Caution to U.S. Citizens and U.S./Canada dual citizens who are residents of Canada about the IRS announcement (IR-2012-5) January 9, 2012, regarding Offshore Voluntary Disclosure
On January 9, 2012, the IRS announced a renewed Offshore Voluntary Disclosure program. This is an IRS program designed to bring tax cheats into compliance. During the last two disclosure programs in 2009 and 2011, a significant number of unsuspecting Canadian residents entered these programs to “make it right” with IRS. We strongly warn law-abiding Canadian residents of the dangers of entering this program which is intended to attract tax cheats who live in the United States but have undisclosed offshore accounts.
The United States has dusted off a long neglected, possibly unconstitutional law which requires all United States persons to file a yearly disclosure of foreign financial accounts (FBAR). There is widespread ignorance of FBAR, and up until recently, very limited compliance. A significant number of Canadians learned about the 2011 Offshore Voluntary Disclosure program from the Canadian media and entered it in fear, not realizing that the IRS had every intention of levying fines of 25% of their net worth (or in some cases 5% for those who were unaware that they were United States citizens), even though in most cases they owed no taxes to the United States, had no knowledge of the FBAR reporting requirement, and had innocent and necessary bank accounts in accordance with the laws of Canada. As a result of this crackdown by the IRS, Finance Minister Jim Flaherty went to bat for Canadian residents, insisting that the IRS get off the backs of hard working Canadian residents who had done no wrong and who were abiding by the tax and banking laws of Canada. “Canada is not a tax haven”, he insisted. As a result of Flaherty’s efforts, United States Ambassador to Canada, David Jacobson tried to assure Canadians that the IRS was not out to get grandma’s bank accounts. He said, “My message on this is to sit tight. We are not unreasonable. We are not unsympathetic. We are not irresponsible.” Law abiding residents of Canada, please do “sit tight”. Do not enter this program out of fear, and do not allow a lawyer to enter you into this program without clearly explaining why you should. If you enter the program, the IRS will surely fine you up to 27.5% of all of your monetary and non-monetary financial assets.
All residents of Canada, who may be affected by the extra-territorial reporting requirements of the United States, should also know the following points:
(1) The Canadian government has said it will not enforce the collection of FBAR fines. Thus the IRS has no means to collect fines from any accounts in Canada.
(2) The Canadian government has said it will not collect taxes for the IRS from Canadian citizens, provided that the person incurred the tax liability while a Canadian citizen.
(3) The IRS cannot be trusted. The Tax Advocate Service, the ombudsman service within the IRS, issued a rare Tax Advocate Directive rebuking the IRS and ordering them to respect the terms of the program and be more lenient, returning to the policy of the FAQ 35 which said that those who enter the program would not be fined more than they would have under existing statutes. To date the IRS has ignored the Taxpayer Advocate Directive. This suggests that the IRS has decided that Offshore Voluntary Disclosure should be a revenue generating instrument and apply the fines of 20% and 25% without regard to the innocence of the people that entered into the program. The IRS presumes that everyone who enters these programs is a tax cheat.
(4) We must stress that the Offshore Voluntary Disclosure program, which the IRS has announced, is not a mandatory law but a voluntary program. Therefore, enter it only if you wish to relinquish voluntarily 27.5% of your hard earned savings and other assets to the IRS.
(5) If you are a United States citizen or Green Card holder and are or were unaware of your filing requirements, we urge you to get sound information regarding your rights and responsibilities from reliable sources. If you are living in Canada and abiding by Canadian tax laws, you are not a criminal nor should you permit the government in Washington D. C. to treat you as one. Know also that “cross border” accountants and lawyers do not have equal standards of competency or morality. Buyer beware!
Peter W. Dunn has written this press release on behalf of the Isaac Brock Society, which is an informal group of individuals who are concerned about the treatment by the United States government of US persons who live in Canada and abroad. We have come together to fight the overreach of the IRS and to provide one another with accurate information, peer-to-peer advice and comfort. Our website is http://isaacbrocksociety.com.
