Sunday, August 24, 2014

Criminal Justice Article of U.S. Global Tax Enforcement (8/24/14)

Jay Nanavati, here, and Justin Thornton,  here, have authored an article on the DOJ and IRS offshore tax initiative.  "DOJ and IRS Use 'Carrot 'n Stick' to Enforce Global Tax Laws" , Criminal Justice, Vol. 29, No. 2, Summer 2014, here.  Most readers of this blog probably already know most of the contents of the article, but it is a good succinct summary of the developments.

I will quibble with their premise stated early in the article:  "The OVDP, currently in its third iteration, is the closest thing to a "carrot" that the government has offered taxpayers to induce compliance."  Of course, a command to get right going forward with no penalty for those who do get right into the future would induce a lot of compliance.  But OVDP does have a significant penalty structure.  With that penalty structure, OVDP is a carrot only for those willful actors for whom the penalties -- particular the FBAR penalties -- could be a lot greater.  But, for nonwillful actors for whom the penalties -- particularly the FBAR penalties -- should be a lot less, it  is not a carrot.  The carrot for them is the streamlined procedures, as recently revised, including the streamlined transition procedures for those in OVDP who would have opted out anyway because they were not willful.  This is just a quibble, though.  The article is good.


  1. Lynne,

    I am still confused as to what your issue is. If the law is that you then lost U.S.citizenship when you became a citizen of another country and you became a citizen of another country, then the U.S. has no jurisdiction to tax you. If the Canadian bank is nevertheless insisting that it send information to the U.S., that is not a U.S. issue. That is between you and your Canadian bank.

    And I still fail to understand your fury at the U.S. if your Canadian bank insists on sending the U.S.the information.

    All that can happen is that the U.S.has information that irrelevant to it -- at least if it is true, as you say it is, that the U.S.citizenship was relinquished as a matter of law when you took citizenship in another country.

    Again, I think the Canadian bank is required to send information only for U.S. citizens and residents. ACcording to your claim as to the law, you are neither. That is an issue between you and your bank.

    So I fail to understand your fury at the U.S. and/or the IRS. It seems to me that you would be better off focusing your fury on your Canadian bank.

    Again, as you say, I may not understand, but I am trying to understand what the real issue is. And, as best I understand it, your complaints are misfocused.

    Jack Townsend

  2. Thanks Marty. I just said that,less articulately than you have said it and with less authority than you have said it.

    But I still fail to understand why, even if the information is passed to the IRS, that should be a big deal. We have stringent privacy laws for information going to the IRS, with felony criminal provisions for anyone not keeping the information private. So, the IRS can only use it for a tax administration function, but she says she is not a citizen. So, the IRS can do nothing with that information. So, except for conspiracy theorists, it is a big nothing.

    But again, consistent with your first point, this is an issue between her and her Canadian bank. If the law is as she says it is and you say it is, she can prove to the Canadian bank that she is neither citizen nor resident and the Canadian bank could not consistent with Canada's laws send the information to the U.S. for a non U.S. citizen or resident.


  3. IgnorantFBARvictimAugust 24, 2014 at 11:42 PM

    Just came across this IRM for Streamlined process.

  4. I got completely different answers from the OVDP Hotline than the interpretations from the IRS agent. Specifically these concerned foreign retirement accounts. The agent and technical advisor told me that me that I could not rely on the Hotline - what counted was their interpretation of the FAQs The final interpretation was up to the IRS agent. There is no written guidance from the IRS with regard to this foreign retirement account and my CPA and lawyer are also flummoxed- we went over the tax treaties etc. to no avial
    Bottom line, I agree with ' guest' the IRS seems to be making up the OVDP rules as it goes along and does not follow its own guidelines ( eg 4.16 of the IRM) for Opt out outcomes
    Jack knows this - he has cases himself of the IRS doing unpredictable things in the Opt out. Its not fair lay all the failings of the IRS at his doorstep.
    He is on the side of the small guy, but also seems to have more faith in the ability of the US to do the right thing in the end ....unlike most of us
    I do hope he is right

  5. Milan
    India PPF does NOT qualify for TAX TREATY exemption in the US - this is from my IRS agent allegedly after checking further with a special group in the IRS
    Where in writing does it say the PPF is exempt from US Tax? ( though I think it should be)

  6. An appeal to stringent privacy laws offers no reassurance. There are constant calls from the senate to share FBAR and general tax information among other government agencies, the Lerner case is a strong indicator that the IRS has 'gone rogue', and congress has a long and dishonourable track record of disregard for its treaty obligations (FATCA and HEART are both treaty overrides). Nobody outside the US can now trust it to abide by its own privacy laws, whatever they may be. This is what happens when a government continually chips away at its obligations under international law.

