Petros has convinced me to try my hand at doing my own posts, so here goes.
Thought I would start with this one. It relates to a recent “victory” of a financial sort for someone who joined the OVDP program back in 2009. We knew him as Moby.
After 27 long months, he won a long struggle with the IRS bureaucracy. He did not “just roll” over and pay out the absurd OVDP penalties designed for willful Whales. Instead he “Opted Out” of the process. This represents a real success if you don’t count the cost in LCUs (life credit units) that he expended in his effort.
I salute him for his decision to no longer be fearful of the process and lead the way for other Minnows! His is only the second report that I have seen. The other was by a gal named Sally. Both have resulted in the equivalent of a “You are forgiven, my son, go and sin no more” letter. For sure, he was in the confessional booth for a long time to get this equivalent of a “Middle Age indulgence.” We can argue endlessly as to why he should not have had to go through this torturous process in the first place. However, setting that aside for the moment, I just want to celebrate Moby’s release from OVDP purgatory. This Minnow can return to swimming freely in the ocean.
So let me start my first post with Moby’s report which has been posted over at Jack Townsend’s blog. I think it is illustrative that the “Opt Out” option is a viable one for those who have already entered the IRS OVDI Minnow hell. The point is, if you are already inside the processing factory, and you don’t want to be turned into fish fertilizer, you are going to have to wiggle yourself off the OVDI penalty conveyor belt. Moby did, and is now free again.
Below is his Report:
And here is the link to more discussions on the subject of Opting Out.
“Opting Out” of OVDI and OVDP; What is Really Happening? (12/12/11)
I just received what I think is my “opt out” result.
– Situation: Usual story; recent immigrant to US (GC holder), home accounts/affairs overlapped with move to the US. Entered 2009 OVDP; then opted out.
– Problem years: Non-filed FBARs for 2007, 2008. Non-filed 5471 for 2007.
– Schedule B: “No” checked (courtesy of TurboTax… blech!)
– Proposed FBAR penalty: $63K
– Total unreported tax: $14K
– Professional. help: Lawyer for amended returns and initial submission. Subsequent dealings were all solo.
– Reasonable cause: Didn’t know; couldn’t have known.
Only accuracy related income tax penalty was assessed (no FBAR/other penalties). What appears to be the final letter didn’t say much other than my “opt out” was approved by the committee, a normal examination had taken place, and the results were in accompanying Form 4549 (no changes other than accuracy penalty). So it looks like I’ve just got to return the 4549 with payment. There was no mention other penalties or any wilfulness determinations.
Of course, my inner Admiral Ackbar (“It’s a trap!”) suspects that I might get a subsequent letter demanding money for info returns. I’ll cross that bridge if/when I get to it.
I hope this information convinces more people to opt out. It’s hard to offer specific advice. I believe that the default position for immigrants/expats should be to opt out. I’ve seen some comments to the effect of “ignorance is no excuse”, but I disagree. Ultimately ignorance is the only excuse any of us have, it’s valid as reasonable cause, and it’s not our fault that we didn’t know about an unpublicized and (until recently) unenforced rule.
Things that convinced me to opt out:|
– Just Me: Showed that by fighting like a rabid Jackalope it was possible to get a better deal. Inspirational actions on his part, and doubly so for publishing his struggle for the benefit of the rest of us. I think he also gets lots of credit for getting TAS engaged and ultimately the TAD issued.
– The Canadians: I’m convinced this was a game changer. They got the issue the visibility it needed. With that many angry Canadians screaming for blood and the US ambassador to Canada making lots of soothing statements I figured that the IRS will be making every effort to be very lenient.
– My case: I figured that my case was as sympathetic as it gets. If I couldn’t opt out then no one would; so I felt compelled to do it for the greater good (not entirely my own preservation, anyway). It wasn’t until I sat down to review my 14 page opt-out/reasonable-cause letter (20+ hours to write!) that I realised how good my case was when all the facts were summed up.
– My new situation: By the time my case was assigned for processing I had already moved back to my native country. Easier to put up a fight when you’re no longer in the US, and have no need/desire to return to it.
I’ll continue to lurk in the forums as I would still like to pitch in if it helps. I’m much more flippant about the process now, but at the time it was the most terrifying and stressful episode of my life and no one should have to deal with it.
BTW: I bear no grudge against the agent I dealt with. He and his supervisor were very professional and helpful. Now the people at the other end of the pyramid are an entirely different story.