@Howard…
Here is IRS’s 2012 the dirty dozen
“Hiding Income Offshore
Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.”
If you are expat, you have a legitimate reason to keep your fund offshore — that is not hiding income.
If you are immigrant to US, you have your legacy money in your native country — you are not hiding income.
After all, if you don’t use entity or any other method to cover up — you are not hiding fund from IRS..
Missing filing FBAR or missing report income alone — does not prove you are willfully hiding income from IRS,
I can only speak to my experience in having entered the 2011 OVDI. I don’t recall any mention by my lawyer that in order to qualify for the lower 5% penalty, we (my husband and I) would have to have been previously unaware of any tax filing requirement. The requirement to qualify for the 5%, we were told, would be to have to be and good standing with the CRA and to have made less than $10,000 in the US in any year within the 8 years we were required to file for. No mention of being ignorant of the law. In fact, now that we’ve considered opting out, we have been advised by an agent at TAS that “ignorance of the law” is not considered a defence in having been delinquent in our tax filings. She said, however, that we may qualify for a “first time penalty abatement” for never having filed before. Of importance, she told us that TAS has been successfully negotiating on behalf of taxpayers within OVDI. To read more about first time penalty abatement, go to TFA, 20.1.1.3.6.1 http://www.irs.gov/irm/part20/irm_20-001-001r-cont01.html#d0e2260
@bubblebustin
Ignorance of a hidden law is a good excuse. That is why IRM has reasonable cause of failure. There would have no reasonable cause for not knowing murder is in violation of law (as we all know the right and wrong and we have seen these trials ).
Penalty on tax part should be applied according to what it should be.
Even if you do not have good excuse on failing to report income on offshore but it is still a good excuse on FBAR. which were unknown to most taxpayers prior 2009.
@bubblebustin,
Inside OVDI, there is no other penalty except the in lieu of penalty. 5% is hard to get inside OVDI.
The penalty relief you talked about is the tax penalty. That is a different kind penalty that we have offshore accounts to worry about.
FBAR penalty is under title 31, that is not for IRS to collect. They have to rely on DOJ to collect. So we have our day in court — if I were expat, I would have agreed to zero penalty only on FBAR.
Many thanks @Michael J. Miller, @Just Me and @ij – your posts have been really helpful and valuable.
OVDI is not an option for me. It seems clear that in light of the Dec fact sheet and what a lot of people here have unfortunately gone through, it is designed for genuine tax cheats. At this stage it seems to me that entering it would be an admission of intentionally hiding money.
I’m starting to feel that naive or otherwise, the most straightforward and perhaps ultimately least risky option is doing as @ij (and @Mach7 on another thread) suggest – filing ammended previous years, current year, and letter of reasonable cause. This is also along the lines of the Dec fact sheet (albeit, they don’t mention things like schedule B errors…). While going forward *may* not be as likely to raise red flags, if the sudden FBAR did trigger an audit it would look worse. Or, in @Michael J. Miller’s words: “if one does end up interacting with the IRS, I would certainly imagine that they’re more likely to consider one’s failures to be inadvertent if amended returns (and better yet late FBARs) were filed; and, conversely, more likely to consider one’s failures to be willful/fraudulent if one did not take those steps.”
To me, that’s a pretty compelling factor. If there were a way of quantifying risk levels, I might be more inclined to just go forward. But I’m starting to see it as a bit of long-term insurance (as well as a more certain path to resolution and peace of mind) in exchange for some increased short-term risk. Make sense?
I’m also heartened by what I’ve read here and at Townsend’s blog, that (correct me if I’m wrong): (a) there is so far not a single known case of an expat minnow being hit with huge FBAR fines (or any such fines??); and (b), as you’ve all just pointed out, the IRS will have to make their own decision to drag an innocent, low-income (indeed soon to be unemployed!) minnow through the courts, prove wilfulness, etc.
