A Vi r g i n i aP r o f e s s i o n a l C o r p o r a t i o n

P.O. Box 17655

Courthouse Postal

Station

Arlington, Virginia

22216-7655

2000 North 15th Street

Suite G2

Arlington, Virginia

22201-2683

703.525.5110

703.525.5122 FAX

www.flottco.com

August 15th, 2013 BY EMAIL David.W.Horton@irs.gov Mr. David W. Horton Director, International Individual Compliance Large Business & International Division Internal Revenue Service 2001 Butterfield Road, 12th Floor Downers Grove, IL 60515 Re: Tax and Financial Account Reporting by Long Term Non-Resident Dual Citizens Dear Mr. Horton: The Service’s approach to tax and FBAR compliance by US citizens who are dual nationals and long-term residents of other countries needs to change. The existing compliance programs do not reflect the demonstrable reality that there are many genuinely innocent delinquent US taxpayers living overseas. Enclosed with this letter is a proposal for an alternative procedure that recognizes this reality. The procedure is based on a questionnaire designed to assess a taxpayer’s culpability for non-compliance. If a non-compliant, non-resident US taxpayer’s answers to the questionnaire indicate a strong likelihood that their non-compliance was not intentional, the taxpayer’s returns and FBAR’s would be processed without penalty. Background The Service has acknowledged that the Offshore Voluntary Disclosure Initiatives (OVDI) and Offshore Voluntary Disclosure Program (OVDP) were not developed for people who are neither tax criminals nor tax cheats. Innocent delinquents have no business entering the OVDP program. Yet, even the New Steamlined Filing Compliance Procedures for Non-Resident, Non-Filer US Taxpayers (“SFCP”) introduced in June last year adopts a conventional enforcement approach, focusing on “low” or “high” compliance risk, “simple” returns and the amount of a taxpayer’s US tax liability, instead of concentrating on identifying hallmarks of culpability for delinquency which is surely the heart of the matter when evaluating non-filers. My concern about the Service’s treatment of this growing group of US taxpayers first arose when Barry Shott announced the Service’s enhanced FBAR enforcement initiative at the IRS-GWU tax conference in December 2008. The tone of the Service’s initial Offshore Voluntary Disclosure Initiative and of then Commissioner Douglas Shulman’s testimony before the House Ways and Means Committee on March 31, 2009 prompted me to write the Commissioner on April 10, 2009, proposing a more measured approach to non-resident, dual citizen taxpayers based on their likely knowledge of US tax requirements. Beth M. Elfrey, Director, Fraud/Bank Secrecy Act, acknowledged the letter on May 7, 2009, but there was no response to my follow up telephone call to the individual identified in her letter. When I saw Mr. Shott at the following year’s IRS-GWU tax conference, I raised the issue with him again. He was kind enough to offer to pass the letter to the Commissioner along to his colleagues at the IRS

