Everything You Need To Know About Tax Compliance – From An IRS Veteran | Ask An Expert with Dan Price

“The US system of tax reporting and FBAR reporting is exceedingly complex, and materially differs from the reporting requirements in most other countries in the Western world.” So says Dan Price, my guest on this week’s Ask An Expert show.

That’s why there’s a high chance of non-compliance if you’re an expat in the US, and why you need to hear this week’s episode. Dan is a distinguished tax attorney, two years into running his own firm but with almost 20 years of experience at the IRS Office of Chief Counsel. While there he established programs designed to aid individuals in becoming tax compliant, and covered both criminal and civil IRS audits. He knows his stuff, so it’s a privilege to have him on the show to take us behind the scenes at the IRS and give you expert advice on staying tax compliant.

We talk about:

The cost of compliance for middle-class tax payers. What qualifies as middle-class? And what are the costs of being in non-compliance? Hint: they’re significant.

How to streamline your filing with the IRS. As Dan explains, there are myriad systems and procedures in place to catch wilful non-compliance. You can’t beat the algorithm, so don’t try.

The difference between true ignorance, or wilful blindness, and knowingly ignoring tax obligations. if you’re an expat or an immigrant and you came here mid-career, there’s a very good chance you’re in some form of non-compliance. Don’t bury your head in the sand. It’s very possible the IRS already has information about you and it might one day catch up with you.

There are solutions, palatable solutions, as you’ll hear in this episode.

For more information on Daniel N Price LLC, visit pricetaxlaw.com

We’re the Brits in America is affiliated with Plan First Wealth LLC, an SEC-registered investment advisor. The views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views or positions of Plan First Wealth.

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Plan First Wealth does not provide any tax and/or legal advice and strongly recommends that listeners seek their own advice in these areas.

About Richard

Richard Taylor is a British expat, dual citizen (UK & US). Originally from Bolton, he now lives in Greenwich, CT, where Plan First Wealth has its head office.

As the firm’s leader, Richard launched Taylor & Taylor, now Plan First Wealth, and continues to fuel the firm’s growth. Richard is a Chartered Financial Planner (UK – CII) in addition to holding the IMC (CFA UK) and Series 65 (US – FINRA).

Connect with Richard on LinkedIn

Transcript:

 

Richard Taylor:
[00:00:54 – 00:01:33]
Welcome to our Ask an Expert show, where I invite a fellow professional in the cross border space to come in and talk to me about the issues we think expats and immigrants in America need to be aware of, if they’re going to thrive here. My guest today is Daniel Price. Dan is a tax attorney with a practice that includes the civil and criminal defense of U.S. tax audits and investigations, and of particular relevance to our listeners, assisting individuals in navigating the process of coming into compliance, especially those with international reporting obligations who for one reason or another have failed to comply with U.S. tax law, which frankly, is pretty much every expat or immigrant I’ve ever met to one degree or another.

Richard Taylor:
[00:01:33 – 00:02:03]
Dan is the managing member of Daniel N. Price P LLC, a law firm he opened in January 2023 after 19 years working for the Office of Chief Counsel of the IRS. Yes, you heard that right. My guest today who has come to talk to us about why and how to voluntarily get into compliance with the IRS which puts a fear of God into most of us. Dan spent nearly two decades with the IRS and during that time he was intimately involved in the establishment of these very same voluntary compliance programs and procedures.

Richard Taylor:
[00:02:04 – 00:02:25]
So I cannot imagine someone better positioned to come and talk to us about this. Not just a letter of the procedure, but hopefully to provide some insights into some of the inner workings and thinkings of the IRS. Dare I say it maybe even demystify the IRS, if only slightly. I’m extremely grateful that he’s agreed to come and share his knowledge and insights with us. So without further ado, let’s get into this.

Richard Taylor:
[00:02:25 – 00:02:28]
Hi Dan. Welcome to We’re The Brits in America podcast.

Dan Price:
[00:02:28 – 00:02:29]
Thank you, Richard.

Richard Taylor:
[00:02:29 – 00:02:48]
I’m so excited to have you here. This is such an important topic. As I alluded to, yes, there will be exceptions, but in my experience, pretty much every single expat or immigrant who certainly who moved here mid career and who accumulated stuff outside the US – they’re all in some form of non compliance. There are exceptions? Yes.

Richard Taylor:
[00:02:48 – 00:02:56]
People who take advice before they come here, absolutely. But I’m talking about the people I see. There’s always some sort of non compliance. One, is helping – is getting people aware of it.

Richard Taylor:
[00:02:56 – 00:03:05]
Then it’s two, once they’re, they’re over the shock and frankly fear it’s helping them realize that one, they should do something about it and solutions exist.

Dan Price:
[00:03:06 – 00:03:34]
Absolutely. And Richard, let me just comment on this. You mentioned that, that almost all immigrants that, that you deal with have some level of non compliance. I want to explain why. The US system of tax reporting and FBAR reporting is exceedingly complex and materially differs from the reporting requirements in most other countries in the Western world.

