Author Archives: admin

U.S. uses inflation to first increase the size of #FBAR penalty base and then increase the size of actual penalties

What is inflation?

In its simplest terms:

“Inflation is defined as a sustained increase in the general level of prices for goods and services in a county, and is measured as an annual percentage change. Under conditions of inflation, the prices of things rise over time. Put differently, as inflation rises, every dollar you own buys a smaller percentage of a good or service. When prices rise, and alternatively when the value of money falls you have inflation.”

Source: Adam Hayes, CFA

(Note his use of the words “goods and services”. Are FBAR penalties and the S. 877A Exit Tax consumer goods or government services?)

Inflation can either be helpful or can be hurtful. Some benefit from inflation and others are hurt by inflation. At a minimum, inflation will always erode the value of cash. This means that (when it comes to cash) that inflation will hurt the owners/lenders of cash (lenders) and help those who borrow and owe cash.
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RT Unbelievable! Toronto based cycling team @TeamTPLRaam places second in @RAAMRaces Race Across America!

Taking a break from our regular programming to congratulate the Toronto based cycling team known as “True Patriot Love” for (1) attempting and (2) completing and (3) placing second (34 minutes behind the winners) in “The World’s Toughest Bicycle Race“.

The Race Across America – starting in Oceanside California and ending in Annapolis, Maryland. Think of it! A group of eight “regular guys” (well perhaps a bit on the fit side) cycled non-stop across America and completed the race in under 6 days. This is faster than some could drive the distance. This is faster than (given the state of Air Travel and time to get to the Airport and through security) that some could fly the distance (well, not really). In any case, a truly amazing achievement. Few people even knew that this was going on. Anyway, spread the word and take a moment to retweet the following tweet.

and this …

and from Facebook …

And hey, if they can manage to do the race, surely you can manage to donate a few dollars to their cause here!
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Morales-Santana: U.S. Supreme Court makes it harder for people “born abroad” to U.S. citizen parent(s) to become citizens

Prologue:U.S. citizenship is not as attractive as it was

One benefit of U.S. citizenship: If one is a U.S. citizen then one cannot be deported from the USA

Some Green Card holders become U.S. citizens. Some do NOT become U.S. citizens. Many of those Green Card holders become U.S. citizens in order to avoid the possibility of deportation. Deportation results in expatriation and can (among other things) subject the unfortunate Green Card holder to the S. 877A Expatriation Tax, which can result in significant confiscation of assets. In fact, the S. 877A Expatriation Tax discourages people from seeking Green Cards in the first place.  That said, it is only Green Card Holders who are “long term residents” who are subject to the Exit Tax.

The plight of Mr. Morales-Santana: No U.S. citizenship = the possibility of deportation

The facts as described by the court:

In 2000, the Government sought to remove Morales-Santana based on several criminal convictions, ranking him as alien because, at his time of birth, his father did not satisfy the requirement of five years’ physical presence after age 14. An immigration judge rejected Morales-Santana’s citizenship claim and ordered his removal. Morales­ Santana later moved to reopen the proceedings, asserting that the Government’s refusal to recognize that he derived citizenship from his U. S.-citizen father violated the Constitution’s equal protection guarantee.

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Mr. Pomerantz meets Mr. #FBAR in the Homeland: The “willful” FBAR penalty requires proof of “willfulness”

Looking for Mr. FBAR

This is one more in a series of posts discussing the FBAR rules. The FBAR rules were born in 1970, laid virtually dormant until the 2000s and then were then unleashed in their full “ferocity” on U.S. persons. A good review of the history of Mr. FBAR is here. A discussion of how the discovery of Mr. FBAR can lead to larger problems is here. Finally, a discussion of of why people must exercise caution in “fixing problems with FBAR” is here.

Mr. FBAR has not visited Canada, but he has visited Canadian citizens

Mr. Pomerantz returns …

Readers of this blog (particularly those in Canada) may recall that I have previously written about the adventures of Mr. Jeffrey P. Pomerantz (currently of Vancouver, Canada) with Mr. FBAR. At that point (March 2017) it was clear that the U.S. Department of Justice planned to sue Mr. Pomerantz to collect the FBAR penalties to which it felt entitled. It is worth noting that FBAR penalties are assessed under the Bank Secrecy Act (Title 31 of U.S. laws) which is different from the Internal Revenue Code (Title 26 of U.S. laws.) In order to collect FBAR penalties the U.S. Government must sue, and sue it did. The purpose of this post is to tell the story of what happened when the U.S. Government sued Mr. Pomerantz in U.S. District Court in Seattle.

