The apparent renewed focus of the government on U.S. citizens and LPRs residing overseas is worth considering in the current environment.

I wrote an article that was published back in Jan-Feb 2012 in the International Tax Journal titled Unsettled Future for U.S. Taxpayers Residing Overseas: Mixed Messages from IRS Commissioner vs. Ambassador—Part I

The article explains the contradictory statements of  David Jacobson, then U.S. Ambassador to Canada and then IRS Commissioner Shulman.  See page 33 of the article, which provides as follows:

More troubling and problematic is the mixed
message sent to U.S. citizens residing overseas,
including by David Jacobson, the U.S. Ambassador
to Canada who stated in a recent interview:
“What the IRS is saying here is that if … you don’t
owe taxes to the U.S., and you file your return and
they show you don’t owe taxes, there aren’t going
to be any penalties for having filed late.” Is that
what the IRS is really saying? The short answer is
a resounding “NO”! The IRS spoke a few days
after the Ambassador’s comments when it issued a
statement entitled, Information for U.S. Citizens or
Dual Citizens Residing Outside the U.S. In the IRS
statement, they indicate that taxpayers who do not
owe any U.S. taxes “ … due to the application of
the foreign earned income exclusion or foreign tax
credits) will owe no failure to file or failure to pay
penalties. In addition, no FBAR penalty applies in
the case of a violation that the IRS determines was
due to reasonable cause.” [Emphasis added.]

There are a number of problems USCs and LPRs living overseas face regarding the application of U.S. law and whether they have filed U.S. income tax returns, FBARs or information returns, such as IRS Form 5471, 3520, 8858, etc.  These problems include:

1.  The IRS makes the determination of whether there is “reasonable cause” when no FBARs were previously filed.  The IRS has not attempted to articulate in any real detail, what they view as “reasonable cause.”  This is not a determination by the taxpayer.  Will one know it when they see it?

2.  USCs and LPRs living outside the U.S. can be subject to the FBAR penalties even if no U.S. income tax is owing (e.g., due to the foreign earned income exclusion and/or foreign tax credits).  Each of these individuals have to track the exchange rate applicable in their home country of residence to know if and when the U.S. dollar thresholds in the U.S. law are met.

3. The FAQs 17 and 18 provide solace to USCs and LPRs residing outside the U.S. only if they ” . . . reported, and paid tax on, all their taxable income for the prior years but did not file FBARS . . . ”  Of course, the school teacher in the IRS’s own example in IRS Example 1 and 2  did not have an account that ever reached the equivalent of US$10,000.  If the school teacher in the IRS example did have such an account, even for a day, she would not fall within the “free on base” rule that the IRS will not assess an FBAR penalty.  That “free on base rule” is only applicable when ” . . . The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns. . . ”  In example 2, there is an unreported tax liability of $2,100.  Hence, according to the IRS analysis the school teacher can be subject to a $10,000 FBAR failure to file penalty, even if the income tax is paid of $2,100, if the IRS determines the late FBAR filing was not due to “reasonable cause.”

4.  A published 2012 District Court opinion, McBride, held the taxpayer was liable for FBAR penalties even if the taxpayer had no actual knowledge.  The facts of that taxpayer were very bad in the case of McBride, yet the conclusions of the Court and statements below, give little comfort to USCs and LPRs residing overseas who have not filed FBARs, that the government might assess large FBAR penalties (the 50% willfulness penalty of the highest account balance in the case of McBride):

. . .  The government does not dispute that McBride’s failure to comply with FBAR was the result of his belief that he did not have a reportable financial interest in the foreign accounts. However, because it is irrelevant that McBride “may have believed he was legally justified in withholding such information[,] [t]he only question that remains is whether the law required its disclosure.” Lefcourt, 125 F.3d at 83. Here, the FBAR requirements did require that McBride disclose his interests in the foreign accounts during both the 2000 and the 2001 tax years. As a result, McBride’s failure to do so was willful. . .

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A. Constructive Knowledge of the Reporting Requirement Is Imputed to Taxpayers Who Sign Their Federal Tax Returns.