@ i j,
By the way, can you clarify what you meant by “(whatever FBAR SOL stands)”? I’m familiar with one meaning of SOL but not sure it’s the one you meant…! Thanks.
@Howard..
It sounds to me that you are coming to a rationale and reasoned process of decision making and thinking your options through.
I would just add one thing.
Now, with your knowledge base, and as an insurance policy for your decision making, I would now spend an hour or so of time with a knowledgeable OVDI attorney to review with you, just to be sure there is not some fact, or other aspect you might have overlooked. I think it would be well spent money when weighed against the penalties that are possible.
You have some names from this blog, and Jack Townsend also maintains a list of ones that might be in your area. They are expensive, but I would not hesitate to spend it for another opinion! You can always ignore it if you want, and still rely on your own council.
Good luck.
@Just Me
Do you mean I should get legal advice specifically to make sure that OVDI is not for me before making my decision?
Do you think advice from an enrolled agent would do?
Thanks again.
@Howard..
I think it is good insurance for your decision, and NO, I do not think an enrolled agent would do!
You need to talk to someone who is an expert in the OVDI process, and that would be a tax attorney. There are many names, and a couple of them have post comments on Isaac Brock who I would be comfortable talking to. Also, Jack Townsend’s maintains a name list of those he considers experts in this area, and there might be one that is close to you. Although telephone consultation does work, as I never saw any attorney face to face.
http://federaltaxcrimes.blogspot.co.nz/p/ovdi-attorneys.html
It is not going to be cheap, but it doesn’t need to break the bank either. Frankly it is immaterial compared to potential penalties. An hour of their time might be enough for them to assess that your thinking is correct. Of course, I would be remiss if I didn’t point out, that you could get an opinion that conflicts with what you are thinking now, or they might see other risk factors that you have not considered. That might set up some stress for you if you are already settled into your decision.
I would hasten to point out, that I went through the entire OVDP without an enrolled agent or practitioner helping me, but I did seek out advice and validation at 3 points in the process. Be sure to interview them about their knowledge and back ground. If they are trying to sell you on needing them for guidance, they are just shilling for work, and are more interested in their fees than your needs. Move on.
Also, you may get advice you don’t like, and I did too. However, it still helped me see potential pitfalls, or things I had not considered. All in all, I thought it was money well spent, in the scheme of things, even when in the end, I took my own Council in seeking out TAS assistance. No attorney advised me to do that as a option, but I learned about that potential while doing my own personal education drudgery.
Good luck.
@Howard,
Whatever FBAR SOL means if you have missed years of FBAR filing requirement — say if you miss last 8 years, but you may need do it only for the last 6 years based on SOL (6 years).
I would suggest do amend back 6 years — so you would have done all required by the law.
@Just Me & @ij – thanks again for the clarifications.
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I am thankful to have been pointed to this site actually by someone who only read the Flaherty article believing that all of this is blown out of proportion because she is someone that is Canadian who was born in the U.S. and didn’t know. Unfortunately those that have not lived ever in the U.S. and not seen the IRS in action – do not believe that all of this is going on and is that serious. Excellent Press Release – hope someone prints it.
