The IRS is using a fraudulent accounting practice, in the spirit of Enron and Bernie Madoff, to expose US persons to increased FBAR fines.
The term “aggregate” in the FBAR rule has been a thorny issue, in which there has been not a little confusion. For example, at the Expat Forum Mach7 related a story of about an accountant he consulted who thought that filers need not include accounts below the $10,000 threshold.
I had a big discussion with an Accountant on this very matter…not my Accountant, but one with a PTIN#. When he finally called me back, he was concerned that he had been doing peoples taxes for 4 years like this, and had never included an account above the 10K value…when in actuality he should have.
A certain Rifleman (British in Malaysia) responded to Mach7, saying that this accountant is an idiot because he doesn’t even understand what the term “aggregate” means. A simple dictionary definition would make the IRS guidance crystal clear.
Well that is uncharitable, to say the least, since the term “aggregate”, in IRS-speak, is total nonsense. Actually, it is worse. It is fraud, for it resembles the type of accounting that goes on at companies like Enron or Bernie Madoff’s hedge fund–but instead of beefing up on paper the financial statements of a company on the edge of bankruptcy, it is an abuse that the IRS perpetrates on the unsuspecting filer who may not always understand standard accounting practices. Let me explain:
The IRS gudiances say the following:
Q. What does “maximum value of account” mean (for Box 15 on the FBAR)?
A. The maximum value of account is the largest amount (not the average amount) of currency and nonmonetary assets that appear on any quarterly or more frequent account statements issued for the applicable year. If periodic account statements are not issued, the maximum account value is the largest amount of currency or nonmonetary assets in the account at any time during the year. Convert foreign currency by using the official exchange rate at the end of the year.
Though the FBAR instructions direct filers to use the official exchange rate, the Internal Revenue Service has no official exchange rate and generally accepts any posted exchange rate that is used consistently. For exchange rates, check the U.S. Treasury Web site or other commercial sites.
Q. A person owns foreign financial accounts X, Y and Z with maximum account balances of $100, $12,000 and $3,000, respectively. Does the person have to file an FBAR and if so, which accounts must be listed on the FBAR?
A. The FBAR instructions require the filing of the FBAR form “ … if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year … ” In this scenario, the person has an FBAR filing obligation because the aggregate value of foreign financial accounts X, Y and Z is $15,100. The person must report foreign financial accounts X, Y and Z on the FBAR even though accounts X and Z have maximum account values below $10,000.
Q. A person owns foreign financial accounts A, B and C with account balances of $3,000, $1,000 and $8,000, respectively. Does the person have to file an FBAR and if so, which accounts must be listed on the FBAR?
A. Even though no single account is over $10,000, because the aggregate value of accounts A, B and C is over $10,000, the person has to file an FBAR and must report foreign financial accounts A, B and C on the FBAR.
This makes the term “aggregate” into a gimmick. Let me offer two scenario as to why it is just simply an accounting lie:
(1) Let’s say you had $9,999. You held it in your chequing account for five days. Then you put it in your savings account for two months. Then you put it in a GIC for two months. Then you opened up an RRSP and put it there. The highest balance in each account $9,999. Now is the aggregate $9,999 or 39,996 (9999*4 accounts)? If the IRS decided to assign a non-wilful fine of $10,000 per account, you will receive a fine of $40,000. But the total amount of money you ever had was $9,999.
(2) Let’s say that you borrow $40,000 from a HELOC (home equity line of credit) and you put the money into five different accounts on five successive days: the aggregate balance is now $200,000–according to the IRS, because nowhere in the guidance does it allow you to subtract your liability from your account balance. Now we are talking about some real money here and so the IRS determines that your non-disclosure was wilful. So they fine you 50% of the total aggregate sum in the account: $100,000.
None of the IRS instructions that I have read offer the ability to count a debt account with a negative balance in the FBAR sum. But in the above scenario the liability in the HELOC offsets 100% of the account balances 100% of the time. The actual net worth of the person is still zero. This makes the term aggregate into meaningless nonsense, not something that a dictionary can clear up (contra Rifleman). So I say the aggregate is zero. The IRS says the aggregate is $200,000. Who is right?
