Tax Analyst’s reported some of the key comments made by IRS Attorney Dan Price at the 11th Annual University of San Diego School of Law – Procopio International Tax Institute.  The course panel he discussed was – Course 10: Current Practical Problems for Taxpayers in OVDP and Streamlined.

The article written by Ms. Amanda Athanasiou provided good coverage of comments from IRS Office of Chief Counsel Attorney Dan Price about the streamlined procedure.  See, the complete article that was published October 27, 2015, Confusion Over Offshore Accounts Prompts IRS Response, Worldwide Tax Daily and Tax Notes Today: News Stories.

The common fact pattern is that many U.S. citizens around the world have simply not filed U.S. federal income tax returns.  Many of them were unaware of the requirements and/or they thought in good faith they were not required to file since their income levels were below the “foreign earned income” exclusion amounts.  See a prior post, March 24, 2014, The Foreign Earned Income Exclusion is Only Available If a U.S. Income Tax Return is Filed. 

The streamlined procedure for U.S. citizens residing overseas does not require that they have previously filed U.S. income tax returns.  See, U.S. Taxpayers Residing Outside the United States: The following streamlined procedures are referred to as the Streamlined Foreign Offshore Procedures.  Eligibility for the Streamlined Foreign Offshore Procedures

Incidentally, with a record number of citizenship renunciations reported just a few days ago (more than 1,400 in the latest quarter – Quarterly Publication of Individuals, Who Have Chosen To Expatriate, as Required by Section 6039G, Oct. 27, 2015) this is particularly important to U.S. citizens living all around the world.

One particularly salient quote regarding the streamlined procedure from Mr. Price was, “The IRS is going to presume the taxpayer was non-willful unless facts indicate otherwise.”

One of the important questions that U.S. citizens overseas face is whether their particular facts indicate they would be better off by simply filing initial or amended tax returns.   There are also so-called “qualified amended returns” which will be discussed in another post.

Neither the federal tax law nor the Treasury Regulations provide that a taxpayer has an affirmative statutory duty to file an amended income tax return, as long the original return reflects a good faith effort to comply with the law at the time the tax return was originally filed.  The Treasury Regulations, which are drafted by the IRS, instruct that a taxpayer “should,” within the period of limitation, amend to correct prior errors in a tax return, but not that a taxpayer “must” amend.  See Treas. Reg. § 1.451-1(a).

When a taxpayer fails to file a tax return by the due date, the taxpayer may be subject to failure to file and failure to pay penalties and interest charges.  See IRC Section 6561; IRC Section 6601.  The real problem can be that if a taxpayer fails to file a return voluntarily, the IRS may file a substitute return for the taxpayer instead, including on the basis of information received by third parties.  See IRC Section 6020.  This substitute return may not give the taxpayer credit for deductions and exemptions they are entitled to.  Substitute returns prepared by the IRS are valid for calculating a taxpayer’s income tax deficiencies and penalties for failure to file and failure to pay. See Holloway v. Commissioner,  T.C. Memo. 2012-137; see also Brewer v. U.S., 764 F. Supp. 309 (S.D.N.Y. 1991).

However, at the end of the day, those U.S. citizens residing overseas who were/are not aware of the U.S. federal tax law filing requirements have not committed a “mortal sin” in the vernacular of the Roman Catholic Church.  Indeed, in these circumstances, they have probably only exposed themselves to penalties (late payment, late filing, etc.) which are based upon the amount of tax owing.  Of course, the IRS does sometimes use the stick of international information reporting penalties over the head of taxpayers.  See, excellent summary by the American Citizens Abroad, Delinquent FBAR and Tax Filing Penalties

The question is:  “Streamlined (to be) or not Streamlined, i.e., just file returns (not to be)”?

This is Part II, a follow-on discussion of older U.S. case law and IRS rulings that address how and when individuals are subject to U.S. taxation before and after they assert they are no longer U.S. citizens.

I might point out that I am of the belief that we humans always like to hear the news we want to hear; and/or interpret it in the way we find most beneficial to us.  Who doesn’t like good news versus bad news?  Whether we (laypeople and tax lawyers alike) interpret Section 877A(g)(4) in any particular way; it is of no real consequence when it is the IRS that will enforce the law and ultimately the Department of Justice, Tax Division who will handle any such case interpreting this provision before a U.S. District Court or the Court of Federal Claims.  For those who have not litigated before these Courts and seen how aggressive are the government lawyers in advocating for the government, the following discussion will hopefully be illustrative.

See, Part I: Tax Timing Problems for Former U.S. Citizens is Nothing New – the IRS and the Courts Have Decided Similar Issues in the Past (Pre IRC Section 877A(g)(4)), dated October 16, 2015.

The question is what is the correct date of “relinquishment of citizenship” as defined in the statute; IRC Section 877A(g)(4)?  Many argue the law cannot be applied retroactively?

However, the specific case discussed here, did just that; applied the law retroactively to determine U.S. citizenship status of an individual and corresponding tax obligations.  This was also in a time of a much simpler tax code with (i) no international information reporting requirements (e.g., IRS Forms 8938, 8858, 5471, 8865, 3520, 3520-A, 926, 8621, etc.), (ii) no Title 31 “FBAR” reporting requirements and (iii) no constant drumbeat by the IRS of international taxpayers and enforcement.  See, recent announcement by IRS on Oct. 16, 2015 (one day after tax returns were required to be filed by many) Offshore Compliance Programs Generate $8 Billion; IRS Urges People to Take Advantage of Voluntary Disclosure Programs.  However, for cautionary posts on the IRS OVDP and the deceptive numbers published (e.g., “$8 Billion”), see How is the offshore voluntary disclosure program really working? Not well for USCs and LPRs living overseas posted May 10, 2014 and The 2013 GAO Report  of the IRS Offshore Voluntary Disclosure Program, International Tax Journal, CCH Wolters Kluwer, January-February 2014.   PDF version here.

