The Honorable Bill Posey
U.S. House of Representatives
Washington, DC 20515
Dear Representative Posey:
Thank you for your letter regarding the interest reporting requirements of 26 C.F.R. §§ 1.6049-4(b)(5) and 1.6049-8 (referred to as bank deposit interest regulations), and the Foreign Account Tax Compliance Act (FATCA) and related intergovernmental agreements (IGAs).
As you know, FATCA was enacted in 2010 with strong bipartisan support. Under FATCA, foreign financial institutions must perform due diligence procedures to identify U.S. account holders and report their account information directly to the Internal Revenue Service (IRS), including the account balance and certain income flows, such as interest. In certain jurisdictions, laws of the foreign country where the financial institution is located would prevent that institution from complying with the requirements of the FATCA statute. For these reasons, the successful implementation of FATCA requires a cooperative international approach that results in foreign countries allowing banks to provide the information required by FATCA.
In order to achieve FATCA's information reporting objectives, the United States worked closely with France, Germany, Italy, Spain, and the United Kingdom to develop a model intergovernmental agreement (referred to as a "Model 1 IGA"). This Model 1 IGA was released in July 2012 to form the basis for bilateral agreements to implement FATCA. These agreements are based on the government-to-government exchange of information pursuant to an existing income tax treaty or tax information exchange agreement. Under a Model 1 IGA, a foreign government agrees to require all the relevant financial institutions located in its jurisdiction to identify U.S. accounts and report the information required under FATCA to the foreign government, which, in turn, will report the information to the IRS. Because a partner government under a Model 1 IGA agrees to establish rules to ensure that the United States will receive all of the FATCA information with respect to U.S. accounts in that jurisdiction, all of the financial institutions in that jurisdiction are treated as compliant with FATCA. The United States also developed a Model 2 IGA, under which a foreign government is required to direct and enable all relevant financial institutions located in its jurisdiction to identify and report information about their consenting U.S. accounts directly to the IRS.
The Model 1 IGA has a reciprocal version and a non-reciprocal version. Under the reciprocal version, the United States agrees to provide to the foreign government the information that U.S. financial institutions currently report with respect to accounts held by residents of the partner jurisdiction, including the information collected under the bank deposit interest regulations. Current U.S. Treasury regulations do not require U.S. financial institutions to report the same scope of information required of foreign financial institutions under FATCA. For example, FATCA requires reporting by foreign financial institutions on the account balance or value of all financial accounts, including bank deposits and custodial accounts, whereas the United States generally only collects information on the U.S. source income paid to those accounts. The United States' commitment to provide bank deposit interest information under the reciprocal Model 1 IGA was a central issue in the negotiations with the five countries that resulted in the Model 1 IGA. Several countries have expressed strong reservations about requiring other countries' financial institutions to provide significantly more information to the United States than U.S. financial institutions were required to provide to the foreign jurisdictions. The United States' agreement to report bank deposit interest information was key to securing agreement from numerous jurisdictions to follow the Model 1 IGA approach.
The effectiveness of the intergovernmental approach in addressing concerns by stakeholders is reflected in the overwhelmingly positive reaction to these agreements. As of early June 2014, the United States has either signed or has reached agreements in substance on IGAs with nearly 80 jurisdictions, and it is in active IGA negotiations with many others.
Time is a crucial factor in these negotiations because FATCA withholding on U.S. source payments made to non-participating foreign financial institutions begins on July 1, 2014. Suspending further negotiation of IGAs would negatively affect the United States' ability to enforce the provisions of FATCA without the imposition of substantial withholding tax. For countries with legal impediments to implementing FATCA, the IGAs are the chief means by which the United States can obtain FATCA information from financial institutions in those jurisdictions. If a moratorium were placed on IGA negotiations, financial institutions located in those jurisdictions would not be legally able to comply with the FATCA reporting regime. As a result, these institutions would be subject to a withholding tax of 30 percent on payments arising from their U.S. investments. This could result in harm to the interests of the United States because it could prompt divestment from U.S. investments by affected financial institutions.
Suspending enforcement of FATCA and further negotiation of IGAs would also harm the United States' efforts to enforce its own tax laws. FATCA is designed to combat noncompliance by U.S. taxpayers who are hiding income or assets in offshore accounts. If countries decide not to pursue IGAs for the reasons stated above, foreign financial institutions in those jurisdictions may be legally unable to report information on their U.S. account holders, and the United States would not be able to obtain the information that it needs to ensure that U.S. persons comply with U.S. tax laws.
