The Service\u2019s approach to tax and FBAR compliance by US citizens who are dual nationals and long-term residents of other countries needs to change. \u00a0The existing compliance programs do not reflect the demonstrable reality that there are many genuinely innocent delinquent US taxpayers living overseas.<\/p>\n
Enclosed with this letter is a proposal for an alternative procedure that recognizes this reality. The procedure is based on a questionnaire designed to assess a taxpayer\u2019s culpability for non-compliance. If a non-compliant, non-resident US taxpayer\u2019s answers to the questionnaire indicate a strong likelihood that their non-compliance was not intentional, the taxpayer\u2019s returns and FBAR\u2019s would be processed without penalty.<\/p>\n
Background<\/strong><\/p>\n The Service has acknowledged that the Offshore Voluntary Disclosure Initiatives (OVDI) and Offshore Voluntary Disclosure Program (OVDP) were not developed for people who are neither tax criminals nor tax cheats. \u00a0Innocent delinquents have no business entering the OVDP program. Yet, even the New Steamlined Filing Compliance Procedures for Non-Resident, Non-Filer US Taxpayers (\u201cSFCP\u201d) introduced in June last year adopts a conventional enforcement approach, focusing on \u201clow\u201d or \u201chigh\u201d compliance risk, \u201csimple\u201d returns and the amount of a taxpayer\u2019s US tax liability, instead of concentrating on identifying hallmarks of culpability for delinquency which is surely the heart of the matter when evaluating non-filers.<\/p>\n My concern about the Service\u2019s treatment of this growing group of US taxpayers first arose when Barry Shott announced the Service\u2019s enhanced FBAR enforcement initiative at the IRS-GWU tax conference in December 2008. \u00a0The tone of the Service\u2019s initial Offshore Voluntary Disclosure Initiative and of then Commissioner Douglas Shulman\u2019s testimony before the House Ways and Means Committee on March 31, 2009 prompted me to write the Commissioner on April 10, 2009, proposing a more measured approach to non-resident, dual citizen taxpayers based on their likely knowledge of US tax requirements.<\/p>\n Beth M. Elfrey, Director, Fraud\/Bank Secrecy Act, acknowledged the letter on May 7, 2009, but there was no response to my follow up telephone call to the individual identified in her letter. \u00a0When I saw Mr. Shott at the following year\u2019s IRS-GWU tax conference, I raised the issue with him again. \u00a0He was kind enough to offer to pass the letter to the Commissioner along to his colleagues at the IRS and to Manal Corwin, who was then International Tax Counsel at Treasury. \u00a0Copies of the letter to Commissioner Shulman, Ms. Elfrey\u2019s response, and the email to Barry Shott are enclosed for your reference.<\/p>\n The letter to Commissioner Shulman asked that attention be paid to differences among US taxpayers based on their likely awareness of their US tax and FBAR compliance obligations. \u00a0Unfortunately, the initial OVDI and its successors have not distinguished among non-resident US citizens based on any of the factors outlined in my letter. \u00a0It is time for the Service to do so.<\/p>\n OVDI #1 and #2 and the current OVDP are designed for people who knowingly violated US tax law by hiding funds in accounts overseas and not declaring income from those accounts on their US tax returns. \u00a0As stated in my letter to the Commissioner and repeat now, the Service should bring the full weight of the law down on those who are tax criminals. \u00a0For them, the OVDI initiatives and their OVDP successor offer a \u201cgood deal\u201d in light of the alternatives of criminal prosecution and application of the full civil penalties provided by law.<\/p>\n Current Compliance Alternatives<\/strong><\/p>\n The problem today for the truly non-culpable taxpayers I am concerned about is that there are only three alternatives: OVDP, SFCP or quiet disclosure. \u00a0Although the Service has repeatedly warned tax practitioners and taxpayers against using that well established alternative to the \u201cnoisy\u201d alternatives of the OVDP or SFCP, it is the one I continue to believe is the most suitable for these kinds of taxpayers unless and until the Service creates a \u201cnoisy\u201d option that fits them.<\/p>\n While the SFCP quite frankly deserves criticism both for vagueness and for displaying a stunning lack of awareness of the compliance challenges faced by US citizens who are dual nationals and have lived most, if not all, of their lives outside the United States, criticism alone is not the primary point of this letter.<\/p>\n I suggest that the SFCP be revised as described later, and that a new procedure be adopted along lines similar to the SFCP, but using a questionnaire designed to assess the taxpayer\u2019s culpability for non-compliance. \u00a0If a non-compliant, non-resident US taxpayer\u2019s answers to the questionnaire indicate a strong likelihood that their non-compliance was not intentional, the taxpayer\u2019s returns and FBAR\u2019s should be processed without penalty.