Of course, the answer to this question helps determine if and when will the individual be subject to the federal tax laws of the U.S. on their worldwide income and global assets.  In the case of Ms. Lucienne D’Hotelle (an interesting 1977 appellate opinion from the firs circuit) she had spent little time in the U.S. and had sent a letter in her native language French to the U.S. Department of State, which stated “I have never considered myself to be a citizen of the United States.”  This is  not unlike many individuals around the world today;  at least as of late – in the era of FATCA, who assert they are not a U.S. citizen because they “relinquish[ed] it by the performance of certain expatriating acts with the required “intent” to give up the US citizenship” and did not notify the U.S. federal government.

The Court nevertheless found Ms. Lucienne D’Hotelle retroactively subject to U.S. income taxation on her non-U.S. source income (up until she received a certificate of loss of nationality from the Department of State); for specific years even when the immigration law provisions of the day said she was no longer a U.S. citizen during that same retroactive period.

There have been many contemporary commentators who argue an individual does not need to (i) have, (ii) do, or (iii) receive any of the following, and yet still should be able to successfully argue they have shed themselves of U.S. citizenship and hence the obligations of U.S. taxation and reporting on their worldwide income and global assets –

(i) receive a U.S. federal government issued document (e.g., a certificate of loss of nationality “CLN” per 877A(g)(4)(C)),

(ii) receive a cancelation of a naturalized citizen’s certificate of naturalization by a U.S. court (per 877A(g)(4)(D)),

(iii) provide a signed statement of voluntary relinquishment from the individual to the U.S. Department of State (per 877A(g)(4)(B)), or

(iv) provide proof of an in person renunciation before a diplomatic or consular officer of the U.S. (per  paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)), in accordance with 877A(g)(4)(C)).

Some older tax cases that interpreted similar concepts are worthy of consideration.  They will certainly be in any brief of the attorneys for the U.S. Department of Justice, Tax Division and/or Chief Counsel lawyers for the IRS in any case where the individual challenges that none of the above items are required in their particular case to avoid U.S. taxation and reporting requirements.

The D’Hotelle case is illustrative of the efforts taken by the Department of Justice, Tax Division in collecting U.S. income tax on a naturalized citizen.  You will notice they did not take a sympathetic approach to her case.   Ms. Lucienne D’Hotelle was born in France in 1909 and died in 1968 in France, yet the U.S. government continued to pursue collection of U.S. income taxation on her foreign source income from the Dominican Republic, France and apparently Puerto Rico even after her death during a period of time when she used a U.S. passport.  Lucienne D’Hotelle de Benitez Rexach, 558 F.2d 37 (1st Cir.1977).  She, not unlike many individuals today, claimed she was not a U.S. citizen – or at least stated “I have never considered myself to be a citizen of the United States.”

Some of the particularly interesting facts relevant to Ms. D’Hotelle, a naturalized citizen, which are relevant to the question of U.S. taxation of citizens, were set forth in the appellate court’s decision as follows:

Lucienne D’Hotelle was born in France in 1909. She became Lucienne D’Hotelle de Benitez Rexach upon her marriage to Felix in San Juan, Puerto Rico in 1928. She was naturalized as a United States citizen on December 7, 1942. The couple spent some time in the Dominican Republic, where Felix engaged in harbor construction projects. Lucienne established a residence in her native France on November 10, 1946 and remained a resident until May 20, 1952. During that time s 404(b) of the Nationality Act of 1940² provided that naturalized citizens who returned to their country of birth and resided there for three years lost their American citizenship. On November 10, 1947, after Lucienne had been in France for one year, the American Embassy in Paris issued her a United States passport valid through November 9, 1949. Soon after its expiration Lucienne applied in Puerto Rico for a renewal. By this time she had resided in France for three years.

                                         * * *

On May 20, 1952, the Vice-Consul there signed a Certificate of Loss of Nationality, citing Lucienne’s continuous residence in France as having automatically divested her of citizenship under s 404(b). Her passport . . . was confiscated, cancelled and never returned to her. The State Department approved the certificate on December 23, 1952. Lucienne made no attempt to regain her American citizenship; neither did she affirmatively renounce it.

                                         * * *

Predictably, the United States eventually sought to tax Lucienne for her half of that income. Whether by accident or design, the government’s efforts began in earnest shortly after the Supreme Court invalidated *40 the successor statute⁴ to s 404(b). In in Schneider v. Rusk, 377 U.S. 163 (1964), the Court held that the distinction drawn by the statute between naturalized and native-born Americans was so discriminatory as to violate due process. In January 1965, about two months after this suit was filed, the State Department notified Lucienne by letter that her expatriation was void under Schneider and that the State Department considered her a citizen. Lucienne replied that she had accepted her denaturalization without protest and had thereafter considered herself not to be an American citizen.

There are other facts that make clear the government was not fond of her husband, the income that he earned and how he managed his and his wife’s assets during and after her death.  The Court also discusses at length the fact that she had used a U.S. passport during the years when she alleges she was not a U.S. citizen.  The Court goes on to analyze her U.S. citizenship, and the following discussions are illustrative of the ultimate tax consequences.

There has been a case floating around since a complaint was filed this summer by Senator Rand Paul (current Presidential candidate) and various other current and former U.S. citizens including a Mr. Kisch who is resident in Toronto, Canada and a Mr. Crawford who lives in Albania; along with other individuals.  Crawford v. United States Dep’t of the Treasury, 2015 U.S. Dist.  The complaint asked for declaratory and injunctive relief.

The District Court granted neither and dismissed the case in favor of the government in a bold fashion upholding FATCA and FBAR/Title 31 reporting and information requirements.   Importantly, the Court concluded by saying ” . . . The FATCA statute, the IGAs, and the FBAR requirements encourage compliance with tax laws, combat tax evasion, and deter the use of foreign accounts to engage in criminal activity. A preliminary injunction would harm these efforts and intrude upon the province of Congress and the President to determine how best to achieve these policy goals.”

