Tax Compliance
Webinar: “New and Improved” June 2014 IRS Offshore Voluntary Disclosure Program – Version 3.0: Including “Streamlined” Rules that are a Game Changer Thursday, July 17, 2014, 12 noon – 1:30 p.m. (PST)
The State Bar of California – Taxation Section
Webinar: “New and Improved” June 2014 IRS Offshore Voluntary Disclosure Program – Version 3.0: Including “Streamlined” Rules that are a Game Changer
Thursday, July 17, 2014, 12 noon – 1:30 p.m. (PST)
Speakers:
• Patrick W. Martin of (Procopio et al San Diego – ), who is the tax team leader of the firm’s tax practice and specializes in international tax matters, with a strong focus on international tax compliance
• Mark E. Matthews of (Caplan & Drysdale in DC – ) focuses his practice on criminal tax enforcement, broad-based civil tax compliance and was Chief of the IRS Criminal Investigation Division, the agency’s investigative and law enforcement arm.
This program offers 1.5 hours participatory MCLE credit, 1.5 legal specialization credit in the area of Taxation Law and .5 hour credit in Legal Ethics. You must register in advance in order to participate.
Just days ago (June 2014), the IRS significantly revamped the “offshore voluntary disclosure program” (“OVDP”) that has existed since 2009. The new terms of the OVDP have now completely changed the “rules of the road” about how and when taxpayers can or should participate in such program. In addition, the so-called “streamlined” process has been changed in virtually all respects.
Learn – when should a taxpayer be considering the 2014 OVDP? When should a taxpayer not participate in the 2014 OVDP? When is an individual eligible? Learn important differences under the 2014 OVDP for those who reside in the U.S. versus U.S. citizens and lawful permanent residents who reside outside the U.S.
Understand the legal ramifications for those who sign certifications under penalties of perjury.
Understand the legal risks for financial, tax and legal advisers.
These changes create numerous legal risks for the unwary and for the financial, tax and legal advisers.
Find out how you can best assist your clients and minimize their legal risks, while simultaneously complying with the labyrinth of rules imposed by the Internal Revenue Service, including modifications to their own terms. This Webinar is appropriate for tax lawyers, non-tax lawyers (such as trusts and estate lawyers and business lawyers), certified public accountants, bankers, trust officers, trustees, enrolled agents and others who have clients who have assets located outside the U.S.
A detailed highlight of the new rules of circular 230 and their application in light of these changes to the OVDP will be discussed, along with other important ethical considerations and practice pointers.
Understand the legal ramifications of U.S. taxpayers who sign certifications under penalties of perjury, specifically including those required by the OVDP. How will United States citizens and lawful permanent residents (“LPR”) who are residing outside the United States view these rules? What are the pitfalls of the revisions in this program? How does the recent jury verdict in the willfulness FBAR 50% penalty case (with 150% penalty found by the jury) in Zwerner affect decisions of taxpayers and their advisers?
This webinar is taught by experienced tax lawyers, all former employees of the IRS, including a former Chief of the IRS Criminal Investigation Division, including experts who specialize in international tax related matters and advising those with worldwide assets; multi-national families and U.S. citizens and LPRs residing outside the U.S.
Extensive written materials will be provided that analyze the law, consider various legal implications of the 2014 OVDP. The course will specifically focus on current trends and developments of the IRS and Tax Division/Justice Department and current civil and criminal cases moving forward.
Plus, understand the basics of FATCA (the Foreign Account Tax Compliance Act) now in effect for 2014 and how this affects this arena of practice and international tax compliance. Specifically understand the role of FATCA under the new IRS modifications to the OVDP and why it is more important than ever.
Finally, some key income tax concepts of residency and international information reporting requirements under Title 26 and Title 31 will be briefly analyzed in the context of the 2014 OVDP.
Moderator: Eric D. Swenson of (Procopio et al San Diego – http://www.procopio.com/attorneys/eric-d-swenson) is a tax attorney with multiple years at Chief Counsel in the IRS and handles complex tax controversy and defense cases against the IRS and State taxing authorities.
Speakers:
• Patrick W. Martin of (Procopio et al San Diego – http://www.procopio.com/attorneys/patrick-w–martin), who is the tax team leader of the firm’s tax practice and specializes in international tax matters, with a strong focus on international tax compliance
• Mark E. Matthews of (Caplan & Drysdale in DC – http://www.capdale.com/mmatthews) focuses his practice on criminal tax enforcement, broad-based civil tax compliance and was Chief of the IRS Criminal Investigation Division, the agency’s investigative and law enforcement arm.
To register, see Webinar: “New and Improved” June 2014 IRS Offshore Voluntary Disclosure Program – Version 3.0 or go to http://www.calbar.org/online-cle and select Taxation or Webinars.
Part II: IRS Form W8-IMY – FATCA Driven – More on the W-9 and W-8 Alphabet Soup with FATCA: IRS Form W8-IMY
Part II: IRS Form W8-IMY – FATCA Driven – More on the W-9 and W-8 Alphabet Soup of FORMs: IRS Form W-8-IMY
FATCA, “Chapter 4”, withholding started the first week of this month, July 1, 2014. Presumably the amount of FATCA withholding will be nominal, if for no other reason, virtually all of the major world economies are countries that have actually signed an IGA or “reached an agreement [FATCA] in substance”.