    And on your touching faith on the ability of a Canadian bank to unravel the minutiae of US citizenship laws from decades ago in order to determine the correctness, or otherwise, of a claim of non-US status, I call shenanigans. Why would a Canadian bank, or any non-US bank, or for that matter any US bank, spend countless hours disentangling the mess that is both historical and present US citizenship law rather than simply taking the easy option and passing information on the US for them to decide?

  7. IgnorantFBARvictimAugust 25, 2014 at 8:12 AM

    The last page, last paragraph bothers me. Jack or someone please interpret it. Does having multiple small accounts an issue for streamline?

  8. I assume that you refer to the last two paragraphs which are:

    6. After making the assessment, refer any case with 5 or more foreign information returns (Forms 3520, 3520-A, 5471, 5472, 8938, 926, or 8621) by e-mailing the CIS ID number to "*LB&I OVDP Compliance" with an explanation that the case is being forwarded due to 5 or more foreign information returns. Enter CIS notes indicating the case was referred to *LB&I OVDP Compliance "5 or more foreign income statements".

    NOTE: The total of 5 forms is a combination of all years filed. For example submissions containing 3 Forms 5471 for 2011 and 3 Forms 5471 for 2012 would be referred since the total is 6. Submissions with a combination totaling less than 5 would not be referred.

    JAT RESPONSE: Multiple financial accounts are not involved in this treatment. The forms involved relate to entities (corporations or trusts) and some others, but not to accounts. Hence, if you had 20 accounts, this would not require special attention under this procedure. (There might be some other reason for special attention, though, but I doubt that merely having multiple small accounts would do it.)

    Jack Townsend

  9. IgnorantFBARvictimAugust 25, 2014 at 9:22 AM

    So if someone has few small bank accounts and mutual funds then there will be one 8938 for each bank account (plus continuation sheet(s)) and multiple 8621 forms, one for each PFIC. That could easily exceed the "5 foreign income statements".

  10. The form 8938 is a single form reporting multiple accounts via the continuation sheet(s). So, if the taxpayer does not have any foreign entities, there would only be 3 such forms.

    Jack Townsend

  11. Demanding my country and my bank determine if I or other Canadians are citizens of a foreign country to protect our financial privacy in violation of our country's constitution is a huge deal. Enough said.

  12. IgnorantFBARvictimAugust 25, 2014 at 2:22 PM

    Thanks Jack. I believe you meant that one 8938+continuation sheets per year. That would count to be a total of 3 foreign information returns for the three amended returns. Does 8621 count as a separate foreign information return? I have several small PFICs (~$2500).

  13. Thanks for the clarification. I think, as clarified, the Forms 8938 would be one per year.

    Now, the Form 8621 is a different matter. The form 8621 instructions say:

    A separate Form 8621 must be filed for each PFIC in which stock is held directly or indirectly.

    So, they would be separate Forms 8621 which could easily cause the number to rise about 5. (All it takes is 3 8938s and 2 8621s. But, all the magic number 5 means is that there will be an additional level of review. If that is all you have, and barring some other bad facts evident from the information the IRS has, I can't imagine that that additional level of review will be a problem.

    Jack Townsend

  14. Jack -
    Thanks to you and the other regulars for the invaluable information on this blog.

    I have a question about the Domestic Streamlined. Based on what you know today, is it advisable for non-willful people to go into the Streamlined program? I have read and heard accounting/tax professionals talk about the dangers of the non-willful certification. That is why I'm scared enough to be considering going into OVDP. I also understand that opting-out under then new OVDP means all bets are off - criminal, higher penalties.

    In your July 3rd post, you mentioned that under streamlined, you file and that's it. Have you heard of new streamline filings being audited/investigated? I have heard from acct/tax professionals, that the IRS will audit all of those certifications/filing. At which point, you've already given everything to them, so all bets could be off.

    So here I'm am confused and scared. Should I file under Streamline or should I go under OVDP, pay 27.5% and move on with my life?

    2) He said that no one has to necessarily "qualify" for SDOP or SFOP. Just follow the instructions and submit your returns & FBARS accordingly, along with the NW certification, penalty check, and income taxes with interest, and that would be it. There would be NO examiner assigned, NO 906 closing statement, "nada."

    JAT Comment on 2): That is my understanding / reading of the tea leaves that were on the table. Nice to hear it confirmed.