Your letter also asks about statutory authority to enter into and implement the IGAs. The United States relies, among other things, on the following authorities to enter into and implement the IGAs: 22 USC Section 2656; Internal Revenue Code Sections 1471, 1474(f), 6011, and 6103(k)(4) and Subtitle F, Chapter 61, Subchapter A, Part III, Subpart B (Information Concerning Transactions with Other Persons).
The Treasury Department and the IRS will continue to work closely with businesses and foreign governments to implement FATCA, including implementation by means of IGAs, in a manner that appropriately balances the compliance objectives of the statute with whatever burdens the statue imposes.
We appreciate your continued attention to this important effort to reduce tax evasion. If you have additional questions, please contact Sandra Salstrom, Office of Legislative Affairs, at (202) 622-1900.
Sincerely,
Alastair M. Fitzpayne
Assistant Secretary for Legislative
Affairs
Addendum 7/5/14 9:45am
Allison Christians of the McGill University Faculty of Law has posted a response to the assertions in the above letter: IRS claims statutory authority for FATCA agreements where no such authority exists (Tax, Society and Culture 7/4/14), here. Allison is a respected member of the academic community, so her views should be taken into consideration on this issue.
Note: Thanks to Just_Me_Also for directing readers to this in a comment. Professor Alison had emailed me about it earlier in the day, but because of travel and vacation with family, I could not attend to it until just now.
Thanks Jack, great post, and a good follow up to post on 6/28 (http://federaltaxcrimes.blogspot.com/2014/06/us-international-tax-enforcement.html?utm_source=BP_recent).
ReplyDeleteFATCA is so much more than just reporting foreign account holders. For.e.g., there are a number of US taxpayers who have foreign mortgaged property. They will be surprised to know that they have to withhold US taxes and pay the IRS before they send the full payment to the foreign mortgage company, unless that mortgage company is in a country where withholding is 0% (England for e.g.). This is pursuant to section 1441. I think, once clients start getting US treasury letters purusant to FATCA on their foreign accounts, I suspect we'll see a mad rush to the door for compliance. Anyone else's take?
Milan, good summary, but the concepts involved are considerably nuanced. I think you pick up some of that, so I will just add some quick additional thoughts.
ReplyDelete1. Mr. Cheek was convicted on remand from the Supreme Court with the proper "Cheek" instruction.
2. The Cheek good faith issue is really a subset of the requirement that the Government prove willfulness -- specific intent to violate a known legal duty -- beyond a reasonable doubt. If the taxpayer had a good faith belief that he or she did not owe tax, the taxpayer per se lacked the willfulness required for tax crimes. (As the Court said, ignorance is an excuse for tax crimes.)
3. The Cheek instruction permits the judge to instruct the jury that it may consider the reasonableness of the belief in the determination of whether the taxpayer had a sincerely held belief so as to negate willfulness.
4. Unreasonable ignorance thus is at high risk of permitting the trier of fact (whether judge, jury or the IRS) to hold that the taxpayer had the required willfulness. Unreasonableness thus imports some objectivity into the Cheek test which, as stated, purely subjective -- did the taxpayer intend to violate a known legal duty?
5. And then, of course, there is conscious avoidance / willful blindness. There is no question that the trier of fact (again, the judge, the jury or the IRS) to determine that the taxpayer's objective actions indicate that, even if there is no strong proof of the required subjective intent, that taxpayer was so willfully blind to the law's requirements that he either really did know or his conduct was so reckless that he should be held to have known. There is no consensus for what I just stated and I think the courts will eventually have to work through that. In the meantime, the IRS can't just repeat the mantra willful blindness and prevail until a court tells the IRS otherwise.
Jack Townsend
Thanks so much, sounds like a plan.
ReplyDeleteThanks. I will read it. But I still can't see as willfulness standard being "broad."
ReplyDeleteI agree. It is intentionally -- if I may use that word -- narrow so that the innocent in a broad sense are not swept up into criminally willful misconduct. But, one cannot avoid willfulness with little more than a claim that his or her heart is pure, at least if there are surrounding "bad" facts allowing a contrary inference.