But, before we begin our story, this post is more about “Civil Procedure” than it is about “Mr. FBAR” …

Bottom line: Although the U.S. Government suffered a temporary (probably) defeat, the defeat was because the Government failed to follow the rules of “Civil Procedure”. In other words, whether Mr. Pomerantz actually violated the FBAR statute was NOT the issue in this case. The issue was whether the Government followed the rules that they were required to follow in order to win their case. The Government did NOT follow the rules. Therefore, the Government lost. With that disclosure, we are no ready to begin yet another example of an adventure with Mr. FBAR.

Once upon a time in District Court in Seattle …

It appears that the hearing took place in early June of 2017. In any event, the court’s judgement was dated June 8, 2017.

Interesting fact: Mr. Jeffrey P. Pomerantz appeared “pro se” – he represented himself at the hearing. He may have had “legal advice” prior to the hearing. On the other hand, he may have had the assistance of the judge who recognized that he did NOT appear with a lawyer.

The judgement references the fact that Mr. Pomerantz sought to transfer the venue from Washington State to Washington, DC. Apparently his “lawyer of choice” was in Washington, DC. The court (for various procedural reasons) denied his request for this “change in venue”. In other words, the hearing took place in Seattle.
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The teaching of Topsnik 2 – 2016: #Greencard expatriation and the S. 877A “Exit Tax”

What! You want to abandon your Green Card and leave the USA!

Introduction – Introducing Gerd Topsnik – The World According to Facebook

“This case will be seen as the first of an (eventual) series of cases that determine how the definition of “long term resident” applies to Green Card holders. The case makes clear that if one does NOT meet the treaty definition of “resident” in the second country, that one
cannot use that treaty to defeat the “long term resident” test. A subsequent case is sure to expand on this issue. Otherwise, the case confirms that the S. 877A Exit Tax rules are “alive and well” and that the “5 year certification” test must be met to avoid “non-covered status”

Topsnik may or may not be a “bad guy”. But even “bad guys” are entitled to have the law properly applied to their facts. It would be very interesting to know how the court would have responded if Topsnik had been paying tax (a nice taxpayer) in Germany as a German resident.”

A nice summary of Topnik 1 and Topsnik 2

This is part of a series of posts on: (1) “tax residency“, (2) the use of “treaty tiebreakers” when an individual is a “tax resident” of more than one jurisdiction and (3) how to use “treaty tiebreakers” to end “tax residency” in an undesirable tax jurisdiction.

This is the second of the two Topsnik posts.

Topsnik 1 focused on the “tax residence” of Green Card Holders. The decision in Topsnik 1 is here:

topsnikdiv.halpern.TC.WPD
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The teaching of Topsnik 1 – 2014: Taxation for #GreenCard @TaxResidency and “tax treaty tiebreakers”

Introduction

This is part of a series of posts on: (1) “tax residency“, (2) the use of “treaty tiebreakers” when an individual is a “tax resident” of more than one jurisdiction and (3) how to use “treaty tiebreakers” to end “tax residency” in an undesirable tax jurisdiction.

Topsnik 1: It’s about the taxation (not expatriation) of  Green Card Holders

The 2014 decision in Topsnik is an interesting example of how these components interact. Mr. Topsnik was given a Green Card in 1977. He moved from the United States in 2003 and did NOT formally abandon his Green Card. He then attempted to argue that because he was a “tax resident” of Germany that he could use a “treaty tie breaker” to argue that he was NOT a “U.S tax resident”.

In summary the court ruled on a number of questions which INCLUDED:

1. Was Mr. Topsnik a U.S. “tax resident”?

Because Mr Topsnik never formally abandoned his Green Card (as required by the regulations) that he WAS a “U.S. tax resident” for ALL relevant years. This meant that he was taxable in the United States on all of his world income.

