and dumbfounded by this news. After a while most calm down and opt to deal with the problem. Below is testimony from one U.S. expat living in Canada who eloquently expresses this universal frustration with the system and opts-out by renouncing her U.S. Citizenship. This may be a viable, although not less expensive solution, for many Canadian expats. But, the many living in less stable or more exposed parts of the world, may find a bid scary surrendering their U.S. Passport and safe-haven security blanket. After all only 75 years ago, Europe was in flames and people there would have given all that they owned for a U.S. Passport. The world today is not a bastion of stability and peace. In any event, I’m sure many of my readers will identity with the problems and feelings expressed below.

Testimony of Marilyn Ginsburg before the United States Senate Finance Committee
International Tax Section
April 9, 2015

Good morning and thank you for the opportunity to speak with you today. My name is Marilyn Ginsburg. I will be 70 years old next month and I renounced my U.S. citizenship, with great regret, in my 69th year.

I was born in St. Louis, grew up in Denver, and moved to Canada when I was 26 years old. My husband and I left the United States in June, 1971, a month after we had both finished graduate school, I with a law degree and my husband with a PhD. in American history. We both obtained jobs teaching in our fields at a Canadian University. We assumed we would stay in Canada for a few interesting years, living in another country, and then return to hearth and home. One thing led to another and this never happened, and we have now lived in Canada for 44 years.

In 1977 our daughter was born in Toronto and we registered her at the U.S. consulate as an American citizen. In 1985, in order to become a member of the Ontario Bar, I was required to become a Canadian citizen. I delivered an affidavit to the U.S. Consulate indicating that I did not intend to relinquish my U.S. citizenship by the act of acquiring Canadian citizenship. Eventually my husband also became a Canadian citizen because it was clear we were there to stay and he wanted to be able to vote in Canadian elections.

However, he and I also continued to vote in U.S. elections and we traveled on our U.S. passports. We have never failed, in 44 years of living outside the country, to file U.S. tax returns. I don’t remember why I knew to do this, but clearly we were among the lucky ones. In other words, we have been model U.S. citizens in every way. Nevertheless, all three of us have since renounced our U.S. citizenship. Why?

First, there is the expense of continuing to be tax compliant. We have to use the services of a specialized and expensive tax accountant who can complete and reconcile our tax returns for both countries. This service is not cheap. As a matter of fact, our accountant estimates that it costs at least twice as much for Americans living in Canada to file their U.S. returns than an American living in the U.S., due to the complexity and number of forms that must be filed.

Last year I had to retain the services of a second highly qualified tax accountant because we owned Canadian mutual funds. I had no idea this was an issue, and apparently neither did my first tax accountant. I chose not to be the one to pay him to do his first IRS form 8621, which according to the IRS website can take 41 hours to complete. Therefore, I found the second accountant, with experience in completing this form, to bring us up to date. Of course, we also must pay taxes to both countries.

Since we are both retired now, and the tax treaty does not address pension income in the same way it addresses employment income, we now owe taxes to the U.S. in addition to our sizable tax bill to Canada. Some of this is covered by the foreign tax credit on our Canadian returns, but not all.

If we combine the cost of accounting fees, and U.S. taxes, including the higher tax rate on any gains from our Canadian mutual funds, we estimate that just to remain U.S. citizens would cost us more than $125,000 of our retirement money over the next 15-20years.

Please note that we are not entitled to any U.S. Social Security or Medicare. We moved to Canada when we were too young to have accumulated sufficient credits, so we have been filing tax returns all those years for no future economic benefit whatsoever. The second reason we renounced our U.S. citizenship was because we felt the U.S. was treating us unfairly. I will cite one example of many.

Why should our Canadian mutual funds be treated as Passive Foreign Investment Corporations, requiring us to pay higher taxes on any gains than my sister in New York pays on her U.S. mutual funds?

