FBAR, FATCA and "US Persons" in Canada

A couple of recent developments:

On June 26 the IRS announced, via a press release, a "plan to help U.S. citizens residing overseas, including dual citizens, catch up with tax filing obligations." Although this was presented in the media as good news for us who are concerned about this, I can't see much change in their position, except that they've removed the deadline for filing under OVDC and raised the possible penalty (have a look at a simultaneous press release: "Under the current OVDP, the offshore penalty has been raised to 27.5 percent from 25 percent in the 2011 program"), while offering assurances that "taxpayers who are low compliance risks" (anyone want to guess what that means?) will face no penalties. I think it may also be new that you only have to file three years' back tax returns, although they're still asking for six years' worth of FBAR reports. In other words, I don't see much that's especially new -- even though Jim Flaherty's said he's pleased.

Their assumption, as always, is that we want to continue to file annual tax returns and FBAR reports. But since it's the case that only the U.S. and Eritrea* insist on taxing according to citizenship, I think we have a case that people who have earned all their money in Canada should not have an obligation to report to or pay taxes to the U.S. In the reverse situation, a Canadian living and working in the U.S. files there and Revenue Canada ignores her. As it should.

It is encouraging that the American Citizens Abroad have put together a working paper in which they call for a "change from citizenship-based taxation to residence-based taxation," arguing not only that it "is revenue neutral and brings major economic advantages to the United States, but that it would "align U.S. tax policy on individuals to that of the rest of the world." It's a very persuasive document, though I'm not optimistic that it will persuade the IRS.

More immediate, perhaps, is their March letter to the IRS commissioner, which begins: "American Citizens Abroad (ACA) is writing to you to express our profound concern that you have not answered the Tax Advocacy Directive (TAD) issued by National Taxpayer Advocate (NTA) Nina Olson in December of 2011.  It is our understanding that it was your statutory duty to answer this Directive by January 26th, 2012.  It is particularly disturbing that the Commissioner of the IRS, himself in a position to enforce the law on other people, should be perceived to be blatantly disregarding legal obligations associated with his duties."

*The ACA points out at the end of the working paper that "Ironically, the United States joined in Resolution 2023 of the Security Council of the United Nations on December 5, 2011 condemning Eritrea for imposing a 'Diaspora tax' on its citizens residing overseas.  Of course, citizenship-based taxation is nothing more than a tax on the American diaspora under a different name."

The best sources for information on this matter remain the Isaac Brock Society Web site, the American Citizens Abroad site, and the IRS' Taxpayer Advocate Office, perhaps especially their "Most Serious Problems" bulletin #12.

Below are some further links to materials I've found that might be helpful in making sense of this. As things develop I'm adding them in the top section, mostly in italics. As a result of a November 28 meeting in Fredericton, Bob Gerard put together a summary statement of what the situation is, as we understand it now.

Current items, as of mid-January:

The Taxpayer Advocate Service, an internal agency of the IRS whose aim is to be a sort of ombudsman for ordinary taxpayers, released its annual report to Congress on January 11. The American Citizens Abroad site has put up a congratulatory note with some important links. Nina Olson, the head of the TAS, is clearly an important ally in this struggle. She also has a blog, which is well worth reading.

What's particularly important to know is that the TAS has actually begun to address the FBAR problem. On October 26,  it issued a memorandum to Douglas Shulman, who is the commissioner of the IRS, regarding their "Directive 2011-1" and requiring a response within three months -- that is, by January 26 (as of January 27, I've not seen one; nothing, for instance, on the IRS' news release page). The memo itself is worth reading. It makes some amazing charges about IRS activities with respect to the OVDP and FBAR reporting. A couple of examples: "On March 1, 2011, the IRS retroactively changed the terms of the OVDP by retracting its promise to apply existing statutes"; "The IRS’s approach treats similarly situated taxpayers differently and turns the burden of proof on its head." I love footnote 4: "Our discussion focuses on the FBAR penalty because it is often the largest and most disproportionate penalty involved." Maybe the best single evidence of their sympathies is in MSP#12 ("Most Serious Problems"): the title of the page (click to read it) is "The IRS’s Offshore Voluntary Disclosure Program 'Bait and Switch' May Undermine Trust for the IRS and Future Compliance Program."