I want to make sure I am reading this all correctly. I obtained citizenship in 1993 and didn’t know I had to file taxes as didn’t think I was American any more. I do have a few relatives and I do hate I won’t see friends – but if I have no plan to set my feet on American soil again. I have chosen not to file/comply or be scared into admitting guilt which I do not have – this is a tax grab by a screwed up Obama nation. I was never asked by a bank to show a birth certificate – if anything a passport and asked my Financial Planner and he says I show as Canadian on my investments as well. Even if by chance the bank or investment group was made to find out and they report – do I care if I have no intention of filing or paying? There is no way I am putting my family here at risk – my home, their assets because I was born in a country that being unreasonable. We did a calculation that if they imposed the fines and went back 8 years and looked at joint stuff – I could owe 200K just off income – nothing to say of the money that went in our account a couple years ago when we sold our house – and even if I wanted to I couldn’t pay. A lot of the money I earned over 150K that is taxable in the U.S. above the 50% paid here is based on being paid back child support payments which were owed for years. Then for the amount between 98 and 150K that is refundable from Canada – Canada does not go back 8 years – so I would be paying twice for some years. I have one kid in University and another 2 years away – their education would be at risk for having the misfortune to be born to someone born in the U.S. Just to file 8 years of taxes would cost me 3200 with an accountant. Of course he thinks I should file. I considered a lawyer —but then I would be paying them to basically tell me what I already know – I am screwed and it doesn’t matter that I had no idea I had any American ties. My view is the day I file – I am admitting I am guilty of something and pointing a bulls eye on my head.
I will admit first the fear factor hit of even though I didn’t feel I should owe because I didn’t know I had to – first knee jerk reaction was to figure out something because of being denied entry – but now it is more shame on them for pulling something like this and I am not going to be party to being held hostage – I only go to the U.S. to vacation to see friends and distant family – so let them come here and see how beautiful Canada is. I am in my 50’s and though it saddens me – I can live with not going back. I also don’t trust anything not in writing about “we probably” won’t impose fines under their “amnesty” to disclose.
My children have Canadian passports (their own) and are young adults so would / could they ever be challenged by the U.S. unless they volunteered they had a parent that was American born entry to the U.S. or to pay U.S. taxes?
So knowing I am not going to comply and the Canadian government won’t collect and I am willing to not travel to the U.S. again as sad as that makes me – do I have anything to fear from the IRS and their reporting demands on the banks?
What would renouncing buy me except a possible chance to go to the U.S. because they now can make me pay taxes to do so. Even though relinquishing gets you out – does it truly get you out of the issue of filing and dealing with border issues? If I choose which I do not to go back myself – do I even need to concern myself at all with anything even if the bank ended up reporting since Canada isn’t going to agree to collect anything for them.
@ Proud, I am not sure that you would have to avoid the US –if you have really compelling reason to go. I have been told by some people here that I shouldn’t go, and I have resolved to go only if my lawyer sister can assure me with relative certainty that I can travel there without being arrested. But I am the “ringleader” here. I would assume that you are off the radar, and therefore, probably safe. However, it is unwise to plan a expensive trip and have your passage to the United States cancelled because you are traveling on a Canadian and not a US passport. We know of two cases so far of US-born who claim they been refused to enter a flight from Europe to the United States because they were travelling on a foreign passport. Imagine you’ve paid for a six thousand dollar cruise from Miami or Galveston, and you can’t get on the airplane! That’s a lot of money to risk. Or say you have pre-paid an expensive vacation in Florida, etc.
Personally, I’m avoiding the US. Just flew over the stupid place yesterday on my way to a very nice little country. For me, the US is now fly-over country to go to countries where I don’t mind spending my money.
That being said, if you do go to the states and get arrested at the border, please let us know.
@Proud: As you have probably learned by reading here, many of us have similar issues. My personal advice to you is Don’t get a US passport, Don’t file past returns and Don’t vote in US election. Doing any of those things is reclaiming US citizenship.
The big dilemma for many of us is the pressure IRS is placing on our banks to become their spies through FATCA. So far, Canadian banks are Flaherty seem to be making attempts to resist, but we don’t know how long that will hold up, especially with information Tiger and I received yesterday from Privacy Commissioner’s Office.
Welcome to Brock. It’s great to have you on board.
@Proud: I posted to you on “Citizenship and Hard Decisions” thread. And I ditto Blaze above. Sit tight for now, learn as much as you can.