A Vi r g i n i aP r o f e s s i o n a l C o r p o r a t i o n

P.O. Box 17655

Courthouse Postal

Station

Arlington, Virginia

22216-7655

2009 North 14th Street

Suite 600

Arlington, Virginia

22201-2514

703.525.5110

703.525.5122 FAX

www.flottco.com

Mr. David W. Horton Director, International Individual Compliance

August 15th, 2013 Page 2

and to Manal Corwin, who was then International Tax Counsel at Treasury. Copies of the letter to Commissioner Shulman, Ms. Elfrey’s response, and the email to Barry Shott are enclosed for your reference. The letter to Commissioner Shulman asked that attention be paid to differences among US taxpayers based on their likely awareness of their US tax and FBAR compliance obligations. Unfortunately, the initial OVDI and its successors have not distinguished among non-resident US citizens based on any of the factors outlined in my letter. It is time for the Service to do so. OVDI #1 and #2 and the current OVDP are designed for people who knowingly violated US tax law by hiding funds in accounts overseas and not declaring income from those accounts on their US tax returns. As stated in my letter to the Commissioner and repeat now, the Service should bring the full weight of the law down on those who are tax criminals. For them, the OVDI initiatives and their OVDP successor offer a “good deal” in light of the alternatives of criminal prosecution and application of the full civil penalties provided by law. Current Compliance Alternatives The problem today for the truly non-culpable taxpayers I am concerned about is that there are only three alternatives: OVDP, SFCP or quiet disclosure. Although the Service has repeatedly warned tax practitioners and taxpayers against using that well established alternative to the “noisy” alternatives of the OVDP or SFCP, it is the one I continue to believe is the most suitable for these kinds of taxpayers unless and until the Service creates a “noisy” option that fits them. While the SFCP quite frankly deserves criticism both for vagueness1 and for displaying a stunning lack of awareness of the compliance challenges faced by US citizens who are dual nationals and 1Vague wording affects several key elements of the SFCP. For example, the procedure is available to non-resident taxpayers who have “resided outside of the U.S. since January 1, 2009”. What about taxpayers who have resided outside the United States from a time before that date? The ordinary meaning of “since” is “from then” or “from a specified time”, except in the context of “long since” forgotten. I believe many people have assumed the January 1, 2009 date covers people who lived outside since before that date. If that is the intent, rewording the eligibility requirement to read “since before” the cut-off date would clarify it. Does the date from which taxpayers have to file delinquent returns “for the past three years” begin when they realize that they have this obligation? For example, if taxpayers become aware of the obligation to file US tax returns in August 2013, will they have to file returns for 2010, 2011 and 2012 since the 2012 return would now be “delinquent”? Or does it mean that taxpayers should file for all years since 2009? Again, some clarification is warranted. The SFCP is said to be for “low risk” returns. The instructions say that low risk “will be predicated on simple returns with little or no US tax due.” What is a “simple” return? Does a return that includes one or more of Forms 1116, 6251, 2555, 5471, 3520, 8868, or 8858 qualify as “simple”? In addition to being “simple”, the SFCP uses a very low US tax liability ($1,500) to determine eligibility. If question 3 is answered yes, a non-resident taxpayer considering the program is told “any returns submitted through this program will not be eligible for the steamlined processing procedures and will be treated as high risk returns subject to examination.” Such taxpayers are then directed to the OVDP. There are many reasons why a non-resident, dual citizen might owe more than $1,500 in US tax. For example, an item of income in the person’s home country may be subject to a lower rate of tax or no tax at all with the result that the person would have insufficient or no foreign tax credits available to offset US tax on that income. We have been told on the phone that the $1,500 threshold is not “hard”, but there is no written guidance to that effect (no FAQ’s). This puts practitioners in an awkward position in advising a non-resident taxpayer about the appropriateness

A Vi r g i n i aP r o f e s s i o n a l C o r p o r a t i o n

P.O. Box 17655

Courthouse Postal

Station

Arlington, Virginia

22216-7655

2009 North 14th Street

Suite 600

Arlington, Virginia

22201-2514

703.525.5110

703.525.5122 FAX

www.flottco.com

Mr. David W. Horton Director, International Individual Compliance

August 15th, 2013 Page 3

have lived most, if not all, of their lives outside the United States,2 criticism alone is not the primary point of this letter. I suggest that the SFCP be revised as described later, and that a new procedure be adopted along lines similar to the SFCP, but using a questionnaire designed to assess the taxpayer’s culpability for non-compliance. If a non-compliant, non-resident US taxpayer’s answers to the questionnaire indicate a strong likelihood that their non-compliance was not intentional, the taxpayer’s returns and FBAR’s should be processed without penalty. The proposal is built around the fundamental fact that US citizenship taxation is a singular exception to the otherwise universal expectation that people pay tax where they live and to countries in which they have income generating investments or financial assets. Only US citizens are subject to taxation on their worldwide income regardless of where they live or the source of their income. Citizenship taxation combined with US birthright citizenship presents unique issues that simply are unknown in other countries. Let me illustrate this point by giving you three examples. The first is a Canadian. She was born in the US while her parents, both Canadian citizens, were at graduate school in 1954. She returned to Canada with them when she was two years old and has lived in Canada since. When her father inquired about her US citizenship in 1973, the US Consul in Winnipeg advised that she would lose her US citizenship if she obtained a Canadian passport and lived in Canada for three year after reaching her 22nd birthday without taking an oath of allegiance to the United States. She obtained a Canadian passport, continued to live in Canada, and did not take an oath of allegiance to the United States prior to reaching her 25th birthday. Unfortunately, unbeknownst to her, the section of the Immigration and Nationality Act of 1952, which the US Consul referenced in his letter to her father, was repealed in 1978 before she had completed three years continuous residence in Canada after turning 22 in 1976. She was shocked to learn on July 22, 2013 that she is still a US citizen by birth. The second is British. She, too, was born in the United States while her parents, both of whom were British citizens, were in the US. She returned with them to England when she was three and has lived in the UK ever since. Indeed, she has travelled to the US on a UK passport with a US visa, issued by the US Consulate in London. She contacted me in early May to confirm that she was not