Equally important, but not widely known: I just found out about a request received by a person trying to file a "voluntary disclosure" (OVDI) who has been at it for a long time, dealing with regular requests for further information, necessitating trips to the US. The latest communication from his tax person says that the IRS now wants him to fill out this form. There is much about it that I find appalling, but perhaps especially this demand:

Explain all face to face meetings, and any other communications you had regarding the accounts or assets with the financial institution(s).  Also include face to face meetings or communications regarding the accounts or assets with independent advisors/investment managers not from the financial institution(s) where the funds are held.  Provide the names, locations and dates of these meetings and/or communications.
It's worth having a look at the whole document, if you're considering making a voluntary disclosure. The assumption of criminal intent that seems to characterize it is particularly disturbing (especially if you're concerned, as I am, that the IRS has left the discretion to individual examiners, who will decide whether your failure to report is "due to reasonable cause"). I'm wondering whether David Alward or Elizabeth May, as they work through the process, have received this, and what they think about it. I know that  a number of people have been forwarding the document to their MPs and other public figures.

A somewhat more encouraging story has just been posted on the Brock Society, about going to the Halifax US Consulate to "relinquish" US citizenship. It's encouraging if you took out Canadian citizenship before the 1978 and 1986 revision of the US citizenship laws. It's not clear to me that this would be possible if you were later than that (as I am, for example).

I've said elsewhere I am not sure that repealing FATCA will do ordinary citizens a lot of good, but repeal is certainly a good idea; it's part of this whole criminalization of US citizens living out of the country. The ACA is mounting a petition campaign against it; click to sign it on line, and see more about their campaign. For lots of reasons, I've argued that really FATCA is a dead duck, one way or another. On January 25, Barrie McKenna published an article in the Globe making this, I think, even clearer; and a January 29 piece from the Financial Times reinforces that. But both also make clear that this is about sparing the banks complications; it will do nothing for the multitude of folks worried about FBAR penalties. McKenna: "But reducing the administration burden of FATCA may not provide much solace for the roughly one million Americans in Canada, many of whom don’t file taxes and other reports to the IRS, as required by U.S. law."

I've just learned about a blog, called U.S.Citizens in Canada InfoShop, which is, it seems to me, a powerful and readable resource for keeping up with developments in this area. I'm not sure who is actually responsible for it, but I have found it very helpful. It's probably a better place to start getting a sense of what the issues are than the Web site you're on now.

It's becoming pretty clear to me, too, that the Isaac Brock Society Web site is a powerful resource (there's some connection between it and the InfoShop blog).  If there is going to be some public action taken that requires a broad spectrum of expats across Canada, I think that may be the place to organize it.

I've recently received an email from the US / Nova Scotia immigration lawyer who spoke at the Halifax meeting, offering her contact information for people concerned about whether they are US Citizens, and what their options might be.

A recent article by the Globe's Barrie McKenna on the release of the Taxpayer Advocate report, "Watchdog slams IRS for alienating expats" (Jan 19) shows how "U.S. National Taxpayer Advocate Nina Olson warns that the IRS is driving honest “benign actors” underground with devastating penalties and an over-complex international tax reporting regime."

On January 9, there were developments that might have some significance. The best explanation I've seen (sent to me by Bob Gerard) is in a blog entry from Moodys tax advisors by Roy A. Berg. Essentially it interprets the January 9 IRS news release titled "IRS Offshore Programs Produce $4.4 Billion To Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens" as being more important than I had thought (I'd thought it was simply a reiteration of the status quo). Berg says it's "a very promising development," and may be a response to pressures from expats, the Canadian government, and the intervention of the Taxpayer Advocate Service (which works from inside the IRS, as I understand it), who in August issued a directive that "acknowledged problems in the 2009 OVDP that resulted in inequitable treatment of similar taxpayers and directed the IRS to address these problems" (read about that here). The announcement's also been reported in the Wall Street Journal. I don't see a significant change, yet, from the status quo in any of these reports.