Let’s consider the following table:
The above accounting takes into consideration two things (1) Chronological factors (how much money is where and when it is there). (2) Offsetting debt. So by any reasonable standards of accounting, the total aggregate is zero. When corporations like Enron or the Banks shift assets to make the balance sheet look solid, we call it “fraud”. When the IRS does it is still fraud, but one which the IRS foists upon US persons in order to make their “crime” of unreported FBARs seem like something really bad.
This is a very practical issue: for I would venture to say that many people would benefit from being able to count negative balances from their mortgages, lines of credits, and credit cards. They would have a much lower “aggregate” sum, and would find either that they are far below the reporting threshold or that, at very least, they are subject to a much lower regime of non-wilful or wilful fines.
But can we expect the IRS to do honest accounting when they have no understanding of basic civics, i.e., the US Constitution?
Good post:
1. The issue of the $10,000 aggregate is to determine whether there is a requirement to file an FBAR.
2. Once the requirement to file an FBAR has been established, and it is determined that a penalty is payable, then (at least under OVDI) people can provide evidence of double counting.
3. Therefore, your points are related to an accurate determination of the amount that a penalty may be applied to. In other words, your points have to do with “lowering the penalty base”.
It is becoming increasingly clear that the only real purpose of FBAR is fine people for non-compliance -raise revenue for the IRS.
http://renounceuscitizenship.wordpress.com/2011/12/17/the-true-value-and-purpose-of-an-fbar/
I was listening to a U.S. CPA last week and he was asked about FBAR. He was emphatic in his view that FBAR was essential so that the IRS could know whether people were paying tax on foreign income. He seemed oblivious to the fact that the FBAR form doesn’t even go to the IRS. Not even the accountants know what the FBAR is for.
Again: The purpose of the FBAR is to use a law that few knew about, or had any reason to suspect exists, to confiscate peoples life savings.
The only option those unlucky enough to be U.S. citizens have is:
1. Get into compliance.
2. Renounce
Finally, have a look at the pearls of wisdom here – John Nolan:
https://twitter.com/#!/renounceus/status/147492463731421184
Renounce wrote: “Once the requirement to file an FBAR has been established, and it is determined that a penalty is payable, then (at least under OVDI) people can provide evidence of double counting.”
Do you have any evidence of this anywhere? I mean, first, OVDI is supposed to be an “amnesty” program, so it is very kind of the IRS to eliminate double accounting. The problem is that the OVDI is done behind closed doors for the most part. Furthermore, if the penalties are outside the OVDI, how do we know that they would eliminate double accounting? Indeed, I have never seen where they have allowed a liability to offset an asset in any of the instructions for FATCA, FBAR, or the new 8938.
Thanks. I’ll have a look at that post by Townsend. The problem of OVDI not including debt in the picture is extremely serious for any one doing leveraged investments where the line of credit is an outside account. Consider that that debt does not appear in the balance.
But apart from that there is the fairness issue. Most folks these days have a large amount of consumer debt and mortgage debt. This means that IRS can potentially levy fines against people with virtually no net worth, and this gives too much arbitrary capricious power to government. The laws therefore need to be repealed.
I was very much aware of this while the OVDI program was going on. What you need to do is begin by looking at the outline of the program. What is the purpose of OVDI?
Then do a search under “lowering FBAR penalty base”. For example:
http://federaltaxcrimes.blogspot.com/2011/06/ovdi-2011-mitigating-penalty-by.html
And there are others. This thread does NOT talk about using a liability to offset an asset (have never heard of that either). But, it does make it clear that one can prevent “double counting” of money in various bank accounts.
Basically under OVDI there are two ways to lower the penalty base:
1. Avoid double counting
2. Argue that certain assets should be excluded.
With respect to arguing that certain assets should be excluded:
The purpose of OVDI is to apply a penalty to non-compliant assets. These are assets that were either purchased from untaxed income or from which income was not reported. This is the argument for why RRSPs should be excluded. This is also the argument for why certain other kinds of assets should be excluded. Now, I know that the IRS does not have an official position on whether RRSPs should be part of the penalty base under OVDI. We will have to see how this develops.