For clarity the regulations to Internal Revenue Code 7701(b) specifically state:

(b)Lawful permanent resident –

(1)Green card test. An alien is a resident alien with respect to a calendar year if the individual is a lawful permanent resident at any time during the calendar year. A lawful permanent resident is an individual who has been lawfully granted the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws. Resident status is deemed to continue unless it is rescinded or administratively or judicially determined to have been abandoned.

(2)Rescission of resident status. Resident status is considered to be rescinded if a final administrative or judicial order of exclusion or deportation is issued regarding the alien individual. For purposes of this paragraph, the term “final judicial order” means an order that is no longer subject to appeal to a higher court of competent jurisdiction.

(3)Administrative or judicial determination of abandonment of resident status. An administrative or judicial determination of abandonment of resident status may be initiated by the alien individual, the Immigration and Naturalization Service (INS), or a consular officer. If the alien initiates this determination, resident status is considered to be abandoned when the individual’s application for abandonment (INS Form I-407) or a letter stating the alien’s intent to abandon his or her resident status, with the Alien Registration Receipt Card (INS Form I-151 or Form I-551) enclosed, is filed with the INS or a consular officer. If INS replaces any of the form numbers referred to in this paragraph or § 301.7701(b)-2(f), refer to the comparable INS replacement form number. For purposes of this paragraph, an alien individual shall be considered to have filed a letter stating the intent to abandon resident status with the INS or a consular office if such letter is sent by certified mail, return receipt requested (or a foreign country’s equivalent thereof). A copy of the letter, along with proof that the letter was mailed and received, should be retained by the alien individual. If the INS or a consular officer initiates this determination, resident status will be considered to be abandoned upon the issuance of a final administrative order of abandonment. If an individual is granted an appeal to a federal court of competent jurisdiction, a final judicial order is required.

Green Card holders must understand that they do NOT end their status as “U.S. tax residents” by leaving the United States and taking up residence in another country! Specific steps (related to notification) are required.

2. Could Mr. Topsnik use the “treaty tiebreaker” to argue that he was a “tax resident” of Germany and NOT a “tax resident” of the United States?

No. The use of a “treaty tiebreaker” requires that an individual be a “tax resident” of both countries. In this case the “treaty tie breaker” could be used ONLY if Mr. Topsnik was a “tax resident” of both Germany and the United States. The court held that Mr. Topsnik was NOT a “tax resident” of Germany but was a “tax resident” of the United States.

Note that the fact that Mr. Topsnik was NOT a “tax resident” of Germany meant that he was NOT eligible to use the “tax treaty tie breaker” rules. Eligibility to use the “tax treaty tie breaker” rules would NOT guarantee that Mr. Topsnik would be a “German tax resident”.

Conclusion: Mr. Topsnik was ONLY a “U.S. tax resident” and was therefore taxable in the United States on his world income!

Moral of the story: If a Green Card Holder ceases to reside in the United States he as NOT ended his status as a U.S. “tax resident”.
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Part 2: OECD Common Reporting Standard (“CRS”): “tax residence” and the “tax treaty tiebreaker”

This is Part 2 – a continuation of the post about “tax residency under the Common Reporting Standard“.

That post ended with:

Breaking “tax residency” to Canada can be difficult and does NOT automatically happen if one moves from Canada. See this sobering discussion in one of my earlier posts about ceasing to be a tax resident of Canada. (In addition, breaking “tax residency in Canada” can result in being subjected to Canada’s departure tax. I have long maintained that paying Canada’s departure tax is clear evidence of having ceased to be a “tax resident of Canada”.)

Let’s assume that our “friend”, without considering possible “tax treaties” is or may be considered to be “ordinarily resident” in and therefore a “tax resident” of Canada.

Would a consideration of possible tax treaties (specifically the “tax treaty residency tiebreaker) make a difference?

This question will be considered in Part 2 – a separate post.

What is the “tax treaty residency tiebreaker”?

It is entirely possible for an individual to be a “tax resident” according to the laws of two (or more countries). This is a disastrous situation for any individual. Fortunately with the exception of “U.S. citizens” (who are always “tax residents of the United States no matter where they live), citizens of most other nations are able to avoid being “tax residents” of more than one country. This is accomplished through a “tax treaty tie breaker” provision. “Treaty tie breakers” are included in many tax treaties. (Q. Why are U.S. citizens always U.S. tax residents? A. U.S. treaties include what is called the “savings clause“).