All persons in the United States are charged with knowledge of the Statutes-at-Large. Jones v. United States, 121 F.3d 1327 (9th Cir. 1997) (citing Bollow v. Federal Reserve Bank, 650 F.2d 1093, 1100 (9th Cir.1981)). It is well established that taxpayers are charged with the knowledge, awareness, and responsibility for their tax returns, signed under penalties of perjury, and submitted to the IRS. Magill v. Comm’r, 70 T.C. 465, 479-80 (1978), aff’d, 651 F.2d 1233 (6th Cir. 1981); Teschner v. Comm’r, T.C. Memo. 1997-498, *17 (1997); accord United States v. Overholt, 307 F.3d 1231, 1245-46 (10th Cir. 2002) (observing that in Bryan v. United States, 524 U.S. 184, 194-95 (1998), the Supreme Court distinguished cases like Cheek v. United States, 498 U.S. 192 (1991) and Ratzlaf v. United States, 510 U.S. 135 (1994) from another context of willfulness on the grounds that the “highly technical statutes” involved in criminal tax prosecutions “carve out an exception to the traditional rule that ignorance of the law is no excuse and require that the defendant have knowledge of the law.”) (internal quotation marks and citations omitted); see also Am. Vending Group, Inc. v. United States, 102 A.F.T.R.2d 6305, *6 (D. Md. 2008) (“Failing to read does not absolve a filer of his or his corporation’s legal obligations. Of course if one does not read the instructions, one does not know of the obligation to file the informational returns.”). . .

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See the blog spot of Jack Townsend –

IRS CI Is Looking at Renunciations of Citizenship Just in Case (3/1/13)

It is reported the IRS CI is interested in the reasons that U.S. citizens renounce their citizenship.  Jaime Arora, IRS Criminal Investigation Division Looking Into U.S. Citizenship Renunciations, 2014 TNT 41-8 (3/3/14).  The article is nonspecific about what the IRS is looking for and the consequences might be if they found something.

Still, there are tax requirements for renouncing citizenship in certain cases.  I won’t go into them now, but link to blogs on the subject here.

I can imagine that mishandling the various forms and representations required for renunciation, including the tax forms and representations, could be a crime under various federal statutes — tax and nontax — and, at last if something was done wrong related to taxes, conceivably the renunciation conduct could refresh statutes of limitations for tax crimes that might have otherwise expired.

Importantly, why someone renounces their U.S. citizenship under the current tax law (IRC Section 877A) is not relevant as to the tax consequences to the individual who renounced.  This is very different from the law that was passed in 1996.  These rules changed in 2004 and yet again in 2008 to create an objective set of taxation rules.  For this reason, it would be very odd for the IRS CI to be investigating (at least recent expatriates) former U.S. citizens to determine why, i.e., the reasons, they renounced U.S. citizenship.

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Will the IRS be assisting the Justice Department to prosecute U.S. citizens who have lived abroad most  (if not all) of their lives?

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The on-going focus of of the government, including the purported “Billions in Hidden Offshore Accounts” by the Permanent Subcommittee on Investigations, begs the questions, where are these billions of assets by U.S. taxpayers?

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Will this be the premiss used by the IRS and Justice Department to try to prosecute U.S. citizens residing overseas?

Law abiding U.S. citizens who have spent most (if not all) of their lives overseas are put in an untenable position vis–à–vis the U.S. federal government regarding U.S. tax and tax filing obligations.

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See what the government has to say

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Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts

The Treasury Inspector General wrote the following in a 2009 report  (of which none of these numbers have seriously been questioned, supported or analyzed) – – titled

A Combination of Legislative Actions and Increased IRS Capability and Capacity Are Required to Reduce the Multi-Billion Dollar U.S. International Tax Gap

Synopsis

The IRS estimated that the entire tax gap for Tax Year 2001 was $345 billion.  However, the IRS has not developed an estimate for the international tax gap.  Non-IRS estimates of the international tax gap range from $40 billion to $123 billion.  While there might be overlap between the IRS tax gap estimate and the international tax gap, it is doubtful that the $345 billion estimate includes the entire international tax gap.

The primary reason for this conclusion is that identifying hidden income within international activity is very difficult and time–consuming.[4]  Furthermore, the IRS did not measure for the international tax gap component in the Individual National Research Project (NRP) estimate for the Tax Year 2001 tax gap.  Therefore, it is unlikely that hidden offshore income is comprehensively included in the IRS tax gap estimates.  In fact, the IRS’s Research, Analysis and Statistics (RAS) organization reasoned that because of cost, staffing, and technical limitations, an NRP type of direct measurement is unfeasible.  However, in an attempt to learn more, the IRS has other initiatives underway.

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The Department of Homeland Security (DHS) uses the TECS  database, which was originally managed and created by the Treasury Department as the  Treasury Enforcement Communications System.  This database allows the U.S. federal government to track the movement of people, funds and various transactions.  It is now being used by the IRS to feed taxpayer data to the TECS as described in the IRS Internal Revenue Manual –

http://www.irs.gov/irm/part9/irm_09-004-002.html

9.4.2.4.1      (08-09-2004) Treasury Enforcement and Communication System

http://www.dhs.gov/xlibrary/assets/privacy/privacy-pia-cbp-tecs-sar-update.pdf