“And to you taxpayers out there, let me say this: Make sure you file your tax return on time! And remember that, even though income taxes can be a ‘pain in the neck,’ the folks at the IRS are regular people just like you, except that they can destroy your life”.
Thus wrote American humorist Dave Barry at the end of a column some years ago describing his frustration at having been chosen by random sample for a tax audit.
As a European (or, more correctly, after David Cameron’s recent walkout at the EU summit– as a Brit) I have always viewed with a mixture of curiosity and horror the workings of the US tax system. It is bad enough that the US is substantially the only country on Mother Earth that still insists on taxing its citizens as well as its residents due to Abe Lincoln’s pique at Americans deserting the country during the Civil War (Guys – get over yourselves, already).
But, to add insult to injury, Uncle Sam’s recent adoption of a policy of wholesale persecution of the world’s banking system (including the soon-to-smoke –you-out FATCA regulations) in search of unreported assets and income of its citizens, is beyond a joke.
To sweeten the bitter pill the IRS has offered Amnesties – the latest being the 2011 Offshore Voluntary Disclosure Initiative (OVDI) which, from my experience, was less an amnesty and more a case of “Come out slowly with your hands above your heads” – the terms were so draconian that, despite the genuine fear of the IRS gradually closing in on them, many people followed Jack Benny’s response to a gun-toting gangster demanding “Your money or your life!” – “I’m thinking it over”, he said. The September deadline passed and many did nothing.
But finally, in this season of goodwill, there are signs that the IRS is softening its stance slightly. On December 7 the IRS issued a Factsheet aimed at Dual Citizens living outside the US. The IRS recognizes that such individuals may have failed to file their Income Tax Returns and FBARs (Report of Foreign Bank and Financial Accounts) in a timely manner, the latter requiring filing by June 30 each year. The standard penalties that will generally apply are explained but, where it can be shown that there is “reasonable cause”, penalties can be reduced or cancelled. Reasonable cause normally means that a taxpayer “exercised ordinary business care and prudence in meeting his tax obligations but nevertheless failed to meet them”.
There is a list of the sort of things that need to be taken into account when deciding reasonable cause but possibly of most interest in the Fact Sheet are the “real situation” examples provided. There appears to be a move to finally show the milk of human kindness to the dual citizen living abroad who has not intentionally evaded US tax and who comes forward voluntarily to report. Ironically, this could mean that those who ultimately shied away from the recent amnesty could now land a better deal.
Of course, as always, there is a sting. The IRS are unlikely to entertain anonymous applications to establish whether “reasonable cause” will apply, so it would appear that there is an element of risk which needs careful analysis before making a move.
Perhaps the IRS are finally turning their backs on an attitude that HL Mencken summarized as: “The haunting fear that someone, somewhere,
may be happy”.