Dan Price:
[00:03:34 – 00:03:55]
So people may have backgrounds and educations and they, they may have some experience with local taxing authorities in other countries, but the IRS and the US tax system is just so different. So a lot of the mistakes are genuinely innocent. Now trying to explain that to the IRS is really an art form.

Richard Taylor:
[00:03:56 – 00:04:19]
It’s so different. And that’s both a defense initially, but as time goes by, that defense loses some of its potency, should we say. And I think, I mean I think it does logically, but also I believe in the, in the eyes of the IRS, if, if you, if you’re a brand new expat here, sure, okay, you’ve made a mistake. You don’t know. You’ve been here 20 years.

Richard Taylor:
[00:04:19 – 00:04:24]
I imagine they’re, they’re less inclined to believe you. You don’t know some of this stuff.

Dan Price:
[00:04:24 – 00:04:36]
Perhaps that’s very true. As time goes on, one’s awareness of obligations in the country of residency, specifically the US should increase over time.

Richard Taylor:
[00:04:36 – 00:04:56]
I don’t want to jump the gun either as well. But it’s not just that expats are unaware of these unique US requirements. That’s part of the problem. The other part of the problem is the penalties. Potential penalties, I should say, for even innocent, what I class as innocent, non compliance.

Richard Taylor:
[00:04:57 – 00:05:36]
Non compliance, where you’ve not been trying to hide anything, you’ve just simply not known or not been aware of what the IRS might call non willful. You posted recently without wanting to get too much into the weeds already, but you posted recently that the FBAR penalties For reporting foreign bank accounts and other assets. The penalties they get re rated every year with inflation. $16,000 a year or $16,500 a year for non willful. So if you haven’t been reporting a bank account or a pension or some other account, not for anything malicious or mendacious, just because you didn’t know, potentially for each year you can get hit with a 16 and a half thousand dollars penalty or something.

Richard Taylor:
[00:05:36 – 00:05:39]
To most people outside the US that will blow their mind.

Dan Price:
[00:05:40 – 00:05:57]
Oh, and that’s one example of a monetary penalty. But that’s a flat penalty. Sixteen and a half thousand per non willful violation. Think about some of the transactional penalties. Many foreign retirement plans may be classified as foreign grantor trusts for U.S.

Dan Price:
[00:05:57 – 00:06:23]
purposes. There are transactional penalties of 35% of contributions to foreign trusts or distributions from foreign trusts. So let’s say there’s a lump sum distribution and it’s not reported properly. The IRS may assess a 35% penalty based on the transaction. Those transactional penalties can be crippling.

Dan Price:
[00:06:23 – 00:06:43]
Additionally, the penalties for failing to timely report large foreign gifts and inheritances are percentage based.5% per month for the failure to report capping at 25%. So a six month late reporting would yield a 25% penalty based on the.

Richard Taylor:
[00:06:43 – 00:07:03]
Gross amount they’re crippling. And wait, it gets worse. You’ve not filed this form, so you’re potentially exposed to these penalties. But in not filing the form, your statute of limitations. The clock doesn’t start ticking because the IRS considers your tax return incomplete, or at least incomplete as it pertains to this missing form.

Richard Taylor:
[00:07:04 – 00:07:17]
So even once you’ve run the clock down after three or six years, then you add interest onto these penalties potentially. Right. And it just, it gets, it gets very ugly. The more I, the more I go down this road, the uglier and uglier it gets. It stresses me out and I’m, I’m only tangentially related to it.

Dan Price:
[00:07:17 – 00:07:36]
Yeah. We talk about the statute of limitations issue briefly. Under code section 6501, the failure to file designated information returns will indefinitely hold open the assessment. Statute of limitations. What does that mean?

Dan Price:
[00:07:36 – 00:08:15]
The IRS would have an unlimited time to start an audit and assess additional tax. Now there are exceptions. If the failure to file that information return was due to reasonable cause, we could say reasonable cause is a legally justifiable excuse. There’s a body of case law that gives us some parameters, but it’s a fairly narrow realm of legally justifiable excuses. Then the statute of limitations would only be open as to income attributable to items that should have been reported on that information returned.

Dan Price:
[00:08:15 – 00:08:31]
But in general, the IRS takes a very constrained view of reasonable cause and will assert the entire return is open indefinitely when these information returns relating to foreign transactions and assets aren’t filed.

Richard Taylor:
[00:08:31 – 00:08:52]
That’s not you phoning up and saying, sorry guys, I just didn’t know we did. I’ve done a podcast on reasonable cause of another tax law that is an involved process, as you mentioned, tight parameters and a whole process asserting it and then hoping it gets accepted. It’s not just a Sorry, gov, I didn’t know. It’s way, way more involved than that. The vast majority of the population, myself included.

Richard Taylor:
[00:08:52 – 00:09:08]
The IRS is this kind of slightly terror. No. Very terrifying organization that you really have no idea how it’s thinking. Yes, it doesn’t matter. You can read, watch everything that comes from the IRS, but really, you just have to.

Richard Taylor:
[00:09:09 – 00:09:17]
You just have no idea. It’s very intimidating. What’s it like working inside? What was that? 19 years?

