Just Me offers advice to newbies to the subject of FBAR compliance and OVDP considerations. To join or not to join. That is the question. This is a must read post.
A link to his Case Study of Communication with the IRS through the entire 851 day process is here.
The purpose of this post is to address Minnows who may be new to Isaac Brock. By Minnows, I mean those of you who were not the original target of the IRS offshore account jihad that started in 2009. Those I call Whales. They were the UBS type tax evading “US persons” living in the Homeland and squirreling away their money in “offshore” secret Swiss Bank accounts specifically to hide it from the IRS. If this is not you, then you can read on. If you are a Whale, or if you have already been around the block on all these IRS VD issues and feel well-informed, you can probably skip reading this post.
If you are a Minnow visiting the Isaac Brock Society you are probably concerned about recent IRS programs and what it all means for you as an US Expat, accidental US Citizen abroad, or an immigrant to America. Some of you are now faced with a hard decision as to what your response will be. You want to know whether or not to join the most recent iteration of the Offshore Voluntary Disclosure Program (OVDP) which may be driven by fear as result of a disingenuous marketing effort created by IRS press releases and totally mischaracterized by a compliant and non skeptical US media. This is a very tough decision that many of you are struggling to make. Far be it from me to give you advice on what you should do. You will not find that answer in this post. However, I can point you in the direction that might help you with the decision that only you can make.
Since I am always reticent to provide specific advice on a blog as to what one should or should not do, I want to be sure you understand that information here does not imply that I am encouraging anyone to do anything other than self educate!
I recognize there are others who will advocate strongly for not joining, or will provide more detailed advice then I am willing to do. I would always caution new readers to be wary of specific advice provided in a causal or generalized way in any online forum. Blogs are a great source of information for continuing education, but when it comes to the OVDI issues, they don’t substitute for good legal advice based upon your very specific facts. But…., before you throw good money at a tax practitioner, you need to go down the self-education route. You need to do some drudgery!
Let’s start now. This may be in the category of conventional wisdom, but it is worth repeating.
I have to assume by now, you have read the About Isaac Brock Society, and know this is a great information sharing site with lots of knowledgeable and good bloggers, but I want to direct your attention to some of the excellent information that is also provided on another blog by a tax attorney professional named Jack Townsend. His blog is called Federal Tax Crimes.
There are many other blogs around the internet, but I am going to suggest that you just focus on these two sites right now. Links here at Isaac Brock will expand your learning universe, but at the start of an educational journey you might try maintaining a site specific core focus to begin with, and Jack’s blog might be a good beginning. Then come back here for additional learning and updates. If you start wandering all over the internet and googling everything, you are just going to get lost and confused. There are many attorneys or bloggers telling you what a great thing it is to declare your sins at the OVDI altar and “come clean.” Run away from anyone that tells you that without knowing anything about you or your specific facts.
Jack’s blog was designed for attorneys and students and not lay people. However, with the advent of the first OVDP of 2009, it has become an excellent source for learning for the rest of us non experts. Jack has indulged many lay readers with his time, answers, and advice. He has provided an excellent forum for information exchange amongst novices on specific OVDI procedures. That is why I am placing a high value on it, and why Isaac Brock lists it as an external resource at the bottom of this page.
Between Isaac Brock and Jack’s blog, you should garner enough good information to make an intelligent decision that is right for you. Once you get through all the reading that I will suggest you do, and you update yourself with the new information that is flowing into here daily, you should be well armed with the prerequisite knowledge necessary to approach an attorney for strategic advice and help, if required. That is why I am proposing that do your own due diligence drudgery first, before you run to some unknown practitioner or blog for help in deciding what to do.
Now, I know this is probably the last thing you really want to do. “Why should you have to do it?” you might say. It is absolutely ridiculous that the US government is treating you this way, and you are angry and a bit fearful. You are not alone. We have all felt that way and expressed it.
You maybe overwhelmed and beleaguered by it all. “Now, you want me to do some additional drudgery too?” you might ask. Just accept that as a fact, and do it anyway! I know, I know! Who in their right mind wants to read legalese, endless blog posts, IRS manuals (IRM) and pour over every nuance of the FAQS the IRS issues about the OVDI? None of us do, I think. But you are reading this, so you must know in your heart that you have to.
The tax practitioners know that many of us are either too lazy or not so inclined to dig into these unfathomable subjects. Some of them have spent a lot of time studying the issues and laws, (or not!) and that is why they charge so much to “take care of it” for you.
Information = power = $.
However, if these experts are not up to speed on OVDI issues, and heaven knows a lot of them are not, the last thing you want to do is pay for their education!! If you are overseas it is especially hard to consult with a good knowledgeable one, but it can be done via phone conferences back to the States on Skype. Therefore, because of the communication ease these days, I would almost never rely on an attorney in your resident country (with some notable exceptions in Canada) for advice on how to navigate the OVDI Minnow processing plant!
