Tuesday, August 12, 2014

FBAR e-filing: violates Taxpayer Bill of Rights, challengeable under Haar

Eric Kroh of Tax Analysts has a story today [gated] on the basic nonsense that is the FBAR (foreign bank account report) e-filing system. As he reports, in defiance of common sense, FinCEN's system does not work for normal users. It does not work on a mac at all, and it does not work on a PC if you have Adobe Acrobat installed (the user must uninstall and use adobe reader instead). So now in addition to frightening people by forcing them to register themselves for monitoring by "Financial Crimes Enforcement," making them feel like criminals just by visiting the website, the US Treasury is all about making sure the user encounters error after error, frustration without end, with no alternative because e-filing is required.

I'll make two points here. First, I think the entire FinCN experience violates the Taxpayer Bill of Rights recently adopted by the IRS, and second, I think the e-filing requirement is susceptible to legal challenge under the recent decision of the Massachusetts Appellate Tax Board in Haar v Commr. Let's look at the TBOR first.

Kroh's article demonstrates that FinCEN's FBAR system pretty clearly violates provision 2 of the Taxpayer Bill of Rights, which guarantees taxpayers a right to quality service. Kroh describes how ridiculous it is to have a form-filing system that conflicts with one of the most ubiquitous pieces of software out there, namely, Adobe Acrobat. He notes that the FinCEN website fails to explain the known issues and offers no promises about maybe fixing this very basic problem. IRS: no blaming things on FinCEN to get out of your obligations. You're administering this mess. (FinCEN is a bureau of Treasury separate from the IRS, but IRS has responsibility for enforcing FBAR by levying penalties for non-compliance.)

The FinCEN experience also violates provision 10 in my view. Provision 10 says taxpayers have the "right to a fair and just tax system." It is neither fair or just in my view to force individuals to register and transmit sensitive personal information on a website that is built for the sole purpose of detecting money laundering, terrorist financing, and other financial crimes, where no evidence exists that the individuals have perpetuated or are planning to perpetuate any such crimes. This process constitutes an intimidation tactic. If you don't believe it, I invite you to visit the FinCEN website, register yourself, and file an FBAR form as a civics lesson.

I am not saying Treasury doesn't need the information FBAR requires (though much or most of it is egregiously duplicative with IRS forms that non-resident US persons already have to file). But I am saying there is no way that Treasury needs to extract this information by making individuals register on a website that so clearly transmits the message: "you are a suspected criminal and we are watching you."

Remember, we are talking about millions and millions of people who have "foreign" bank accounts because they live in foreign countries; most are citizens of those foreign countries where they live; and their banks are local to them. Congress treats these people as if they live in the United States, when they do not. But Congress does not similarly treat their local bank accounts as local (Congress should do so, and would fix many problems if they did, as I argued in a Tax Analysts column in 2012). This mismatch of fiction against fact does not make people money launderers or tax evaders. Many, many of these individuals are unjustly caught up in the US tax net because of the madness of citizenship taxation. Also: consider that the FBAR instructions even say that kids ought to fill out their own FBAR forms. Come on.

Taxpayer Rights, yes. But remedies? Not so Clear.

Whether violating the taxpayer bill of rights creates grounds for a lawsuit remains to be seen; I think Congress' continuous failure to codify the TBOR is precisely to prevent this possibility (I discussed the issue here). But the recent case of Haar v Commissioner suggests that a lawsuit challenging the requirement that FBAR forms be filed electronically would have merit. I note from Kroh's article:
According to a FinCEN FAQ, failure to comply with the electronic filing mandate could result in civil penalties, including a $500 fine for each negligent currency transaction. Exceptions to the mandate are allowed only in some limited circumstances, according to the agency. 
Now comes Haar:
This appeal involves the Commissioner’s assessment of a $100 penalty... because of the appellant’s failure to electronically submit [a payment in connection with an extension of time to file]...
 Mr. Haar maintained that the Commissioner’s electronic payment mandate is a “serious invasion of both [his] privacy and [his] personal business practices,” as it exposes his finances to risk of cyber attack.  On his abatement application, Mr. Haar explained, “I intentionally do no electronic banking nor direct bill paying, I have none of my credit cards linked to my bank accounts directly and I think anyone who does any of the above is exposing themselves to multiple risks of cybercrime and identity theft.”  At the hearing, Mr. Haar testified that he does not link his “bank account information in any electronic way to any other electronic medium” because he believes it is a “very foolish thing to do.” Mr. Haar further expressed doubts as to the security of the computer systems used by the Department of Revenue (“DOR”), noting that “if the Pentagon can be hacked,” he had little confidence that DOR could protect his – or any other taxpayer’s – personal data from theft. 
To which the Commissioner responded:
It was the Commissioner’s position ... that... she has the authority to mandate electronic filing and payment and to assess penalties if, after notice, a taxpayer failed to comply with the prescribed filing and payment mandates.  While ... penalties may be abated if a taxpayer can demonstrate “reasonable cause” for non-compliance, the Commissioner maintained that the appellant did not establish reasonable cause because Administrative Procedure 633 (“AP 633”) provides that “[t]he fact that a taxpayer does not own a computer or is uncomfortable with electronic data or funds transfer will not support a claim for reasonable cause.”  AP 633(II)(D). 
But the Appellate Tax Board saw things differently, noting that Treasury has steadily expanded e-filing requirements, but that there is no federal requirement that individual e-file their annual tax returns, and that reasonable cause is an objective standard that can't be eliminated by a mere declaration by Administrative Procedure. The ATB concluded:
On the facts of this appeal, particularly the appellant’s credible testimony concerning his consistent practice of avoiding the payment of his bills electronically, the Board found and ruled that the appellant exercised the degree of care that an ordinary taxpayer in his position would have exercised when he made his timely payment by check, contrary to the Commissioner’s electronic payment mandate.  The Board therefore found and ruled that the appellant met his burden of proving reasonable cause under § 33(g) for his failure to remit payment electronically in connection with his extension application for the tax year at issue. 
Accordingly, the Board issued a decision for the appellant in this appeal and granted an abatement of the $100 penalty, along with statutory additions. 
I note that Haar represented himself in that appeal. When I saw that FinCEN had made e-filing mandatory, I wondered if it would spark lawsuits. The Haar case suggests that such lawsuits might prevail if the facts and legal standards align.