Why should I have to pay an accountant for 41 hours of work to try to figure out how to report my small gains on every Canadian mutual fund I own?

Mutual funds are an important part of most peoples’ retirement savings because they spread the risk, and, as a resident of Canada, I am not allowed to own U.S. mutual funds. The law makes no sense.

I live in Canada so a Canadian mutual fund is not a foreign investment for me; it is a local investment like a U.S. mutual fund is for my sister. Is it fair for the United States to make it more expensive and more difficult for its citizens living abroad to save for their retirements than citizens living in America? That is discriminatory treatment and one reason why U.S. citizens living abroad feel like they are treated as second class citizens.

The third reason that I renounced is because I wanted to sleep better at night. I am not saying this jokingly. I am quite serious.

When I read that the penalty for a non-willful failure to properly file our FBAR forms was $10,000 I decided it was simply no longer worth the worry. These forms require me to give our tax account very detailed information for every bank, retirement, savings, checking and investment account we own. My accountant relies totally on what I tell him. What if, as I get older, I forget? Some days I go to our downstairs pantry and can’t remember why I went. However, no one is fining me $10,000 for forgetting that I went downstairs for a bag of sugar.

These forms are filed with the Financial Crimes Enforcement Network of the Department of the Treasury. They were originally, in 1970, intended to uncover criminal activity by those who were using secret bank accounts for money laundering, securities manipulation, insider trading, and other illegal activities. But ordinary Americans living abroad are not criminals using secret bank accounts to hide illegal activity.

I was recently made aware of the horrendous experience of an American woman, living in Canada, who, in an attempt to be totally tax compliant, entered into an IRS “amnesty” program. This was not because she was a tax cheat, or was hiding money off shore; it was just because she had not known, when filing her yearly U.S. tax returns that she also had to file the annual FBAR form. The manner in which this woman was treated by the IRS is enough to make one weep.

Any member of Congress who truly wishes to understand the damage being done to Americans abroad by the present tax regime, and the way in which it is being enforced by the IRS, must read Ms. d ’Addario’s complete letter to House Representatives Adrian Smith and John Larson.

While discussing the disproportionate nature of fines under FATCA, including the filing of these FBAR forms, Nina Olson, the U.S. Taxpayer Advocate, asked in October, 2014, “…why are we doing this to folks? Why are we tormenting them in this way”?

I wish I knew the answer to that question. What would have happened if I hadn’t, by chance, read in a seniors’ magazine that Americans living in Canada, who own Canadian mutual funds, are in big trouble? I lost sleep about that until I found our second accountant who brought us into compliance on that form, the IRS instructions for which are 13 pages long/ .I just can’t afford this amount of time and money and this level of anxiety trying to remain tax compliant any longer.

I have never been anything other than a loyal and law abiding American and yet I really began to worry. I have read horror stories about how the IRS treats people and frankly, I did not ever want to be one of those people. In 2014, even former IRS Commissioner, Steven Miller, when discussing his cost benefit analysis of FATCA and its reporting requirements, concluded that the costs may well outweigh the benefit.

Americans all over the world are doing their own personal analyses and they are not just about dollars and cents. They are about the stresses involved for non-American spouses, for children who have inherited American citizenship and must now make important tax and citizenship decisions; they are about fear and feelings of being treated unjustly.

I have many American friends living in Canada, most of whom have or will be renouncing their U.S. Citizenship. Others would like to, but for one reason or another, find it impossible to do so. I can tell you today that not one single dual citizen I know is hiding money off shore or has ever knowingly cheated the United States out of a single penny. Most of them didn’t realize, until recently, that they were still U.S. citizens, or they did know, but did not understand they had to file U.S. tax returns while living abroad. They are now caught in the cross hairs of a tax weapon that was meant to catch wealthy Americans hiding money outside the country, not my lovely neighbor, who married a Canadian 45 years ago and is now a retired teacher living on a pension.