See the complete and most recent list of countries who have signed FATCA IGAs or “reached an agreement in substance.” See, Russia Joins the FATCA Group – On the Last Day? Complete List of Countries to Date (Very Few Notable Absences)
As explained in previous posts, the U.S. federal tax authority, the Internal Revenue Service (IRS) has been modifying dramatically the tax forms required to be filled out and filed by both individuals, financial institutions around the world (FFI) and by non-financial foreign entities (NFFE) all due to FATCA. See, specifically the post that focused on new form W8-BEN-E. See, FATCA Driven – New IRS Forms W-8BEN versus W-8BEN-E versus W-9 (etc. etc.) for USCs and LPRs Overseas – It’s All About Information and More Information
United States Citizens (USCs) and Lawful Permanent Residents (LPRs) who reside outside the U.S. will need to have a general understanding of how these forms are to be completed. This is particularly important, since they are to be signed under “penalty of perjury” as to their accuracy. There will be a host of institutions that will be requesting USCs and LPRs residing overseas to complete these forms, including their banks, investment and brokerage houses, investment funds, private companies, mutual funds, etc. in their home country of residence or any other country outside the U.S.
What information and how it needs to be provided, depends upon whether the USC or LPR is being asked to sign as an individual. If that is the case see, FATCA Driven – New IRS Forms W-8BEN versus W-8BEN-E versus W-9 (etc. etc.) for USCs and LPRs Overseas – It’s All About Information and More Information
If the account with the financial institution is not an individual account, a W8-BEN-E or W8-IMY will typically be required to be completed by the entity, when the USC or LPR has an ownership interest in the entity (e.g., corporation, partnership or trust). Specifically when a USC or LPR is a “substantial U.S. owner” as defined by the statute and FATCA regulations. In short, a “substantial U.S. owner” is a “U.S. person” (which always includes USCs and sometimes includes LPRs) with more than a 10% interest by vote or value in a foreign corporation, partnership or trust.
There is no 10% ownership threshold for “foreign investment vehicles” (as defined in IRC Sections 1473(2)(B) and 1471(d)(5)(C)) such as investment funds, private equity funds, private companies, etc. where itis engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.
As you can see, this is a very broad definition that does not require any ownership threshold to cause reporting; a .00001% ownership interest in a “foreign investment vehicle” will give rise to a “U.S. owner” and hence subject to FATCA reporting.
This post and follow-up posts focuses on a few key aspects of the Form W-8IMY.
Incorporated into this post are key pages, showing the different categories that a partnership or a trust (or other “flow through” entity) will be required to complete when representing their status to different third parties, including foreign financial institutions.
Normally, the individual USC or LPR will not need to complete the W-8IMY (but certainly may be required if they are the managing partner of a partnership, trustee of a trust, or fall into other categories identified in the law). It will be the trust or partnership itself that will be collecting information about its U.S. owners (e.g., through an IRS Form W-9). The trust or partnership itself, will then be reporting this information to the foreign financial institution that will then report to the IRS (or to their own country who will then report to the IRS if there is an IGA in place).
U.S. Enforcement/Collection of Taxes Overseas against USCs and LPRs – Legal Limitations
Maybe its a natural response for USCs and LPRs living overseas to ask: “What is the chance I will get audited by the IRS?” Sometimes, those individuals who either have less good faith (or are simply ignorant about how U.S. tax law functions) will also ask: “How will the U.S. government ever know of my assets or income in my home country?”
A follow-up question is how does the U.S. federal government enforce tax obligations overseas? This question often comes, of course, from individuals who reside in different countries outside the U.S. and typically have most (if not all) of their assets located in their country of residence.
A USC or LPR residing in Costa Rica, for instance, might have almost all of his business assets in Costa Rica and maybe financial
investment assets in nearby regions such as Panama. Similarly, a Chinese born dual national USC may have companies and business assets in both mainland China and Hong Kong. If neither of these individuals have assets in the U.S., how can the U.S. federal government enforce tax liens, levies and the like against these individuals?
These questions are getting asked more and more now that FATCA has gone into force and financial information around the world is being collected regarding USC accounts in virtually all countries and financial institutions. See, FATCA Driven – New IRS Forms W-8BEN versus W-8BEN-E versus W-9 (etc. etc.) for USCs and LPRs Overseas – It’s All About Information and More Information
An excellent layman’s term summary of FATCA can be located on HSBC’s website here.
This overseas asset and income information will eventually be delivered, pursuant to the FATCA rules, to the U.S. Internal Revenue Service (IRS – revenue authority).
Hence, the collection of information under FATCA will be extensive. This, at least in part, answers the question of: “How will they ever know of my assets or income in my home country?” Admittedly, the complete answer to this question is far more complicated, when one considers the intricacies of FATCA and its regulations and other guidance from the IRS/Treasury.
However, that is a different question, than how that financial and income information will be used by the IRS to (a) make tax assessments, (b) assess and collect foreign bank account report (FBAR) penalties (See, Section 16 of the IRM), and (c) generally enforce and collect such tax assessments and penalties against USCs and LPRs residing outside the U.S.
1. INFORMATION – The collection of asset and financial information under FATCA has a very “long arm” around the world. Indeed, the image of the Uncle Sam octopus published in the June 28, 2014 article in the The Economist entitled Taxing America’s diaspora: FATCA’s flaws captures well the idea of the reach of FATCA.
2. INFORMATION VS COLLECTION – However, enforcing tax assessments and penalties and collecting against assets located outside the U.S. is a very different legal question, without such a “long arm”; simply because the reach and jurisdiction of U.S. law is necessarily limited and regularly in conflict with local laws of different countries.