@tiger
@blaze
Thank you both. You have told me what my gut has been telling me to do. I have friends that have gone bonkers and are freaked out. I think I would have been 10 years ago when I was travelling there a lot. I will admit I got tired of relatives always wanting me to come there in the name of vacation – now I have an excuse to tell them if they want to see me – visit here.
My kids and husband are Canadian with Canadian passports – will just have to get them to go to Kroger across the border when I crave something I can’t get here:-)
Thank god I am out of corporate and don’t travel there as part of a job on business – I use to all the time. Knew it was right time to work for myself.
Thanks again.
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http://www.fuerstlaw.com/wp/index.php/26/irs-commissioner-ignores-taxpayer-advocates-recommendations-seeking-to-address-unduly-harsh-penalties-faced-by-participants-of-the-offshore-voluntary-disclosure-program/
“The Commissioner’s failure to adhere to his statutory duty to respond to the recommendations by the Taxpayer Advocate coupled with his remarks during his speech before the National Press Club reflect that his objectives are focused solely on generating revenue, without any regard to taxpayers’ rights or whether such revenue is properly collected. “
Thank you Michael, for sharing so much information and your valuable time over here. i am hoping if you have the time, you can clarify something for me.
If one does a QD for the years of 2008,2009 and 2010 and has an “unreported” interest income of around 6K(returns were filed and taxes when applicable were paid on these in the country where this was earned) in all these 3 years but it is below 5K before that – can the IRS/Treasury demand FBARs for earlier years since the FBAR SOL would still be open uptil 2006(after June 30 2012).
Also, the new directive of Mar/9/2012 says something about extending the Tax SOL to six years for unreported income above $5000 and an SOL open on Mar/18/2010. I am not sure what they mean by this and if you could clarify, it would definitely shed some light on what they are actually trying to say.
@AnonymouslyFoolish, I’ll be happy to reply. FIrst, if you do a QD and submit amended returns for 2008-2010, and the IRS audits, all of their options are on the table. For example, they can assess (collection is another matter) FBAR penalties for 2008, 2009, or 2010, if they find reasonable cause to be lacking, or assess FBAR penalties (again, collection is another matter) for any prior year. (Other civil penalties, such as fraud, or criminal prosecution may also be possibilities, depending on the facts.) The IRS may, perhaps, consider reasonable cause on the FBAR penalties for the prior open years if FBARs are submitted, but that’s up to them. But the main point is that, when you go the QD route, it’s more about what penalties may be imposed, not so much about what other returns may be required.
As for the SOL, the 2010 HIRE Act (enacted, I believe, on 3/18/10) amended section 6501 of the Code to provided for an extended SOL in certain circumstances relating to foreign assets.
Under one of those changes, a six-year SOL applies for income from “specified foreign financial assets” of the kind that would be reportable on Form 8938, if the amount of unreported gross income is at least $5,000. Notably, this rule applies even if the taxpayer’s total amount of such foreign assets is not sufficient to have required the filing of Form 8938 (and, I believe, even if the Form was actually filed).
A separate change enacted as part of the same legislation extends the SOL indefinitely if Form 8938 was required and not filed. The indefinite extension generally applies to the entire return (including items unrelated to any foreign assets), but if the taxpayer shows reasonable cause for not filing the Form 8938, then the extension is limited to income from the foreign assets that should have been disclosed on Form 8938.
@ Michael, Thank you for the helpful comments.
Don’t forget to mention that a person who files a FBAR of any sort, is voluntarily waiving certain constitutional rights, such as the 4th Amendment and the 5th Amendment. Remember the words of the Miranda Rights: You have the right to remain silent, anything you say can and will be used against you in a court of law. Or in the police dramas, how the lawyer whose client is being interrogated, interjects, “Don’t answer that question!”
If a client files an FBAR with information that is potentially incriminating, then the lawyer should advise them of their Fifth Amendment rights, and how the actual filing becomes a possible waiver of that right, so that the Justice Department may indeed use the information on the forms to incriminate the filer.
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