ReplyDeleteJack Townsend
Thanks Jack. I did not see the Justices saying what you mention in # 3, but rather that the objective belief of a defendant, no matter how unreasonable, can be used to negate willness. This is part of why the Supreme Court vacated the two earlier lower court opinions, Correct? . Perhaps I will read the Justices' opinions again.
ReplyDeleteBut given your # 5, I agree with you..that the "IRS can't just repeat the mantra willful blindness and prevail until a court tells the IRS otherwise."
I hope that everyone on this blog can really take note of that.
Thanks so much for your wonderful insight. :)
Milan,
ReplyDeleteThis is a quote from Cheek:
Of course, the more unreasonable the asserted beliefs or misunderstandings are, the more likely the jury will consider them to be nothing more than simple disagreement with known legal duties imposed by the tax laws, and will find that the Government has carried its burden of proving knowledge.
The full Cheek case is here:
https://casetext.com/case/cheek-v-united-states
Jack Townsend
Jack,
ReplyDeleteLike secondguess noted with his/her analogy of gadget having bugs worked out in second release, it seems best to wait until good number of SDOP cases have gone thru the system. That way IRS get things sorted out with the new program.
I just filed my first FBAR for 2013 and was in the process of filing the other 5 years along with 3 years of amended returns, along with an RC letter.
On one hand I would like to wait for cases of early SDOP filers to go thru so IRS works out the kinks. But on the other hand, waiting may risk information coming to IRS before I file.
I am curious what is your opinion on one going ahead with a QD with RC now. That way I have disclosed fully as soon as possible. Once SDOP results start to trickle out, then file SDOP.
See an issue with that approach?
Okay. I believe I missed this. I'll have to read it again this weekend. Ty.
ReplyDeleteQD with RC sounds good if your RC arguments are strong or solid. In your case as some other readers have commented here they look a bit shaky :
ReplyDelete1. USP for a long time
2. filed only in the US
3. tax exempt CDs in India (NRI accounts) - no FTC
4. amount of CDs relatively large compared to overall annual income
5. first time filer of FBARs, Form 8938 and Form 8621
How would this look to file a QD with RC letters in 7/2014 for 3 years with 6 years of FBARs and 6 month later to file a SDOP which would be the same as the QD except the NW certification ?
This smells like the taxpayer will be flagged for audit to test how solid his NW arguments really are.
Unfortunately the IRS is treating the request to switch as an opt out so if anyone has written to the IRS they should contact them urgently to tell them that did not intend an opt out (if that is the case).
ReplyDeleteSuzanne,
ReplyDeleteThanks for the update. I am not sure than opt out is a bad result. Keep in mind than the strategy of withdrawing applied only to the people who had not yet submitted their packages -- had not submitted 8 years of amended or delinquent taxes and paid the resulting tax, 20% penalty and interest and, if they submit the streamlined package, will only offer the IRS 3 years of information with tax and interest for those years only. If they are not willful, on the opt out they may get as good a result as the streamlined program offers. Than is heavily fact dependent, of course, but one of the reasons for the new streamlined programs was to achieve a rough and ready result of roughly what they might achieve on opt out, so than than class of persons would not have to join OVDP in the first place (which unnecessarily chews up a lot of IRS resources).
So, we'll have to see how it plays out.
In addition, it could be than, on opt out, for a quick resolution, the IRS might just mimic the streamlined program result. We'll have to see how this plays out. Hopefully, of course, the best result is for the IRS to honor Ms. Best's indication. In this regard, the question was clear and Ms. Best did say than they had considered it. So, at least as she gave her response, it was not off the cuff.
Jack Townsend
UStax. Thanks for the correction. I should have said can just repeat. Sorry.
ReplyDeleteJack Townsend
believe me when I say the 5% already paid will be at that moment your smallest problem
ReplyDeleteCongratulations Seconguess on your winning on the pension funds account. I have a situation that I believe deserves debating with the IRS also on a foreign pension fund. I am in the OVDP with a 906 not yet signed. I have been wondering about discussing it with the examiner but have felt so intimidated. My penalty calculation is almost $200K because of the valuation of a small condo abroad in the highest year which is the real estate boom. My retirement account appears to me non reportable but I am not sure how to approach the examiner. Your story would so very much help me. Would you please share and guide me somewhat? Thanks so so much!!