Finally, everybody hates lawyers – but a good one can help you in this area!
http://www.irs.gov/businesses/international/article/0,,id=235699,00.html
So at least they acknowledge the accounting malpractice of the FBAR reporting requirements. This is a small comfort if you are in the “amnesty” program. But there is no reason to think that they will be this magnanimous if not in an amnesty program. At least, I don’t think so. This still doesn’t deal with the debt vs. equity issue and it doesn’t change the basic premise of the post that the term “aggregate” is an accounting lie. It is just a lie that the IRS confesses is indeed a lie.
I agree with you – as I have said before: The only valuable FBAR is an “unfiled” FBAR. This will allow them to assess penalties.
The FBAR law is simple – if money was in an account – it must be reported. Doesn’t matter what the character (equity or debt) of the money is. Yes, they can assess penalties on people with no net worth. But, that is completely consistent with the pupose of FBAR which is to assess penalties.
Maybe you can shed some light on this – what possible legitimate value could the information on an FBAR have? Help me with this. I can’t figure it.
Americans believe – we are a nation of laws – we must follow our laws – it doesn’t matter what the law is – the fact that is is a law means that it must moral legitimacy. Laws do NOT presumptively carry any moral force. The U.S. of today is probably worse than King George was tat the time of the Revolution.
It is much worse than King George, much!
There is no legitimate purpose for this information because (1) the law is intended to catch money laundering; (2) harassing law abiding citizens with filing requirements doesn’t lead to money laundering arrests; (3) forcing law abiding citizens to hand over information without a warrant is a stark violation of the 4th amendment which protects the person’s papers. (4) It is also a violation of the 5th Amendment because it is for the purpose of criminal investigation not taxes. Thus if you find yourself in a criminal investigation, you are no longer required to provide information under the 5th Amendment. If the law started as just a means of regulating unpaid taxes that would be one thing, but it is actually designed to detect criminality.
The IRS has done a bait and switch. They have turned FBAR a crime detection program into a revenue program. This is one of most damned illegal acts committed by the IRS and it is the reason I support Ron Paul who is the only presidential candidate that has publicly stated that he wants to eliminate the IRS.
http://renounceuscitizenship.wordpress.com/2011/12/12/ron-paul-iowa-debate-december-11-2011/
U.S. citizenship – FATCA – FBAR – OVDI – U.S. Expats
Ron Paul Iowa Debate December 11, 2011
Win, lose or draw, Ron Paul is the most important candidate in the run for the Presidency. The reason is as follows:
Recent events have made it clear that the U.S. has abandoned its historical and constitutional roots that were premised on freedom and democracy. The U.S. that was described by Margaret Thatcher, as “that great citadel of freedom and democracy“, no longer exists. Ron Paul is the only candidate for President who believes in the values embodied in the U.S. constitution. “To be clear” (as Obama would say), the U.S. revolution was fought over these values. World War II was fought to preserve these values. And under the “leadership” of Barack Obama, the U.S. has turned its back on these values.
The 2012 campaign is one where candidates are talking about the economy, jobs, immigration, education, etc. But, it is the way that these issues are being discussed that is most interesting. As real as these things are, they are not the main issue. The main issue is whether the U.S. is going to once again that great citadel of freedom and justice, or whether it will continue to undermine those liberties that previous generations died for.
Ron Paul is the only candidate is talking about the issue that matters most. Enjoy watching this video! Watching it actually made me feel better about the United States.
Hats off to Congressman Ron Paul – and thanks to him for framing the issues in this important debate!
There is another reason for the Treasury Department to want FBARs filed. They provide an annually-updated database of off-shore wealth, complete with physical location, account numbers and balances, for future taxation initiatives. This is the real peril, rather than the threat of imminent penalties for non-filing, ie, that the Treasury Department will be able to calculate the amount of wealth held by US citizens outside the US which can be readily pilfered via innovative tax policies directed at unprotected citizens who have no official recourse through the political process. FATCA is simply the other arm of the pincer movement: it blackmails the Canadian custodians of the assets (the banks) into confirming the data, presumably as a prelude to requiring their compliance in some future legalized plundering. That’s why FATCA will never be repealed, and why we, as a constituency, must make our own government recognize the consequences of going along with the IRS. The wealth of Canadians must be protected from seizure by the US government.
My experience in the OVDP, was that there was no double counting of accounts. They took my calculation of the highest aggregate, as it was a pretty extensive spreadsheet showing all appropriate transfers.