Was it easy for me to renounce? I cried when signing the renunciation oath at the U.S. consulate in Quebec City, where we flew because the wait time to renounce at the consulate in Toronto is now over a year. It hurt then and it still hurts. My mother, who is nearly 93, was terribly upset that I renounced my citizenship, other relatives didn’t understand, and I am bitter and angry that a country my family has lived in since before the Civil War is treating its own citizens abroad like criminals and tax cheats and making their lives miserable because of an unfair tax regime. I believe that my earliest known American ancestor, who settled in Bowling Green, Kentucky in 1848, would understand my predicament.

Ms. Olson, the U.S. Taxpayer Advocate, when speaking about the possible future consequences of FATCA and all of its related reporting requirements, said, I don’t think we’ll know [what they are] for years. And by that point we’ll actually be a little too late to go, ‘Oops, my bad move, we shouldn’t have done this,’ and then try to unwind it.” In the meantime, how many Americans living abroad, who have represented this country proudly all over the world, will have renounced their U.S. citizenship?

Is this what you want?

RSS further comments

The above testimony was first published by John Richardson in American’s Abroad as “Testimony: The Effects of the Current Tax System on Americans Abroad.”.

For most expats renouncing U.S. citizenship is an unwise decision. Apart from the reasons stated above, the initial cost of tax compliance to renounce can be greater than the cost of coming into compliance and remaining a citizen. Once an expat has caught up with filing, annual U.S. filings are not too burdensome for most.

For most expats, the safest path to come back into the tax filing system or correct errors in previous filings is through the Streamlined Filing Compliance Procedures. The advantages and disadvantages are fully explained in other blog posts which can be found by searching under “Streamlined Filing Compliance Procedures, or, Streamlined Filings.”

It is important to remember, however, that each case is unique. The specific facts and circumstances of your particular situation need to be reviewed and evaluated by an experienced offshore tax attorney. Only then can the safest path to follow be determined.

Robert S. Steinberg, Esquire www.steinbergtaxlaw.com rss@steinbergtaxlaw.com

 

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SOME COMMON MISCONCEPTIONS ABOUT THE STREAMLINED FILING COMPLIANCE PROCEDURES

I receive many inquiries about Streamlined Filings from U.S. citizens or Green Card holders living outside the U.S. as well as from recent immigrants to the U.S. or work visa holders living inside the U.S. In all of these cases, the individuals have read a good deal about Streamlined Filings and often OVDP submissions on the internet. They frequently have spoken to any number of other professionals about these alternatives for coming into compliance. And, most often they are totally confused, misinformed or have misunderstood what they have read or been told.

Let me try to clear up some common misconceptions:

  1. Nature of Streamlined Filing Compliance Procedures (SFCP).   The OVDP is an offspring of the IRS general Voluntary Disclosure Procedures found in the Internal Revenue Manual IRM), with added features that include prescribed FBAR penalty and income tax penalty provisions along with the grant of amnesty from criminal prosecution for disclosed criminal conduct related to the offshore accounts.   The SFCP on the other hand do not represent a formal voluntary disclosure program and do not grant amnesty from criminal charges.   Rather, the SFCP are procedures for filing delinquent returns and foreign reporting forms of non-willful taxpayers under a filing process that offers penalty relief. Unlike the OVDP there is no upfront screening of candidates for the Streamlined Process and the process does not end with the signing of a closing agreement, a contract between IRS and the taxpayers, resolving all tax issues for the years covered. Streamlined Filings, after a preliminary facial review by IRS Streamlined personnel in Austin Texas, are processed like other tax returns but subject to Streamlined relief as to penalties.   Because the Streamlined Procedures do not offer criminal amnesty taxpayers whose conduct borders on criminal or could be viewed as criminal, should not attempt to come into compliance under the Streamlined Process. Yet some comfort may be taken from the likelihood that a Streamlined Filing which IRS considers to flow from willful noncompliance, nonetheless may qualify as a Voluntary Disclosure under the Voluntary Disclosure policies stated in the IRM. This could be a vital fallback argument should IRS disagree with the conclusion of the Non-willful Certification.
  2. Streamlined returns are not ordinary returns: Streamlined returns may be processed like other delinquent or amended returns but they are not ordinary tax filings. Because there is no criminal amnesty grant, IRS could still treat the taxpayer’s conduct as willful or even criminal. Therefore, streamlined returns must be prepared with much greater care and due diligence than would be required for a timely filed original return.  All items of income, deduction and credit should be verified by the return preparer. It is imperative that no mistakes or errors appear in the Streamlined returns. Normally, a return preparer need not review underlying source documents but can take the taxpayer’s word for amounts of income, deduction and credit that do not appear unreasonable on their face. Not so in a Streamlined filing. The return preparer must examine all source documents and make sure that the items are properly reported both as to amount, year and character of the item being reported. Being cavalier about a Streamlined filing can lead to disastrous results. As a result, Streamlined returns will be more costly than timely filed returns or most amended returns that do not seek to correct offshore noncompliance.
  3. Streamlined filings have a legal component: Streamlined Filings required submission of Form 14653 or Form 14654, Non-willful Certifications. The forms, signed under penalties of perjury contain some tax and foreign account information but also require a detailed statement of the reasons why the taxpayer believes his or her conduct is non-willful. Characterizing a taxpayer’s conduct as negligent, grossly negligent, inadvertent, ignorant, reckless, willful, willfully blind, non-willful or criminal is a legal determination. It requires that an attorney experience in these matters who must:
    1. Obtain documents concerning the foreign financial accounts from the client, foreign financial institutions, others and IRS records on the taxpayer;
    2. Interview the client and other individuals having knowledge of the facts.
    3. In all of this gathering of facts attempt to preserve, in so far as may be possible, attorney-client privilege, the client’s Fifth Amendment Privilege against self-incrimination, and attorney work product privilege.
    4. Draw legal conclusions as to the character of the client’s conduct based on all of the evidence obtained.
    5. CPAs or Enrolled Agents, usually are capable return preparers, but they are not licensed or trained as attorneys and therefore commit malpractice and do clients a serious disservice when attempting, as some do, to complete the legal component of Streamlined filings.
  4. Husbands, Wives and the 330 day rule: Taxpayers who spend 330 days outside of the U.S. in any one of the three most recent years for which the filing due date has passes are treated as residing outside of the U.S and may file under the Streamlined Procedures for persons residing outside of the U.S.   A husband and wife are tested separately for this rule. Thus, if a couple live outside of the U.S., have no U.S. abode but the husband spent more than 35 days in the U.S. during all three most recent delinquent return years, the couple will not be able to file delinquent joint returns under the Streamlined Process. Nor will the husband be able to file Married Filing Separately returns under the Streamlined Process. Rather, the choices available are:
    1. Assuming as stated above that no returns have previously been filed for the three most recent years for which the due date has passed:
      • Wife files a Married Filing Separately Streamlined return under the Streamlined Foreign Procedures; and, Husband files a Married Filing Separately returns outside of the Streamlined process. Under this approach:
        • Wife pays no Miscellaneous Offshore Penalty on the penalty base representing her interest in the highest balance of couples’ foreign financial accounts for the most recent six years for which the FBAR due date has passed.