See a prior post regarding how FATCA affects United States citizens (USCs) and lawful permanent residents (LPRs) residing outside the U.S.; as was the case of many of the complainants in the case, Part 1- Unintended Consequences of FATCA – for USCs and LPRs Living Outside the U.S., posted August 13, 2014.

Also, the tax publication/resource, Tax Analysts summarized the original complaint (which can be read in its entirety here) as follows:

           The FATCA suit makes the following claims:

• the IGAs are unconstitutional sole executive agreements because they exceed the scope of the president’s independent constitutional powers, and because they override FATCA;
• the heightened reporting requirements for foreign financial accounts deny U.S. citizens living abroad the equal protection of the laws;
• the FATCA FFI penalty, passthrough penalty, and willfulness penalty are all unconstitutional under the excessive fines clause;
• FATCA’s information reporting requirements are unconstitutional under the Fourth Amendment; and
• the IGAs’ information reporting requirements are also unconstitutional under the Fourth Amendment.

See, complete Tax Note’s article of July 15, 2015:  Sen. Paul Files Lawsuit Challenging FATCA, by William R. Davis and Andrew Velarde.

Not unsurprisingly, the District Court ruled in favor of the government and dismissed the majority of the claims by a finding that the parties lacked standing to bring the suit and that ” . . . The FATCA statute, the IGAs, and the FBAR requirements encourage compliance with tax laws . . .”

Some highlights of the Court’s opinion [with my emphasis added] are set out below:

* * *

1. Background

A. FATCA Statute and Regulations

Congress passed the Foreign Accounts Tax Compliance Act (FATCA) in 2010 to improve compliance with tax laws by U.S. taxpayers holding foreign accounts. FATCA accomplishes this through two forms of reporting: (1) by foreign financial institutions (FFIs) about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest, 26 U.S.C. § 1471; and, (2) by U.S. taxpayers about their interests in certain foreign financial accounts and offshore assets. 26 U.S.C. § 6038D.

1. FATCA

President Obama signed FATCA into law on March 18, 2010. Senator Carl Levin, a co-sponsor of the FATCA legislation, declared that “offshore tax abuses [targeted by FATCA] cost the federal treasury an estimated $100 billion in lost tax revenues annually” 156 Cong. Rec. 5 S1745-01 (2010). FATCA became law as the IRS began its Offshore Voluntary Disclosure Program (OVDP), which since 2009 has allowed U.S. taxpayers with undisclosed overseas assets to disclose them and pay reduced penalties. By 2014, the OVDP collected $6.5 billion through voluntary disclosures from 45,000 participants. “IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance,” http://www.irs.gov/uac/Newsroom/IRS-Makes-Changes-to-Offshore-Programs;-Revisions-Ease-Burden-and-Help-More-Taxpayers-Come-into-Compliance (last visited Sept. 15, 2015). The success of the voluntary program has likely been enhanced by the existence of FATCA.

* * *

C. Report of Foreign Bank and Financial Account

The third body of law at issue in this case pertains to the Report of Foreign Bank and Financial Account (FBAR) requirements.  U.S. persons who hold a financial account in a foreign country that exceeds $10,000 in aggregate value must file an FBAR with the Treasury Department reporting the account. See 31 U.S.C. § 5314; 31 C.F.R. § 1010.350; 31 C.F.R. § 1010.306(c). The current FBAR form is FinCEN Form 114. The form has been due by June 30 of each year regarding accounts held during the previous calendar year. § 1010.306(c). Beginning with the 2016 tax year, the due date of the form will be April 15. Pub. L. No. 114-41, § 2006(b)(11). A person who fails to file a required FBAR may be assessed a civil monetary penalty. 31 U.S.C. § 5321(a)(5)(A). The amount of the penalty is capped at $10,000 unless the failure was willful. See 5321(a)(5)(B)(i), (C). A willful failure to file increases the maximum penalty to $100,000 or half the value in the account at the time of the violation, whichever is greater. § 5321(a)(5)(C). In either case, whether to impose the penalty and the amount of the penalty are committed to the Secretary’s discretion. See § 5321(a)(5)(A) (“The Secretary of the Treasury may impose a civil money penalty[.]”) & § 5321(a)(5)(B) (“[T]he amount of any civil penalty . . . shall not exceed” the statutory ceiling). Plaintiffs seek to enjoin enforcement of the willful FBAR penalty under § 5321(a)(5). Prayer for Relief, part Q. They also ask for an injunction against “the FBAR account-balance reporting requirement” of FinCen Form 114. Prayer for Relief, part W.

      The Government asserts that the information in the FBAR assists law enforcement and the IRS in identifying unreported taxable income of U.S. taxpayers that is held in foreign accounts as  well as investigating money laundering and terrorism.

* * *

     Mark Crawford decries his bank’s policy against taking U.S. citizens as clients and claims the denial of his application for a brokerage account may have “impacted Mark financially,” ¶ 21, any such harm is not fairly traceable to an action by Defendants, which are not responsible for decisions that foreign banks make about whom to accept as clients. Crawford cannot establish standing indirectly when third parties are the causes of his alleged injuries. See Shearson, 725 F.3d at 592. Moreover, his discomfort with complying with the disclosures required by FATCA, see ¶23, does not establish the concrete, particularized harm that confers standing to sue. See, e.g., Lujan, 504 U.S. at 561 (requiring “concrete and particularized” and “actual or imminent” injury). Even if Crawford fears “unconstitutionally excessive fines imposed by 31 U.S.C. § 5321 if he willfully fails to file an FBAR,” ¶ 24, there is no allegation that he failed to file any FBAR that may have been required, much less that the Government has assessed an “excessive” FBAR penalty against him. Any harm that may come his way from imagined future events is speculative and cannot form the foundation for his lawsuit.