In the Opt Out, I have to believe similar practice would occur, but don’t know that for sure. My Examiner at the time was unsure also, but as many of you you have been reading Jack Townsend’s blog, may know, in the end, I was only hit with one non willful penalty on a unified FBAR basis, and no aggregates applied, double counted or not!
Also, there is a new post from an Attorney Brian Mahany on Jack’s blog today about what they are seeing on Opt Outs. You might want to check that one out… http://bit.ly/so3Uob
Thanks, Just Me, for responding. I accepted renounce’s position that aggregate sums are not calculated in the penalty base. I am aware of your case from reading both Hodgen and Townsend. I am very happy that you have responded to this new blog. Cases like yours in the OVDI made it clear to some of us, that there was no question of complying with FBAR. Now that the Canadian government has indicated that it would not collect FBAR fines for the IRS, I have come out of the closet. Yet it is not certain that is such a good idea.
There are nevertheless the main three points: (1) The IRS does not penalize “aggregate” amounts but they require reporting on that amount, which leaves the open impression that the double accounting could in fact be a part of the penalty base. It remains an accounting lie, though one to which they have admitted. (2) The other major point is that debt is never anywhere calculated into the figure. This can give a false impression of wealth. (3) These two accounting practices leads to too many people filing that should ever have to file something like this.
Can’t argue with your analysis, as you are right on, but as you know, they can make the rules any ole way they please, using whatever tortured definition they wish, and they do! Rationality, logic or reason have no shelter in their rule making world, and thinking you can beat them using even basic accounting GAAP rules, is a fool’s errand, unfortunately. Keep up the good work pointing out the absurdities. You will have blogging job security, as they are endless examples everywhere in the tax code. I appreciate your efforts.
An amazing individual. I think that if he becomes the Republican candidate and eventually makes it to the Oval office, you will see positive change in America…Ron Paul for 2012!
@all, in my personal OVDI experience, apparently an explanation of the flow of funds can prevent double counting but sadly negative balances are not factored in. Still waiting!
@ Bubblebustin: Yet the IRS reserves the ability to do this fraudulent double accounting outside of the OVDI. That’s a big stick that they use to beat over the heads of those in the program.
@Petros, it’s actually more like the carrot they use to beat you with.
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My question is not about penalty, but about the need to file an FBAR at all. What if double accounting has a role in determining whether you meet the $10,000 threshhold thereby determining whether you need to file an FBAR at all? (FYI, I am talking “baby minnow”, folks!) In other words, let’s say I have a total of $9500 across three accounts, but due because I’ve transferred money between accounts, my aggregate would well exceed $10,000. I want to invoke the ‘no double accounting’ theory as a reason for NOT filing the FBAR in the first place. What do you think?
@kitty k – To the best of my knowledge, there is no allowance in FBAR reporting for double accounting. For people who live and work abroad and lead a normal financial life, it is highly likely that there will be of transfers between accounts, thus giving a picture of greater wealth than they really have. Having also been through OVDI and having had my double accounting spreadsheets accepted by my agent, I can tell you that the agent did not ask me to correct the FBARs which I assume would have been done if allowances for double accounting had been permitted on the FBAR
So to be clear, technically, you should file the FBAR for the example you give.
Thanks Not that Lisa! Sigh. So if I had kept the $9500 in one account only for the entire year, I wouldn’t have to file the FBAR (assuming $9500 is all I had) but because I’ve transferred from one account to another, I do have to file the FBAR, even though my total amount of money never actually exceeded $10,000 at any one time.
Yup.
Tsk. I suppose now this has everything to do with penalties then, as I did not file FBARS for the last 2 years because I never at any one time had more than $10,000 in all foreign accounts combined.
I’m under the impression that FBARS we’re not required until the 2011 tax season (say, for US citizen living abroad with multiple foreign accounts). I will double check this, but am I right?
I know that for my 2013 taxes, I will exceed $10,000 (legitimately, and not through any double/triple/multiple counting) so I was planning on filing the FBAR, but now I am worried about past years (and how many years past, at that?)
Thanks.
@kittyk,
Unfortunately, no –FBARs have been required for a long, long time, but as many other things relating to US citizens / persons abroad, they turned a blind eye until recently. It is all about the absurd penalties for NOT filing!!! Canada will not collect for the US FBAR penalties for the US.