The “Readers Digest Version …
It’s difficult to be a U.S. citizen living outside the United States. The U.S. extra-territorial tax regime has created an industry of professionals who “feast off the injustice” of the U.S. tax and regulatory regime. U.S. citizenship taxation reinforced by FATCA has truly created for tax, financial planning, and immmigration professionals:
“The gift that just keeps on giving.”
The messaging to Americans abroad includes:
Americans abroad who don’t file U.S. taxes are constantly warned of the consequences of non-compliance.
Americans abroad who DO file U.S. taxes are constantly warned of the consequences of mistakes in their attempts at compliance.
Americans abroad attempting financial and retirement planning outside the United States are constantly on the search for financial products that wont’ conflict with U.S. tax rules.
Americans abroad who want to escape by renouncing U.S. citizenship are constantly being warned of possible tax and immigration consequences associated with renunciation.
(It’s clear that U.S. citizens living outside the United States are being punished for who they are and NOT what they do or don’t do.)
In this context, there continues to be a significant “fear mongering” coming from various players in the U.S. tax compliance industry. I suggest that Americans abroad should exercise caution in how they respond to these messages. In 2013 I wrote a post suggesting eleven principles for how one should respond to the U.S. tax compliance (or noncompliance) problem. This 2023 post is intended to provide an update to the 2013 post. The 2013 post is reproduced as Part C of this update.
This general purpose is to provide suggestions for how to RESPOND rather than REACT to your possible situation as a U.S. citizen living outside the United Staes. My thoughts are organized in the following four parts:
Part A – “Proper U.S. legal advice” – What does it mean and where should you seek it?
Part B – The evolution of the compliance landscape from 2013 to 2023
Part C – My original post from July of 2013
Part D – Summary and two final thoughts
Part A – “Proper U.S. legal advice” – What does it mean and where should you seek it?
Further thoughts and updates – November 24, 2023 …
This post (see Part C) was originally written on July 10, 2013. I had completely forgotten about it, but was reminded of it when I read an “advertorial” this week. The “advertorial” was from a U.S. tax compliance firm which was “fanning the flames of fear” and generally trying to market their services …
The article included the suggestion that U.S. citizens in Canada receive “proper U.S. legal advice“. The implication is that “proper U.S. legal advice” would come from a U.S. licensed lawyer (yes, sounds reasonable). That said, it’s important to understand that “U.S. lawyers” who “practise before the IRS” are subject to the Treasury’s Department Circular 230. Circular 230 includes what is in effect a code of professional conduct for tax professionals who practise before the Internal Revenue Service. (This includes U.S. licensed lawyers, U.S. licensed accountants, Enrolled Agents, etc.) Of particular note are the following two sections which are of direct relevance to Americans abroad seeking advice about their U.S. tax compliance obligations.
The obligations that Circular 230 imposes on the U.S. advisor include:
1. The obligation to inform the person of noncompliance and the associated penalties/consequences
§ 10.21 Knowledge of client’s omission.
A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.
(Note that this directs the advisor to describe the possible penalties.)
2. The requirement of NOT assisting in or advising non-compliance
§ 10.51 Incompetence and disreputable conduct.
(a) Incompetence and disreputable conduct.
Incompetence and disreputable conduct for which a practitioner may be sanctioned under §10.50 includes, but is not limited to —
(7) Willfully assisting, counseling, encouraging a client or prospective client in violating, or suggesting to a client or prospective client to violate, any Federal tax law, or knowingly counseling or suggesting to a client or prospective client an illegal plan to evade Federal taxes or payment thereof.
(At a minimum this directs the advisor to NOT suggest that non-compliance is an option.)
Bottom line: “Proper U.S. legal advice” is likely to include: identification of noncompliance, a discussion of penalties and a directive that compliance is the correct course of action. It’s important that this be understood BEFORE seeking U.S. centric advice.
Would it make a difference if one consulted a non-U.S. advisor?
I suspect that the answer may vary on a county by country basis …
The situation in Canada appears to be that Canadian lawyers, accountants, etc. are NOT subject to Circular 230. I expect they might tell you that there is no Canadian law that requires Canadian residents to comply with U.S. tax laws. In any case, they clearly are NOT required to read you the “Circular 230 Riot Act”. While updating this post I came across a 2016 fascinating post at the Isaac Brock Society that discusses this very issue. Obviously, the post could not be understood to be legal advice. That said, it does make some interesting observations.
The context of the Isaac Brock Society post is captured in the introductory paragraph:
[Many readers living outside the U.S. who are not IRS compliant, have sought advice from tax attorneys on whether they should or should not enter into a lifetime of IRS compliance, and what would be the “cost”. Maybe your tax attorney living in Canada etc. is also an Enrolled Agent of the U.S. IRS, possibly affecting the nature of the interaction between attorney and you the client. What were the options suggested and especially disclosures made to you by your attorney? Attorneys must adhere to the professional and ethical standards of their law societies. See discussion below:]
As always, I suggest that your general advisor should be different from the person who does your actual tax preparation!
Part B – The evolution of the compliance landscape from 2013 to 2023
Generally since, 2013:
– the “Offshore Voluntary Disclosure Program” – OVDP – was retired in 2018
– the “streamlined compliance procedures” are better and available to more people
– the IRS “Relief Procedures For Former Citizens” program was introduced in 2019
– the “delinquent international information return” procedures (including “Delinquent FBAR Submission Procedures“) have evolved
A 2020 podcast exploring these options is available here.
My general advice about how to approach this problem remains intact. I continue to recommend separating the “advisor” from the “tax preparer”.
Part C – My original post from July of 2013
(Note that I have included a horizontal line through the parts that are no longer relevant because of the change in compliance options detailed in “Part B” above.)
What should be considered before contacting a lawyer
The Reality of U.S. Citizenship Abroad
Nobody denied that the unintended targets of Congressional legislation aimed at those who supposedly “owe allegiance” to the USA, now assisted by craven foreign governments anxious lest their financial services entities lose access to the US market, are mostly unlikely to do anything at all. But the whole idea of universal self-assessment of taxation is to keep the taxpayer in an anxious condition, to make him overpay if possible, but at least not to underpay. Those now faced with an unprecedented, even retroactive, enforcement campaign and who must, if they wish to become compliant and avoid penalty or even prosecution (should they be identified in the future), sacrifice much of their wealth, even become insolvent.
Comment at the Isaac Brock Society blog – July 29, 2013
It’s a tough time to be a U.S. citizen abroad. The world is awash in FATCA anxiety. The U.S. has discovered FBAR as a way to raise penalty revenue and have embarked on an “FBAR Fundraiser”. Incredibly all bank accounts outside the U.S. are considered to be “offshore accounts“. U.S. law requires U.S. citizens to enter the U.S. with a U.S. passport. Those renewing their passports are now required to provide information relevant to tax compliance. Many are inclined to simply renounce their U.S. citizenship. Even renouncing citizenship has tax implications. Yet, all indications are, that the vast majority of U.S. citizens abroad are NOT tax compliant. Continue reading →