<\/p>\n The proposal is built around the fundamental fact that US citizenship taxation is a singular exception to the otherwise universal expectation that people pay tax where they live and to countries in which they have income generating investments or financial assets. \u00a0Only US citizens are subject to taxation on their worldwide income regardless of where they live or the source of their income.<\/p>\n Citizenship taxation combined with US birthright citizenship presents unique issues that simply are unknown in other countries. \u00a0Let me illustrate this point by giving you three examples.<\/p>\n The first is a Canadian. \u00a0She was born in the US while her parents, both Canadian citizens, were at graduate school in 1954. \u00a0She returned to Canada with them when she was two years old and has lived in Canada since. \u00a0When her father inquired about her US citizenship in 1973, the US Consul in Winnipeg advised that she would lose her US citizenship if she obtained a Canadian passport and lived in Canada for three year after reaching her 22nd birthday without taking an oath of allegiance to the United States. \u00a0She obtained a Canadian passport, continued to live in Canada, and did not take an oath of allegiance to the United States prior to reaching her 25th birthday. \u00a0Unfortunately, unbeknownst to her, the section of the Immigration and Nationality Act of 1952, which the US Consul referenced in his letter to her father, was repealed in 1978 before she had completed three years continuous residence in Canada after turning 22 in 1976. She was shocked to learn on July 22, 2013 that she is still a US citizen by birth.<\/p>\n The second is British. \u00a0She, too, was born in the United States while her parents, both of whom were British citizens, were in the US. \u00a0She returned with them to England when she was three and has lived in the UK ever since. \u00a0Indeed, she has travelled to the US on a UK passport with a US visa, issued by the US Consulate in London. \u00a0She contacted me in early May to confirm that she was not as US citizen based on the US visa issued to her. \u00a0I had to advise her that she was indeed a US citizen by birth and explained US citizenship is automatic and non-consensual by operation of the Fourteenth Amendment. \u00a0Being a British citizen at birth did not affect her US citizenship.<\/p>\n The third is Irish. \u00a0She was born in the US to Irish nationals who were studying in the US. \u00a0She left when she was five and has lived in Ireland or other parts of Europe since. \u00a0On July 10, 2013 she contacted me after having been told the week before at a party that US citizens were being called in to a local bank to verify their citizenship. \u00a0Like the Canadian before her, she was genuinely surprised to learn that she is a US citizen and subject to tax on her worldwide income.<\/p>\n These examples, like those of John and Sarah in the letter to then Commissioner Shulman, could be multiplied. \u00a0As I am sure you must realize, none of these people intentionally failed to file US tax returns or FBAR\u2019s. \u00a0Each has a good case of \u201creasonable cause\u201d, but the Service has repeatedly emphasized the penalties for \u201cnon-willful\u201d violations of the FBAR filing requirement and worse. \u00a0More to the point, it is likely that all three of these individuals will not be filing simple returns with a US tax liability of less than $1,500. \u00a0They are clearly not candidates for OVDP, but they also don\u2019t (or are not likely to) qualify for SFCP. \u00a0Quiet disclosure certainly looks like the best option for them. Yet, that exposes them to risks that the Service itself has emphasized. \u00a0These individuals and the many like them around the world are why I am proposing a new alternative to those that exist, including quiet disclosure.<\/p>\n New Compliance Procedure for Non-Resident, Dual National, Delinquent US Taxpayers \u00a0<\/strong><\/p>\n The axiom that ignorance of the law is no excuse makes sense when applying universal norms or expectations. \u00a0Most people understand that there are laws governing many aspects of life and, even if they don\u2019t know all of the details, are sufficiently aware to investigate the rules if they think they apply to them. \u00a0Citizenship taxation is not a universal norm or expectation.<\/p>\n Even though birthright citizenship is more common than citizenship taxation, the combination of the two creates unique and unforeseeable challenges for most of these \u201caccidental Americans\u201d. \u00a0For example, the Canadian owns a corporation, which is a CFC for US tax purposes. \u00a0The British person has received certain gifts which are subject to Form 3520 reporting. \u00a0The Irish woman is a well compensated executive who now lives in Switzerland and has received stock options and grants as part of her compensation.