Some thoughts on the “savings clause”

First, the “savings clause” ensures that the United States retains the right to impose full taxation on U.S. citizens living abroad (even those who are dual citizens and reside outside the United States in their country of second citizenship).

Second, the U.S. insistence on the “savings clause” ensures that other countries agree to allow the United States to impose U.S. taxation on their own citizen/residents who also happen to have U.S. citizenship (generally because of a U.S. place of birth.)

Where are “tax treaty tie breakers” found? What do they typically say?

Many countries have “tax treaty tie breaker” provisions in their tax treaties. The purpose is to assign tax residence to one country when a person is a “tax resident” of more than one country.

As explained by Wayne Bewick and Todd Trowbridge of Trowbridge Professional Corporation (writing in the context of Canadian tax treaties):

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Determining Tax Residency In the United States: Citizenship and other forms of deemed tax residence

Introduction

The advent of the OECD Common Reporting Standard (“CRS”) has illuminated the issue of “tax residency” and the desire of people to become “tax residents of  more “tax favourable” jurisdictions. It has become critically important for people to understand what is meant by “tax residency”. It is important that people understand how “tax residency” is determined and the questions that must be asked in determining “tax residency”. “Tax residency” is NOT necessarily determined by physical presence.

What is meant by tax residence? Different rules for different countries

All countries have rules for determining who is a “tax resident” of their country. Some countries have rules that “deem” people to be tax residents. Other countries have rules that base “tax residency” on  “facts and circumstances”. Canada is a country that bases “tax residency” on either “deemed” tax residency OR tax residency based on “factual circumstances”.

What if a person qualifies as “tax resident” of two countries?

When an individual (who is NOT a U.S. citizen) is a “tax resident” of two countries, it is common to consider any tax treaty between those two countries. Often the tax treaty will contain a “treaty tie breaker” provision which will allocate “tax residence” to one of the two countries. (Note that the “savings clause” which is found in standard U.S. tax treaties prevents U.S. citizens from having most tax treaty benefits. Note “treaty tie breaker” provisions are available to Green Card Holders.)

In summary: for the purposes of the “CRS”, tax residence is determined by BOTH a country’s domestic laws AND tax treaty provisions that assign “tax residence” to one country.

Even though the United States has chosen to NOT participate in the OECD “Common Reporting Standard” (CRS), and is NOT a “reportable jurisdiction, the OECD reminds us of the rules for determining “U.S. tax residency”.

Deemed tax residency in the United States …

The IRS discussion of “U.S. Tax Residency” includes:
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Whether through regulation or legislation #FATCA Same Country Exemption won’t work

In the beginning there was Facebook …

and from a second Facebook group:

 

Introduction: If you were to REPEAL FATCA

A previous post discussing the what exactly is meant by FATCA and the Mark Meadows “Repeal FATCA” bill, described:

FATCA is the collective effect of a number of specific amendments to the Internal Revenue Code which are designed to target both (1) Foreign Financial Institutions and (2) Those “U.S. Persons” who are their customers.

1. There are “Three Faces To FATCA” which include:

– Face 1: Legislation targeting Foreign Financial Institutions (Internal Revenue Code Chapter 4)

– Face 2: The FATCA IGAs (which for practical purposes have replaced Chapter 4)

– Face 3: Legislation targeting individuals (primarily Americans abroad who commit “Personal Finance Abroad – While Living Abroad” – Internal Revenue Code 6038D which mandates Form 8938)

2. The amendments to the Internal Revenue Code that would be necessary to reverse the sections of the Internal Revenue that created FATCA.

Legislative FATCA vs. Regulatory FATCA

The sections of the Internal Revenue Code that comprise “FATCA” are surprisingly few.

FATCA Face 1: Internal Revenue Code S. 1474(f) gives Treasury broad authority to make “FATCA regulations”.
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Impressions of the @RepMarkMeadows April 26/17 #FATCA Hearing in Washington, DC – Opportunity to make case to end “taxation-based citizenship”

FATCA Hearings in Washington, DC – April 26, 2017

Beginnings – It all began in July 2016

The purpose of this post is NOT to describe the hearing in detail (that has already been well done), but rather to provide my overall (and perhaps broader) impressions based on actually having attended the hearing.