At this stage of your education, just take a deep breath, and devote some meaningful time on your personal drudgery. Remember, you are doing this, as much as anything, so you don’t make a wrong choice in the professional practitioner market place, should you decide to go down that route.
It is a “Buyer Beware World” out there. Some attorneys are very good, and know the ins and outs of the IRS VD programs. Some are just looking for your money. There is a lot of good commentary at the Isaac Brock Society to those points, but I want to caution you again. You have to learn to identify them. Self-education is required for you do that.
As fun as attorney bashing can be, don’t discount all of them either. A good attorney who can provide you a sounding board with critical advice at key decision points is worth every penny of the price they may charge. At least that has been my experience.
Should you decide to enter the OVDI program, and again I am not suggesting that you should, there are a lot more strategies now on how to minimize the cost in dollars then there were back in 2009.
The “Opt Out” for all its faults is beginning to look like a good option for Minnows if you are already in the OVDI process. There may be strategies on joining the OVDI and immediately asking to “Opt Out”, or just doing a straight up VD, or a Quiet Disclosure (QD), or just start filing the FBARs and 1040s from now on going forward. There are other approaches too. Some are put forth here at IBS and in other blogs that say you shouldn’t join in the first place. I am not going to advocate one way or the other about that here. Each has its own set of risks and rewards depending on facts and ones need to sleep at night.
Unfortunately, what ever your decision is across the wide spectrum of choices from doing nothing to renouncing your US Citizenship, there will still be a big cost in LCUs. (Life Credit Units). It will consume a lot of your time figuring it all out. You shouldn’t have to this, and we can bemoan it all we want, but there it is. It is what it is! You are going to have to spend something, your money or your time, and it is up to you to work out what you can afford and in what portions.
At this point, I would just say, accept that fact that this drudgery for dummies is something you have to do for yourself. At first, for some of you, it will just be incomprehensible and totally illogical. Don’t get bogged down with whether or not any of this makes logical sense. My wife had a hard time dealing with that, and kept getting distracted on the logic tangent!
For a cynic like me, tax statutes by definition are often illogical, as they are written by lobbyist, passed by politicians for heaven’s sake, defined by technical IRS writers and then interpreted by tax attorneys! And then there is you at the end of the unintended consequence train wreck chain reaction to complexity . You have to deal with the impossible compliance mess that results.
Tax laws can be stupid, arbitrary and capricious, and all that complexity gets magnified every step of way until they are applied to you. We can rant endless about it, but what’s the point other than make you feel better? It doesn’t change anything. So, just get back to the recognition that you have to bear up under the burden of lots of reading and research now to work out what to do. However, if you do it slowly, but surely, the information will seep in and stick in your brain. At least that is how it works for me! You eat this elephant one bite at a time, and surprisingly, you find out that you can digest it!
It is not easy however, and not without heart burn. It took me forever to get my little brain around the legal technicalities of willful, non willful and willful blindness issues and what penalties could apply. Understanding who had the burden of proof, what were the appeal processes inside and outside the 2009 OVDP, what litigation ‘might’ happen or not, took effort and constant re-reading and repetition. These are not natural subjects for me. Then, coming to terms with an honest assessment of where I sat on that spectrum of failure and risk took time.
Trust me on this. If you do the drudgery now, and are disciplined in the incremental learning process, eventually the way forward will become clearer and appear. The right decision for you will emerge.
If you are not already in the OVDI, the “recycled” new one without deadlines for participation, means you have time for that knowledge evolution to occur. That is an advantage you have, that a lot of folks back in the days of VDPs with deadlines didn’t have. Fear, urgency and incorrect practitioner advice drove many to make mistakes in their decision-making process. You now have time to get it right! I don’t think you need to feel rushed into a decision. You also have the advantage of reading about the experience of those who have gone before you on the processing conveyor belt. There is much to be gained from their stories.
As a good example, if you haven’t read Moby’s experience yet, this would be one that you can go to school on. (3/11/2012 Note update at end of this text)
So, if it were me, coming new to this subject, I would start reading the specific blogs which I have listed below. I would systematically work through the ones I provide in a progressive manner, starting with the oldest post first. There will be duplication of information between blog threads, but like any learning experience you need repetition for concepts to stick with you. Some of us need it more than others. And yes, again, it is a drudgery, except for a very few of you sick ones out there that love this stuff! I joke! 🙂 Who could love this? Ah yes, they have the titles like attorney and CPA attached to their names! Mate, they are not like us, but with a little effort, you can become more like them. In these matters you have to, or so it seems to me.