* * *

    None of the allegations states that Kuettel is presently being harmed by FATCA or the Swiss IGA, and neither FATCA nor the IGA apply to him as a non-U.S. citizen. See ¶¶ 51-58.  His assertion of past harm because he was “mostly unsuccessful” in refinancing his mortgage due to FATCA does not convey standing. If that was a harm, it was due to actions of third-party foreign banks not those of Defendants. Regardless, having now renounced his American citizenship and obtained refinancing on terms he found acceptable, any past harm is not redressable here. See Adarand Constructors, Inc. v. Pena, 515 U.S. 200, 210-11 (1995) (“[T]he fact of past injury . . . does nothing to establish a real and immediate threat that he would again suffer similar injury in the future.” (quotation omitted)). This leaves Kuettel’s claims concerning the FBAR requirement, in Counts 3 and 6, for which the Government concedes Kuettel has standing. Response, ECF 16, at 15, PAGEID 216.

* * *

    Donna-Lane Nelson is a citizen of Switzerland who has also renounced her U.S. citizenship. ¶ 59. She alleges that her Swiss bank “notified her that she would not be able to open a new account if she ever closed her existing one because she was an American. Fearing that she would eventually not be able to bank in the country where she lived, she decided to relinquish her U.S. citizenship.” ¶ 65. After she renounced, a Swiss bank “offered investment opportunities that were not available to her as an American.” Id. She “resents having to provide” “explanations” to Swiss banks that have requested information on her past U.S. citizenship and payments to her daughter, who lives in the United States, and she sees “threats implied by these requests which appear to be prompted by FATCA.” ¶ 68. Like other Plaintiffs, Nelson does not want to disclose financial information to the Government, and she fears willful FBAR penalties, even though no such penalty has been imposed or threatened against her. ¶¶ 69, 70. Unlike the preceding Plaintiffs, however, she adds that she fears the 30% withholding tax may be imposed against her “if her business partner,” who is now her husband, and with whom she has joint accounts, “opts to become a recalcitrant account holder.” ¶

* * *

L. Marc Zell states that he is a practicing attorney and a citizen of both the United States and Israel who lives in Israel. He alleges that: (1) he and his firm have been required by Israeli banking institutions to complete IRS withholding forms for individuals whose funds his firm holds in trust, regardless of whether the forms are legally required, causing certain clients to leave his firm, ¶¶ 79 & 81; (2) Israeli banks have required his firm to close accounts, refused to open others, and requested conduct contrary to banking regulations, ¶¶ 79-80; and, (3) the compelled disclosure of his fiduciary relationship with clients impinges on the attorney-client relationship, ¶ 82. On request of clients, who claim their rights are violated by FATCA, Zell “has decided not to comply with the FATCA disclosure requirements whenever that alternative exists.” ¶ 83. He fears that the FATCA 30% withholding tax on pass-through payments to recalcitrant account holders could be imposed due to his refusal to provide identifying information about a client to an Israeli bank. ¶ He also has refused to provide information to his own bank and “fears that he will be classified as a recalcitrant account holder,” ¶ 85. Like the other Plaintiffs, he does not want his financial information disclosed, ¶ 86, and fears an FBAR penalty if the IRS determines that he willfully failed to file an FBAR, ¶ 87.

     The majority of Zell’s allegations concern conduct of Israeli banks and his belief that the actions have been unfair to him or his clients. But conduct of third parties (even if related to the banks’ compliance with FATCA) does not confer standing to bring suit against Defendants. See, e.g., Ammex Inc. v. United States, 367 F.3d 530, 533 (6th Cir. 2004). Nor may Zell seek redress on behalf of third parties who have allegedly suffered harm, including unidentified clients. See Warth v. Seldin, 422 U.S. 490, 499 (1975). The third parties who have allegedly suffered harm are not plaintiffs, thus, alleged harm to them does not provide a basis for Zell to maintain this suit. The contention that disclosure of the identity of clients for whom Zell holds funds in trust violates the attorney-client privilege is also without merit. He gives no example of harm that has occurred or how he was harmed by disclosure of clients’ identities. He cannot raise the attorney-client privilege on his clients’ behalf, nor is the fact of representation privileged. See In re Special Sept. 1978 Grand Jury (II), 640 F.2d 49, 62 (7th Cir. 1980) (“[A]ttorney-client privilege belongs to the client alone[.]”); United States v. Robinson, 121 F.3d 971, 976 (5th Cir. 1997) (“The fact of representation . . . is generally not within the privilege.”). It is the fiduciary relationship, not the attorney-client relationship, that is the basis for the reporting requirement.

* * *

   “We begin, of course, with the presumption that the challenged statute”—FATCA—“is  valid. Its wisdom is not the concern of the courts; if a challenged action does not violate the Constitution, it must be sustained[.]” INS v. Chadha, 426 U.S. 919, 944 (1983); see also National Federation of Independent Business v. Sebelius 132 S. Ct. 2566, 2594 (2012) (“‘[E]very reasonable construction must be resorted to, in order to save a statute from unconstitutionality.’” (quoting Hooper v. California, 155 U.S. 648, 657 (1895))).

* * *

Plaintiffs decry that U.S. citizens living in foreign countries are in this manner treated differently than U.S. citizens living in the United States. According to Plaintiffs, the federal government has no legitimate interest in knowing the amount of any income, gain, loss, deduction, or credit recognized on a foreign account, whether a foreign account was opened or closed during the year, or the balance of a foreign account.

       Plaintiffs contend that the “heightened reporting requirements” imposed by FATCA, the FBAR information-reporting requirements, and the Canadian, Swiss, Czech, and Israeli IGAs, violate the Fifth Amendment rights of “U.S. citizens living in a foreign country” and should be enjoined. See Complaint ¶¶ 124-130

* * *

Plaintiffs’ equal protection claims fail because the statutes, regulations, and executive agreements that they challenge simply do not make the classification they assert. None of the challenged provisions single out U.S. citizens living abroad. Instead, all Americans with specified foreign bank accounts or assets are subject to reporting requirements, no matter where they happen to live. The provisions Plaintiffs contend discriminate against “U.S. citizens living abroad” actually apply to all U.S. taxpayers, no matter their residence.