To say it another way, Uncle Sam can indeed enforce the collection of financial and asset information under FATCA, due to the economic costs and ramifications to financial institutions and their investors if they did not comply with the automatic information exchange. However, Uncle Same cannot simply enforce the collection of U.S. taxes and penalties through the worldwide financial institutional network, the same way it can in the U.S.
The U.S. has broad lien, levy and seizure powers under U.S. tax law. The IRS can simply seize assets from U.S. bank accounts without going to a judge or court for final (or jeopardy) tax assessments provided they comply with various provisions of the law. This is not a typical concept in the law for other creditors (other than the IRS) who must generally first take steps through the courts to get some type of judicial action (e.g., a court order) before simply seizing and taking assets from an individual.
The IRS’s broad lien and levy powers against assets, however, has significant limitations overseas. See the 1998 Treasury Report – Sometimes Old is as Good as New – 1998 Treasury Department Report on Citizens and LPRs, I hav
e worked with IRS Revenue Officers who specialize in international collection matters who argue and assert they can merely exercise this lien and levy power overseas against foreign financial institutions. However, this is where the power of the IRS comes to a screeching halt (or at least a major slowdown); when the collection of overseas assets is at stake.
The IRS is not without remedies to collect foreign assets, but it is not a simple process; if it can be done at all in any particular circumstance.
The IRS has no specific enforcement provisions negotiated in international treaties that will necessarily enable them to enforce and collect U.S. income taxes overseas with foreign government assistance. The cornerstone 9th Circuit case of Her Majesty held in 1979 that the Canadian tax authorities could not enforce a tax judgment against U.S. taxpayers within the U.S. –
The basic facts were these, as reported in the case:
British Columbia then served a “Notice of Intention to Enforce Payment” on the defendants in the United States, and filed a certificate of assessment in the Vancouver Registry of the Supreme Court of British Columbia. This certificate was for $195,929.50 (a penalty and interest were included), and under the laws of British Columbia its filing gave it the same effect as a judgment of the court. British Columbia then instituted the present action in the United States. It was dismissed because the court below concluded that the Oregon courts would follow the “revenue rule.” Stated simply, the revenue rule merely provides that the courts of one jurisdiction do not recognize the revenue laws of another jurisdiction.1
The U.S. 9th Circuit Court went on to say:
Although the Supreme Court has never had occasion to address the question of whether the revenue rule would prevent a foreign country from enforcing its tax judgment in the courts of the United States, the indications are strong that the Court would reach the same result as we reach in the present case. Both the majority and the dissenting opinion in Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 84 S.Ct. 923, 11 L.Ed.2d 804 (1964), discussed the rule in a spirit which indicates a continued recognition of the revenue rule in the international sphere.10
This Majesty case specifically cited a Canadian Supreme Court case (Harden) which also applied the revenue rule in not enforcing a tax judgement in the U.S. courts for taxes against a Canadian resident:
Reciprocity would itself be a sufficient basis for denying British Columbia’s claim. The courts of British Columbia, relying upon the revenue rule, have refused to recognize the judgment of a United States court for taxes. United States v. Harden, 1963 Canada Law Reports 366 (Sup.Ct. of Canada, 1963, Affirming Court of Appeal for British Columbia).12
CONCLUSION: The revenue rule has been with us for centuries and as such has become firmly embedded in the law. There were sound reasons which supported its original adoption, and there remain sound reasons supporting its continued validity. When and if the rule is changed, it is a more proper function of the policy-making branches of our government to make such a change.
As a result of these cases and the Revenue Rule, the U.S. and Canada modified their income tax treaty to (at least in theory) allow for the international enforcement of taxes. The U.S. now has five income treaties with “mutual assistance” provisions: Canada, Sweden, France, Denmark, and the Netherlands (with a clause in the newly negotiated, but yet to go into force, Swiss treaty).
The U.S. tax and international tax world has changed dramatically since 1979 and the 9th Circuit case of Her Majesty particularly with the advent of FATCA. Nevertheless, there are serious legal limitations imposed on t
he IRS in collecting assets for U.S. tax liabilities and penalties owed by USCs and LPRs residing overseas. Indeed, this is surely one of the principle reasons the IRS revised OVDP terms in June 2014 impose a 0% penalty against USCs and LPRs who participate in the so-called “streamlined process”. See, More on the New 2014 “Streamlined” Process for USCs and LPRs Residing Overseas.
The follow-on post will discuss the very limited provisions that have been recently negotiated with these five different countries and explain in more detail the limits on the U.S. federal government on the collection of taxes. It will also discuss the important differences of civil U.S. international tax enforcement/collection versus criminal tax enforcement; which are two very different beasts.
Finally, a dedicated post on the topic will discuss the steps the U.S. federal government is taking through the Department of Homeland Security and a database of information (TECS) to track and monitor people and their assets. The government describes TECS as follows: “The Treasury Enforcement Communications System (TECS) is a database maintained by the Department of Homeland Security (DHS), and it is used extensively by the law enforcement community. It contains information about individuals and businesses suspected of, or involved in, violations of federal law.”
More on “PFICs” and their Complications for USCs and LPRs Living Outside the U.S. -(What if there are No Records?)
More on “PFICs” and their Complications for USCs and LPRs Living Outside the U.S. – -(What if there are No Records?)
The statutory rules of PFICs are set forth in 26 U.S. Code § 1297 – Passive foreign investment company. The U.S. Treasury and IRS also published new regulations in January 2014 on PFICs.
For an overview, see “PFICs” – What is a PFIC – and their Complications for USCs and LPRs Living Outside the U.S.