On Jack’s blog I would start reading in May of 2011. I don’t think you need to go back farther than that, although you certainly can using the monthly archives. The selected list below is not exhaustive, or even authoritative, but it represents progressive learning which has occurred as the OVDI was developing, and the controversies surrounding the OVDP were being discussed. I would read every comment and every additional reference provided. If Jack or someone provides a link, I would follow it to see what it says.
The special and unique thing about Jack’s blog is that sometimes he provides excellent and detailed advice around a certain set of specific facts based upon his extensive legal background and knowledge. That is very helpful. He is the professor and is qualified to do so, while I am not! I have found him to be a very valuable resource. Also, he reviews with the readers the decision tree he uses to help some of his own clients decide on their best course of action. I put great weight on what he has to say.
You will also hear many folks asking very similar questions that you may have. You will read about others sharing their experiences and giving novice responses which too can be very helpful. Of course there are plenty of opinions, as we all have one, so take that on board with a grain of salt. Since his site is moderated, if someone gets off on a wild tangent or something, it may not be put up. You don’t have to slug through a bunch of over-the-top rants although, I have had some that have been borderline! LOL
When you get done with all this reading, plus the information you are picking up here at Isaac Brock, you are now armed and ready to talk to an attorney, should you decide you want to (or not). With a strong knowledge background, you can cut to the chase, and not waste a lot of money on an attorney telling you things you already know! They then become a partner in your strategic and tactical decisions, rather than an expert dictator of what you should do!
If you are not willing to do this drudgery than be prepared to pay out BIG $. If you have more money than time, you may be tempted to do that, however you can still incur significant and unnecessary risks in spite of the money spent. By definition those reading here are probably Minnows, and likely not anxious to spend the bucks. You may be a DIY person. I was. You can go through the entire process without giving power of attorney (POA) to anyone. You can learn to trust your own council, if you do what I suggest. Just remember, if you put your OVDI life in a tax practitioner’s hands, how do you judge the quality of the advice you are given? Think about that! If you don’t have a strong knowledge foundation to measure advice against, you are setting yourself up to be fish fertilizer. So, do the drudgery now and become Fool Proof and Process Proof later!
That is the best advice I can give you for now. Hope it helps.
Happy reading!
1. Looking for Mr Fbar (added 3/11/2012)
2. Evolution of the FBAR, Where we were, where we are and why it matters, 2006 by Hale Sheppard (added 3/11/2012)
3. To OVDI or Not to OVDI – That is the Question (Of Quiet Disclosures and Doing Nothing) (5/23/11)
4. Opting Out of the IRS 2009 OVDP and 2011 OVDI (6/14/11)
5. To OVDI or not to OVDI – Part 2 (7/31/11)
6. Of Fear and Hostages: A Mid-Sight Editorial on The OVDI Program and Extortion (8/1/11)
8. Opting Out Considerations by Jeff Neiman (9/10/11)
9. Experiences Inside OVDP / OVDI (9/14/11)
10. IRS Promotes the Success of OVDI and Related Items (9/16/11)
11. Article on OVDI and Beyond – Highly Recommended (10/24/11)
12. Excellent Article on Offshore Accounts – History and Future (11/9/11)
13. IRS will Give Canadians Some Breaks!!! (12/2/11)
15. “Opting Out” of OVDI and OVDP; What is Really Happening? (12/12/11)
16. Tax Notes Discusses Dispute Between the Taxpayer Advocate and the IRS About OVDP 2011 (1/6/12)
17. IRS Re-Opens Offshore Voluntary Disclosure Program (1/9/12)
19. “Opting Out” #2 (3/2/12) (added 3/11/2012)
20. Moby “Opt Out” update (added 3/11/2012)
21. “Experiences Inside OVDP / OVDI #2 (4/4/12) (added 4/5/2012)
22. “Opting Out” #3 (4/4/12) (added 4/5/2012)
23. Open Forum Comments to Congress and IRS Regarding Tax Administration for Offshore Accounts (4/9/12)
24. IRS OVDI June 1st, 2011 Opt Out Guidelines (added 4/12/2012)
25. Article by Scott Michel, a DC attorney on foreign reporting requirements and initiatives. (added 5/8/2012)
Special note on this article, where Scott, good as he is, might have gotten something wrong. This note has been confirmed by Jack Townsend.
Scott says..
Opting out enables the IRS to conduct a full audit, and if the taxpayer can satisfy to the IRS that their conduct was not willful, lesser penalties might be imposed (for example, the non-willful FBAR penalty).
Note: It is not up to the taxpayer to satisfy the IRS, it is up to the IRS to establish willfulness. Anything the taxpayer can present in defense of non-wilfulness is useful, but ultimately, the IRS has to prove willfulness.That requires a high standard!
I think that Scott, like the IRS, slips into assuming “willfulness” if you are in the OVDI. It was what the program was designed for, willful tax evading homeland Whales. However, as we now know, given how it has been administered, and given IRS hyperbolic threats, a lot of benignly non willful minnows were in the program and should be Opting Out now rather than paying disproportional penalties.