ReplyDeleteI think here is a partial answer to my question what about an account where the US owner withdrew funds ?
ReplyDeleteLets even assume further that this is the sole "bad fact", and there were no other indicia of willfulness. We know that there is case law that holds that use of the accounts (withdrawals) coupled with failure to "check the box" on Schedule B of Form 1040, constitutes willfulness. So, in the absence of any other "bad facts", is a taxpayer who withdrew 2,000 XY currency while in India not eligible for the Streamlined program ? Or, asked another way, if the IRS will see withdrawals on the bank statements, what is the possibility of the IRS now rejecting the non-willful submission ?
Good catch. I remember from my tax research class about IRS Acquiescences. So once the courts get more of a consensus, then perhaps the IRS would too. Until then, willness is quite, contextual.
ReplyDeleteSee here.
http://www.irs.gov/irb/2012-46_IRB/ar04.html
Perhaps Jack can talk about acquiescences by the IRS on another blog.
You can make many RC arguments for any case. Will they pale in number and quality when compared to all the willful blindness arguments, & conscious avoidance accusations of his/her case. Does it look nonwillful, in which case, in an examination setting, a 3800 letter for FBARS (non penalty) could be given, and failure to file & failure to pay penalties would be waived. This is why I still love Just Me's reasonable cause opt out letter.
ReplyDeleteHere's one: "By having tax exempt CDs in the country of his birth, and checking with his bank & home country tax adviser, he was told he had no tax responsibility and was completely compliant."
You can make quite a few RCs, but one has to know ALL facets of a case, and not simply what's pasted here on a blog.
I think willfulness is by its nature contextual. It is like a tapestry. If you look at only part or parts of it, you don't see the whole picture. I don't think than the court decisions will develop otherwise.
ReplyDeleteObviously, since willfulness is a state of mind, then if the trier (whether judge, jury or IRS) could climb into the person's mind, then we could perhaps know what he intended. But, absent than, you have to look at the whole tapestry and see whether the facts permit an inference of intent/willfulness to the appropriate degree (beyond a reasonable doubt in a criminal case and lesser in a civil case).
Jack Townsend
I am not sure than the IRS or ultimately any judge or jury would find willfulness solely from (i) a no answer on Schedule B and (ii) one or more withdrawals. It is the whole context which permits the willful conclusion.
ReplyDeleteI usually find than these cases have good facts and bad facts. Only by considering them all -- at least the most relevant -- in context can the determination be reached.
I will say than I have handled a number of opt outs where the schedule b question was answered no and there were withdrawals.
For example, what if the withdrawals were by wire transfer into the U.S.? Would than make a difference. I would argue than the wire transfer is a good fact which might be marshaled with other good facts to avoid a willful determination.
Jack Townsend
Thanks Jack. This is helpful, as I read more cases.
ReplyDeleteI think you mean anon5percent. In the link you mention, in the narrative story, one can find links to Just Me's penalty mitigation request as done by TAS (Exhibit S at that link) and Moby's reasonable cause arguments. There is also a separate document by anon5percent with the reasonable cause arguments that the agent said would have been accepted had I (anon5percent) not been ultimately processed by the previous Streamlined Program.
ReplyDeleteSo as not to confuse readers, I think you mean anon5percent's reasonable cause opt out letter. I am very happy that you have found the letter useful. A good week of my time went into that. It served its purpose as it spared me from paying in the high five figures in FBAR and tax penalties.
ReplyDeleteI am indeed agreeing that we'll see a mad rush to the door of compliance once clients start getting US Treasury letters pursuant to FATCA on their foreign accounts; I also believe that many of these affected, if permanently settled abroad, will subsequently expatriate to simplify their lives.
ReplyDeleteI don't know what you mean by "many" will expatriate. I think a lot of them will end up regretting that action because what the U.S. is doing is what the rest of the world -- at least the developed and wannabee countries -- is doing. They can run but, in a larger sense, the ability to hide from some relevant tax authority is severely constricting.
ReplyDeleteThere is more to life and meaning that money.
Jack Townsend
Hello Laura Sommer-Skrzynski nice that you pay us a visit from IBS here at JATs blog.
ReplyDeleteDo you have your CLN yet and how is your QD working out for you so far ?
I hope everything is o.k. and no FBAR audit is coming your way .