The Isaac Brock Society have issued a press release (January 10) cautioning people to think twice before accepting the new Offshore Voluntary Disclosure program. They say, among other things, "We strongly warn law-abiding Canadian residents of the dangers of entering this program which is intended to attract tax cheats who live in the United States but have undisclosed offshore accounts." On the other hand, the Globe and Mail's Barrie McKenna has written a piece strongly suggesting that now is the time to "come clean." It's worth reading some of the online comments on it, which suggest that it's serving the nefarious purposes of the IRS, and question the assumption, in McKenna's article and elsewhere, that innocent taxpayers have something to "come clean" about.

If you're tempted to dismiss the problem, you might have a look at a Reuters piece called "Taxpayers with overseas accounts seethe at penalties," which concludes with this:

"There are all sorts of shades of culpability in a program that the IRS couldn't deal with when it had to move a lot of people through," says Jack Townsend, a Houston tax attorney who writes on these issues at his Federal Tax Crimes blog. "The people who made out well are the real crooks who have been doing this for years, while the people who don't have that culpability are getting hammered because of the one-size-fits-all rule."
Marie Cashion, Bob Gerard and I have set up an email list to allow concerned people to communicate about this; if you like you can subscribe by sending an email to ustax-on@stu.ca, and confirming when you get a response (or you can email me directly).

The earliest items on this page (below the horizontal rule) are mostly news reports; there's more substantive information toward the bottom. I'm adding things as I go. Most recent material is at the top, above the horizontal line, and mostly has to do with various political initiatives or official statements opposing the reporting requirements. I've taken some links to relevant IRS sites, from a Financial Post article in September and other sources, and posted them at the bottom.

The IRS' December 7 "Information for U.S. Citizens or Dual Citizens Residing Outside the U. S.," which is apparently the document that Ambassador Jacobson was announcing, has appeared on the IRS Web site. My quick reading suggests that it's not a change in the law or IRS policy, but a reasssurance that whether you'll be penalized for failure to file FBAR documentation is left up to the individual examiner, who will decide whether your failure to report is "due to reasonable cause."  It seems unnecessarily complicated by a list of four "examples," but I think the bottom line is that "an examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty." Or not.

On December 2 The Globe and Mail ran a story announcing an amnesty for penalties on unpaid taxes and late filing. This may be good news, but I'm not clear that it applies to FBAR filings and to those, quite different, penalties. Further information is expected. [Later notice: I usually don't read the comments on news articles, but the comments on this one in the Globe are quite amazing, and rather more skeptical than even I am. It's worth skimming through them.]

A meeting for people concerned about the issue in the local area was held November 28. Marie Cashion's notice of the meeting is here; my report of what happened at the meeting is here.

The Telegraph-Journal, the Gleaner, and the Times & Transcript all published an article by Chris Morris the next day about David Lutz's message to the group; you can read it here.

Click to see the letter in the Gleaner from Cashion or the Times & Transcript and Daily Gleaner article about the issue and the meeting.

Questions have been raised about whether penalties for failing to file FBAR reports would be contingent on owing back taxes (unlikely for virtually all Canadians). My reading of the list of civil penalties on the IRS "2011 Offshore Voluntary Disclosure Initiative Frequently Asked Questions and Answers" page suggests that the penalties are discretionary, but not tied to whether you owe taxes. All the tax consultants I've spoken to have either said that it was unlikely to impossible that penalties would actually be imposed if no taxes were owing, or have said they have no advice.

Recently, On October 26 Jim Flaherty wrote, as Minister of Finance, a letter in response to a question about this in which he makes clear that Canada will not collect penalties or taxes on behalf of the US, and includes a "fact sheet" on FBAR, dated October 2011.  It's worth reading.

The US Ambassador to Canada, in a speech in Ottawa October 21, vowed (according to Barrie McKenna in the Globe), "to find a way to 'accommodate' the thousands of Canadians caught up in a tax crackdown on Americans who stash their money offshore." The Globe article is here, a CBC story on it here, and the whole speech by Ambassador Jacobson is here (scroll to the bottom of the section on expats). Jacobson's conclusion: "My message on this one is to sit tight. We are not unreasonable. We are not unsympathetic. We are not irresponsible."