Richard Taylor:
[00:09:17 – 00:09:27]
I say, totally ridiculous. I can’t actually expect you to sum up 19 years, but I’m just, I’m interested in, in how you reflect back on that, what it was like being as part of the IRS.

Dan Price:
[00:09:28 – 00:09:52]
Working for the government requires a degree of patience that some people don’t have. Dealing with ridiculous procedures, looking for practical workarounds. In everyday life, you have to be patient. You need to be resilient, have some creativity. Or you need to be, I hate to say it, a drone.

Dan Price:
[00:09:52 – 00:10:15]
So unless you’re creative and resilient at work through the system, or you’re simply a drone that conforms to the system, those are the two major buckets of, of IRS workers. Fortunately, I worked with teams that were creative and resilient and I, I enjoyed my tenure. I had fun. But there were also frustrating elements of government practice and.

Richard Taylor:
[00:10:16 – 00:10:23]
19 years IRS, and now what? Just, just. This is your second year in private practice. You just, you just completed two years in private practice.

Dan Price:
[00:10:24 – 00:10:32]
And I also took a year off to do some pro bono work. So I’ve been three, three years out of the government. Two years operating my own law firm.

Richard Taylor:
[00:10:32 – 00:11:07]
So 19 years on the government side creating these programs and, and in court prosecuting tax cases, and then for the last two years on the other side of that working with the taxpayers who previously, I guess you could say you’re in opposition to in some ways. What has that experience been like and has it given you? It must have caused you to look back at your time in the IRS and think, oh, do you know, I wish I’d known this about individual taxpayers now when I was drafting these laws. Or does it, do you, do you wish you could like communicate with your ex colleagues in a way and say you’re seeing an action interpreting it as X, but really it’s Y.

Dan Price:
[00:11:07 – 00:11:23]
The largest item that I’ve learned being in private practice is the real cost. True. True. And complete compliance brings on middle class taxpayers. The IRS has this view.

Dan Price:
[00:11:23 – 00:11:38]
Well, everybody should comply with the law. Why can’t you comply with the law? Taxpayers need to find the right advisors. Right advice costs money. Filling out the panoply of forms to comply costs money.

Dan Price:
[00:11:38 – 00:12:16]
I think the IRS really doesn’t understand the compliance burden on the average international taxpayer. And I’ve provided public comments back to treasury and IRS Office of Chief Counsel about some of these topics because the compliance burdens are colossal. I’ve seen taxpayers with the requirement to report foreign mutual funds as pfix on Forms 8621 where the the accountants cost to to prepare the return have eclipsed the value of the underlying investments. That’s ridiculous.

Richard Taylor:
[00:12:16 – 00:12:18]
I can believe it. Yeah.

Dan Price:
[00:12:18 – 00:12:21]
And the IRS doesn’t understand that and.

Richard Taylor:
[00:12:21 – 00:12:24]
Then you point it out to them and they disregard it to their defense.

Dan Price:
[00:12:24 – 00:12:28]
Congress writes the laws, the IRS simply administers them.

Richard Taylor:
[00:12:28 – 00:12:29]
True.

Dan Price:
[00:12:29 – 00:12:38]
But the commissioner does have inherent discretion and I just feel that that inherent discretion hasn’t been used sufficiently.

Richard Taylor:
[00:12:38 – 00:13:18]
Let’s get on to the topic at hand. As I said before, and as you mentioned, we have one of the, the architects of the compliance programs, specifically the streamlined. What we’re here to talk about is expatriates, immigrants or anyone with international assets really is frequently in some form of non compliance and that can be a scary place to be, especially once you realize the size of the potential penalties involved and the scope in terms of what they call penalty sacking. Right, Dan, where they you, you know, you’ll get the FBAR penalty. If that’s not bad enough, they’ll lob on an 8938 or 3520 and then they’ll do it for multiple years.

Richard Taylor:
[00:13:18 – 00:13:40]
And once you start tossing up and doing the maths, it’s an, it’s a, it’s an utterly terrifying place to be. But solutions exist and we’re here to talk about those solutions. Should we talk a bit fIRSt of all about a common refrain I’ve heard when I’ve pointed this stuff out to someone is oh, they’re not looking for me. Oh, they won’t Find me. Which I find a strange attitude to take straight away.

Richard Taylor:
[00:13:41 – 00:13:46]
But let’s maybe talk about how they they might catch up with you.

Dan Price:
[00:13:47 – 00:14:01]
That is a common refrain. Taxpayers will say, or potential clients may say, I’m just a small fish. Why would the IRS ever even look for me? How would my name ever pop up on the radar? Well, one way is just by random chance.

Dan Price:
[00:14:01 – 00:14:16]
The IRS has an algorithm to randomly select people for audit. We could call it the unlucky lottery. It’s like getting hit by lightning. Nobody wants to get hit by lightning. Nobody wants to get selected for an NRP or National Research program audit.