United States Citizens living overseas, whether or not they are “Accidental Americans”, as well as lawful permanent 
residents (LPRs) living outside the U.S. generally have the burden of proof under U.S. tax law to show they complied with U.S. law. Indeed, when the Internal Revenue Service (IRS – the U.S. revenue authority) makes a tax assessment against an individual, the law generally carries with it a “presumption of correctness” in favor of the IRS.
This presumption of correctness was confirmed by the U.S. Supreme Court and therefore imposes the burden on the taxpayer of proving that the assessment made by the IRS is erroneous. During my career, I have seen plenty of erroneous assessments made by the IRS, and an increasing number of assessments made against taxpayers residing in countries throughout the world, be it France, Australia, Canada, Russia, Germany, Mexico, Thailand, Japan, Hong Kong, etc.
Why is this presumption of correctness relevant, when PFICs are explained and discussed here? The law of PFICs is complex, to the point that very few IRS revenue agents really have any detailed understanding of how PFICs work, when they apply and how taxpayers are to report their investments in PFICs. Very few U.S. tax practitioners understand PFICs.
Accordingly, I regularly see errors made by the IRS in proposed tax assessments, including PFIC calculations. Unfortunately for the individual taxpayer, they must prove the IRS is wrong in its tax assessment.
PFICs create a real burden on individual taxpayers who have shares in a PFIC in different locations around the world, since it is rare that foreign companies, investment funds, mutual funds and the like ever provide any detailed accounting of (a) asset, or (b) income information (per U.S. tax rules) that are required to be reported by PFIC investors who are USCs or LPRs.
Unlike a controlled foreign corporation (CFC), a PFIC has no ownership threshold. If a USC owns just 1,000 shares/units out of 20M issued shares in a foreign mutual fund, the U.S. citizen will nevertheless need to report this 1,000 share/unit interest (even though this is only 0.0005% of the fund) on his or her individual income tax return if the foreign mutual fund meets – the income test or asset test. Virtually all mutual and investments funds will satisfy these tests, since by definition the funds are making investments in other companies or other passive income items, such as bonds, stocks, futures, ETFs, etc.
The income test is met when at least 75% of the income is passive income as defined under the law. The asset test is satisfied when at least 50% of the foreign corporation’s average assets produce such passive income.
The practical problem arises when the individual taxpayer needs information from the fund (or other foreign entity) that reflects information such as –
- the pro-rata share of the “ordinary” earnings (in the example above, just 1,000 share/20M shares – 0.0005% of the fund);
- the pro-rata share of the “net capital gain”;
- the total cash or property distributed;
- the total cash or property “deemed” distributed (which means there was actually no distribution – but the law “deems” there to have been a distribution); and
- many other complex calculations that require basic information to be provided by the PFIC in the first place.
What foreign fund or investment company around the world (located in whatever country – catering to customers commonly in their own country) even tracks or accounts for income and gains for U.S. tax law purposes; i.e. “ordinary” earnings versus “capital gains” – specifically including the netting of “capital gains” and “capital losses” as required by U.S. law? I certainly do not see such accounting records provided in the marketplace of investment funds, hedge funds and companies that cater to persons residing outside the U.S.
Most foreign companies around the world (unless they are controlled and managed by USCs who are aware of these U.S. tax obligations) never maintain such accounting records or the detailed information necessary to even provide it to their USC or LPR investors. Hence, USCs/LPR investors may never be able to accurate make these PFIC calculations.
Also, the ownership of shares/units of the fund might always be changing throughout the year. In other words, even if the “ordinary income” and “net capital gain” is available for a particular fund/PFIC, the total number of outstanding shares/units has to be stable or known for the USC or LPR to calculate their pro-rata share. In the above example, if there are 20M outstanding shares/units at the beginning of the year, but by the end of the year there are 22M outstanding shares/units, how is the USC or LPR investor ever going to be able to calculate their pro-rata share, assuming they have the “ordinary” earnings and “capital gains” amounts for the entire calendar year? Its not simply the “ordinary” earnings and “capital gains” multiplied by 0.0005%.
The only “good news” in this explanation of PFICs, is that there is not an automatic US$10,000 penalty for failure to file their investments in a PFIC on IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
This is a departure from the normal rule of a minimum US$10,000 penalty for failure to file information returns regarding international (i.e., non-U.S. assets and investments). See, USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms.
All of these tax compliance rules begs a very important question for a USC who is considering renouncing their U.S. citizenship. The issue arises if they have had investments in PFICs during the last five years. If the USC has not been complying with IRC Section 1297 regarding PFICs, how can the taxpayer ever certify under penalty of perjury ” . . . that he has met the requirements of this title for the 5 preceding taxable years. . . [for purposes of Section 877(a)(2)(C)]”?
More details about PFICs to come in later posts.
Russia Joins the FATCA Group – On the Last Day? Complete List of Countries to Date (Very Few Notable Absences)
According to The Moscow Times, Putin Signs Last-Minute Law to Satisfy FATCA
With China and Russia as prior major holdouts, the recent news from both countries probably assures the long-term success of FATCA.
There are very few notable “hold-outs” on FATCA IGAs. The following list reflects those countries of note (from my perspective) who have not signed or “reached an agreement in substance”:
Kenya
Nigeria
Egypt
Pakistan
Bahrain
Philippines
Malaysia
Guatemala
Uruguay
El Salvador
Nicaragua
Ecuador
Argentina
Venezuela
Lots of other countries with less commercial and financial ties to the U.S., did not – including – countries such as Kazakhstan, Uzbekistan and Cambodia.