Elizabeth May who is also (along with New Brunswick Premier David Alward) a "US Person," has written (September 12) the PM a strong letter about this, which is here. More recently (October 14), the twelve members of the NDP British Columbia Caucus sent an equally strong letter to Finance Minister Flaherty and Foreign Affairs Minister Baird. Read it here. (I suspect that a group of NDP MPs don't exactly have Baird's or Flaherty's ear, but it's pretty powerful, suggesting five specific strategies or initiatives that would resolve the problem, and which I can, if I try real hard, imagine being implemented.)

In his Fall MP Report, my MP, Conservative Mike Allen, included a page of information and a clear declaration of opposition to the US policy as implemented. He's given me permission to post it on this site; it's here (en Français aussi).

On September 30, the executive director of the American Citizens Abroad wrote to four congressmen calling for a repeal of FATCA. The letter is on their site, here.

There is also, as of September 27, a letter from Congressman Charles Boustany, Chairman of the House Ways and Means Subcommittee on Oversight, to Tim Geithner (with copies to the IRS and the Offfice of Management and Budget), assailing the policy and asking for information about the situation.

 (It's important to bear in mind that repealing FATCA wouldn't actually solve the problem for US citizens abroad; it would just mean that you would be less likely to be reported to the IRS by your financial institution.)

Material below is more or less chronological:

The Globe and Mail had a piece on July 27 called "Truth, justice and becoming un-American" that may have been what started lots of people worrying about this.

The Financial Post published an account of the situation called "Americans Among Us" on July 30.

Way back in February there was a piece in the Wall Street Journal that outlined the problems: ""Many taxpayers who deserve a lower penalty won't get the benefit of it, and some may owe penalties even when no tax is due," said Bryan Skarlatos, an attorney with Kostelanetz & Fink in New York."

The CBC item on August 8 may be where I first heard about it.

A journal called Tax Profile from "CCH" (I don't know who this is, but my accountant forwarded it to me, so I think it has some authority) published in July an analysis called "Tax Tsunami for non-U.S. Tax Compliant Canadian Residents who are U.S. Citizens or Green Card Holders," which is pretty helpful in assessing the likely consequences of different courses of action.

The American Citizens Abroad Web site is full of material regarding this, especially a piece called FATCA destroys lives and the US economy. They also link to a couple of articles by a US tax attorney who points out that the IRS "summarily now presumes that all OVDP participants willfully failed to declare the foreign accounts," and that people are liable to the even more ludicrously exorbitant penalties for wilful (as opposed to inadvertent) failure to report. He also indicates that the "Taxpayer Advocate Service," which is an independent organization within the IRS established to protect people from unjust practices, is challenging this, although so far to no avail.

The same lawyer reports, in a blog entry, "A Few Voluntary Disclosure Successes." The first one is especially worth reading; the penalty for a totally innocent account held in Europe by a retired professor was reduced "to only $5,000 a year for the last five years" (the short version is here). And that's a "success." Part of the conclusion to the entry is " . . . there is no guarantee that future cases will have similar outcomes. In particular, the penalty regime of the 2011 OVDI is very different from the penalty regime under the 2009 OVDP. Foreign life insurance is now explicitly covered by the 2011 OVDI. Significantly, arguments of non-willful tax non compliance and of reasonable cause for non-compliance, are of no consequence under the OVDI."

On the Forbes Web site, an article titled "Some Foreign Account Penalties Unfair, Says Taxpayer Advocate" by tax lawyer Robert Wood points out that "In her June 30, 2011 Report to Congress, U.S. Taxpayer Advocate Nina Olson criticizes the IRS over its Offshore Voluntary Disclosure Program.  According to its mission statement, the Taxpayer Advocate Service–an independent organization within the IRS–helps taxpayers resolve problems and recommends changes to prevent them." The article includes links to her report and some other useful items. But in general the Forbes site is pretty cautionary about this: for example, they say the the IRS is making this a high priority, and you'd better come forward and fess up. For instance, "These penalties may seem high until you consider the alternative.  In fact, the penalties for coming forward under the current prepackaged IRS program pale in comparison to what the IRS could rain down on taxpayers caught violating the rules.  Between income tax, interest, civil and criminal penalties for the tax and FBAR violations, jail time can be as high as ten years and fines can be multiples of the foreign accounts." ("'Quiet' Foreign Account Disclosure Not Enough").