of the SFCP in lieu of quiet disclosure. The rest of the questions in the questionnaire deal with compliance related questions, but are not ones that could reasonably be expected to reveal a basis for non-culpability. No program supposedly designed to help people come back into compliance should present such fundamental threshold challenges. Quiet disclosure is the better option based on the SFCP as written. 2The drafters of the requirement that tax returns submitted under the SFCP must have a valid SSN clearly have no idea what the Social Security Administration requires of persons born in the United States who did not receive a valid social security number by the time they reached 12 in order to obtain an SSN if they have resided continuously outside the United States and do not have an SSN. We discovered the special requirements when assisting a dual US citizen who left the US when she was two years old and has lived since then in the country of her other citizenship. Her parents did not get her a SSN while they were in the US. When she realized that she was required to file US tax returns and FBAR’s, she was 40 years old. To get an SSN, she must present a “timeline” to the Federal Benefits Unit at the Embassy in her home country demonstrating with evidence satisfactory to that unit that she has lived continuously outside the United States and does not have an SSN, even though she has a valid US passport.

A Vi r g i n i aP r o f e s s i o n a l C o r p o r a t i o n

P.O. Box 17655

Courthouse Postal

Station

Arlington, Virginia

22216-7655

2009 North 14th Street

Suite 600

Arlington, Virginia

22201-2514

703.525.5110

703.525.5122 FAX

www.flottco.com

Mr. David W. Horton Director, International Individual Compliance

August 15th, 2013 Page 4

as US citizen based on the US visa issued to her. I had to advise her that she was indeed a US citizen by birth and explained US citizenship is automatic and non-consensual by operation of the Fourteenth Amendment. Being a British citizen at birth did not affect her US citizenship. The third is Irish. She was born in the US to Irish nationals who were studying in the US. She left when she was five and has lived in Ireland or other parts of Europe since. On July 10, 2013 she contacted me after having been told the week before at a party that US citizens were being called in to a local bank to verify their citizenship. Like the Canadian before her, she was genuinely surprised to learn that she is a US citizen and subject to tax on her worldwide income. These examples, like those of John and Sarah in the letter to then Commissioner Shulman, could be multiplied. As I am sure you must realize, none of these people intentionally failed to file US tax returns or FBAR’s. Each has a good case of “reasonable cause”, but the Service has repeatedly emphasized the penalties for “non-willful” violations of the FBAR filing requirement and worse. More to the point, it is likely that all three of these individuals will not be filing simple returns with a US tax liability of less than $1,500. They are clearly not candidates for OVDP, but they also don’t (or are not likely to) qualify for SFCP. Quiet disclosure certainly looks like the best option for them. Yet, that exposes them to risks that the Service itself has emphasized. These individuals and the many like them around the world are why I am proposing a new alternative to those that exist, including quiet disclosure. New Compliance Procedure for Non-Resident, Dual National, Delinquent US Taxpayers The axiom that ignorance of the law is no excuse makes sense when applying universal norms or expectations. Most people understand that there are laws governing many aspects of life and, even if they don’t know all of the details, are sufficiently aware to investigate the rules if they think they apply to them. Citizenship taxation is not a universal norm or expectation. Even though birthright citizenship is more common than citizenship taxation, the combination of the two creates unique and unforeseeable challenges for most of these “accidental Americans”. For example, the Canadian owns a corporation, which is a CFC for US tax purposes. The British person has received certain gifts which are subject to Form 3520 reporting. The Irish woman is a well compensated executive who now lives in Switzerland and has received stock options and grants as part of her compensation. The context within which I ask you to consider the enclosed proposal is based on the following categories of US citizens that generally follow those outlined to the Commissioner in March 2009:

1. US citizens and permanent residents who live in the United States; 2. US citizens and permanent residents who are on temporary work assignments outside the