        • Husband will pay no penalty if he establishes in a statement attached to his delinquent returns that he has reasonable cause for the delinquency. Such a filing should be made only if a compelling argument can be made for reasonable cause because IRS will carefully examine amended returns with offshore disclosures made outside of the Streamlined Process of OVDP.
        • Husband and wife both enter the OVDP. Note that is wife makes a Streamlined filing the husband will be ineligible for the OVDP. According to the OVDP Hotline neither must have made a Streamlined Filing for either to be eligible to enter the OVDP.
    2. Assuming joint returns have been filed for the three most recent years for which the due date has passed:
      • Streamlined filing: File a joint Streamlined filing for persons living inside the U.S. and pay a 5% penalty on the highest balance of their combined foreign financial accounts.
      • Wife cannot file a MFS Streamlined return as in (1) above because a joint return can only be amended by a joint return.
      • If compelling case for reasonable cause can be made, file amended returns outside of the Streamlined Process understanding again that such a filing shines a light on the taxpayers and offers neither protection from penalties nor criminal amnesty.
  5. Husbands, Wives and Non-willfulness: Be mindful that husbands and wives often act in concert but also often act independently of one another. Determinations of willful versus non-willful conduct are specific to each taxpayer. Legal determinations of the culpability of each spouse will play a large part in deciding how to proceed with coming into compliance. Refer to paragraph 3 above.
  6. Calculation of the offshore penalty for Streamlined Domestic Offshore filings:
    1. Under the OVDP regime the penalty base is expansive and includes all assets connected to the noncompliance on which income was not reported. Thus, the value of a rental property on which the rental income was not reported, is included in the penalty base.
    2. For Streamlined filings the penalty base is much narrower and includes only foreign financial assets required to be reported in an FBAR or foreign financial assets reported on those forms but on which the income was not reported. Thus, not reporting rental income does not result in the value of the rental property being included in the Streamlined Domestic penalty base.
  7. Most compelling reasons for entering the OVDP:
    1. You have committed a tax crime or may be viewed as having committed a tax crime and want to avoid being charged.
    2. You fear that the maximum FBAR willful penalty may be assessed against you.
    3. You feel you were non-willful but had very large foreign accounts and want the certainty of not being charged with a crime and more time to consider opting-out of the OVDP penalty regime to argue for a lower FBAR penalty amount on audit.
    4. Taxpayers not falling into the above categories do not belong in the OVDP.
  8. Most compelling reasons for filing returns under the Streamlined Filing Compliance Procedures:
    1. You committed no overt acts that would tend to evidence, “the intentional violation of a known legal duty,” such as by hiding your identify behind a non-operating, nominee entity, using mail-holds or other incriminating means of deception, programmed repatriation of funds in amounts under $10,000 and so on. Again, these determinations must be made by a tax attorney experienced in such matters.
    2. Your tax filing history, educational background, investment experience, financial sophistication, work experience and other detailed facts establish that your failure to property file or report was due to negligence, inadvertence, mistake or good faith ignorance of the law but was not reckless, willful, or, conduct seeking to willfully avoid knowledge of the FBAR reporting requirement; and, also establish that, upon gaining such knowledge, that you promptly began to rectify the noncompliance. Other facts might include:
      1. That the amounts of income not reported are relatively small compared to the income reported in your filed returns.
      2. That the value of assets offshore not reported is relatively small compared to the value of U.S. based assets.
      3. That the assets and income were located in a country from which you immigrated to the US or in which you now live and were not located in a known tax haven country to which you had no connection other connection apart from owing the foreign financial asset.
      4. You’ve lived outside of the U.S. for a long period of time.
      5. Circumstances in your life such as illness prevented you from timely filing or reporting.
      6. Any other facts and circumstances tending to negate willfulness.

 

Conclusion

The Streamlined Filing Compliance Procedures may seem simple to the uninformed. In reality however, Streamlined filings are very risky to navigate and require specific legal tax expertise as well and sound legal judgment. A Streamlined filing that should not have been made may subject the taxpayer to both criminal prosecution and potentially draconian FBAR and income tax penalties. Thus, taxpayers should carefully select tax counsel seeking legal tax knowledge, experience and mature judgment. Taxpayers should be suspicious of promised results or unreasonably low fees. The wise man sayeth: “When the stakes are high, seek the best advice available.”

 

© 2017 by Robert S. Steinberg, Esquire
All rights reserved
www.steinbergtaxlaw.com

 

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