There are currently 90 countries identified by the U.S. Treasury as having an IGA or “reaching an agreement in substance” as follows (note there are fewer signed IGAs than unsigned):
Countries that have signed agreements:
Model 1 IGA
1) Australia (4-28-2014)
2) Belgium (4-23-2014)
3) Canada (2-5-2014)
4) Cayman Islands (11-29-2013)
5) Costa Rica (11-26-2013)
6) Denmark (11-19-2012)
7) Estonia (4-11-2014)
8) Finland (3-5-2014)
9) France (11-14-2013)
10) Germany (5-31-2013)
11) Gibraltar (5-8-2014)
12) Guernsey (12-13-2013)
13) Hungary (2-4-2014)
14) Honduras (3-31-2014)
15) Ireland (1-23-2013)
16) Isle of Man (12-13-2013)
17) Italy (1-10-2014)
18) Jamaica (5-1-2014)
19) Jersey (12-13-2013)
20) Latvia (6-27-2014)
21) Liechtenstein (5-19-2014)
22) Luxembourg (3-28-2014)
23) Malta (12-16-2013)
24) Mauritius (12-27-2013)
25) Mexico (4-9-2014)
26) Netherlands (12-18-2013)
27) New Zealand (6-12-2014)
28) Norway (4-15-2013)
29) South Africa (6-9-2014)
30) Spain (5-14-2013)
31) Slovenia (6-2-2014)
32) United Kingdom (9-12-2012)
Model 2 IGA (signed agreements)
33) Austria (4-29-2014)
34) Bermuda (12-19-2013)
35) Chile (3-5-2014)
36) Japan (6-11-2013)
37) Switzerland (2-14-2013)
And those countries which are deemed to have “reached agreement in substance” –
Model 1 IGA
38) Algeria (6-30-2014)
39) Antigua and Barbuda (6-3-2014)
40) Azerbaijan (5-16-2014)
41) Bahamas (4-17-2014)
42) Barbados (5-27-2014)
43) Belarus (6-6-2014)
44) Brazil (4-2-2014)
45) British Virgin Islands (4-2-2014)
46) Bulgaria (4-23-2014)
47) China (6-26-2014)
48) Colombia (4-23-2014)
49) Croatia (4-2-2014)
50) Curaçao (4-30-2014)
51) Czech Republic (4-2-2014)
52) Cyprus (4-22-2014)
53) Dominica (6-19-2014)
54) Dominican Republic (6-30-2014)
55) Georgia (6-12-201)
56) Greenland (6-29-2014)
57) Grenada (6-16-2014)
58) Guyana (6-24-2014)
59) India (4-11-2014)
60) Indonesia (5-4-2014)
61) Israel (4-28-2014)
62) Kosovo (4-2-2014)
63) Kuwait (5-1-2014)
64) Lithuania (4-2-2014)
65) Panama (5-1-2014)
66) Peru (5-1-2014)
67) Poland (4-2-2014)
68) Portugal (4-2-2014)
69) Qatar (4-2-2014)
70) Romania (4-2-2014)
71) St. Kitts and Nevis (6-4-2014)
72) St. Lucia (6-12-2014)
73) St. Vincent and the Grenadines (6-2-2014)
74) Saudi Arabia (6-24-2014)
75) Seychelles (5-28-2014)
76) Singapore (5-5-2014)
77) Slovak Republic (4-11-2014)
78) South Korea (4-2-2014)
79) Sweden (4-24-2014)
80) Thailand (6-24-2014)
81) Turkey (6-3-2014)
82) Turkmenistan (6-3-2014)
83) Turks and Caicos Islands (5-12-2014)
84) Ukraine (6-26-2014)
85) United Arab Emirates (5-21-2014)
Model 2 IGA
86) Armenia (5-8-2014)
87) Hong Kong (5-9-2014)
88) Moldova (6-30-2014)
89) Paraguay (6-6-2014)
90) Taiwan (6-23-2014)*
FATCA Driven – New IRS Forms W-8BEN versus W-8BEN-E versus W-9 (etc. etc.) for USCs and LPRs Overseas – It’s All About Information and More Information
FATCA Driven – New IRS Forms W-8BEN versus W-8BEN-E versus W-9 (etc. etc.) for USCs and LPRs Overseas- It’s All About Information and More Information
An earlier post explained why U.S. citizens (and some LPRs) 
cannot sign the new IRS Form W-8BEN. See, IRS Releases New IRS Form W8-BEN. * U.S. citizens and LPRs beware of completing such form at the request of a third party.
IRS Forms, W-8, W-9, W-8BEN-E, W-7, W-8IMY, W-4, W-8ECI, W-8EXP are a confusing alphabet soup of IRS forms. They have become more difficult to understand now because of the intricacies of the law of FATCA. See, The Importance of a Certificate of Loss of Nationality (“CLN”) and FATCA – Foreign Account Tax Compliance Act.
In short, these forms are designed to “track taxpayers”; their assets and their accounts. The forms track and identify USCs who are individuals and if they are “substantial owners” (basically 10%) in various foreign entities; explained more below.
U.S. tax lingo means that a “taxpayer identification number” (TIN) is a broad definition and can also include all of the following, which are TINs –
- “Social Security Number” (SSN) in the case of certain individuals (USCs, LPRs and those who have permission to work in the U.S. under a particular visa);
- “Individual Taxpayer Identification Numbers” (ITIN) in the case of other individuals who are not USCs or LPRs and not otherwise eligible for a SSN (another post will explain how ITINs are obtained);
- Employer identification numbers (EINs) for certain entities, such as corporations, partnerships and trusts.
