Part 2: Because banks and people are not the same: @RepMaloney #FATCA amendments require foreign banks but NOT individuals to report custodial accounts

Introduction:


FATCA imposes obligations on both foreign banks (report on individuals to the IRS – Internal Revenue Code Section 1471) and obligations on individual Americans abroad (report foreign assets to the IRS – Internal Revenue Code 6038D).
Depository vs. Custodial Accounts
In general a “Depository” accounts is a basic day-to-day bank account (checking, savings, etc.)
In general a “Custodial” account is a brokerage or other account that holds assets for management.
The Maloney bill addresses these obligations (with respect to the reporting of “Custodial” accounts) differently.
The Maloney bill and foreign banks – Section 1471 Amendments – custodial accounts are reportable
Representative Maloney’s H.R. 4362 – “Overseas Americans Financial Access Act” – includes relief provisions for both foreign banks AND for individual Americans abroad.
My previous post discussed how the Maloney bill impacts the reporting requirements of foreign banks. Notably the Maloney bill relaxes the reporting requirements for foreign banks ONLY with respect to depository accounts.
The Maloney bill and individuals – Section 6038D Amendments – custodial accounts not reportable
It appears that the Maloney bill would relax the Form 8938 reporting requirements for individuals with respect to BOTH depository and custodial accounts. Although not a model of clarity, it means that (as a general principle) Americans abroad would not be required to report their local (foreign to the USA) accounts (depository or custodial) to the IRS. This is a variant of what has been called FATCA SCE (“Same Country Exemption”).
Bottom Line: Foreign banks and Americans abroad do NOT get the same treatment under the Maloney bill. Is this an oversight? Is it careless drafting? Is it deliberate?
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Technical analysis (of interest to few people) follows:
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December 31, 2019 and US Born individuals living outside the USA without having a Social Security Number

Introduction – “The Little Red FATCA Book”

More at:

The Two Ugly Faces of FATCA – One for foreign banks and another for US persons

The Obligations of the banks under the IGA

These obligations are described in the FATCA IGA entered into between the United States and the other country. In general the IGA requires non-U.S. banks to “Review, Identify and Report” on U.S. citizens.

The Obligations of the individual taxpayer under IRC 6038D – Form 8938
The mandatory reporting which takes place on Form 8938 is mandated Internal Revenue Code 6038D.

Non-US AKA “Foreign Banks” – The Problem of US Born customers who do NOT have a US Social Security Number are they in danger of their bank accounts being closed?

Those accused of being U.S. citizens who are NOT U.S. citizens have the opportunity to “self-certify” they are NOT U.S. citizens

The Possibility of being “Born In The USA” but NOT being a U.S. citizen

The Possibility of being “Born Outside The USA”, acquiring U.S. citizenship at birth but NOT being a U.S. citizen today

Looks like being “Born In The USA” may not be a great thing!

John Richardson – Follow me on Twitter @ExpatriationLaw

Part 1: #FATCA is: Maloney "Overseas Americans Financial Access Act" is the wrong answer to the right question

Introduction and purpose …


On March 18, 2010, President Obama signed FATCA (“Foreign Account Tax Compliance Act”) into law. FATCA was:
– a revenue offset provision to the HIRE Act
– a series of conforming amendments to the Internal Revenue Code that:
(a) imposed requirements on Foreign Banks (Internal Revenue Code Sections 1471 – 1474); and
(b) imposed reporting requirements on individuals (Internal Revenue Code 6038D). Those reporting requirements are expressed in Form 8938.
On September 17, 2019 Representative Maloney introduced H.R. 4362 – “Overseas Americans Financial Access Act” – which introduced changes to BOTH the FATCA requirements imposed on Foreign Banks and requirements imposed on Individuals.
This post discusses ONLY the aspect to the Maloney bill that “relaxes” the requirements on Foreign Banks. I have writen a separate post discussing how the Maloney bill would impact individuals.
(Those interested in learning more about FATCA may be interested in my “Little Red FATCA Book)“.
The Maloney Bill is NOT The Same As SCE Previously Drafted!
The Good News:
The Maloney bill appears to apply to ALL Americans abroad – without regard to whether they are compliant with their U.S. tax filing requirements. (A previous version of SCE applied ONLY to Americans abroad who were compliant with their U.S. tax filing requirements.) Interestingly, the Bill (like Internal Revenue Code 911) would NOT apply to “permanent residents (Green Card Holders) in exactly the same way.
The Bad News:
The bill as drafted gives the banks the option to either continue to report on the depository accounts of Americans abroad or not. This is an option available to the bank. I (along with many others) suggest that banks will NOT be willing to engage with individuals with respect to whether they meet the requirements of the Maloney bill. The exact language of the bill includes:

(i) IN GENERAL.—Unless the foreign financial institution elects to not have this subparagraph apply, such term shall not include any depository account maintained by such financial institution if each holder of such account is—

The Maloney bill is too narrow in application
The bill as drafted applies ONLY to “depository accounts”. This means that the bill applies only to day-to-day bank accounts. It specifically does NOT apply to “custodial accounts”. This means that it excludes investment accounts, brokerage accounts, etc.
Verdict: The Maloney bill is clearly far too narrow. There is no reason why the Maloney proposal should not extend to ALL accounts (depository, custodial or any other kind of account) held by an American living outside the United States.
The technical analysis (which will NOT be of interest to the average reader) follows. It consists of Part A to Part D.
Thoughts and Suggestion
The Maloney bill is symbolic. It is not a serious attempt to alleviate the problems of Americans abroad. Representative Maloney should – as a Democrat – support Representative Holding’s “Tax Fairness For Americans Abroad Act of 2018”.
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IRS provides limited tax relief for certain individuals renounced(ing) after March 18, 2010

Update – My thoughts “The Morning After” – September 7, 2019:
After having digested this for a day (it was announced the afternoon of September 6/19), I offer the following additional thoughts:

Practical value: I think that this IRS announcement/program has value. It may be that those who have renounced would NOT want to come into compliance (although there are certainly some who would – just to bring closure). But, the IRS announcement makes clear that this procedure is available to those who have not yet renounced/relinquished and wish to do so in the future. The point is that these future relinquishers can:

1. Come into tax compliance and have up to $25,000 USD in tax forgiven; and

2. Come into tax compliance without getting a Social Security number. This has the potential to be enormously helpful to a lot of people (but this is a minority view). It’s a way to make the compliance/renunciation process easier and less expensive (tax forgiveness) than it has been to date.

Of course, this will anger the thousands who have previously come into compliance, paid taxes and gone to the trouble of getting a Social Security number.

IRS Motivation: Much of the discussion in social media has revolved around the question of: “Why would the IRS offer this program at all? What’s in it for the IRS (especially if they are forgiving taxes)? I don’t know and nobody outside Treasury/IRS knows. But, my guess is that this is a political response from US Treasury to the problems that FATCA is causing with foreign banks. Viewed prospectively, this provides a clearer path for accidental Americans (living outside the USA) to renounce U.S. citizenship. Although renunciation (which does have tax consequences) does NOT require tax compliance, most people seem to think that it does. Also, this is a clear response from Treasury/IRS to the problems that foreign banks are having with FATCA compliance. In other words: I do NOT think that this has anything to do with helping accidental Americans. I do think that it to assist foreign banks with the problems they are having with accidental Americans. Note that the relinquishment date – March 18, 2010 – is tied to the date that FATCA was enacted. But, what do I know?

Now on to the post as originally written …

Breaking news – just released today – September 6, 2019

Background:

In what appears to be a response to how FATCA issues affect “accidental Americans” living outside the United States, the IRS has introduced a procedure providing limited tax relief, penalty relief and certainty for accidental Americans who need to renounce U.S. citizenship in a FATCA world. The problem is described in this recent article by Helen Burggraf at American Expat Finance. Note that March 18, 2010 was the date that the HIRE Act (of which FATCA was a revenue offset) was enacted – making it clear that this relief is tied to FATCA and NOT to “citizenship-based taxation” per se.

