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US Tax Laws Pushing Americans to Expatriate; OVDI “Arbitrary and Capricious” – An Interview With Bill Yates – Former Attorney, Office of Associate Chief Counsel (International), IRS, continued…



TaxConnections Picture - Statue Liberty and FlagToday’s blog post completes the interview with Willard (Bill) Yates, who recently retired from the Office of Associate Chief Counsel (International), Internal Revenue Service after 31 years of service. During his tenure as a Chief Counsel Attorney, Bill was the recipient of 10 awards, including the Albert Gallatin Award, Treasury’s highest career service award. The Gallatin is awarded only to select federal employees who served twenty or more years in the Department and whose record reflects fidelity to duty. Bill received the Gallatin award for his work throughout his IRS career, including his work on implementation of some of the compliance requirements of the Foreign Account Tax Compliance Act (FATCA).

Most of Bill’s career at IRS focused on offshore compliance, including his participation in a massive overhaul of outdated foreign trust reporting requirements Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts and Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner). Bill was the principal drafter of the regulations under section 679, Foreign trusts having one or more United States beneficiaries, Notice 2003-75, RRSP and RRIF Information Reporting and Notice 2009-85, Guidance for Expatriates Under Section 877A.

Our focus for this series will be on Bill’s comments on the American Citizens Abroad working paper titled, RBT, Residence Based Taxation: A Necessary and Urgent Tax Reform (RBT Proposal), which recently was submitted to the International Tax Reform Working Group of the House Ways and Means Committee.

In general, the RBT Proposal offers an alternative to citizen-based taxation (CBT).

La Torre Jeker: Implementing the RBT begins on page 14 of the RBT Proposal. Do you have any comments on the implementation of the RBT Proposal?

Yates: I certainly do. ACA definitely has taken the high road as far as the part about bringing overseas taxpayers back into the system. The IRS OVDIs go a little bit overboard, euphemistically speaking, when it when it comes to encouraging people to come forward. In general, the OVDIs required filing both the original returns and amended returns for the prior 8 years that report all income and disclose the foreign accounts. In addition, all missing FBARs are required to be filed, accompanied by a signed agreement to extend the statutes of limitations, and pay a penalty of up to 27.5% of the accounts’ highest balance over the 8 year period. Finally, OVDI required the payment of a 20% accuracy penalty based on the total underpayment for the 8 years, as well as failure to pay penalties, and pay failure to file penalties.

Taxpayers did have the option of “opting out” of OVDI, but do so risked exposure to criminal prosecution and additional FBAR penalties.

Whatever, course of action taken by a taxpayer, the OVDI terrified and angered a great many people. I received calls from many practitioners who told me stories about “accidental citizens” who had RRSPs who came forward and eventually were handed a 20% penalty of an account which represented their entire savings. From what I was hearing, an RRSP with approximately $100,000 was pretty much the norm. So, IRS takes a $20,000 chunk out of it. Practitioners told me that many of their clients were in tears when they were informed of what was going to happen to their savings. This is unacceptable.

Here is a typical example: A is a Canadian citizen; only a Canadian citizen, he thinks. Unfortunately, A is wrong. A’s parents were both Canadian citizens, and only Canadian citizens. A’s parents lived in Canada. Unfortunately for A, when A was “on the way,” the closest hos
pital was just across the border in the U.S. A was born in the U.S. hospital. Twenty years later, A, who has never lived or worked in the U.S., is at a barbecue where he learns through casual conversation that he is a dual citizen; Canada and U.S. He soon becomes aware of his filing obligations and also, to his horror, the IRS OVDI. Just like everyone who has ever worked in Canada, whether Canadian or U.S., A has an RRSP. A has only $15,000 in his RRSP. He has never filed an FBAR. He is a truck driver.

There is really no need to continue. Suffice it to say that A is the last person the IRS OVDI should be hitting. The RBT Proposal states, “Many of the inconsistencies and inefficiencies inherent in FATCA legislation and IRS policies since 2009 can be traced to the unjustified bundling of Americans abroad and rich tax evaders, domestically resident but with assets hidden abroad, into a single amalgam. In reality, these are two very different subject groups.”