Hence, an SSN, ITIN, EIN are all TINs, depending upon which context they are being used.
My earlier post warns U.S. citizens NOT to sign IRS Form W-8BEN, because such certification would be false. – Importantly, no U.S. citizen can legally sign and certify they are NOT a “U.S. person” under U.S. federal tax law. Hence, they cannot sign and complete IRS Form W-8BEN. –
Individual U.S. citizens should normally be signing IRS Form W-9, or the substitute form provided by the financial institution when asked for their U.S. taxpayer status. Banks and other third parties can have their own 
substitute returns that comply with the regulations. Hence, the form might not look exactly like the official IRS forms reflected here.
The IRS Form W-9 is to request the U.S. taxpayer identification number of a U.S. citizen and LPR (or a TIN for a U.S. company – or other company). The IRS version is reflected herein. See, The Catch 22 of Opening a Bank Account in Your Own Country – for USCs and LPRs.
Why is all of this important, now with FATCA in effect and operational throughout the world?
There is greater focus on information that will be provided to foreign financial institutions (FFIs) around the world as they collect and track data on their account holders.
In the case of USC (and many – if not most LPRs) individuals residing overseas, they will NOT be able to sign an IRS Form W-8, as explained above and in the prior posts – such as IRS Releases New IRS Form W8-BEN. * U.S. citizens and LPRs beware of completing such form at the request of a third party.
However, if a USC (and/or LPR) is a shareholder, partner or other economic owner in a non-U.S. foreign entity (such as a corporation, certain other type of companies, certain “partnership” and “trusts” – which can be known as a non-financial foreign entity – “NFFE”), the entity itself will be required to identify the “substantial U.S. owners” of the NFFE. Sounds complicated? It is very complicated.
See the key provisions of the IRS Form W-8-BEN-E highlighted in this post that reflects some of these multiple categories. This form requires the person completing it to frankly understand the FATCA regulations (some 450+ pages worth – including preamble) and properly categorize the type of entity/taxpayer in some 30+/- different categories. That is why the Form W-8BEN-E is some 8 pages in length.
Worse, for the person signing it; they must certify under penalty of perjury that it is complete and accurate. There will undoubtedly be numerous good faith errors by those who attempt to complete these new forms. Indeed, the new IRS Form W-8IMY has not even been addressed in this post, which is another form that was substantially modified due to the FATCA regulations.
If this summary has not cleared up the confusion for you; don’t worry, you are not alone!
I will try to continue to provided key summary explanations of these rules during the course of the next few months, as persons need to understand how to complete and implement properly these IRS Forms or the substitute forms provided by various FFIs throughout the world; now including China and Hong Kong!
It is during these next few months (prior to 31 December 2014) that this topic will be of great interest as FFIs around the world request this information from their account holders; not just USCs or LPRs. See, HUGE NEWS – China has “Reached an Agreement in Substance” for a FATCA Intergovernmental Agreement (IGA) – its Affect on USCs and LPRs Living in China and Hong Kong
Senator Reed Again Proposes Special “Tax Expatriation” Legislation Adverse to Former Citizens (not LPRs)
This blog has covered a number of posts related to Senator Reed, important to USCs who are considering (or who have already) renounced United States citizenship. See for instance, The 1996 Reed Amendment – The Immigration Law with “No Teeth” and “No Bite”
As previously explained, the 1996 Reed Amendment which is part of the immigration law (Title 8), but not the tax law (Title 26) –
A bit of background on Senator Jack Reed of Rhode Island is worthwhile at this point. Senator Reed has had a long and illustrious public service career in the U.S. government. He has a military background where he studied at West Point, served as an Army Ranger, studied law at Harvard and previously was in the House of Representatives.
Senator Reed tried in 2012 to convince then Department of Homeland Security, Secretary Napolitano to enforce the 1996 Reed Amendment to preclude Facebook co-founder Eduardo Saverin from re-entry to the U.S. after he renounced U.S. citizenship. See portion of the letter in this blog.
Of course, Mr. Saverin would have been obliged to pay any “mark to market” U.S. tax applicable to his assets at the time of expatriation. He could not have escaped taxation under the law as it was written; which is the current law in effect today.
This past week Senator Reed was a sponsor of a new appropriates bill for the Department of Homeland Security; the “2015 Homeland Security” bill that provides for US$47.2B (billion) in appropriates for a range of spending; such as $10.2B for the Coast Guard, $5.5B for Immigration and Customs Enforcement (ICE), $1.6B for the Secret Service, among other spending items.
Senator Reed is identified in his own website as ” . . . A member of the powerful Appropriations Committee, which controls the purse strings of the federal government, Reed has been described by the Boston Globe as “a relentless advocate for his home state.” –
Within Senator Reed’s “2015 Homeland Security” proposed amendments, he apparently introduces a new provision to the immigration law – which is explained in his website as –
- Reed’s provision to help prevent expatriate tax dodgers from reentering the United States calls on DHS to report within 90 days on their efforts to enforce the law that Senator Reed authored to prohibit individuals from reentering the United States if they renounced their citizenship in order to avoid taxes.