Good Luck to you
I was providing an example as to what reasonable cause good very well be construed as, and one iota of that has to be taken up in the whole of the taxpayer's behaviour. Ongoing tax compliance in another country shows that the taxpayer is wanting to be in compliance globally. Taxpayer also filing timely US returns, albeit without the global compoenents, can be construed as good tax compliance. Plausibility is in the eyes of the beholder, but of course, ample evidence would need to be provided to back up good faith effort claims, and to exhibit taxpayer good behaviour overall. In light of taxpayer's noncompliance with regards to US rules. I think Just Me's & Moby's Opt Out RC letters did that quite well. That was what I was alluding to.
ReplyDeleteYes, correct. I edited it in many respects, but left the framework in place. For e.g., you mentioned lack of knowledge of FBAR reporting. I added 3520 reporting statistics from google. And relied heavily on taxpayer's small gap of time between finding out about IRS's worldwide reporting rules and their good faith execution of entering the OVDP of 2011. What I found was there were quite many more RC arguments for a taxpayer against the OVDP examiner willful arguments based on just "not checkign the box" at the bottom of schedule B.
ReplyDeleteOnce It's resolved, I'll post my version on the blog, with Jack's permission.
Yes, my mistake. Thanks for pointing it out. I used anon5percent's letter. JustMe had the TAO, from what I remember. Just Me's case was equally educating.
ReplyDeleteYes, sorry to mix it up. I found Moby's "environmental" considerations illuminating, which anon5percent (you?) used also in your RC letter.
ReplyDeleteHi Jack,
ReplyDeleteThe US Consular officer in Vancouver told me back in April that numbers do ex-pats coming into relinquish or renounce their USC spiked as a result of FATCA. In his words, there were "too many to process." My suspicion is we'll see an exponential increase in the numbers of USC ex-patriating this year.
I've lived in Canada for over 20 years, 13 of which I've been Canadian. I was born and raised in Boston and for the most part have been proud of my US heritage. I am very unhappy that the federal government has put me in a position where I even have to consider relinquishing my birth right to avoid being treated like an Eritrean abroad.
Here's food for thought. This is from the UN's Universal Declaration of Human Rights:
Article 13.
(1) Everyone has the right to freedom of movement and residence within the borders of each state.
(2) Everyone has the right to leave any country, including his own, and to return to his country.
All the best and
Hi Jack,
ReplyDeleteThe US Consular officer in Vancouver told me back in April that numbers do ex-pats coming into relinquish or renounce their USC spiked as a result of FATCA. In his words, there were "too many to process." My suspicion is we'll see an exponential increase in the numbers of USC ex-patriating this year.
I've lived in Canada for over 20 years, 13 of which I've been Canadian. I was born and raised in Boston and for the most part have been proud of my US heritage. I am very unhappy that the federal government has put me in a position where I even have to consider relinquishing my birth right to avoid being treated like an Eritrean abroad.
Here's food for thought. This is from the UN's Universal Declaration of Human Rights:
Article 13.
(1) Everyone has the right to freedom of movement and residence within the borders of each state.
(2) Everyone has the right to leave any country, including his own, and to return to his country.
All the best,
BC_Doc
A comment from the Isaac Brock website. The comment reflects the anger and frustration of ex-pat Americans:
ReplyDeleteSamuel Adams says
July 3, 2014 at 4:36 pm
Tomorrow America will celebrate the 4th of July, when 56 brave souls signed a Declaration of Independence from Great Britain 238 years earlier.
This begs the question, how many brave souls will be signing their own Declarations of Independence from America this year?
If Innocente’s estimates are right, the number will easily exceed 5,000, maybe even 6,000.
Let Freedom ring!
Thanks for your comment.
ReplyDeleteI am not sure what the Declaration of Human Rights has to do with the U.S. offshore initiatives, including FATCA. To say that a person (a real person, not an entity) has the right to move around the country and leave and enter the country does not seem to be relevant. A person, however, can surrender that right.
Jack Townsend
Are you implying that he'she is being watched by the NSA or something like that.
ReplyDeleteLot's of arrogance here from the proponents of FATCA. Let me assure you, that very few people affected are interested in tax evasion. In fact, if you just stick to those within your own borders, you might find some moral allies amongst us. However, this concept of citizenship based taxation is wherein lies the problem. Do you people even realize that you`re the only ones doing this?