The RBT Proposal sets forth a far more palatable solution:

“An equitable and acceptable compliance program for Americans abroad:

• would require just three years of back tax reporting;

• would eliminate the requirement to file the FBAR which is superfluous since it is not a tax form; Form 8938 (submitted as an attachment of Form 1040) provides a much more comprehensive report on overseas assets;

• must eliminate all non-filing penalties for FBAR and Form 8938;

• must eliminate any threat or risk of criminal prosecution;

• must be open to all non-residents, with no ceiling threshold for the amount of taxes due;

• must be limited to payment of only back taxes, interest and late filing penalties related to unpaid taxes associated with the three years of back-filing.”

I had no part in OVDI, although I was part of a group that reviewed the OVDI FAQs.

La Torre Jeker: What was that like?

Yates: In the law dictionary where it lists “arbitrary and capricious,” the definition says, “See IRS OVDI FAQs.”

La Torre Jeker: Do you think the IRS will modify future OVDI programs as suggested by the RBT Proposal?

Yates: I doubt it. Apparently, the program has been successful in bringing in approximately $5 billion in back taxes and penalties. And, believe me no one at the IRS Field level is going to speak up about the inconsistencies inherent in OVDI as far as “accidental citizens” are concerned. I have good friends in the Field that didn’t agree at all with what their managers were telling them to do. They had no choice, other than to do what they were told. These are really talented, fair-minded people who are being marginalized. They aren’t out to “get” Joe Blow taxpayer. They want to get the big guys, the guys with the money who are cheating Joe Blow taxpayer through tax evasion.

You have to wonder how much more could be brought in if future OVDIs were less draconian. Earlier, I said that the OVDI had made a lot of taxpayers angry. At least, that’s what I heard. Apparently, a lot of taxpayers living overseas decided that the IRS OVDIs were totally unfair and way too risky. So, they decided to take their chances and not come forward at all.

La Torre Jeker: In the final analysis, do you think that RBT has a chance?

Yates: Not really. The Treasury and IRS have too much invested in FATCA to turn back now. It’s really too bad, but something had to happen. UBS and LGT broke the dam, resulting in the flood of compliance measures manifested by IRS OVDIs and FATCA. The OVDIs caught up a whole lot of people who were totally unaware of their U.S. filing requirements. How could they have been? And, FATCA is hitting U.S. taxpayers living overseas with unforeseen consequences, such as having their foreign bank account(s) closed.

La Torre Jeker: So, you think FATCA is a mistake?

Yates: It doesn’t matter what I think, now. FATCA is inevitable. However, Jacqueline Bugnion, Tax Team Director of ACA, explains that the RBT proposal could pass even if FATCA remains. But, she concludes that if citizen-based taxation remains, FATCA must go:

Citizen-based taxation (CBT) and RBT are two separate issues. What Congress has to realize is that the current citizenship-based taxation creates a serious competitive disadvantage for the United States and that if FATCA remains, CBT for Americans living and working abroad has to go. Otherwise, having a US passport overseas is simply too much of a liability to keep. Over 80% of Americans abroad are long-term overseas residents, married to foreigners, working abroad. Many have dual nationality – some even born with it. Why should they have to continue to double file, double pay when all of their governmental services come from the country where they reside? CBT does great harm to the US because it prevents US corporations from sending Americans abroad to represent US interests. More freedom of movement of US citizens would enhance US competitiveness around the World.

La Torre Jeker: Do you think Jackie is right when she says that FATCA must go if CBT for American citizens living and working overseas remains?

Yates: To me, it’s really a question of whether FATCA will go if CBT remains. But, I’ll tell you one thing. I’ll never forget what someone said after one of our many, endless Form 8938 drafting sessions.

La Torre Jeker: What was that?

Yates: “Boy, I sure wouldn’t want to have to fill out this form.”

Virginia La Torre Jeker J.D., has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has 30 years of experience specializing in US and international tax planning as well as international commercial transactions. She has been based in Dubai since 2001; prior to that time she worked in Hong Kong for 15 years as a US tax consultant for international law firms, major banks (including HSBC) international accounting firms (Deloitte) and trust companies. Early in her career she worked in New York with the top-tier international law firm, Willkie Farr & Gallagher.

Virginia is regularly asked to speak at numerous conferences and seminars for various institutes and commercial organizations; publishes a vast array of scholarly works in her area of expertise, been interviewed by CNN and is regularly quoted (or has her articles featured) in local and international publications. She was recently appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. She was a guest lecturer at the University of Hong Kong, LL.M Program (Law Department) and served as an adjunct Business Law professor at the American University of Dubai and at the American University of Sharjah where she also taught the legal / ethical aspects of internet law and internet based transactions.

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