This Reed proposal seems very odd, since the motivation of how or why someone renounced their U.S. citizenship or formally abandoned their LPR status, became irrelevant for federal income tax purposes with the 2008 “mark to market” modifications. See, Joint Committee Reports – 2008 Report re: HEROES Act – Mark to Market Regime – New Section 877A (55 pages)
Indeed, the reason or purpose anyone decided to renounce their citizenship, became irrelevant for tax purposes with the 2004 amendments to Title 26. See, more detailed information on this blog in the Government Reports Re – Law.
Senator Reed’s proposal seems even more odd, when one considers that the federal government is already required to publish quarterly the list of USCs who have renounced. See, Will the IRS simply select the list of published former citizens for tax audits?
This begs the question – Why does Senator Reed propose such legislative modifications?
- for political reasons;
- to attract more press;
- to identify those who actually owe taxes – “tax dodgers”; or
- to generally demonize United States citizens living overseas who have decided to shed their USC?
Why does Senator Reed persist on trying to get former USCs barred from re-entering the U.S., if and when they fully comply with the tax provisions; IRC Sections 877, 887A, 2801, et. seq.? See, Reed Asks Homeland Security to Enforce Law on Ex-Citizen Tax
Also, see Senator Reed’s complete 17 May 2012 letter (Reed’s letter to Napolitano) on the subject; which of course was never enforced at the time. It was not enforced by the Department of Homeland Security or the U.S. Justice Department.
Finally, see also, Obtaining a U.S. Visa after Renouncing U.S. Citizenship – The Cloud of the Still Living “Reed Amendment”
Senator Reed’s shadow looms large, at least theoretically, over anyone considering renouncing their United States citizenship.
HUGE NEWS – China has “Reached an Agreement in Substance” for a FATCA Intergovernmental Agreement (IGA) – its Affect on USCs and LPRs Living in China and Hong Kong
HUGE NEWS – China has “Reached an Agreement in Substance” for a FATCA Intergovernmental Agreement (IGA) – its Affect on USCs and LPRs Living in China and Hong Kong
On the absolute eve of the crucial July 1, 2014 FATCA deadline, China has apparently “reached [an] agreement in substance” -i.e., an IGA with the U.S. Treasury Department. 
This has enormous implications, in my view, considering the amount of trade between the two countries and the number of U.S. citizens and LPRs residing in China (not to mention the number of US. companies doing business in China).
There had been much doubt whether China would sign an IGA. See, for instance, China’s Relationship with the Contentious U.S. FATCA. – In my view, had China not agreed to a FATCA IGA, enormous repercussions around the world would have followed – particularly regarding how FATCA would not have been able to be rolled out throughout the major economic countries.
China now joins the other IGA countries “deemed to have been entered into” by a total of some 80+/- countries. See, those countries-jurisdictions that have signed agreements and those who have reached agreements in substance and have consented to being included on [the Treasury] list.
China is now included as of 26 June 2014. Hong Kong had previously entered into a Model 2 IGA in 9 May 2014.
What does this mean for USCs and LPRs living in China and Hong Kong? In short, Chinese and Hong Kong financial institutions (FFIs) and non-financial foreign entities (NFFEs) will need to identify the accounts of USCs and LPRs pursuant to the FATCA rules set forth in the IGA. The reporting extends beyond individuals to companies and trusts which have so-called “substantial U.S. owners”.
Presumably, China will be issuing some type of implementing regulations to provide the details of how these Chinese FFIs and NFFEs will go about collecting this information. See, The Catch 22 of Opening a Bank Account in Your Own Country – for USCs and LPRs, for an overview of how these institutions will be requiring specific information of USC and LPR individuals in their home countries.
Supreme Court’s Decision in Cook vs. Tait and Notification Requirement of Section 7701(a)(50)
The U.S. Supreme Court upheld as Constitutional the concept of citizenship based taxation in 1924 in Cook v. Tait. In that case, the U.S. citizen resided permanently and was domiciled in Mexico City with his Mexican citizen wife.
In those years, the Revenue Act of 1921 imposed a top income tax rate of 8%. The IRS made a demand against Mr. Cook to pay his tax. Mr. Cook paid it and sued for refund of the US$1,193 paid. That amount represents about 
US$16,893 in 2014 inflation adjusted dollars. Neither amounts are significant in current actions taken by the IRS.
As a point of reference, Mr. Zwerner was alleged to owe US$3,630,119 (on an account with a maximum value during the years at issue of apparently no more than US$1.69M) and ultimately paid about US$ 1.75M (more than he even had in his account?) per the Notice of Settlement filed with the Court referenced here:
Even in 1922 dollars when Mr. Cook was living in Mexico City, the payment by Zwerner of about US$ 1.75M in current dollars, would represent about $123,581 in those dollars. See, Why the Zwerner FBAR Case is Probably a Pyrrhic Victory for the Government – for USCs and LPRs Living Outside the U.S. (Part II)
There was no Foreign Account Tax Compliance Act (“FATCA”) in the days of Cook in Mexico City, so it would be interesting to know how and why the audit and tax assessment collection was commenced. This was long before e-mails and internet, and there was a very different system of international travel. Communication and technology in 2014 is quite different from technology nearly 100 years ago when the first transcontinental (not transnational) telephone call was made in 1915 a few years before the tax issue arose in the case of Mr. Cook.
Now to the key point of this post. The Supreme Court in Cook vs. Tait framed the question before the Court as follows:
- The question in the case . . . as expressed by plaintiff [Mr. Cook], whether Congress has power to impose a tax upon income received by a native citizen of the United States who, at the time the income was received, was permanently resident and domiciled in the city of Mexico, the income being from real and personal property located in Mexico.