The attorney was actually a reference from Jack Townsend, who emailed it to me since there was no attorney from the list on his website in my city. He told me he was good. I believe it, because I was ready to meet with him after our conversation, even though I didn’t like what he said. Fear Factor. And my wife reasoned me to cancel the apointment when I told her they wanted up to $20k.
Some firms charge a fixed amount for OVDP cases, while this one charges by time.
@ Christophe: I think the short answer is yes, of course. Here is an article that might help: http://www.slate.com/articles/news_and_politics/explainer/2001/09/do_noncitizens_have_constitutional_rights.html
A little research would verify this, or not.
@Just Me, Petros and renounceuscitizenship,
Thank you so much for your answers. They have helped me tremendously.
Happy to help when we can!
@Civic, I just saw your comment and email address, I will send you a greeting.
@Christophe, I am sorry that I was not aware your first question. I just came back from my travel. I think Just Me et al, have done a great job to make you strong. I was fearful before. It was baseless.
Only $18K after 2005, you are not a minnow but a krill and you are the bottom of food chain of marine life -:). I would not even bother to do QD and but to do forward filing. I think you are done already as you mentioned that you did file this year.
Here is my logic,
Your current amount is so small, and it is well below the radar of IRS. What can they get after your $18K -:) ?
Your total past tax due after 2005 are small too.
2004/2005 amount is a bit more –but it is out of range of SOL of FBAR, and the tax due was also of normal IRS assessment time of three years.
Go sleep well, and enjoy your time with your American kids — you are honest immigrant — and this country owes you a big THANKS for being so good !!!
@ij. Thanks for taking the time to answer.
I might be paranoid, but my main fear is to be deported in case of an audit, for having checked the wrong checkbox on my 1040 and not filing FBAR when I should have. I agree that we’re not talking about much money in my case, and Just Me and Petros reassured me, but I don’t know if money is the main issue in some cases.
I have found several articles that state that OVDI is the safest plan for green card holders.
The guy from El Paso didn’t owe that much.
And this article:
states that “The best-kept secret when dealing with the IRS/CID is to know that its agents are under tremendous pressure to produce as many easy criminal cases as possible. Every year the IRS/CID likes to boast they initiate 3,000-4,000 investigations and have a 90% successful prosecution rate; to get these high numbers their agents must pursue many easy-to-work perjury cases.”
I am leaning towards QD, amending 3 years of taxes, and 6 years of FBARs with a reasonable cause letter, as I don’t want to owe anything. The difference in SoL between FBAR and taxes is odd. No one really answered if we needed to amend as many years in taxes as FBARs, as the 3 earlier years will not match if we don’t do it. And I hope that if I am audited, they won’t assess FBAR penalties. If they do, then I would have made the wrong choice, as the penalty would likely be higher than in the program.
But OVDI would for sure wipe out 10 years of savings, but almost guarantee that I will be able to stay.
If you do decide QD, then I think you should amend tax 1040X for last three years as you owe so little (far less than 25% of your total income)
FBAR should go back to 6 years. I would be all around 18K — they won’t bother to audit you — I am certain.
Even if you are audited, it would be much same as joining OVDI and then opting out. You do have a reasonable cause as an immigrant AND the fact that you have some fund in your native country is a reasonable cause (not like Bill Gates to keep tons of his money offshore -:). That is a reasonable cause in my view.
Again, no need to worry.
@ij You said: “FBAR should go back to 6 years. I would be all around 18K — they won’t bother to audit you — I am certain”
Is FBAR penalty only addressed in case of an audit?
Just me and Moby
Thanks for your guidance and encouragement. We feel so alone and depressed with this IRS mess, this websites gives us some hope.
Our situation is different than yours, we still live here. Our penalty inside OVDI is 23k. We don’t have knowledge and communicating skills, can’t find experienced professional in reasonable charges. Always had money in home country, tax compliant there, did not know about FBAR. Should we consider opting out?
Came to US in 2006 .
Transfered money from US to India in 2008 that made the account total more than $10k(about $16k)
Have Rental Income of 250$/PM 2008 onwards which i did not know that has to be reported.I pay an EMI roughly the same amount as rent. I am paying the tax in home country.
What is my best recourse , Should i go for OVDI or just submit the amneded taxes and FBAR from 2009 onwards.
@ashu, sorry you find yourself in this mess.
First compute your tax liability in the US. Since you’re paying tax on your rental income in India, you might not have a tax liability here, once you take into account the foreign tax paid.
If this is the case, you only have to file past FBARs to the dept of treasury, with a reasonable cause letter.