  15. I amended tax returns but I do not owe any tax for years 2011, 2012, 2013 due to foreign tax paid. am I qualified for SDOP or simply file returns saying no tax is owed.

  16. Jack, the way the IGAs are written is that the banks normally pass on the information of any account holder with a US birthplace. There is the option that the bank not do that if they have written proof that the individual is not a US citizen. But the bank does not have to ask for such proof (a CLN) and indeed the IGAs do not obligate the banks to take such proof into consideration before violating the individual's legal privacy rights.
    Lynne doesn't have any document from the US State Department because in 1973 naturalization as a Canadian was clear enough. But now the people implementing FATCA etc. will be wanting "proof" from the US State Department that the individual is not a citizen. If there is any doubt, they will treat these people as if they were dual citizens.
    (Luckily for me, I don't have that problem. The Germans wouldn't let me naturalize until I showed them my CLN.)

  17. Jack,
    It would appear that FATCA data is protected by 6103 but is that correct for FBAR data as well? Also, for both, I think there is a serious concern from taxpayers about the quality of basic data protection from hacking/fraudsters. For example, for FATCA, one has to worry about data theft via the participating FFI, any of their independent compliance contractors, and of course, the reporting system they use to provide info to the IRS. Perhaps not so much a problem for people living in certain Western countries, but for a US citizen living in Russia, having all of their account information collected and collated in a single place could be worrisome (not to mention for people living in far riskier places, such as Iraq, Lebanon or Saudi Arabia. I am not sure Americans there are too thrilled about central databases identifying them as such but that is another issue.) Domestic data and identity theft are already a huge problem for the IRS and given the speed in which they are implementing FATCA, I imagine it will be even bigger on the foreign front.

  18. There is always a concern when data is held -- even by the person whose data it is. So there can be no assurance that some data may escape from the IRS, but that possibility is very remote. More likely that someone wanting that type of data will get it from the foreign bank or the foreign bank's contractors.

    FBARs are not subject to the privacy rules for IRS data (including FATCA data). Other law enforcement agencies have access to the FBAR database. However, for someone who is not a U.S. person and therefore not filing the FBAR, this should not be a major concern.

    Jack Townsend

  19. Would not proof of her Canadian citizenship (surely she has that), coupled with the law which apparently then made U.S. citizenship revocation automatic, coupled with an opinion of qualified counsel do the trick.

    Also, how do the Canadian banks know the place of birth? Are the banks now having to ask all customers the place of birth? That may be an item on a passport and the banks may have a copy of the passport, but I would not think that normally that is a piece of information collected by banks. Could be wrong.

    Also, one avenue she might pursue would be to ask the State Department to confirm that she is not a U.S. citizen. If the law was automatic and she provides the State Department proof of Canadian citizenship, I would think that the State Department could then confirm that she is no longer a citizen. Will the State Department refuse to do that?

    Jack Townsend

  20. I assume you have omitted income from the original return but, upon including on the amended return, you still owe no tax. I think you would be qualified for SDOP, although (depending upon other facts being benign as well), perhaps just amended returns and delinquent FBARs might do the trick.

    Jack Townsend

  21. Tostreamlineornot

    You ask the biggest issue involved for those considering streamlining -- should you do that? The issue is whether you can make the required certification of nonwillfulness without creating material risk that the IRS -- or ultimately a court -- would disagree as to your nonwillfulness. That is a big issue and, in my opinion, you need personalized advice on that addressing all of the multiple and intertwined factors of your unique situation. The IRS has not made that decision easy, except for those near the ends of the willful/nonwillful spectrum. Those in the middle will necessarily have some degree of uncertainty if they choose to streamline. But, I think that, appropriately counseled, many of those in the middle will find that degree of uncertainty acceptable.

    The returns and FBARs that you file under the streamlined program will be subject to audit, hence the risk of contesting the nonwillful certification.

    Jack Townsend

  22. Jack, many banks are now actively implementing client onboarding procedures that include numerous questions designed to ferret out US indicia, including place of birth.

  23. Agreed, which is why both FBAR and FATCA are worrisome to many US expats. Imagine if the IRS were to require US residents to provide with the same information, there would be a massive uproar from both the right and the left. True, the IRS has access to some of that information (via 1099s and other forms) but it is sent in independently and then collated by the IRS under 6103 protections. For expats, they have to collate it all in one place (and watch as their banks do the same in a different place) and then submit via a shaky online system with who knows what level of hacking protection. And of course, none of that information is protected by 6103 and can be requested by any governmental official for pretty much any reason, irrespective of probable cause. Indeed, they can not only request the FBAR form itself but also five years of account statements (which, if we are talking about a checking account, is pretty much your whole economic existence on paper). That fact should, at a minimum, raise privacy concerns.