<\/p>\n The context within which I ask you to consider the enclosed proposal is based on the following categories of US citizens that generally follow those outlined to the Commissioner in March 2009:<\/p>\n US citizens and permanent residents who live in the United States;<\/p>\n<\/li>\n US citizens and permanent residents who are on temporary work assignments outside the United States or who work for US government agencies overseas;<\/p>\n<\/li>\n US citizens, not covered by Category 2 above, who have resided outside the United States continuously beginning on or after January 1, 2003;<\/p>\n<\/li>\n US citizens who have resided outside the United States continuously for more than ten years as of January 1, 2013 and continue to reside outside the United States;<\/p>\n<\/li>\n US citizens who were born in the United States, but moved from the United States prior to their 18th birthday and have resided continuously outside the United States since that time; and<\/p>\n<\/li>\n US citizens born outside the United States who have never resided in the United States.<\/p>\n<\/li>\n<\/ol>\n The OVDP exists for people in categories 1 & 2, and is a good option for such people to bring themselves into compliance with their US tax and bank reporting obligations.<\/p>\n The SFCP is probably suitable for people in category 3 with several minor modifications as noted below: (1) changing the eligibility requirement to \u201con or after January 1, 2003\u201d; (2) fixing a hard tax liability amount ($1,500 is too low for many reasons); (3) setting a fixed number of tax returns to be filed and clarifying the tax year for which returns are required (e.g., three years counting from the most recent year for which a return is delinquent); (4) maintaining the number of FBAR\u2019s \u00a0to be filed at six years, counting from the most recent year for which an FBAR is delinquent; and (5) removing \u201csimple\u201d before tax return in the eligibility criteria or providing a more definitive description of what constitutes \u201csimple\u201d.<\/p>\n The enclosed proposed new procedure is for people in categories 4, 5 and 6. In a nutshell, it creates a \u201cnoisy\u201d alternative for taxpayers who can establish that they fall within one of the last three categories listed above by answering a detailed questionnaire, the purpose of which is to provide a basis on which the Service can determine their culpability for being delinquent.<\/p>\n The people described earlier in this letter are the polar opposites of the US tax cheats who knowingly hid money overseas and failed to report their full worldwide income on their US tax returns. \u00a0Many are citizens in name only in that they do not vote, cannot pass on their US citizenship to their children, have no US assets or income from sources in the US and otherwise have only family or emotional ties to the US. \u00a0Most, if not all, had no reason to expect that they had US tax and bank reporting obligations. \u00a0The IRS needs a procedure that provides them a soft landing when they bring themselves into compliance.<\/p>\n US citizenship taxation is the law and the Service which must enforce it. \u00a0However, like a sensible police officer when confronting what, based on the facts and circumstances, is an innocent or unintentional violation of the law, the IRS should find a way to issue a warning instead of a ticket.<\/p>\n The passage of FATCA is going to bring the reality of US citizenship taxation to many US dual citizens who will be surprised and frightened by the reported consequences of their non-compliance with US tax and bank reporting laws. \u00a0I strongly urge the Service to adopt a procedure like the one proposed here that really fits the facts and circumstances of the people in categories 4 through 6. They need to know that voluntarily bringing themselves into compliance is not a crap shoot or a dive off the high board without knowing how much water is in the pool. \u00a0It is time for the Service to develop a procedure that focuses on the real issue: culpability so that truly innocent delinquents can comply without fear of undue consequences.<\/p>\n Please do not hesitate to contact me. I am ready to assist in any way I can to get a new program suitable for these taxpayers in place as quickly as possible.