In a nutshell, it appears (I will read this in more detail again) to say that:

Individuals who:

1. Have NEVER filed a 1040 U.S. tax return
2. Have relinquished/renounced U.S. citizenship after March 18, 2010
3. File the five tax years in the year prior to relinquishment
4. File a tax return in the year of relinquishment
5. Have a net worth of less than 2 million USD at the time of relinquishment AND at the time of filing*
6. Have a total of less than $25,000.00 in U.S. tax liabilities over the five year period
7. Have an average U.S. tax liability of less than approximately 165,000 USD for the five preceding years*
8. Certify that their failure to file was non-willful.

can file, avoid paying the U.S. taxes owed and NOT be a covered expatriate.

*These mirror the general requirements to not be a covered expatriate.

This is of value for a limited (but probably numerically large) group of people. The benefits appear to be:

1. Forgiveness of tax up to $25,000.00
2. The opportunity to exit the U.S. tax system cleanly and avoid covered expatriate status.

This is likely to upset those who previously went to the trouble of coming into compliance to expatriate. Note that the procedures are not available to anybody who has EVER filed a 1040.

I will write more on this later. But, for the moment here is the announcement from the IRS News Room:

09 | 6 | 19
IRS announces new procedures to enable certain expatriated individuals a way to come into compliance with their U.S. tax and filing obligations

IR-2019-151

WASHINGTON – The Internal Revenue Service today announced new procedures that will enable certain individuals who relinquished their U.S. citizenship to come into compliance with their U.S. tax and filing obligations and receive relief for back taxes.

The apply only to individuals who have not filed U.S. tax returns as U.S. citizens or residents, owe a limited amount of back taxes to the United States and have net assets of less than $2 million. Only taxpayers whose past compliance failures were non-willful can take advantage of these new procedures. Many in this group may have lived outside the United States most of their lives and may have not been aware that they had U.S. tax obligations.
Eligible individuals wishing to use these relief procedures are required to file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and their year of expatriation. Provided that the taxpayer’s tax liability does not exceed a total of $25,000 for the six years in question, the taxpayer is relieved from paying U.S. taxes. The purpose of these procedures is to provide relief for certain former citizens. Individuals who qualify for these procedures will not be assessed penalties and interest.
The IRS is offering these procedures without a specific termination date. The IRS will announce a closing date prior to ending the procedures. Individuals who relinquished their U.S. citizenship any time after March 18, 2010, are eligible so long as they satisfy the other criteria of the procedures.

These procedures are only available to individuals. Estates, trusts, corporations, partnerships and other entities may not use these procedures.

The IRS will host an on-line webinar in the near future providing additional information and practical tips for making a submission to the Relief Procedures for Certain Former Citizens.

Relinquishing U.S. citizenship and the tax consequences that follow are serious matters that involve irrevocable decisions. Taxpayers who relinquish citizenship without complying with their U.S. tax obligations are subject to the significant tax consequences of the U.S. expatriation tax regime. Taxpayers interested in these procedures should read all the materials carefully, including the FAQs, and consider consulting legal counsel before making any decisions.

See the following link for more information:

https://www.irs.gov/individuals/international-taxpayers/relief-procedures-for-certain-former-citizens
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The 2019 IRS "expatriation" compliance campaign: Getting ahead of the fear mongering

On July 19, 2019 the IRS announced six new compliance initiatives.
Of particular interest to U.S. citizens and permanent residents (Green Card holders) is what is described as:

Expatriation
U.S. citizens and long-term residents (lawful permanent residents in eight out of the last 15 taxable years) who expatriated on or after June 17, 2008, may not have met their filing requirements or tax obligations. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including outreach, soft letters, and examination.