Can the United States impose worldwide taxation on U.S. citizens who permanently live overseas and who only have income from property or services outside the U.S.? Of course, the Supreme Court, said, that such a citizenship based rule was Constitutional. The rationale of the Court was explained in the opinion as follows, specific to the rights of citizenship:
- . . . the scope and extent of the sovereign power of the United States as a nation and its relations to its citizens and their relation to it.’ And that power in its scope and extent, it was decided, is based on the presumption that government by its very nature benefits the citizen and his property wherever found, and that opposition to it holds on to citizenship while it ‘belittles and destroys its advantages and blessings by denying the possession by government of an essential power required to make citizenship completely beneficial.’ In other words, the principle was declared that the government, by its very nature, benefits the citizen and his property wherever found, and therefore has the power to make the benefit complete. Or, to express it another way, the basis of the power to tax was not and cannot be made dependent upon the situs of the property in all cases, it being in or out of the United States, nor was not and cannot be made dependent upon the domicile of the citizen, that being in or out of the United States, but upon his relation as citizen to the United States and the relation of the latter to him as citizen. [emphasis added]
The Supreme Court emphasizes at several points that it is because of the benefits of citizenship and the rights conferred to the citizen of the United States, that the United States government has the Constitutional power to impose worldwide taxation.
What is the difference, if someone is NOT a U.S. citizen? How can the U.S. federal government impose worldwide taxation on property outside the U..S. when the individual is not a citizen, has no right to even enter the United States and generally has no benefits or protections afforded to a U.S. citizen? Indeed, a recent interpretation of the U.S. government in a Justice Department memo spells out the rights of certain U.S. citizens. See New York Times recent article, Court Releases Large Parts of Memo Approving Killing of American in Yemen Targeting Anwar al-Awlaki Was Legal, Justice Department Said
Back on topic, the rationale in Cook v. Tait did not extend to someone who was not a citizen. For example, the Internal Revenue in the 1920s was of course not attempting to impose taxation on Mr. Cook’s Mexican national wife who lived exclusively in Mexico.
Herein, is a most interesting problematic and possibly (maybe – probably?) unconstitutional aspect of current law under the provisions off IRC Section 7701(a)(5)(if the loss of nationality is retroactive to a date long ago in the past but the tax code/IRS is not recognizing that past date as the expatriation date.
If someone has lost all rights to U.S. citizenship years or decades ago, how can the U.S. federal government continue to impose worldwide income taxation for all of the intervening years?
How can the tax law impose a “Constitutional fiction” that a person continues to be “. . . treated as a United States citizen . . . ” simply because they did not file a paper notification with the U.S. federal government. See, Section 7701(a)(50) was adopted and has a very clear timing rule about when a person “. . . cease[s] to be treated as a United States citizen. . . ” It is not the same as for immigration law purposes. It’s a fiction in the tax law as to when one ““. . . cease[s] to be . . . a United States citizen. . . ”
The statute says ” . . . An individual shall not cease to be treated as a United States citizen before the date on which the individual’s citizenship is treated as relinquished under section 877A (g)(4). . .”
How can the U.S. federal government continue to impose U.S. worldwide income taxation on former U.S. citizens because of the provisions under Section 7701(a)(50) and 877A (g)(4)?
The U.S. Supreme Court in Cook vs. Tait found the U.S. citizenship based taxation system as Constitutional since ” . . . government by its very nature benefits the citizen and his property wherever found . . .” and because of “ . . . his relation as citizen to the United States and the relation of the latter to him as citizen. . . . ” [emphasis added]
A person who is not a citizen, obviously does not receive these benefits from the government as does a United States citizen.
In practice, the only body that can determine whether a law is Constitutional or not, is the U.S. Supreme Court. It’s not likely that this question will reach the Supreme Court any time soon; if ever. Meanwhile, the IRS generally has the duty to enforce the law as currently written.
IRS Sting Operation and Criminal Tax Indictments of Canadian Citizens – Investigations Overseas – Enabling U.S. Taxpayers with Offshore Accounts
The U.S. Department of Justice reported that two Canadian citizens along with a U.S. citizen were indicted for enabling tax evasion with offshore accounts. The press release from three months ago, 24 March 2014, can be reviewed here. Some highlights of the press release are below:
- According to the indictment, . . . Poulin, an attorney at a law firm based in Turks and Caicos, worked and resided in Canada and in the Turks and Caicos. His clientele also included numerous U.S. citizens.
- According to the indictment, Vandyk, St-Cyr and Poulin solicited U.S. citizens to use their services to hide assets from the U.S. government. Vandyk and St-Cyr directed the undercover agents posing as U.S. clients to create offshore foundations with the assistance of Poulin and others because they and the investment firm did not want to appear to deal with U.S. clients. Vandyk and St-Cyr used the offshore entities to move money into the Cayman Islands and used foreign attorneys as intermediaries for such transactions.
- According to the indictment, Poulin established an offshore foundation for the undercover agents posing as U.S. clients and served as a nominal board member in lieu of the clients.
The facts of this case will be interesting to cover, to see how and to what extent the IRS and Justice Department will be focusing on U.S. citizens residing overseas and their reporting (or failure to report) their “foreign” accounts; i.e., their financial accounts in their home countries of residence.
Since the withholding tax provisions under the Foreign Account Tax Compliance Act (“FATCA”) come into effect in a matter of days, it will be interesting to see if the government has more indictments along these lines planned for the summer of 2014.
U.S. citizens who are in the process of renouncing citizenship should be aware of each of the steps required as part of the process; both under U.S. federal tax law and immigration law.