Dan Price:
[00:14:16 – 00:14:43]
But it happens. And when it happens, part of the standard audit question is, do you have any foreign bank accounts? Do you have any foreign investments? And when an IRS agent is asking you that question under oath, you have the option of either one answering truthfully or taking the fifth. Either way, the exam is going to continue and the examination is going to focus on international reporting.

Dan Price:
[00:14:44 – 00:15:25]
But the IRS also has many other avenues of information collecting. Intergovernmental agreements or tax treaties provide the IRS with tremendous amounts of data. When I worked with chief Counsel, I worked with the Exchange of Information office that handled treaty exchanges. At times, the IRS through its treaty partners received spontaneous tips about taxpayer non compliance. For example country one might say we have some evidence that our citizen is also a green card holder and may be out of compliance IRS.

Dan Price:
[00:15:25 – 00:15:50]
And guess what? The IRS takes those tips very seriously. Additionally, FATCA and the automatic exchange of information from FATCA Partners provides a treasure trove of information for the IRS. So if you’re a US citizen or green card holder residing, let’s say in Western Europe, every bank in Western Europe will screen for citizenship and then report that bank account information back to the IRS.

Richard Taylor:
[00:15:50 – 00:16:27]
That obviously is a colossal amount of data and no one being able to see into the IRS. One of the kind of like theories about that abounds is that this colossal amount of data is just sat there somewhere and it’s either waiting for someone to go through it and discover all these unreported accounts, which, let’s be honest, would probably never happen because it’s too big a job, or worryingly now it’s waiting for someone to feed it into a system and for the for AI to trawl it and just throw out discrepancies. Is that a reasonable outcome to us to think that could happen?

Dan Price:
[00:16:28 – 00:17:00]
Absolutely. The IRS is greatly improving its data analytics. Since I departed the government, the IRS has publicly touted advancements in data analytics, including the use of AI but let me talk about what I saw fIRSthand even before I left. Although the amount of fat good data is colossal, even using simple data analysis tools, the IRS can select cases that appear to give good audit potential. I’ll give you an example.

Dan Price:
[00:17:00 – 00:17:23]
Now, the FATCID data received from Western European banks can easily be compared against Form 8938 reporting and FBAR reporting. Very simple data analytics. Oh, bank is telling us about a colossal account held by taxpayer Smith. Taxpayer Smith didn’t file an FBAR or an 8938. That’s low hanging fruit.

Dan Price:
[00:17:24 – 00:17:52]
I also saw fIRSthand some cases where the FATCA reporting the IRS received from its IGA partners was materially incorrect. For example, a decimal placement error in an account balance could trigger an audit. So the bank might report a maximum balance of 8 million, whereas in reality the maximum balance is 80,000. And that disconnect can also trigger audits.

Richard Taylor:
[00:17:52 – 00:18:09]
Oh, they come at you, think you’ve got 8 million, you’ve got 80,000. They’re not coming at you with smiles and being all nicey nicey. So the message is, well, I’ve had one tax attorney tell me in response to the they’re not looking for me. It doesn’t matter what the IRS are looking for. It matters what they find.

Richard Taylor:
[00:18:09 – 00:18:28]
If you have unreported bank accounts, mutual funds, these pfix, we’re talking about ETFs, pensions, retirement accounts, I think it would be, I think it’s very, very foolish to just think, hope that it will never catch up with you. Maybe it won’t, but, but that’s getting less and less, it’s getting more and more likely that it will.

Dan Price:
[00:18:28 – 00:18:46]
That’s true. Additionally, the IRS encourages whistleblowers. There’s an active whistleblower program. The IRS advertises the awards it’ll provide when tips successfully lead to the assessment and collection of tax and penalties. And penalties are a major component of those investigations.

Dan Price:
[00:18:46 – 00:19:08]
Think about willful FBAR penalties. Willful FBAR penalties Now start at 160,000 and change per year or 50% of the bank balance, whichever is greater. So whistleblowers have a strong incentive to provide tips relating to international non compliance.

Richard Taylor:
[00:19:08 – 00:19:35]
Let’s talk about how to get into compliance. And I want to preface this with I’ve been doing this for 10 years. I’ve met a lot of people and as I say, the vast majority of them had some, I believe I had some form of non compliance in there also. The vast, vast majority, perhaps even every single person I’ve met has wanted to do the right thing. I honestly have never met anyone who was trying to commit tax fraud or conceal assets from the IRS or if I have, they haven’t told me.

Richard Taylor:
[00:19:36 – 00:20:15]
Some of them were making questionable decisions, but no one was actively hiding stuff or trying to under report to save tax. So the community I serve, expats and immigrants, yes, I think non compliance is high, but it’s accidental, innocent. My feeling is, and this was increased when I recently read a book about 15 years on from the Bernie Madoff scandal. It was a reporter who had gained access to Bernie Madoff in prison and had done a deep dive. And it was fascinating and I was just struck by how mega, mega, mega, mega wealthy people really are trying to game the system, really are trying to hide and under report assets.

Richard Taylor:
[00:20:16 – 00:20:34]
I don’t believe this problem large exists in the international expat space. I do think it genuinely exists in the American space. I find it hard to fathom. Maybe that’s why I’m not a billionaire. So the reason I raise that point is I truly believe that the vast, vast majority, if they’re in some form of non compliance are doing so out of.