What is expatriation?
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To be FORMWarned is to be FORMArmed! The easiest way to receive a Form 3520A penalty would be to file a Form 3520


There is evidence from both tax practitioners and from individuals that Americans abroad are suffering from a “Form 3520A” penalty epidemic. Some of the best discussion of both the scope and technicalities of this problem may be found at Tax Connections. See particularly the posts here, here and here. (Mr. Carter’s original post was also reproduced at American Expat Finance.) The posts have attracted commentary from a number of tax professionals. The IRS Taxpayer Advocate has been invited to intervene.
“Tax Compliant” Americans Abroad are just a penalty waiting to happen!
Americans abroad are potentially required a very large number of IRS forms.
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The Moore case – A recent Form #T1135 taxpayer victory

This is the fifth post in my series of posts about Canada’s Foreign Asset reporting requirements. The first post described the range of Foreign Asset reporting requirements. The second post discussed the conditions which trigger the requirement to file Form T1135. The third post focuses on how to complete and file Form T1135. The fourth post was a short summery of the penalties for failing to file T1135. This fifth post is about the recent Moore case which was an example of taxpayer victory in resisting the draconian and unreasonable Form T1135 penalties.
The Judgement of Boyle, J really speaks for itself.
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Failure to file Canada Foreign Property Returns – #T1135 – Penalties and voluntary disclosure

Introduction – Form T1135 is a “Penalty Jackpot” for the Canada Revenue Agency


To be forewarned is to be forearmed!


On July 14, 2019 the text on the page referenced in the above tweet included:

Penalties
This page provides information (including a table of penalties and frequently asked questions) about penalties for late or improperly filed forms and information returns.
Failing to file
The penalty for failing to file a return is $25 per day for up to 100 days (minimum $100 and maximum $2,500). This penalty does apply to Form T1142.
When failing to file is done knowingly or under circumstances amounting to gross negligence, the penalty is $500 per month for up to 24 months (maximum $12,000), less any penalties already levied. This penalty does not apply to Form T1142.
After 24 months, the penalty is 5% of whichever of the following resulted in the requirement to file the information return, less any penalties mentioned above already levied:
– the cost of the foreign property
– the fair market value of the property transferred or loaned to the trust
– the cost of the shares and indebtedness of the foreign affiliate
– Note – This penalty does not apply to Form T1142.
The CRA may issue a demand to file a return to a person or partnership under subsection 233(1) of the Income Tax Act. If so, and if the person or partnership knowingly or under circumstances amounting to gross negligence fails to comply with the demand, the penalty is $1,000 per month for up to 24 months (maximum $24,000), less any penalties already levied. This penalty does apply to Form T1142.
False statements or omissions
A penalty applies to people who knowingly or under circumstances amounting to gross negligence make false statements or omissions in an information return.
For Form T1142, the penalty is the greater of either:
– $2,500 or
– 5% of whichever of the following the false statement or omission was made about:
– the fair market value of the distributed property or
– the indebtedness
For the other information returns, the penalty is the greater of either:
– $24,000 or
– 5% of whichever of the following the false statement or omission was made about:
– the cost of the foreign property
– the fair market value of the property transferred or loaned to the trust or
– the cost of the shares and indebtedness of the foreign affiliate
Due diligence exception for penalties
The penalty for omissions on Forms T1134 and T1141 does not apply to taxpayers who make diligent efforts to get the requested information and who:
– disclose in the return the unavailability of the information and file the information within 90 days of it later becoming available

A “Table Of Penalties” may be found here.

A Form T1135 Primer – How to complete and file Form T1135


This is the third post in my series of posts about Canada’s Foreign Asset reporting requirements. The first post described the range of Foreign Asset reporting requirements. The second post discussed the conditions which trigger the requirement to file Form T1135. This third post focuses on how to complete and file Form T1135.
For many individuals, the threshold question of WHETHER you are required to file Form T1135 will be more difficult than HOW to file Form T1135. This post ASSUMES that you have met the reporting threshold and focuses on:
1. A review of whether Form T1135 is required
2. What information is required to be reported on the T1135
3. How to complete Form T1135
4. Where/how to file Form T1135

Form T1135 is available on the Canada Revenue Agency site here.
I have also uploaded the form.
t1135-17e
You should print the form and have it available while you read this post. Form T1135 has broken the different categories of assets into seven different categories of foreign property.
Here we go …
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