Now, if you owe taxes, it’s tough…. If you get in OVDP, they’ll take into account the value of your home in the calculation of the in-lieu of penalty, and therefore it’s going to be huge. If you do OVDP, you’re most likely going to opt out. So your solutions are basically OVDP knowing you will opt out, Quiet Disclosure, or disclose going forward without fixing the past. Only a lawyer who will analyse your facts in detail will be able to advise you best, knowing what the risks are.
A prominent lawyer is this area, Jack Townsend, says that the results of an opt out audit should be the same in case of opt out, if you’re audited after a quiet disclosure, or if you just go forward.
So since you know that you’re going to opt out, you may wonder if it’s really worth getting into the program in the first place. The main reason for doing it, is if because of your facts, they may press criminal charges against you. If a lawyer determines that this is the case, then you should do OVDI and not opt out.
I would advise a couple things:
1) Get in touch with National Indian American Coordinating Council (see article below)
They are familiar with this issue and might be of help.
2) Wait until September before contacting a lawyer or make a decision.
The IRS recently published some new procedures for US citizen living abroad who are in the same boat as us. They’re going to be applicable starting September 1st.
Unfortunately, these new procedures don’t apply to immigrant US residents.
3) File a Systemic issue with the TAS:
suggesting that they allow immigrants (VISA and green card holders) to use these new procedures as well. OVDP just doesn’t make sense for non tax evaders or people who were just not aware of that and want to become compliant. Most minnows, once they pass the fear stage should decide against OVDP.
4) Ask all of your immigrant friends to do 3) above 🙂
Maybe if they’re flooded with requests to solve the immigrants issue, they’ll publish new procedures for us.
Thanks for your valuable inputs . I have added the Systemic issue with TAS.
What are the typical scenarios which invite the criminal charge upon audit.
A criminal charge is related to “Willful” Tax evasion. That takes a VERY high standard of proof for the IRS and the DOJ to prosecute. They only do that for the very egregious Whales, and that doesn’t sound like you, does it? So I would not worry about it, unless you in fact were involved in some tax evasion scheme.
The IRS has “non willful” penalties which are severe enough that they can apply in an Opt Out or examination from a QD. It suits their purpose, as the burden of proof moves from them to you. That is what they mostly use for minnows. So the chances they would charge you with a “willful” penalty are very very slim.
The main thing is if you are now recognizing your errors, and trying to become compliant in a manner that is the least painful and there is a measure of risk in each decision.
I am not sure of the status of your 2011 tax filings, but if you did those wrong, you have to consider whether you amend them to correct your error or not! There are lot of nuances in making the correct decision. The important thing is to be compliant right now, and then think about correcting past errors, either via a QD, a noisy disclosure, or the OVDI. In this regard, once you understand the implications of each decision, then maybe consulting with a Good international tax attorney for advice (one that isn’t trying to milk you for endless fees) might be money well spent to reassure you of the right decision.
Hope this helps. You struggle with the same things that many minnows do. The IRS does not make a compliance decision an easy one for you, without suffering significant pain.
Sorry, I am not a lawyer. I can’t answer that question.
Jack Townsend would say that the determination of the risk of civil fraud and willfulness is all about nuances.
Here is the part of the Internal Revenue Manual that talks about it. That’s all I can point you to.
For penalties, it says “Penalties should be asserted only to promote compliance with the FBAR reporting and recordkeeping requirements”. So it is important that you start filing correctly from now on.
Read the part about negligence: 220.127.116.11.3.1 (07-01-2008)
And about Willfulness: 18.104.22.168.5.3 (07-01-2008), which might determines if the case might get criminal. It most likely also depends on the amount of money involved.
Most immigrants just did not close our accounts and just did not know about the requirement to declare interest and file FBARs. Our reasonable cause is that no one told us when we got our Visa or Green card, and in some cases, accountants did not mention it either.
The thing that bothers me most is the black and white question on schedule B that asks if we have a foreign account. For most of us, it’s checked no. Now, it’s not necessary a sign of willfullness, but you need to have a good explanation (reasonable cause).
For some, they used an accountant that never asked about your foreign account and checked no for you and the person did not review schedule B carefully to notice.
For some, they used a tax software and skipped that section, and the software defaulted to no.
In case of audit, a lawyer can be helpful if you don’t want to deal with the IRS directly and possibly incriminate yourself. If I am audited, I’ll likely hire one.
Actually, read this great post about how you’re not supposed to talk to investigators:
Also, I encourage you to visit Jack Townsend’s blog:
Hope this helps.