The April 26, 2017 FATCA hearing in Washington was long in the making. It’s genesis was rooted in a meeting that took place in July of 2016 at the Republican National Convention. The planning and preparation involved the efforts and consistent cooperation (weekly meetings since August) of a number of people in different countries and on different continents. It was a privilege to have been part of this group. A list of the people who worked on making the hearing happen – the  “FATCA prep team” – is  described here. Those efforts culminated in what some  witnessed “in real time” on April 26, and what thousands more will see (thanks to Youtube) in days to come.

The hearing has already been documented IN DETAIL and discussed in various places IN DETAIL, with the best commentary coming from posts at the Isaac Brock Society here and here and various Facebook groups here, here, here and here. (An example of ridiculous commentary is here.) When I say “commentary” I mean NOT ONLY the posts, but the rich and insightful comments. Seriously, this collection of “digital experiences” really is “History In The Making!”

Thinking about FATCA, What is it anyway?

I have written numerous posts about FATCA – “The Little Red FATCA Book” which you will find here. An explanation of how the Meadows “Repeal FATCA” bill would actually work is here. Basically, FATCA is the collective effect of a number of amendments (including the creation of a new Chapter 4 of Subtitle A of the Internal Revenue Code – which has made largely irrelevant by the FATCA IGAs)  which are designed to identify, attack and impose sanctions on:

A. FATCA: Non-U.S. banks and other financial institutions

Forcing them to “hunt down” the financial accounts and entities (examples include mutual funds, corporations, trusts and some insurance policies) owned by “U.S. persons”. The goal is to “turn them over” to the IRS.

This imposes enormous compliance costs on non-U.S. banks. The obvious effect is that they will not want  U.S. person customers. Would you? Interestingly the focus of the witnesses (Mr. Crawford and Mr. Kuettel) was primarily on the denial of basic access to financial and banking services.

Although important, this is only one half of the equation. What happens when “U.S. persons” learn (the vast majority had no idea) that they are subject to U.S. taxation?

B. FATCA: “U.S. Persons” with non-U.S. financial assets and bank accounts

It is not possible for “U.S. citizens” to BOTH: be U.S. tax compliant and live a productive life outside the United States, when they are also subject to the tax laws of other nations. (Digital nomads are the exception.) The reason is that U.S. citizens living outside the United States are living under a system where:

  1. They are presumed to live in the United States (which they don’t); and
  2. Their assets (which are local to them) are presumed to be “foreign” to the United States.

If you don’t understand (or don’t believe) why this is true, you will find an explanation here.

Just remember:

“When In Rome, Live As A Homelander” and do NOT “Commit Personal Finance Abroad!” (It’s UnAmerican)

Although a major effect of FATCA is to subject Americans abroad to a very special set of tax rules (think PFIC, foreign pension, CFC, and a crushing burden of forms that impact ONLY Americans abroad), there was NO witness that even alluded to this as one of the effects of FATCA. (FATCA is the enforcer of the uniquely American policy of “taxation-based citizenship”). There was also no witness that described how a “FATCA letter” can lead to absolute financial ruin for honest taxpayers, who have made a life outside the friendly borders of the United States of America. There was no witness who explained the confiscatory effects of entering one of the IRS “Amnesty – Ministry of Love” programs.

This had had the effect of making it seem as though FATCA (in terms of the effect on Americans abroad) was just a simple “disclosure – Form 8938 issue. Nothing could be further from the truth.

If it were not for “taxation-based citizenship”, FATCA would be no more or less a problem for Americans abroad than it would be for Homelanders (which doesn’t mean it is not a problem). Unfortunately, the hearing did not provide evidence on this point.

(This is NOT a criticism. But, just imagine if there had been witnesses who had been identified as a “U.S. Person” because of FATCA, did NOT know about “taxation-based citizenship” and then were forced into the “Offshore Voluntary Disclosure Program“. Now that would have been a story …!)

It is “taxation-based citizenship” that makes the effects of FATCA so hard on Americans abroad! In 2011, I remember thinking:

The United States can have either FATCA or it can have “taxation-based citizenship” but it CANNOT have both!

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