Lawsuits are not the only way to protect taxpayer rights in this case, however. If the US practiced residence based taxation like the rest of the world, the universe of US taxpayers who have foreign bank accounts but who aren't rich enough to employ others to deal with complex US filing obligations will shrink to a negligible number and the issue all but goes away. Until then, Treasury can act, and act quickly to resolve the technical problems here, even if we have to wait for Congress to fix the underlying defect of citizenship taxation.

The solution is clear: Treasury should abolish FinCEN registration for FBAR purposes alone and the FBAR should be treated like other tax forms since it is administered by the IRS. The IRS should make the FBAR form available as a regular pdf on the IRS website like all the other tax forms, and have a link so people who choose to e-file can do so.

Monday, August 11, 2014

International complaint lodged against US citizenship taxation

Further to my prior post, the ADCS press release also mentions that a group of individuals has filed a complaint with the United Nations, to protest the U.S. practice of citizenship taxation. It's about time that happened. The UN sanctioned Eritrea in 2011, for extracting a comparatively tiny amount of tax on its disapora. It did so apparently at the behest of the United States. Yet three years later the whole world is engaged in the process of perfecting citizenship taxation for the US, with no discussion whatsoever, at any official level. You can get a little info abut the UN complaint here but the complaint itself has not yet been made public. As soon as it is, I will post it.

Filed Today: Lawsuit challenging constitutionality of FATCA in Canada

Noted Canadian constitutional lawyer Joseph Arvay filed suit today to challenge the constitutionality of Canada's implementation of FATCA. The statement of the claim is laid against the Attorney General of Canada in the Federal Court of Canada. It seeks a declaration by the Court that the relevant parts of recently enacted Bill C-31, referred to as the "Impugned Provisions," are beyond Parliament's authority and of no force and effect under the Constitution. The claim makes four claims about Canada's attempt to implement FATCA:

(1) it violates the Constitution by creating federal power over a provincial domain;
(2) it violates s. 7 of the Charter, guaranteeing individual rights to life, liberty & property;
(3) it violates s. 8 of the Charter, preventing unreasonable search & seizure; and
(4) it violates s. 15 of the Charter, prohibiting discrimination based on national origin etc.

The complaint concludes that none of these infringements can be justified by section 1 of the Charter, which provides for only "such reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society."

The lawsuit is the product of efforts by a small, grassroots group formed for this purpose, calling themselves the Alliance for the Defence of Canadian Sovereignty. They have issued a press release, here. The two named plaintiffs are taking a major risk in being exposed as "non-compliant US Persons" in this lawsuit. On the other hand the IRS may not wish to get in the middle of this fight and prove the plaintiff's case, which is succinctly stated here.

I look forward to following the case, which I expect to wind its way toward the Supreme Court. As I've said many times, there are massive problems with FATCA that have nothing to do with tax evasion and everything to do with the basic injustice that is citizenship taxation and all global efforts to enforce it for the US. The US Congress is reluctant to act on this antiquated and unjust regime and the IRS must plow ahead, as I explained recently. But that certainly does not mean that other countries must do the job of the IRS, most especially when doing so is inconsistent with their own laws.

Wednesday, August 6, 2014

Christians on Regulating Tax Preparers: A Global Problem for the IRS

I have a new column this week in Tax Analysts: Regulating Tax Preparers: A Global Problem for the IRS, in which I discuss the challenges of protecting a global taxpayer population from fraud and abuse and make (yet another) plea for sanity in the form of abandoning citizenship taxation and turning to residence-base taxation. Here is the gated published version; here is the SSRN version (ungated). And here is a brief abstract:

The IRS recently announced that its mandatory registration regime for paid tax return preparers, struck down in the Loving decision, would henceforth be offered as a voluntary program. But the authors of this program appear to have forgotten that the US system is perfectly global in reach, thanks to its permanent inclusion of citizens and others with legal residence status no matter where in the world they live. Protecting a global taxpayer population from fraud and abuse is an enormous task, with massive legal, administrative, and even diplomatic factors to consider. Citizenship taxation plagues the project of tax return preparer regulation, just as it does all aspects of US tax law. Accepting the universally practiced norm of residency-based taxation is the only viable solution. If Congress cannot do so, it will always be the case that for the IRS, thinking locally truly means acting globally.
Just as this was published, a friend sent me an email about a growing problem of FBAR fraud, in which criminals attempt to get personal & financial information from people by sending them serious looking notices. Here's an example, from Tax-Expatriation blog:

I'm sorry I didn't see this before I published my column, as I would have mentioned it as a significant issue. Capitalizing on the ignorance and fear of regular (non-rich) US persons outside the United States will be all too easy for criminals, I am afraid. I hope that the IRS and FinCEN can figure out a way to warn people--but I don't see how they can really do that on a global scale, especially since FATCA's job is to funnel information about millions of people to the IRS, and not the other way around. At minimum, every government that signs an agreement to implement FATCA should be sending out the warnings, since each is undertaking a huge responsibility in implementing US citizenship taxation on their own residents.