Richard Taylor:
[00:20:34 – 00:20:38]
It’s an accident. It’s out of unknowing. There’s no malicious intent there.

Dan Price:
[00:20:39 – 00:21:01]
I agree with that. In fact, I would extrapolate even further. I think the vast majority of US persons, green card holders, US citizens, whether residing in the US or abroad, have a very healthy respect for the IRS. They want to do the right thing. It’s a very rare person who intends to commit tax fraud.

Richard Taylor:
[00:21:01 – 00:21:28]
You know you say that though, but the, the scandal that really ratcheted all this up, the ubs, that was naked tax fraud. That was a sizable chunk of very, very of wealthy Americans hiding money. These burn notices, right? No, obviously I’m kind of horrified by the level of penalties and the repercussions for this innocent non compliance. And then I’ll try and put my, my IRS hat on and think about that coming from and that we, you and I have talked about it before.

Richard Taylor:
[00:21:28 – 00:21:50]
This, this idea of like willful blindness. But also if you’re working on in, in the international space and you’re, you’re, you’re being fed all this information by UBS or whoever under the amnesty program where you must all these accounts where they were hiding money, they were, there’s no way around it. They were hiding money from the IRS to avoid paying taxes. I’d get pretty cynical.

Dan Price:
[00:21:51 – 00:22:24]
That’s actually a good way to explain how the IRS approaches the vast majority of These cases because a tiny fraction of taxpayers purposely used Swiss bank accounts and other foreign bank accounts to evade paying taxes. There’s an inherent suspicion of all taxpayers that have international holdings. So think about it from the enforcement side. The IRS sees the worst of the worst. The IRS went after UBS and Credit Suisse and so many other banks.

Dan Price:
[00:22:24 – 00:22:44]
Look at the Department of Justice Swiss bank program. So many banks came forward for non prosecution agreements. That taints the view of the benign actors. From the tax cop perspective, there’s almost a default view of oh, they must be hiding something because they have a foreign bank account or a foreign investment.

Richard Taylor:
[00:22:45 – 00:22:58]
And I get it. And it’s horrible. Going back to what you originally said, it’s horrible that the kind of middle class taxpayers are sucked in and bear the burden of that. The people who aren’t hiding 10, 20, 30, 50 million in a UBS account. But here we are.

Richard Taylor:
[00:22:58 – 00:22:59]
But here we are.

Dan Price:
[00:22:59 – 00:23:28]
The IRS also made an interesting admission. The IRS has an internal auditor called TIGTA or the Treasury Inspector General for Tax Administration. TIGTA will audit various IRS functions and then publish reports. TIGTA audited the international enforcement of individuals by the large business and international division LB and I. So LBNI kind of has a split personality.

Dan Price:
[00:23:29 – 00:24:15]
It audits the biggest corporations and it has a little international section that handles international individual taxpayers. So TIGTA audited that component that audits individual international taxpayers and criticized that section of the IRS for basically not having a good return on investment. Well, in rebuttal to the TikTok report, that section of the IRS said we focus on penalties. Now what’s interesting is TPI or total positive income of the taxpayers under audit was only like $200,000. And the LB and I responded saying yes, but we focus on penalties.

Dan Price:
[00:24:15 – 00:24:29]
And that wasn’t taken into account. So I view that as an admission that the IRS is really focusing on middle class and upper middle class taxpayers and really focusing on penalty shakedowns rather than on substantive tax.

Richard Taylor:
[00:24:29 – 00:24:37]
So horrible. And this is the people we work with, you know, people who’ve come here, they’ve made it, they’ve done well. Not ridiculous. You know, it’s not what I call FU money. You know, it can still run out.

Richard Taylor:
[00:24:38 – 00:25:00]
And one of the reasons it can cause it to run out is you get hit with penalty stacking from the IRS. So now we’ve sufficiently terrified everyone, myself included, and on the assumption that the people we’re talking about, the people I’m referring to, this is innocent, my parlance innocent, non compliance. What do we Do? What do they do?

Dan Price:
[00:25:00 – 00:25:18]
We have to have that assumption fIRSt. Let’s assume for argument’s sake the taxpayer was non willful. This is an innocent, benign mistake. Well, one potential option may be the streamline filing compliance procedures. I’ll walk through the two major sections of the streamlined procedures.

Dan Price:
[00:25:18 – 00:26:22]
Streamline domestic offshore is designed for taxpayers that do not meet a very specific non residency test. What does the IRS offer in this procedure? If there’s international reporting mistakes, either FBAR8938 other international information returns, and there’s some quantum of previously unreported income from a foreign financial asset, the IRS is essentially saying, come in, we want you to come back into the fold, tell us why you made these mistakes, file your correct tax returns, amended returns for the most recent three years, clean up your FBARs for the past six years and simply pay a 5% penalty on the unreported foreign financial assets. Now, that 5% penalty can be steep. What if it’s a foreign pension, a UK SIP that was left off an FBAR, and somebody has $800,000 in that SIP?