United States or who work for US government agencies overseas; 3. US citizens, not covered by Category 2 above, who have resided outside the United States

continuously beginning on or after January 1, 2003; 4. US citizens who have resided outside the United States continuously for more than ten

years as of January 1, 2013 and continue to reside outside the United States; 5. US citizens who were born in the United States, but moved from the United States prior to

their 18th birthday and have resided continuously outside the United States since that time; and

6. US citizens born outside the United States who have never resided in the United States.

A Vi r g i n i aP r o f e s s i o n a l C o r p o r a t i o n

P.O. Box 17655

Courthouse Postal

Station

Arlington, Virginia

22216-7655

2009 North 14th Street

Suite 600

Arlington, Virginia

22201-2514

703.525.5110

703.525.5122 FAX

www.flottco.com

Mr. David W. Horton Director, International Individual Compliance

August 15th, 2013 Page 5

The OVDP exists for people in categories 1 & 2, and is a good option for such people to bring themselves into compliance with their US tax and bank reporting obligations. The SFCP is probably suitable for people in category 3 with several minor modifications as noted below: (1) changing the eligibility requirement to “on or after January 1, 2003”; (2) fixing a hard tax liability amount ($1,500 is too low for many reasons); (3) setting a fixed number of tax returns to be filed and clarifying the tax year for which returns are required (e.g., three years counting from the most recent year for which a return is delinquent); (4) maintaining the number of FBAR’s to be filed at six years, counting from the most recent year for which an FBAR is delinquent; and (5) removing “simple” before tax return in the eligibility criteria or providing a more definitive description of what constitutes “simple”. The enclosed proposed new procedure is for people in categories 4, 5 and 6. In a nutshell, it creates a “noisy” alternative for taxpayers who can establish that they fall within one of the last three categories listed above by answering a detailed questionnaire, the purpose of which is to provide a basis on which the Service can determine their culpability for being delinquent. The people described earlier in this letter are the polar opposites of the US tax cheats who knowingly hid money overseas and failed to report their full worldwide income on their US tax returns. Many are citizens in name only in that they do not vote, cannot pass on their US citizenship to their children, have no US assets or income from sources in the US and otherwise have only family or emotional ties to the US. Most, if not all, had no reason to expect that they had US tax and bank reporting obligations. The IRS needs a procedure that provides them a soft landing when they bring themselves into compliance. US citizenship taxation is the law and the Service which must enforce it. However, like a sensible police officer when confronting what, based on the facts and circumstances, is an innocent or unintentional violation of the law, the IRS should find a way to issue a warning instead of a ticket. The passage of FATCA is going to bring the reality of US citizenship taxation to many US dual citizens who will be surprised and frightened by the reported consequences of their non-compliance with US tax and bank reporting laws. I strongly urge the Service to adopt a procedure like the one proposed here that really fits the facts and circumstances of the people in categories 4 through 6. They need to know that voluntarily bringing themselves into compliance is not a crap shoot or a dive off the high board without knowing how much water is in the pool. It is time for the Service to develop a procedure that focuses on the real issue: culpability so that truly innocent delinquents can comply without fear of undue consequences. Please do not hesitate to contact me. I am ready to assist in any way I can to get a new program suitable for these taxpayers in place as quickly as possible. Yours truly,

Stephen Flott Enclosures (4) cc: Heather C. Maloy w/enclosures by email Michael Danilack w/enclosures by email

1

Stephen Flott

From: Stephen FlottSent: 12/14/2009 6:34 PMTo: barry.b.shott@irs.govCc: manal.corwin@do.treas.govSubject: "Accidental US Citizens" - Follow up

Barry: Further to our discussion last Friday during the IRS-GWU tax conference, attached is the letter I sent earlier this year to Commissioner Shulman regarding the issue of compliance (primarily FBAR related) with US tax laws by certain US citizens who reside permanently overseas. I certainly understand the Commissioner's response to my question at Thursday's lunch and realize that changing the historic basis of citizenship taxation is not a small task. However, the number of US citizen/dual nationals residing permanently in the country of their second citizenship, many from birth, is only going to grow and dealing with them in a way that makes sense is going to require a lot more resources than have been devoted to the issue to date. As we agreed, if there are 7 million US citizens residing overseas today, there are likely to be 15 million ten years from now as people flow across borders in this increasingly global world. The second attachment is the response I got from the Service. I have yet to hear in response to my follow up with Mr. Lundquist. I very much appreciate your willingness to pass these letters along. In the event that I have not correctly written Manal Corwin's email address, please pass these documents along to her. Thank you again. Accept my best wishes for your "next life" after the Service. Sincerely, Stephen Flott Flott & Co. PC 2009 North 14th Street, Suite 600 Arlington, VA 22201-2514 [Mailing Address: PO Box 17655, Arlington VA 22216-7655] Tel: +1-703-525-5110 X126 Fax:+1-703-525-5122 www.flottco.com  