ReplyDeleteTo me, the most interesting sentence in the above blog is "This could result in harm to the interests of the United States because it could prompt divestment from U.S. investments by affected financial institutions." Do you seriously think that this ISN'T going to happen? It already is.
Let me also add, I did not have the "oh so great fortune" to have been born in the USA. But, without a doubt, the most stupid financial blunder I've ever made in my life was to have married one who was. I'd have been way more "free" had my spouse been any other nationality. Good Day!
How long before you think the USA leverages these FATCA "agreements" (you know exactly why the quotation marks) into actually getting these foreign governments to permit the IRS to collect what it feels it is owed FROM them? And no, I won`t be rushing into ``compliance`` any time soon. There`s just nothing to be gained from it.
ReplyDeleteAre you implying that this person is being watched by the NSA or some other US government agency? That's a very inappropriate form of bullying.
ReplyDeleteOr, they could just stay in the countries in which they live and happily pay taxes to that jurisdiction from which they receive the benefits of citizenship. What's to fear? I don't understand your last comment.
ReplyDeletePierreD,
ReplyDeleteLet me remind you that this blog is about the practical -- trying to help practitioners, students and lay people deal with the world that is. I have previously said that I would reject rants about the unfairness of the system. There are other blogs where readers can comment on the unfairness of the system. But, for this blog, such rants do not make my intended audience's lives better.
I came very close to rejecting this comment and will be watching your and other readers' comments to eliminate this genre of rant.
I do appreciate your interest in the blog and look forward to your contributions of information that can be helpful to the intended audience of this blog.
Jack Townsend
Jack, I don't understand your comment, and I think you're missing the point. You seem to think that the 'many' here are wilful tax evaders, but they are not.
ReplyDeleteThe 'many' that will expatriate are the dual citizens who live outside the US, and have perhaps done so for many years, maybe their entire lives. These people are neither running nor hiding, but simply trying to live normal, law abiding, open, honest financial lives in THEIR OWN communities. Expatriation for them is the easiest, and most obvious, path.
Yes, there is more to life than money. But for many duals outside the US renouncing has little or no downside, whereas the upsides are more money AND a better quality of life. Why would a rational dual citizen living outside the US long term NOT renounce?
Jack...
ReplyDeleteI notice that you have just posted this letter without the usual JAT comments.
Not sure if you have seen this excellent rebuttal to the claims being made.
It is by International Law Professor, Allison Christians... She references your blog as the source for her analysis and comment.
Title: IRS claims statutory authority for FATCA agreements where no such authority exists
It begins like this....
"Over at federal tax crimes blog Jack Townsend has posted a letter from the IRS to Congressman Bill Posey, in response to an inquiry the Congressman apparently made about the intergovernmental agreements ("IGAs") to implement FATCA by other governments (instead of directly by foreign financial institutions, per the law Congress enacted in 2010)."
"None of these sources of law contain any authorization to enter into or implement the IGAs. It is patently clear that no such authorization has been made by Congress, and that the IGAs are sole executive agreements entered into by the executive branch on its own under its "plenary executive authority”. As such the agreements are constitutionally suspect because they do not accord with the delineated treaty power set forth in Article II. As Michael Ramsey wrote in a 1998 article, the danger is that if the president seeks to reach agreements outside of his plenary constitutional powers, the agreement lacks domestic legal effect."
You might be interested in reading the rest of this scholarly response to the authority they so blithely claim. :)
http://taxpol.blogspot.com.au/2014/07/irs-claims-statutory-authority-for.html
I am not the legal expert, you and Allison are, so will let you read and analyse on the merits. Maybe you will have some follow on comments which I am sure Allison would be interested in hearing.
Thnx
Thanks for your response. You make many excellent points.
ReplyDeleteI do agree that a dual citizen living in the country of citizenship other than the U.S. who has no interest in continuing his or her U.S. citizenship probably should renounce. My only point is that that is an issue that is much larger than the tax and related responsibilities to the U.S. I think that some who move too quickly to renouncing citizenship in response to the requirement that they meet tax and related reporting responsibilities may regret it when they perceive the full implications.
I am by no means an America first, or America greatest or any such person. I simply believe that, if you are an American or citizen of any other country, you should meet the responsibilities of citizenship. Otherwise, you should renounce.