Dan Price:
[00:26:22 – 00:26:47]
That 5% penalty can be costly. But in exchange, the IRS says so long as you are non willful and non fraudulent, your penalty will be kept. So it’s an exchange 5% penalty in the back tax for the most recent three years. A story in exchange for an assurance the IRS won’t seek higher penalties.

Richard Taylor:
[00:26:47 – 00:27:11]
Dan, can I just jump in a second? I find people will fixate on the penalty. They’ll think, okay, okay, so it’s going to cost me 40 grand. Yeah. But also if that you’re doing the streamline because you had unreported income elsewhere, maybe related to the sipp, and you’re going to have to refile the tax returns and, and pick up that income so you got the penalty plus.

Richard Taylor:
[00:27:11 – 00:27:51]
And I’m sure this is really obvious to you, but I find people, if they don’t put two and two together, it comes as a surprise to them. They think, they think their exposure is the 40,000, the 5%, but it’s not. It’s the tax you should have paid plus the interest on it, plus the penalty, plus frankly, the cost of undertaking this action. Because you’re going to need accountants and I urge you, for reasons we’re going into, to hire a good lawyer so the cost mounts up and that frightens some people. And I asked them to think about what we talked about before because if they really sat down, did the maths on the penalty, stacking the f bar penalties the 8,3520 penalties and the rest that can apply.

Richard Taylor:
[00:27:51 – 00:27:56]
Tax underpayment penalties. If they came at you full force, it’d be orders of magnitude of that.

Dan Price:
[00:27:57 – 00:28:20]
That’s a really good point, Richard. And typically when clients are on the fence about which compliance path to take, I’ll prepare a rough spreadsheet. Here’s the predictability or some level of predictability by making a streamlined submission. Now, the IRS can always audit a streamlined submission. And the IRS may not agree with the taxpayer’s position, but that’s something that could be battled on audit too.

Dan Price:
[00:28:21 – 00:28:44]
But look at the potential predictability of a streamlined submission versus the what if you do nothing and the IRS later audits you and you have all these open statute of limitations and all these other potential penalties that could be added on. Normally that, that second what if of doing nothing is scarier than the cost of a streamlined.

Richard Taylor:
[00:28:45 – 00:28:47]
Okay, so that’s the domestic procedure.

Dan Price:
[00:28:47 – 00:29:16]
Now for the streamlined foreign offshore procedure. The IRS is implicitly acknowledging that U.S. persons who spent considerable time abroad may have lacked full awareness of their US Filing obligations. I deal with many clients who moved abroad and they didn’t realize they needed to continue filing US tax returns. They think, I’ve moved to the uk, I’m filing with hmrc, I’m in full compliance here.

Dan Price:
[00:29:17 – 00:29:37]
I didn’t know I had to do something back home with the IRS. And they may get some partial information. Well, you pay higher taxes in the uk, there’s a foreign tax credit, so you wouldn’t even owe anything to the US or they may hear about the foreign earned income exclusion. They think, well, I’m under the foreign earned income exclusion. I don’t even have to file a tax return.

Dan Price:
[00:29:37 – 00:30:03]
And sometimes people simply get bad advice too. So there’s an implicit acknowledgment by the government that if you’re really living abroad for a period of time, you might have misunderstood your US Filing obligations. So for streamlined foreign offshore, the terms of the procedures are much more generous. The IRS will accept non filed returns. The IRS imposes zero penalties.

Dan Price:
[00:30:04 – 00:30:35]
But a non residency requirement has to be established for one of the most recent three years. The taxpayer must establish that they’ve resided outside of the US for more than 330 days that year and one of the most recent three years. So especially during the pandemic, many taxpayers can easily qualify if they were residing abroad. There were travel lockdowns. A lot of my international clients didn’t come to the US at all during at least a portion of the pandemic.

Richard Taylor:
[00:30:35 – 00:30:46]
Years because the foreign is such a generous program and just having one year, I didn’t, I wasn’t aware of that. I always just thought it was for people who properly lived outside the U.S. wow. Good for them.

Dan Price:
[00:30:46 – 00:30:48]
It’s, it’s a real gift.

Richard Taylor:
[00:30:48 – 00:30:55]
Yeah. It’s such a good program though. Can you imagine the big point in time when the IRS are like, right. If you don’t know by now, you should.

Dan Price:
[00:30:56 – 00:31:24]
So when I was with the government, the streamlined procedures, both of them, domestic and foreign, were subject to annual review. And various constituents within the IRS consistently urged the termination of those procedures for that very reason. Like this has been going on so long. The people should be aware of their obligations. Look, look at ubs back in 2008 and 2009.

Dan Price:
[00:31:24 – 00:31:47]
It’s impossible for people to be ignorant. But that view did not, has not prevailed to date. So every, every year it would go up for annual review. And IRS executives looked at the raw numbers for the use of the procedures and continued their approval for the next year. Now, I don’t know whether those annual reviews are still ongoing.