Shulman Letter 4-10-2009.pdf

IRS Response to Shulman Letter...

 

NEW COMPLIANCE PROCEDURE FOR NON-RESIDENT, DUAL NATIONAL, DELINQUENT US TAXPAYERS This compliance procedure is only available to US persons who are also nationals of another country and (1) have resided continuously outside the United States for more than ten years as of January 1, 2013 and continue to reside outside the United States; (2) were born in the United States but moved from the United States prior to their 18th birthday and continue to reside outside the United States; or (3) were born outside the United States and continue to reside outside the United States. Qualifying US persons must complete the attached questionnaire under penalties of perjury and attach it to the tax returns they are required to file in accordance with this compliance procedure. Qualifying US persons must file three years of US tax returns, beginning with the most recent tax year for which returns are delinquent and must file an FBAR (Form TD F 90-22.1) for the same three year period, unless they have timely filed a tax return for the current tax year for which returns are due, in whch case they must file returns/FBAR’s for the two prior tax years, for a total of three years. Example 1: If a qualifying US person timely filed a US tax return and FBAR for the 2012 tax year, that person would be required to file tax returns and FBAR’s only for 2010 and 2011. Example 2: If a qualifying US person had not timely filed a US tax return for 2012, that person would be required to file tax returns and FBAR’s for three years beginning in 2012. Qualifying US persons may file their tax returns and FBAR’s without a social security number if they do not have one. A unique identifying number will be assigned to them by the Service. These taxpayers must pay any tax and interest due, but will not be subject to penalties for late filing either of the tax returns or the FBAR’s. All tax returns filed in accordance with this procedure must have Non-Resident, Dual National Taxpayer written on the top of the return. All of the required returns must be attached to the completed questionnaire and mailed to: Internal Revenue Service 3651 South I-H 35 Stop 6063 AUSC Attention: Non-Resident, Dual National Procedure Austin, TX 78741

Tax Year 1 Tax Year 21234 Yes No5 If yes, of what country or countries did you become a citizen at birth?6 Yes No78 Yes No9

101112 Yes No13141516 Yes No

17 Yes No18 Yes No1920 Yes No2122 Yes No23 Yes No24

Nature Amount Nature Amount Nature Amount Nature AmountTax Year 1Tax Year 2Tax Year 3

25 Yes No

SignatureDate

SSNTax Years

Nationality of MotherDid you become a citizen of a country other than the United States at birth?

Have you ever lived in the United States?

When did you leave the United States?Have you lived outside the United States continuously since then?

Address

New Compliance Procedure for Non-Resident, Dual National, Delinquent US Taxpayers Questionnaire

Name

Check if you do not have a US Social Security NumberTax Year 3

Place of BirthNationality of Father

Date of Birth

If no, when did you return to the United States?

If yes, how long did you live in the United States?Are you a naturalized US citizen?When did you become a US citizen?How long did you live in the United States after becoming a citizen?

When did you leave the United States after returning?What was the reason for your return to the United States?

Have you lived outside the United States continuously since then?

(Nature refers to the type of income, interest, dividends, capital gain, rent, etc.)

Have you ever had a US passport?If so, do you hold a currently valid US passport?

(For purposes of questions 12 through 16, visits to the United States for business or pleasure lasting less than 30 days each should be ignored.)

If no, when did your last valid US passport expire?Do you live in the country listed in the address at the top of this Questionnaire?How long have you lived there?Are you in compliance with your tax obligations in that country?

Under penalties of perjury, I declare that I have examined the facts stated above, and to the best of myknowledge and belief, they are true, correct and complete.

Do you have any US souce income?If yes, please identify the nature and amount of that income for each of the tax years listed above.

Have you reported this income to the country in which you now reside?