But if it is just the tax responsibilities that causes one to renounce, I just wonder whether, ultimately, that will be satisfying to the renouncer and his future generations (it does have consequences).
Jack Townsend
Thank you for your reply.
ReplyDeleteWith regards to possible hasty action, dual citizens living outside the US are acutely aware of congress's increasingly anti-expat laws. First there was HIPAA and section 877 (election year), then AJCA and rule tightening (election year), then HEART and 877A (election year), then HIRE and FATCA (mid term election year). And as future swords of Damocles we have the 'Reed Amendment' (election year) and Ex-PATRIOT (election year). The direction of travel is clear. Duals living abroad see the door to freedom closing, and wish to pass through it before it shuts entirely.
On regret, most renunciants report overwhelming relief at new found freedom from the 'responsibilities' of US citizenship. This may not be true for all, but it is true for all cases I know of. I think that if you ask you will find that many people agonize considerably over a decision such as this before committing to action. Again, it comes down to improving the quality of one's life (or the life of one's offspring) by NOT being a US citizen.
Many countries make it easy to resume citizenship once renounced. The US does not, and further, threatens the Reed Amendment and Ex-PATRIOT. Consider the message that this sends. It is not a positive one.
Two different sets of responsibilities that are incompatible with each other can force a decision. The US's citizenship based tax system causes incompatibity for expats, because the US system does not mesh with the other systems.
ReplyDeleteIf one intends to return to the US or wants to leave the option open, then renouncing US citizenship is a bad idea. But if one is happy where one is and intends to stay there, why then it's much better to be a citizen of the country where one lives than to be a foreigner there.
In my case, what FATCA did was get me thinking. I realized that did not I want to ever go back to the US to live. And, in my book, Congress was not exhibiting much loyalty to me when they passed that law. (I actually think Congress simply did not consider what FATCA would do to expats. I became worried what else Congress, in its infinite wisdom, might decide to do.)
Did I change my citizenship because of FATCA? No. I had been on the fence for years and hadn't gotten around to it. FATCA just gave me a little push in the direction I should have taken earlier, that's all.
Sally,
ReplyDeleteWell said.
I appreciate your thoughtful comments.
Jack Townsend
Hi Sally. This comment may or may not be related to what you said, but I wanted to add that many people forget that a US person includes a US company, and anyone who has gotten a green card and has stayed for one day in the USA after having attained the GC. For people born in USA, yes, they are citizens, but the law is the same for anyone who got a GC, and has been in the USA for even one day after having that GC. The citizenship based tax system even applies to any work visa holder, H1, L1, L2, (any one with a F1 student visa living in usa beyond 5 years), and possibly other nonexempt visa types who, unbeknownst to them, have been filing 1040 tax returns WITHOUT their foreign income & asset information. These visa holders, can be construed as "electing" to enter into the citizenship bases system by their choice to file a 1040.
ReplyDeleteMeanwhile, you have complicated tax rules (CFC, PFICs) for US corporations, and resourcing of income, courtesy of treaties, which can allow companies like Apple & Google to set up corporations in different world taxing jurisdicaiton in order to pay minimal or no US or global taxes. FATCA won't hurt them one bit, because they are already fully disclosing.
The point is, the tax system is complex, and while companies have the resources to sift through and be aware of tax laws, they can also take advantage of those laws. But they also have the MEANS to pass on that cost to a large consumer base across the world.
Individuals, who many times do not even have advisors or practioners to help them file, or explain the law, are in the end, the ones who have to face the blunt force of the inequities of the law in this manner. Even renouncing seems to invoke an expensive "exit" tax (form 8854 process), and caught between a rock & a hard place.
As a practioner, I see this all the time. There is a perspicuous gap between the type of compliance the IRS wants to see for individuals with foreign assets and income, and the amount of information available with which to have done so. Counter this with a company like GE, which paid no tax in one year due to a corporate net operating loss provision of the tax code, a code they very advantegeously and legally took advantage of.
Until the IRS acknowledgest this gap, the Courts will I think, be the only recourse with the IRS overreaches in enforcement from only a statutory angle (IRM & Code).