Citizenship considerations

A site called US law relating to dual citizenship is very useful about who is and isn't a US citizen, and under what circumstances (although the person who put it up isn't a lawyer and claims no expertise, there are lots of useful links, and it's very coherent, mostly).

Equally interesting, I think, is a posting (by another non-lawyer) on expatforum.com about the definition of citizenship. I'm intrigued by his definition of what he calls “Relinquishants”: "those people who intended to relinquish their US citizenship upon swearing loyalty oaths upon becoming citizens of another country, employees of the public service of another country, members of the armed forces of another country, or any combination thereof." He goes on, "By swearing these oaths, these people committed an “expatriating act” under Section 349 of the US Immigration and Nationality Act. Such acts are separate and distinct from formal renunciation, which is another expatriating act listed under Section 349 and which is neither necessary nor desirable for these persons to perform in order to relinquish their US nationality. Under Section 349 of the Act, the State Department can establish a formal procedure to be followed for renunciation; Section 349 of the Act provides no such discretion to the State Department for the other expatriating acts." On this reading of the law, if you took out Canadian citizenship, you automatically gave up your US citizenship. I suspect, though, that this misses the implications of the easing of the dual citizenship limits in 1978 and 1986.

Recently, a correspondent sent me a pdf from the US State Department: "REQUEST FOR DETERMINATION OF POSSIBLE LOSS OF UNITED STATES CITIZENSHIP." It looks to me like the form you'd use to relinquish citizenship. A prologue says, in part, "The following information is needed to determine your present citizenship status and possible loss of U.S. citizenship. . . . You are advised to consult an attorney before completing this form." You can see the whole form here.

What "Foreign Accounts" does the law apply to?

There is a lot of pretty terrifying information on the IRS Web site. For instance, on the Q&A page, "Those taxpayers making quiet disclosures should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years." Or the list of penalty amounts. Somewhere on the site, as well, there is a definition of what counts as an "account," and although I can no longer find it, I found it scarily broad. According to the ACA (here; you need to scroll down to "offshore Voluntary disclosure Initiative"), a draft form which will need to be filed along with the 1040 "is designed to be filed by those having 'specified foreign financial assets having an aggregate value of more than $50,000'." I don't know what's meant by "specified" there. I see references to "bank accounts" in various places, but Rubenstein says that life insurance is included; I don't know whether retirement funds would be, but the ACA says that the Foreign Account Tax Compliance Act "requires foreign financial institutions (FFI) of broad scope – banks, stock brokers, hedge funds, pension funds, insurance companies, trusts – to report directly to the IRS all clients who are U.S. persons." I don't know why they'd include all those unless they were considered "foreign financial assets." ("Why FATCA is Bad for America and Why it Should be Repealed Now!", ACA Report, July 2011. Italics mine.)

On the IRS site there is a FAQ page about this, which says this:

Q. What is a financial account?

A. A “financial account” includes any bank, securities, securities derivatives or other financial instruments accounts. The term includes any savings, demand, checking, deposit or any other account maintained with a financial institution or other person engaged in the business of a financial institution. Financial account also generally includes any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund (including mutual funds). Individual bonds, notes, or stock certificates held by the filer are not a financial account nor is an unsecured loan to a foreign trade or business that is not a financial institution.

I've since had confirmation from my retirement fund manager and Standard Life that it would indeed include my retirement funds.

An additional reporting form has recently, as a part of FATCA, been added to the FBAR form: Form 8938 would apply to accounts and I think would apply mainly to larger amounts like retirement funds. The ACA has a warning about it on their site, and there's a bit of paranoid guessing about why yet another form might required on the expatforum.com site (that you're paranoid doesn't mean they're not after you).