Dan Price:
[00:31:47 – 00:32:20]
I anticipate they are. And I assume that based on volume, they’re still being approved. But the IRS has publicly said these may be terminated at any time. Now recently, the American Bar Association, I was on the committee that prepared some comments to the IRS, recommended that 1 the IRS consolidate its instructions and guidance into a single source for the streamlined procedures and make them permanent. Whether the IRS will take take that proposal seriously, we don’t know.

Dan Price:
[00:32:20 – 00:32:22]
But we made that, that proposal.

Richard Taylor:
[00:32:23 – 00:32:35]
Fascinating. I did not know that about the annual review. Yeah, it’d be great if that became permanent. And it makes sense, right? It’s good tax policy because even with more resources, there’s no way you can get around every taxpayer.

Richard Taylor:
[00:32:35 – 00:32:46]
And having a, having a path for people to voluntarily come in from the cold and rectify it is great. So you go back three years, your tax return, you go about six years on the fbar. What about prior years?

Dan Price:
[00:32:47 – 00:33:15]
That’s the beauty. Let’s say somebody has been living abroad for 40 years, earned significant income, will have significant U.S. liabilities, but they were truly non willful. The trade make an SFO submission, three years of tax return, six years of FBARs in lieu of all other filings. Basically come back, get into compliance, stay in compliance and we’ll be happy.

Dan Price:
[00:33:15 – 00:33:17]
That’s the essence of the government’s offer.

Richard Taylor:
[00:33:18 – 00:33:43]
For some people, this is such a staggeringly good solution to their problems. Let’s talk about a critical, absolutely critical piece Though of this jigsaw, for me, it all hinges on this piece. And this is why I think it’s absolutely imperative if you do this. You work with a lawyer as well as an accountant, and that is how you qualify in terms of your state of mind or your the culpability of your actions.

Dan Price:
[00:33:44 – 00:34:32]
State of mind or inculpability can be analogized to. Let’s say we have a dead body on our hands. Was it a premeditated murder, the intentional taking of a human life with, with no, no self defense argument, or was it accidental manslaughter or was it somewhere in between? So in the criminal context, when we’re dealing with a dead body in front of us, state of mind is crucial to determine what the appropriate penalty is, if any. Similarly, in the tax context, we have a spectrum of states of mind from willful, that would be like committing murder to having a legal defense to penalties considered reasonable cause.

Dan Price:
[00:34:32 – 00:34:56]
That would be like having a self defense argument when the dead body’s in front of us. So we have to analyze the spectrum of intent when it comes to Title 31 violations and tax violations. And really this is a gray area. Does the taxpayer meet this nebulous threshold of non willful? So what do we mean by non willful to qualify for the streamlined procedures?

Dan Price:
[00:34:57 – 00:35:26]
We have willful and we have reckless. The IRS and the body of case law relating to FBAR penalties has essentially compressed recklessness and willfulness together. Non willfulness would encompass gross negligence, negligence and completely benign activity. And it really takes an understanding of the body of case law to, and an understanding of the taxpayers facts to make that judgment call.

Richard Taylor:
[00:35:26 – 00:35:29]
Non willfulness includes gross negligence.

Dan Price:
[00:35:29 – 00:35:42]
An IRS spokesman who mentored me at one point in my career publicly acknowledged that gross negligence is encompassed by or by the term non willful.

Richard Taylor:
[00:35:42 – 00:35:51]
Am I right in thinking reasonable cause, which is similar but different? Would you expect gross negligence to, to meet the reasonable cause criteria as well or not?

Dan Price:
[00:35:51 – 00:36:09]
We could think about reasonable cause being a much lower level of culpability than gross negligence. We might analogizing back to the dead body in front of us, we might say gross negligence is some form of manslaughter versus murder.

Richard Taylor:
[00:36:10 – 00:36:15]
This concept of willful blindness that the IRS talk about that meet the standard for non willfulness.

Dan Price:
[00:36:16 – 00:37:11]
This is where it becomes very difficult. Willful blindness correlates very closely to recklessness. And the IRS and the Department of Justice Tax Division have successfully argued in federal court cases that where a taxpayer has a Schedule B in their return, Schedule B has a section called Part three At the very Bottom with a few questions about foreign bank accounts and foreign trusts. So where there’s a schedule B, the taxpayer is said to have been put on legal notice of those questions on schedule B, part three, lines seven and eight and if they’ve checked them no when in fact they should have checked one or more yes. The IRS has been very successful in arguing that that constitutes reckless conduct because the whole return is signed under the penalties of perjury.

Dan Price:
[00:37:11 – 00:37:49]
On the flip side though, I helped write the FAQ for the FAQs for the streamlined procedures that acknowledge that many people accidentally check no. So it really requires a fine tuned analysis of why the box was checked no. Who checked no. Was was it the preparer on their own without consulting the taxpayer or were there other circumstances in the background that could excuse it to determine whether the conduct was willful blindness akin to recklessness or was it just negligence?