@Just Me and @Christophe
Thanks a lot for prompt and helpful comments. I was really scared but after reading your comments i have got a direction. Keep doing the good work.
Glad to help if we can. It takes a while to get your head around it, as it is so foreign to you when you first run into the realization of the complexity of these regulations and penalty regimes. America is not so friendly from this side of the ledger. The IRS specializes in “fear and intimidation” as its compliance tool of choice, and while a lot of it is just hyperbole, they can make your life miserable, if you let them. You have to resist that fear factor, and be sure you are making decisions based upon rationale, risk assessed, thought processes. That takes a while, and a lot of personal drudgery, but you will arrive at a decision that is right for you.
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I NEED ADVICE AND HELP!
I need advice on whether I should enter the OVDI, the Streamlined Program, or try to do a Quiet Disclosure. Allow to preface this by noting that I have done a great deal of research on this issue. I have spent many hours reading http://isaacbrocksociety.ca/ and http://federaltaxcrimes.blogspot.co.nz/. I know what the options are; I just need to know the best choice for me.
• US citizen; maintains an American mailing address at parent’s house but lives abroad
• Have stocks and cash in American bank accounts and brokerages totaling ~$150k
• Lived abroad since 2001 (Country A 2001-2004, Country B 2004-2006, Country A 2006-2009, Country C 2009-present)
• Have never made more than $40k while living abroad
• Have no investments, property, etc. other than stocks in the US.
• Unmarried, no dependents
• Filed taxes 2001-2006, always taking the FEIE
• Last filed taxes 2006
• Stopped filing taxes because my tax owed was always $0. Made no stock transactions 2007-2012.
• Have met the Physical Presence Test every year (including the years I have not filed)
• Incorrectly reported my cost basis for stock sales in 2006, resulting in a ~$3k lien
• Received notice of above lien too late, as I had moved from my address and forgot to send forwarding address. Lien was deducted from my American bank account and letter mailed from my bank to my American address notifying me of lien. By then, it was too late to appeal.
• From 2007-2012, had nominal American income (<$500 a year from bank interest); made no stock sales during this time.
• Made stock sales in 2013
• Made excess IRA contributions of ~$2k in 2006 (the last year I filed a 1040), ~3k in 2007, and $5k in 2012. I have not yet corrected these and they are therefore each subject to a 6% penalty per year that they remain uncorrected.
• Have never filed an FBAR.
• Value of foreign bank accounts have never exceeded a combined $50k combined.
• On two occasions I held bank accounts in two countries simultaneously; in 2006 and 2009. This was due to the fact that I was moving from one country to another and needed to leave the first account open until I opened an account in the second country.
I have three options:
1) Quiet Disclosure: Submit 1040X for 2006 to reflect 6% excess IRA contribution tax. Submit 1040s for 2007-2013 that reflect 6% excess IRA contribution tax for 2006 (2006-2013), 2007 (2007-2013) and 2012 (2012-2013) and submit FBARs for 2007-2013.
Pros: Above-board, completely fulfills tax liability.
Cons: IRS frowns on QD; fact that I filed and then stopped filing may be grounds for willful neglect, resulting in devastating penalties.
2) Streamlined: Submit 1040s for 2010-2013 and FBARS for 2007-2013.
Pros: I could get tax compliant for these years. Once I clear streamlined, I could file a 1040x for 2006, 1040s for 2007-2009, and 1040x for 2010-2013 to clear up the excess IRA contribution taxes.
• The fact that I had filed overseas taxes until 2006 and then stopped may raise red flags
• The IRS says “This procedure is available for non-resident U.S. taxpayers who have resided outside of the U.S. since This procedure is available for non-resident U.S. taxpayers who have resided outside of the U.S. since January 1, 2009, and who have not filed a U.S. tax return during the same period.” I have not filed a return since this date; however, I did file one while living abroad in 2001-2006.
• The fact that I held bank accounts in two different countries will raise my risk level
• If I pay the tax on the excess IRA contribution in 2012, the IRS may look back to my 2006 and note that I did not pay the tax on that
• If rejected from Streamlined I cannot apply to OVDI and will almost certainly get audited
3) Enter OVDI
• No risk of being accused of dishonesty
• Have the option of opting out of OVDI and/or joining Streamlined
• Subject to draconian penalties
• Get caught up in a massive bureaucratic nightmare. From what I have read online, it took years and years for people who made seemingly innocent mistakes to resolve their problems.
Based upon this information, what should I do?