Articles, media coverage, etc.

The Globe and Mail has published a number of articles about this since the "amnesty" deadline, somewhat less sensationalized than the CBC.

American Citizens Abroad has continued to fulminate about the issue, too. On September 19 they posted: "IRS Traps Innocent, Hard-Working Americans" -- but the best, strongest statement about it is probably The FBAR SCAM, which outlines their lobbying position. I was especially charmed by this:
In March 2011, 18 months after the end of the period for entering the OVDP, the IRS retroactively changed the rules of the OVDP and stated that all cases would be treated as willful violators – hence the term “Bait and Switch”. Those who entered the program in good faith as non-willful violators “could either agree to pay more than they believed they owed or withdraw from the 2009 OVDP and face the possibility the IRS would assert massive civil penalties and seek criminal prosecution.”

Under these rules, the OVDP systematically imposed a penalty amounting to 20% of the highest balance in the foreign accounts for each of the six years from 2003 to 2009.  The IRS also specified that any account linked to the servicing of real estate would be subject to the inclusion of the valuation of that real estate in calculating the penalties (i.e. 20% of the value of the real estate).  This was presented as a “deal” because the law allows for maximum penalties of  50% of overseas assets for every year of noncompliance.

They include a number of terrifying cases. Here's one:
 An American in Germany: An American citizen who has lived in Germany for 32 years had no idea she had to file U.S. taxes until 2009.  She owed no U.S. taxes. To correct the situation she filed back years and also filed the FBAR forms.  In late 2009 she learned of the IRS OVDP and read the very confusing FAQ which said one should not submit a voluntary disclosure if one did not owe any tax but had merely not filled out the FBAR form.  Q10, on the other hand, explained that the type of filing she had done was “quiet disclosure” and threatened criminal prosecution for not turning it into a “noisy disclosure”.  She decided to err on the side of caution and entered the OVDP. “What a mistake that was, expecting fairness from the IRS!  The IRS concluded that I did not owe any tax, but it nevertheless asked for the maximum non-willful penalty, which corresponds to 8 months take-home pay." Her story was featured in a recent article in the Financial Times, “Tax Compliance Bill Drives Expat to Despair of US”; June 12, 2011.
And now, besides the CBC coverage of my own case, the Telegraph-Journal is on the story. So is the St. Thomas Journalism School's New Brunswick Beacon, which ran a story called "Americans living in Canada, beware of the IRS," by Amy MacKenzie, on December 3.

A September 2011 issue of the Canadian Tax Foundation's Canadian Tax Highlights says that "FBAR penalties are not taxes" and "it is highly likely that they are penal and thus are not enforceable in Canada." It concludes, "In summary, a Canadian citizen need have little concern about the collection of US tax, interest, and ancillary penalties." A jpeg of the whole document -- available on line only to members of the Foundation, so this has apparently been leaked or pirated) is here.

I'm increasingly convinced that doing nothing is the best course of action: something has to happen to straighten this out. But it's clear that I'm not going to be eager to cross that border any time soon. It seems clear the IRS can't come across the border after me; what they could do if I crossed it, though, still isn't obvious.

The Financial Post has a number of articles of interest. On September 19, one called "Americans in Canada: Tax confusion reigns" has a set of links at the bottom to useful sites:

On September 24, the FP put out a Q&A with a number of experts. I'm beginning to think there's never going to be a definitive answer: regularly we're advised to "talk to an expert," but in my experience all the experts agree that really they have no advice for you (or assure you, as innumerable tax experts on the Web do, that they can file your 1040s and you won't have to worry about penalties).

Miscellaneous Links to other official documents from the IRS

The IRs page on "Report of Foreign Bank and Financial Accounts (FBAR)"

Draft instructions for Form 8938 "Statement of Specified Foreign Financial Assets"
Draft Form 8938

The IRS information bulletin FS-2011-13, "Information for U.S. Citizens or Dual Citizens Residing Outside the U.S."

The Fredericton Dual Citizen US Tax Information blog