Richard Taylor:
[00:37:50 – 00:38:40]
You know, I just want to bring this to life for people as well. So as I mentioned before, I meet people all the time and I we spot some form of non compliance and at that point assuming the person really had no idea, I believe not a lawyer, but I believe you’ve got a great case of non willfulness. You know, you didn’t know it’s been brought to your attention and you resolve to fix it. And that fact pattern will hopefully line up. But where it can get muddy, I imagine is when someone learns about something, learns about a non compliance or an issue and chooses to do nothing about it, or actively chooses to do to you knowingly does something incorrectly or wrong and then later thinks you know what, now’s the time to fix this, I’ll try and do the streamline program.

Richard Taylor:
[00:38:40 – 00:38:51]
Well you maybe at fIRSt you were non willful, but for the last three years you’ve known you shouldn’t be doing this and you’ve continued that potentially disqualifies you from the program.

Dan Price:
[00:38:52 – 00:39:31]
It would and we can analogize to the old expression ignorance is bliss. Sometimes when somebody’s truly ignorant of their filing requirements, that’s much better than having been informed and then ignoring the filing requirements. And the IRS has seen cases where taxpayers truly were non willful at point one in time and then they were dilatory, waited two or three years to take any action at all, then took action. And the IRS has successfully argued well that action taken in year three rather than at year one, that action is no longer non willful and you’re out.

Richard Taylor:
[00:39:32 – 00:39:58]
You don’t qualify for the program is the options which hopefully we’ll get into another podcast are Radically different and much less attractive. So Dan, I know I have to let you go here for your next appointment. This has been a masterclass and just to speak to someone who’s, who was there, who’s, who’s built it, who’s seen the submissions. We, not, we’ve not got on to the submissions that you have to weave a story of non willfulness, a couple of lines saying, I’m sorry Governor, I didn’t, I had no idea. It’s not going to cut it.

Richard Taylor:
[00:39:58 – 00:40:12]
This is why you need to, this is a, this is a process. You need to tell the IRS everything. Good, the bad, the ugly and explain in detail why you are non willful. And for that you need an attorney. I believe you truly need an attorney to do this properly.

Richard Taylor:
[00:40:12 – 00:40:20]
Because if you, even if you’re non willful, if you mess up the submission, you know you’re out. And then they’ve got, they’ve got all the facts. You handed them a smoking gun.

Dan Price:
[00:40:20 – 00:40:47]
And concerning the narrative component, that really is the most important component of a streamlined submission. When I worked for the government, I literally read thousands of streamlined submissions. Many were done by CPAs with just a paragraph or two. That’s not sufficient, that doesn’t comply with what the government really wants. There are FAQs that I help draft that explain.

Dan Price:
[00:40:47 – 00:40:56]
The IRS wants a complete story relating to the non compliance. Every factor that relates to the non compliance needs to be addressed.

Richard Taylor:
[00:40:56 – 00:41:17]
If you’re listening to this, if you’re an expat or an immigrant and you came here mid career, there’s a very good chance you’re in some form of non compliance. Don’t bury your head in the sand. It’s very possible the IRS already has this information about you and it might one day catch up with you. There are solutions, palatable solutions. Don’t bury your head in the sand.

Richard Taylor:
[00:41:18 – 00:41:30]
Take advice, take good advice and, and resolve this and don’t have it hanging over you. That is my message to everyone. And I think we’ve covered a lot. We covered that today. I’m so grateful you came on and, talked to us about this.

Dan Price:
[00:41:30 – 00:41:31]
Thank you so much, Richard.

Richard Taylor:
[00:41:31 – 00:41:32]
Where can people find you?

Dan Price:
[00:41:32 – 00:41:41]
My website is Price Tax Law.com Alternately, just Google Daniel M. Price and you’ll find me.

Richard Taylor:
[00:41:41 – 00:41:52]
Lots of good stuff on LinkedIn as well. So you’ll find him there. I hope you’ll come back and talk to us about the other programs. You know, learning from the master himself. People going to want to hear this.

Dan Price:
[00:41:53 – 00:41:54]
Thank you, Richard. I look forward to it.

Richard Taylor:
[00:41:54 – 00:42:02]
Thank you. See you soon. All right folks, that’s another episode of we’re the Brits in America Under Our Belts. Thank you for listening.

Richard Taylor:
[00:42:02 – 00:42:22]
I appreciate it. And I appreciate you. If you’re enjoying the show and would like to support the mission, which is to help ambitious expats and immigrants thrive in America, I’d ask you to subscribe to the POD wherever you listen and also consider leaving a rating and review. This stuff really does matter. Please help us get this information to the people who need it. That is your fellow expats.

Richard Taylor:
[00:42:23 – 00:42:49]
Just a quick reminder that this show is brought to you by Plan FIRSt Wealth. We are a US Based lifestyle financial planner and wealth manager and we help successful American and international families living across the US to make the most of their opportunity and ultimately to retire happier. If you’d like to know more about how we might be able to help you, you can find us on our website, www.planfIRStwealth.com or you can look me up on LinkedIn. Do get in touch. We’d love to hear from you.

Richard Taylor:
[00:42:49 – 00:42:55]
As always, thank you to the podcast guys for their help producing this episode and the entire show.

Richard Taylor:
[00:42:55 – 00:42:56]
See you next time.