* * *

The distinction that the regulations do make is rationally related to a legitimate government interest. The U.S. tax system is based in large part on voluntary compliance: taxpayers are expected to disclose their sources of income annually on their federal tax returns. The information reporting required by FATCA is intended to address the use of offshore accounts to facilitate tax evasion, and to strengthen the integrity of the voluntary compliance system by placing U.S. taxpayers that have access to offshore investment opportunities in an equal position with U.S. taxpayers that invest within the United States. Third party information reporting is an important tool used by the IRS to close the tax gap between taxes due and taxes paid. The knowledge that financial institutions will also be disclosing information about an account encourages individuals to properly disclose their income on their tax returns. See Leandra Lederman, Statutory Speed Bumps: The Roles Third Parties Play in Tax Compliance, 60 STAN. L. REV. 695, 711 (2007).

       Unlike most countries, U.S. taxpayers are subject to tax on their worldwide income, and their  investments have become increasingly global in scope. Absent the FATCA reporting by FFIs, some U.S. taxpayers may attempt to evade U.S. tax by hiding money in offshore accounts where, prior to FATCA, they were not subject to automatic reporting to the IRS by FFIs. The information required to be reported, including payments made or credited to the account and the balance or value of the account is to assist the IRS in determining previously unreported income and the value of such information is based on experience from the DOJ prosecution of offshore tax evasion. See Senate Permanent Subcommittee on Investigations bipartisan report on “Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts,” February 26, 2014; see also Cal. Bankers Ass’n v. Shultz, 416 U.S. 21, 29 (1974) (“when law enforcement personnel are confronted with the secret foreign bank account or the secret foreign financial institution they are placed in an impossible situation…they must subject themselves to time consuming and often times fruitless foreign legal process.”).

The FBAR reporting requirements, likewise, have a rational basis. As the Supreme Court noted in California Bankers, when Congress enacted the Bank Secrecy Act (which provides the statutory basis for the FBAR), it “recognized that the use of financial institutions, both domestic and foreign, in furtherance of activities designed to evade the regulatory mechanism of the United States, had markedly increased.” Id. at 38. The Government has a legitimate interest in collecting information about foreign accounts, including account balances held by U.S. citizens, for the same reason that it requires reporting of information on U.S.-based accounts. The information assists law enforcement and the IRS, among other things, in identifying unreported taxable income of U.S. taxpayers that is held in foreign accounts. Without FBAR reporting, the Government’s efforts to track financial crime and tax evasion would be hampered.

* * *

In Count Six, Plaintiffs contend that the FBAR “Willfullness Penalty” is unconstitutional under the Excessive Fines Clause. Plaintiffs decry that 26 U.S.C. § 5321 imposes a penalty of up to $100,000 or 50% of the balance of the account at the time of the violation, whichever is greater, for failures to file an FBAR as required by 26 U.S.C. § 5314 (the FBAR “Willfulness Penalty”). 31 U.S.C. § 5321(b)(5)(C)(i). 31

Plaintiffs allege the Willfulness Penalty is designed to punish and is therefore subject to the Excessive Fines Clause. Plaintiffs further allege the Willfulness Penalty is grossly disproportionate to the gravity of the offense.

Plaintiffs’ Eighth Amendment claims, however, are not ripe for adjudication because no withholding or FBAR penalty has been imposed against any Plaintiff . . .

* * *

IV. Conclusion

Plaintiffs have failed to establish that they are entitled to a preliminary injunction . . .  The FATCA statute, the IGAs, and the FBAR requirements encourage compliance with tax laws, combat tax evasion,37 and deter the use of foreign accounts to engage in criminal activity. A preliminary injunction would harm these efforts and intrude upon the province of Congress and the President to determine how best to achieve these policy goals. Thus, Plaintiffs’ Motion for Preliminary Injunction, ECF 8, is DENIED.

DONE and ORDERED in Dayton, Ohio, this Tuesday, September 29, 2015.

* * *

Crawford v. U.S. Department of Treasury, 15-cv-00250, U.S. District Court, Southern District of Ohio (Dayton).

For those U.S. citizens and lawful permanent residents residing outside the U.S. who expected the Courts to be sympathetic to their legal arguments somehow invalidating  Chapter 4/FATCA and the FBAR filing requirements under Title 31, they will surely be disappointed by the result.

The IRS again this year reminded U.S. citizens residing overseas of their tax return filing obligations. 

In the IRS announcement, IR-2015-70, April 10, 2015, titled IRS Reminds Those with Foreign Assets of U.S. Tax Obligations, the federal agency charged with enforcement of U.S. federal tax and financial account reporting laws, provides in part as follows:

* * *

Most People Abroad Need to File

A filing requirement generally applies even if a taxpayer qualifies for tax benefits, such as the foreign earned income exclusion or the foreign tax credit , that substantially reduce or eliminate their U.S. tax liability. These tax benefits are not automatic and are only available if an eligible taxpayer files a U.S. income tax return.

The filing deadline is Monday, June 15, 2015, for U.S. citizens and resident aliens whose tax home and abode are outside the United States and Puerto Rico, and for those serving in the military outside the U.S. and Puerto Rico, on the regular due date of their tax return. To use this automatic two-month extension, taxpayers must attach a statement to their return explaining which of these two situations applies. See U.S. Citizens and Resident Aliens Abroad for details.

. . .

Prior posts have discussed related filing issues, including the following:

• IRS Beats the Drums – Re: Foreign Assets, Just Days Before April 15 (Posted on April 12, 2014)

• USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms(Posted on March 17, 2014)

• Nuances of FBAR – Foreign Bank Account Report Filings – for USCs and LPRs living outside the U.S.