  24. Hello Jack/Milan/Other practitioners
    In your professional circles or by reach-outs to IRS Is there any real world information on how straight/new SDOP submission (i.e. NOT transition cases) are performing/faring? Or is it still too early to get such empirical information?

    Is it well know/confirmed that IRS will by default audit the returns and closely review the self-certification with a lens?

    The SDOP program is similar to the streamlined program that has existed for expats even before (with the exception of the 5% penalty). So could one draw parallels from how those fared?


  25. Can one clarify what's considered a PFIC again?

    Is a small portfolio (< 10K USD in value) of straight publicly listed stocks overseas (NOT mutual funds) considered a PFIC.

    IgnorantFbarVictim - Many thanks for posting that link to IRM!

  26. RajNIL,

    I am not a PFIC expert, but my understanding is that foreign publicly held companies can be PFICs, depending upon how they operate.

    The instructions thus state:

    Publicly traded corporations must use fair market value when determining PFIC status using the asset test.

    The instructions are here:

    Jack Townsend

  27. I think it is too early to tell about what is happening in the regular streamlined programs (SFOP and SDOP). Mixed messages are coming out about the transition streamlined within OVDP, but that is simply because someone is there reviewing the documents and decisions can be made quicker. I would suspect that it will be some time before the IRS can put significant audit resources to the regular streamlined submissions. I do understand that the IRS has various indicia that will help it triage to determine where it should spend resources on the streamlined submissions. But again, I think it is too early for much to have been done under the new streamlined programs just announced in June.

    Jack Townsend

  28. yes upon including on the amended return, I do not owe tax as tax paid in foreign country nullifies any additional tax. Actually I get quite a bit of refund as per tax calculation.Since didnt know so didnt include on the original return.

  29. Hello Jack, you are correct: The state department will likely confirm that the US citizen who became a Canadian in the 1970's has not been a citizen since the 1970's.

    But...there is a conflict between the immigration laws and the tax laws.

    Unfortunately, the code §877A(g)(4)(B) is not written to respect retroactive renunciation. The IRS is stuck with the wording of the code; which basically indicates that the taxpayer is considered a US citizen until the US citizen "furnishes" the state department with a statement of voluntary relinquishment. If a US citizen became a Canadian citizen in 1973, and intended to lose their US citizenship and have not proven otherwise since that time (no voting, working in US as a citizen, etc), then the state department will consider the taxpayer a non US citizen since 1973. But, the IRS does not consider a taxpayer a non-US citizen until the DATE on the CLN. This creates the absurd result that the person (according to the state department) has not been a citizen since 1973, but for tax purposes they are still a citizen 41 years later!

    If some brave soul took this to the supreme court, perhaps these conflicting laws could be resolved, but it seems unlikely anyone would want to risk such a case.

    Here is the code section:

    (4) Relinquishment of citizenship
    A citizen shall be treated as relinquishing his United States citizenship on the earliest of—
    (A) the date the individual renounces his United States nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481 (a)(5)),
    (B) the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481 (a)(1)–(4)),
    (C) the date the United States Department of State issues to the individual a certificate of loss of nationality, or
    (D) the date a court of the United States cancels a naturalized citizen’s certificate of naturalization.
    Subparagraph (A) or (B) shall not apply to any individual unless the renunciation or voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State.

  30. Thanks, frontrowseat.

    I agree that there is a gap in the law on the issue. However, if the State Department acknowledge (as it must under the law) that the person is not a citizen, then you do not even get to the point of relinquishment. You can't relinquish that which you do not have. Now, the Code may have been enacted under a different model, but at the end of the day, if the person is not a U.S. citizen or U.S. resident, he or she has no filing obligation. Period.

    So, if the State Department were to tell the person that they are not a U.S. citizen and that person is not a U.S. resident, then that person has no U.S. filing obligations whatever, regardless of what the Code says or might say. I suspect that a U.S. Court would so held, regardless of what the tax Code says.

    Maybe that will take a court case if the IRS were to pursue the matter. But the IRS will not pursue the matter. So the only issue is whether Canadian banks are so anal retentive that they would not accept proof of non-U.S. citizenship (whether from State Department or otherwise). I would think that the Canadian banks would be opening themselves up to a ton of liability to Canadian citizens if they behaved otherwise.

    Jack Townsend


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