<\/p>\n _____________________________________________________<\/p>\n Vague wording affects several key elements of the SFCP. \u00a0For example, the procedure is available to non-resident taxpayers who have \u201cresided outside of the U.S. since January 1, 2009\u201d. \u00a0What about taxpayers who have resided outside the United States from a time before that date? \u00a0The ordinary meaning of \u201csince\u201d is \u201cfrom then\u201d or \u201cfrom a specified time\u201d, except in the context of \u201clong since\u201d forgotten. \u00a0I believe many people have assumed the January 1, 2009 date covers people who lived outside since before that date. \u00a0If that is the intent, rewording the eligibility requirement to read \u201csince before\u201d the cut-off date would clarify it. \u00a0Does the date from which taxpayers have to file delinquent returns \u201cfor the past three years\u201d begin when they realize that they have this obligation? For example, if taxpayers become aware of the obligation to file US tax returns in August 2013, will they have to file returns for 2010, 2011 and 2012 since the 2012 return would now be \u201cdelinquent\u201d? \u00a0\u00a0Or does it mean that taxpayers should file for all years since 2009? \u00a0Again, some clarification is warranted.<\/p>\n The SFCP is said to be for \u201clow risk\u201d returns. \u00a0The instructions say that low risk \u201cwill be predicated on simple returns with little or no US tax due.\u201d \u00a0What is a \u201csimple\u201d return? \u00a0Does a return that includes one or more of Forms 1116, 6251, 2555, 5471, 3520, 8868, or 8858 qualify as \u201csimple\u201d?<\/p>\n In addition to being \u201csimple\u201d, the SFCP uses a very low US tax liability ($1,500) to determine eligibility. \u00a0If question 3 is answered yes, a non-resident taxpayer considering the program is told \u201cany returns submitted through this program will not be eligible for the steamlined processing procedures and will be treated as high risk returns subject to examination.\u201d \u00a0Such taxpayers are then directed to the OVDP. \u00a0There are many reasons why a non-resident, dual citizen might owe more than $1,500 in US tax. \u00a0For example, an item of income in the person\u2019s home country may be subject to a lower rate of tax or no tax at all with the result that the person would have insufficient or no foreign tax credits available to offset US tax on that income. \u00a0We have been told on the phone that the $1,500 threshold is not \u201chard\u201d, but there is no written guidance to that effect (no FAQ\u2019s). This puts practitioners in an awkward position in advising a non-resident taxpayer about the appropriateness of the SFCP in lieu of quiet disclosure. \u00a0\u00a0The rest of the questions in the questionnaire deal with compliance related questions, but are not ones that could reasonably be expected to reveal a basis for non-culpability.<\/p>\n No program supposedly designed to help people come back into compliance should present such fundamental threshold challenges. \u00a0Quiet disclosure is the better option based on the SFCP as written.<\/p>\n The drafters of the requirement that tax returns submitted under the SFCP must have a valid SSN clearly have no idea what the Social Security Administration requires of persons born in the United States who did not receive a valid social security number by the time they reached 12 in order to obtain an SSN if they have resided continuously outside the United States and do not have an SSN. \u00a0We discovered the special requirements when assisting a dual US citizen who left the US when she was two years old and has lived since then in the country of her other citizenship. \u00a0Her parents did not get her a SSN while they were in the US. When she realized that she was required to file US tax returns and FBAR\u2019s, she was 40 years old. \u00a0To get an SSN, she must present a \u201ctimeline\u201d to the Federal Benefits Unit at the Embassy in her home country demonstrating with evidence satisfactory to that unit that she has lived continuously outside the United States and does not have an SSN, even though she has a valid US passport.<\/p>\n <\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" DEAR MR. HORTON: The Service\u2019s approach to tax and FBAR compliance by US citizens who are dual nationals and long-term residents of other countries needs to change. \u00a0The existing compliance programs do not reflect the demonstrable reality that there are many genuinely innocent delinquent US taxpayers living overseas. Enclosed with this letter is a proposal…<\/p>\n","protected":false},"author":8,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[19,10,11],"tags":[],"class_list":["post-234","post","type-post","status-publish","format-standard","hentry","category-foreign-bank-account-reports","category-us-citizenship","category-us-tax-returns-for-non-residents"],"_links":{"self":[{"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/posts\/234","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/comments?post=234"}],"version-history":[{"count":0,"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/posts\/234\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/media?parent=234"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/categories?post=234"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.flottco.com\/accidentaluscitizen\/wp-json\/wp\/v2\/tags?post=234"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n