The IRS is in charge of U.S. federal tax administration.  It’s mission statement is set out below and is very different from the mission of the U.S. Department of State:

The IRS Mission

Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

This mission statement describes our role and the public’s expectation about how we should perform that role.

• In the United States, the Congress passes tax laws and requires taxpayers to comply.
• The taxpayer’s role is to understand and meet his or her tax obligations.
• The IRS role is to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share.

The U.S. Department of State is in charge of something very different from taxes and tax policy.  Below is its Mission Statement –

Department Mission Statement

The Department’s mission is to shape and sustain a peaceful, prosperous, just, and democratic world and foster conditions for stability and progress for the benefit of the American people and people everywhere. This mission is shared with the USAID, ensuring we have a common path forward in partnership as we invest in the shared security and prosperity that will ultimately better prepare us for the challenges of tomorrow.
          –From the FY 2014 Agency Financial Report,
         released November 2014

In my career of more than 25 years as a tax professional, working in the international tax area, I have never before seen communications sent by the U.S. Department of State, directly discussing U.S. federal tax obligations.

However, there have been many changes in the last few years in how aggressive the IRS (and Tax Division, Department of Justice) has become in enforcing U.S. tax laws overseas.   See, Should IRS use Department of Homeland Security to Track Taxpayers Overseas Re: Civil (not Criminal) Tax Matters? The IRS works with Department of Homeland Security with TECs Database to Track Movement of Taxpayers

This seems to be part of a bigger trend of the IRS to use other governmental agencies and their resources in identifying and locating U.S. taxpayers and their assets overseas.

One recent development is the communication sent by the U.S. Department of State via e-mail to U.S. citizens residing overseas.  The following is the complete text of the tax compliance communication sent by the U.S. Department of State, which ends with a reference:  “I Haven’t Filed All My Tax Returns, What Can I Do?.”  It then references the IRS offshore programs (which includes the OVDP, which in my view, should be reserved for only those U.S. taxpayers who have criminal tax liability – see,  How Congressional Hearings (Particularly In the Senate) Drive IRS and Justice Department Behavior):

Dear U.S. citizens,

The Internal Revenue Service (IRS) has provided the following guidance for U.S. citizens abroad preparing for the 2015 tax filing season. This IRS guidance is posted under Federal Benefits and Obligations on travel.state.gov.    U.S. embassies and consulates cannot mail tax returns on behalf of U.S. taxpayers living abroad.

1.               Who Must File?

All U.S. citizens and resident aliens must file a U.S. individual income tax return, even if they permanently live outside the United States and may not owe any tax because of income exclusion or tax credit.

2.               When is the 2014 Federal Tax Return Due?

Due date for Form 1040: April 15, 2015

Extensions:

• An automatic extension to June 15, 2015, is granted for taxpayers living outside the United States and Puerto Rico. No form is required; write “Taxpayer Resident Abroad” at the top of your tax return.
• Caution: This extension applies only for filing your tax return, not for payment. If you owe any taxes, you’re required to pay by April 15, 2015. Interest and penalties will generally be applied if payment is made after this date.
• To request an additional extension to October 15, 2015, use Form 4868.
• Caution: This extension applies only for filing your tax return, not for payment. If you owe any taxes, you’re required to pay by April 15, 2015. Interest and penalties will generally be applied if payment make after this date.
• Other extensions may be available on IRS.gov.

3.               Can I Mail My Return and Payment?

You can mail your tax return and payment using the postal service or approved private delivery services. A list of approved delivery services is available on IRS.gov. If you mail a return from outside the United States, the date of filing is the postmark date. However, if you mail a payment, separately or with your return, your payment is not considered received until the date of actual receipt.

4.               Can I Electronically File My Return?

You can prepare and e-file your income tax return, in many cases for free. Participating software companies make their products available through the IRS. E-File options are listed on IRS.gov.

5.               What Forms May I Need?

• 1040, U.S Individual Income Tax Return
• Instructions to Form 1040
• 1116, Foreign Tax Credit
• 2013 Instructions to Form 1116 – 2014 instructions will be available soon, please check on http://www.irs.gov
• 2350, Application for Extension of Time to File U.S. Income Tax Return (for U.S. citizens and residents abroad)
• 2350 in Spanish
• 2555, Foreign Earned Income Exclusion
• Instructions to Form 2555
• 2555-EZ, Foreign Earned Income Exclusion
• Instructions to Form 2555-EZ
• 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
• 4868 in Spanish
• 8802, Application for United States Residency Certificate
• Instructions to Form 8802
• 8938, Statement of Specified Foreign Financial Assets
• Instructions to Form 8938
• 14653, Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures

6.               How Do I Pay My Taxes?

You must pay your taxes in U.S. dollars.

• Direct pay. You can pay online with a direct transfer from your U.S. bank account using Direct Pay, the Electronic Federal Tax Payment System, or by a U.S. debit or credit card. You can also pay by phone using the Electronic Federal Tax Payment System or by a U.S. debit or credit card.
• Foreign wire transfers. If you have a U.S. bank account, you can use the Electronic Federal Tax Payment System. If you do not have a U.S. bank account, ask whether your financial institution has a U.S. affiliate that can help you make same-day wire transfers.
• Foreign electronic payments. International taxpayers who do not have a U.S. bank account may transfer funds from their foreign bank account directly to the IRS for payment of their tax liabilities.

7.               Other Reporting?

You also may have to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), by June 30, 2015.

8.               Does the IRS Provide Help in Other Languages?

The IRS provides tax information in Chinese, Korean, Russian, Spanish, and Vietnamese. Go to http://www.irs.gov and use the drop down box under “Languages” on the upper right corner to select your language.

9.               Where Can I Get Help?

Contact the International Taxpayer Service Call Center by phone or fax. The International Call Center is open Monday through Friday, from 6:00 a.m. to 11:00 p.m. (Eastern Time).