Pierre,
ReplyDeleteIf I can add something useful, this would be it. Trade, the IRS says, has NO withholding. So if a US company does business with a company in Belgium, then payments made to the foreign company would NOT have any US tax withholding on it. But there are other compliance procedures the IRS still wants you to follow. However, if that same US based company would be paying interest to a company in India, then the IRS wants that US company to withhold US taxes. If there were no treaty between India & USA, then it would be 30%, as you have remarked. But since there is a treaty, the withholding would be 15%. There are similar situations for foreign companies doing business in USA. The IRS just wants their income taxes from US effectively connected income (ECTI). A W8BEN would help with that.
So FATCA serves to simply enforce existing law, and not to stifle trade or US investment, here or abroad. I see FATCA as a moving, molding, aspect of the law, which, will in the beginning have lots of failures, but with many countries already agreeing to it in its existing form, I see it as one which is here to stay. Companies know this, and they have long since been abiding by 5329, and FATCA rules, LONG before FATCA came into play.
now this is a rant !
ReplyDeleteI was merely highlighting the inequities in tax law compliance and proper public dissemination of the law to individual taxpayers versus corporate taxpayers. Given the fact that in the Judge Kozinski has said, " 'ignorance of law is no defense ' is a hoary maxim...it does not automatically apply to today's phalanx of federal regulatory crimes."
ReplyDeleteJack posted this on his blog on June 26th. See here: http://federaltaxcrimes.blogspot.com/2014/06/false-statements-crime-element-of.html.
So the gap of knowledge amonsts individuals & corporations is large. I also wanted to mention the "exit" tax (8854 process) as a possible legal deterrent to those who might consider simply giving up their GC, inlight of their new found knowledge of the US's citizenship based tax laws and FATCA. My aim was not to rant, but to simply convey the vexing, and complex nature of tax filing responsibilities coupled with the roadblocks of an individual person deciding not to comply and to simply "give up" their GC, and therby their US filing & tax responsibilities. Considering that many US companies are legally taking advantage of US laws (inverstion, NOLs, etc.), and also fully disclosing per FATCA, individuals don't seem to have the same resources with which to comply in the same manner & legally pay the minimum US tax the law affords them to. Thus there is that prodigious gap between awareness and simple cognizance. One would argue the IRS has already acknowledged that gap with OVDP & other voluntary disclosure programs (streamlined procedures). However, I an arguing the opposite. Indeed, this blog is partly a testament to individuals lack of resources and ability to even have known, in the remotest sense, about FATCA, FBAR, and what willful & nonwillful means. Given that, the fact that their remains distinct possibilities of the application of steep penalties from both willful and nonwillful considerations of each taxpayer's case, it would seem that the IRS has not aknowledged this gap
The advantage of the SFCP is that those that are expected to get either NW or W get a chance at NW without risk. If the IRS rejects, the taxpayer can continue with the OVDP and pay the 27.5% (not the latecomers). However, the situation is less clear with those taxpayers who are expected to get either RC or NW. Does the IRS usually hint towards their expected assessment (RC, NW, or W) for taxpayers who participate in the OVDP and are at the almost-final stage where they have to make the opt-out call?
ReplyDeleteI'm also curious whether the examiners might be more harsh with opt-outs now because the new internal unspoken rule could be: Everyone should either OVDP or SFCP. I remember the news of how QD's were frowned upon after the GAO report. Now that this SFCP is announced, the opt-out could be unofficially frowned upon, which could make the penalties harsher.
ReplyDeleteOf course, you could also make the opposing argument: the SFCP could be hard to qualify for because of the rigorous 3-layer assessment and because of the rumors at the end of your post in "Rumors on the Workings of Streamlined Programs (Including Transitioning in OVDP) (7/3/14; 7/17/14)".
Thank you for your valuable blog updates.
I have a question about joint certifications of non-willfulness. For a (domestic) couple who have always filed jointly, but where only one of them has a compliance issue, should the certification be joint or not?
ReplyDeleteThe top of the Certification form states that "Spouses should submit a joint certification if they are submitting joint income tax returns under the Streamlined Foreign Offshore Procedures." Is that a typo? Why would they refer to SFOP on the certification form for SDOP?
Related to this is the order in which names should be listed. If the couple has always filed with one as the primary and it is the secondary taxpayer who has the issue, is IRS going to get confused? Since the FBARs will be in the name of the spouse with the compliance issue, my inclination is to put that spouse first. I would also think it would be prudent to specify in the "essay portion" of the statement that the other spouse has nothing to report.
I would be most interested in other readers' opinions on this.
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