Tel: 267-941-1000 (not toll-free)

Fax: 267-941-1055

You may also contact the IRS office in London, Paris, or Frankfurt. For addresses and telephone numbers, contact my local office internationally.

10.            I Received a Notice from the IRS, What Do I Do?

If you receive a notice from the IRS and need to contact the IRS, call the number listed on the notice or the International Taxpayer Service Call Center (see above).

11.            Where Can I Get More Information?

For information on the IRS website about international taxpayers, see this page.

For general information about international taxpayers, see Publication 54, “Taxation of U.S. Citizens and Residents Abroad.”

For information on the Affordable Care Act and taxpayers outside the United States, see Publication 5187, “Health Care Law.”

12.            I Haven’t Filed All My Tax Returns, What Can I Do?

If you have not filed all the returns required of you and want to catch up on your filing obligations, see this announcement: IRS makes changes to offshore-programs.

The IRS announced a few days ago that it will close various “civil-side enforcement” overseas offices.

The IRS Statement is set out in part below:

The IRS is planning to close civil-side enforcement offices in Frankfurt, London and Paris this budget year. This is in addition to the closure of the Beijing office earlier this fiscal year. After budget reductions over the last 4 consecutive years, the IRS is forced to make tough choices during this period of fiscal austerity and these closures have relatively little impact on taxpayers and treaty partners. Considering our global mission, technological advances, and budgetary constraints, the Internal Revenue Service is realigning many functions and
positions from foreign-based to US-based.

. . .

IRS remains committed, however, to servicing our expatriate community and meeting our international obligations. We believe these services can be provided by other methods.

IRS will also continue to interact and collaborate with foreign tax authorities directly and through participation in many international forums and organizations, and through bilateral or group projects. This collaboration remains essential in
meeting the challenges of tax administration in a global economy.

This announcement comes on the heals of further comments in December from senior Tax Division/Department of Justice attorneys that offshore tax evasion remains among the highest priority areas for criminal enforcement in 2015.

The closing of IRS offices in important world centers that serve “normal”  international taxpayers, while at the same time another part of the government (Department of Justice) continues to beat the “international tax evasion” drum, continues to send a bit of a mixed message.

In an article I wrote and 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, I quoted then Commissioner Shulman from December 15, 2011, and his prepared remarks to the IRS/GWU 24th Annual Institute on Current Issues in International Taxation:

Does the IRS Assume U.S. Citizens Having Assets Outside the U.S. are Tax Cheats?

This rhetorical question is asked for a simple reason.  In IRS training materials, which are part of the basic core training provided to IRS agents investigating individuals with assets outside the U.S. and international matters and transactions, the IRS makes the following bold statement:

“Most U.S. taxpayers using an offshore entity or structure of entities to hold foreign accounts are simply hiding the accounts from the Internal Revenue Service and other creditors . . . “

A slide from these IRS training materials has this statement along with tax evasion activities that IRS agents are to be on the look out.  Certainly, the identification of illegitimate tax evasion activities is appropriate for tax authorities, but such a bold statement ignores the larger reality of the international business world.

Unfortunately, such a bold statement by the IRS does not reflect the reality of millions of U.S. citizens and lawful permanent residents residing outside the U.S.; or indeed maybe millions more who live in the U.S. and have offshore business and investment activities.

For additional background of the estimated millions of USCs residing outside the U.S., see an earlier post:  Key Take Aways from Senate Investigations re: Foreign Banks and “Offshore Tax Evasion”: U.S. Citizens Residing Overseas have Become a Focus of the Government.

The world is a very global and international marketplace with international commercial activities undertaken throughout at a scale that rivals the volume of international business just a few years ago.  The IRS seems to ignore this important consideration, which is supported by the Department of Commerce – Bureau of Economic Analysis, in their reporting of international export transactions in goods and services.  According to these statistics, the amount of exported services has more than doubled from the year 2004 ($336 billion in services) to 2013 ($682 billion) and total exports for 2013 exceeded $3 trillion.

According to the federal government itself in reports prepared by the Department of Commerce – Bureau of Economic Analysis, these international transactions continue to grow robustly in the year 2014.

Therefore, a more balanced understanding and view of how, when and where international business is conducted by U.S. citizens around the world should help IRS agents when they conduct tax audits and not assume – erroneously that – “Most U.S. taxpayers using an offshore entity or structure of entities to hold foreign accounts are simply hiding the accounts from the Internal Revenue Service and other creditors . .”

U.S. citizens who have spent most all of their lives outside the U.S. are often times shocked to learn about the scope of the U.S. citizenship based taxation system.  In recent years, due to the aggressive pursuit of the IRS and Tax Division of the Department of Justice, there has become a keen focus on assets and accounts located outside the U.S.

Most recently in August of this year, the IRS has articulated its position for U.S. citizens and lawful permanent residents residing outside the U.S. in a document titled – “New Filing Compliance Procedures for Non-Resident U.S. Taxpayers”

For a brief chronology of the actions taken by the IRS and DOJ and the U.S. Congress in the offshore world during the last few years see, How Congressional Hearings (Particularly In the Senate) Drive IRS and Justice Department Behavior

See, also IRS Audit Techniques – Expatriation, How the IRS Can file a “Substitute Return” for those USCs and LPRs Residing Overseas

The IRS has had for years a specific program for “non-filers”; i.e., those persons who do not file U.S. income tax returns.  See, How the IRS Can file a “Substitute Return” for those USCs and LPRs Residing Overseas

The program is detailed in the Internal Revenue Manual, set out below.  A follow-up post will discuss some uniquely complex issues affecting U.S. citizens and lawful permanent residents who reside outside the U.S.

Read the Q&A format here.

The U.S. federal government has extensive “legal tools” at their disposal to help enforce the U.S. tax law overseas.  There are limits, both in practice and legally, of how they can effectively use those legal tools against USCs and LPRs residing outside the U.S.  See, U.S. Enforcement/Collection of Taxes Overseas against USCs and LPRs – Legal Limitations

Although U.S. citizenship taxation has been the law in the U.S. since the Civil War, it has been a “de facto” residency based taxation system for the last 100 years, since the U.S. government did not have the means to collect information to identify assets, income and USC and LPR taxpayers outside the U.S.  Plus, based upon my experience, few USCs who lived almost all of their lives outside the U.S. had any idea of their obligation to file U.S. federal income tax returns, as U.S. “tax residents.”  IRS Form 1040.

This has changed with technology, the integrated worldwide financial system and FATCA which is now bringing a massive amount of financial data and information to the IRS.   See, Part 3 – Unintended Consequences of FATCA: Will Taxpayer (Individual’s) Personal Financial Data at IRS get “Snowdened”?

The IRS has a powerful tool to assess taxes against any taxpayer who does not file U.S. income tax returns, specifically including USCs and LPRs residing outside the U.S.  This tool is known as the “Substitute Return” and is explained well in a New York Times Article from Feb. 2012,  If You Don’t File, Beware the Ghost Return

The IRS provides a snippet of information below in their website:

What if you don’t file voluntarily

Substitute Return 

If you fail to file, we may file a substitute return for you. This return might not give you credit for deductions and exemptions you may be entitled to receive. We will send you a Notice of Deficiency CP3219N (90-day letter) proposing a tax assessment. You will have 90 days to file your past due tax return or file a petition in Tax Court. If you do neither, we will proceed with our proposed assessment. If you have received notice CP3219N you can not request an extension to file. 

If any of the income listed is incorrect, you may do the following:

• Contact us at 1-866-681-4271 to let us know.
• Contact the payer (source) of the income to request a corrected Form W-2 or 1099.
• Attach the corrected forms when you send us your completed tax returns.

If the IRS files a substitute return, it is still in your best interest to file your own tax return to take advantage of any exemptions, credits and deductions you are entitled to receive. The IRS will generally adjust your account to reflect the correct figures.

The Internal Revenue Manual explains the Substitute Return and the so-called Automated Substitute for Return (ASFR) Program.

Based upon my experience, a Substitute Return for a non-resident taxpayer is necessarily terribly wrong and incorrect.  This is because it is typically based upon only a small sliver of information;  typically some item of income. It does not include a complete picture of the taxpayer.  There are never expense items that are available for a deduction, nor foreign taxes reflected available for a foreign tax credit, etc.  See,  USCs and LPRs Living Outside the U.S. – Key Tax and BSA Forms

I have never seen a Substitute Return which includes a foreign earned income exclusion calculation for the benefit of the individual.   See, The Foreign Earned Income Exclusion is Only Available If a U.S. Income Tax Return is Filed

I suspect that once the IRS collects information under FATCA (starting this year 2014) on the non-U.S. accounts and investments of millions of U.S. citizens and lawful permanent residents, they will begin to issue Substitute Returns in mass.  This will cause an entire “parade of horribles” such as the following:

• The foreign addresses will often be incorrect or the regular mail service will simply not be able to effectively deliver the IRS correspondence to the non-U.S. address;

• There will be mismatching of taxpayer identification numbers;

• Those USCs who have no social security numbers (SSN) will get caught in a “no man’s land” with information received without a SSN;  See, Why do I have to get a Social Security Number to file a U.S. income tax return (USCs)?

• The IRS will mix up financial information, assets and accounts among Individuals with the same names (e.g., Juan Perez Gonzalez or Mary Johnson) who are living overseas, particularly since there is no global taxpayer identification number system, which will distort terribly the tax assessments the IRS makes;

• The information and reports created by the IRS will be entirely in English, and then sent overseas to countries where English is not a first language and where the taxpayer may have little to no command over the English language;

• Incorrect currency calculations, since most of the time the USC or LPR residing overseas will have their accounts in currencies other than U.S. dollars;

• etc., etc. etc.

Finally, the last major disadvantage of the USC or LPR overseas in these cases, is that the law creates a “presumption of correctness” in favor of the IRS and their determinations (at least in the civil law context – which is where this part of the tax administration lies).  See an earlier post:

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.

See and eariler post,  More on “PFICs” and their Complications for USCs and LPRs Living Outside the U.S. -(What if there are No Records?)

See, U.S. Supreme Court decision, Welch v. Helvering, 290 U.S. 111 (1933), stating that the Commissioner’s “ . . .ruling has the support of a presumption of correctness, and the petitioner [taxpayer] has the burden of proving it to be wrong . . . ” and further citing to another Supreme Court decision, Wickwire v. Reinecke,275 U. S. 101. 

At the end of the day, the USC or LPR residing overseas is at a terrible disadvantage as they need to identify U.S. tax law principles applicable to their case (which almost always means they need to hire a U.S. tax professional and incur those costs) and respond within a very short window of time to the IRS.  They also have to prove the IRS was wrong in its determinations made in the Substitute Return.

IRS Office of Chief Counsel attorney Daniel Price had some astute observations at the October 30 panel at the University of San Diego School of Law-Procopio International Tax Law Institute annual conference.  For specific coverage by tax journalist Amanda Athanasiou of TaxAnalysts, in their Worldwide Tax Daily –  IRS Addresses Questions About OVDP and Streamlined Filing

Specifically, Mr. Price said that “Practitioners know what tax fraud is, practitioners know what willful conduct is — the government doesn’t need to provide a negative definition in this context.”

The panelists spent a significant time on the streamlined filing compliance program and how it should be more efficient for taxpayers and the government.  As reported in the TaxAnalysts article, Mr. Price “said the Service’s goal is to direct willful individuals with true criminal liability to OVDP and non-willful individuals to the streamlined program.”

See, IRS and Practitioner Comments on the Streamlined NonWillful Certification  from the Federal Tax Crimes Blog for further comments and observations.