26. IRS Warning Letters May be Sufficient for Some NonWillful Violations (5/18/12) (added 5/18/2012)
27. Burden on Government to Prove Willfulness in FBAR Matters. (Added 6/08/2012)
– Link to Jack’s discussion and comments
28. The 2012 IRS Offshore Voluntary Disclosure Initiative by Charles Rettig (Added 6/08/2012)
– Link to Jack’s discussion and comments
29. Making Voluntary Disclosures to the IRS, by Jack Townsend (Added 6/10/2012) Abstract: This paper discusses the IRS Voluntary Disclosure Practice, including tips for the practitioner. Topics include noisy disclosures and quiet disclosures as well, in some cases, just making no disclosure at all. The article places particular emphasis on the recent offshore financial account voluntary disclosure program and its alternatives.
30. National Taxpayer Advocate Report to Congress (6/27/12)
32. Tax Advocate Report Identifies IRS’ OVDP / OVDI As Problem (1/9/13) Good stats and discussion of the Opt Out process, and complexities of Offshore tax filings.
33. Report on Webinar on Opting Out and Litigating FBAR Penalties (added 1/17/13 ) This is a Must Read for those currently stuck in the OVDP and considering Opting Out.
34. Warnings on Continued Government Patience for Offshore Account Ostriches (1/31/13)
35. Report of Government Comments on FBAR Penalties at ABA Tax Section Meeting (2/1/13)
36. Article on Taxing Administration for Offshore Accounts (2/2/13)
37. IRS has New Forms for Offshore Voluntary Disclosure Letter and Attachment (3/23/13) (added 3/35/2013)
38. Hale Sheppard Article on Willful FBAR Penalty Cases (4/26/13)
39. More on the GAO Report on IRS Offshore Disclosure Initiatives (4/27/13)
41. Guest Blog: Analysis of the Data in the GAO Report (5/13/13)
42. New York State Bar Letter to Treasury to Restore OVDP Integrity by Not Ejecting Precleared Taxpayers (5/21/13)
43. IRS Modifies Policy for First-Time Penalty Relief (5/31/13)
44. Offshore Items from Report on NYU Tax Controversy Forum (6/11/’13)
45. Rubinstein on the State of Offshore Bank Account Compliance (6/12/13) (note comment by Jack where he infers that U.S. will have some type of triage that will ignore the minnows)
46. Quiet Disclosures That Don’t Stay Quiet – Civil Examinations (6/13/13)
47. An OVDI Odyssey – an Opt Out Success Story (6/16/13)
Finally: Below is the link to my personal story that is told through the letters of communication I had with the IRS through out the entire OVDP process. It starts with my letters to Commissioner Shulman, and ends with the Tax Advocacy Appeal letter that allowed me to have FAQ 35 (consider this an inside the OVDP opt out) relief. That lowered my penalty from $172K to $25k for a ‘nonwillful’ failure. Still a lot of money, and in retrospect way too much for my failure. However, the process does exhaust you, and like a plea bargain, even when you are innocent, it did allow me to put an end to a 2+year process without any willfulness charge or more lengthy appeal process or expense. Without TAS intersession, (the one bright spot in my story) I am uncertain what would have happened. Maybe I would have had even a better outcome like Moby did with his ‘Opt Out’ which came later, or maybe I would have been fish fertilizer, but will never know.
48. My Story: Letters to Shulman, or a Case Study of OVDP communication attempts with the IRS. An insider’s view of the process. (added 3/11/2012)
One final comment, which I would be remiss not to mention. Phil Hodgen’s has up until recently maintained a fine blog on OVDP and OVDI issues. I used it extensively during by own personal drudgery. I checked it daily. You will notice that Isaac Brock has it listed in the resources, and Petros comment in the thread about Phil is right on point. I like Phil’s style of writing, his cynical wit, and his advocacy on behalf of Minnows. I did do some posting there, but since the majority of my experience sharing was on Jack Townsend’s blog, I decided to keep your focus there in your discovery process.
If you read all the threads and comments that I suggest, you will note that there are often links back to Phil, and you should definitely read what he has to say. There are other blogs by attorneys that I could mention also. I have found many to be reputable and very helpful in understanding the history of how this FBAR mess all came to be. Not wanting to clutter a long post any further, I left them out. Again, if you just methodically work through the Townsend threads I have highlighted you will discover them too. It all depends on your personal tolerance level for drudgery. Not many find this discovery process an exhilarating one! 🙂
Fellow Minnows:
Need some clarifications on cold calculations on OVDI Vs the worst case penalty of non-willful go-forward.
Case 1: There are 2 accounts with the following data by month in a particular year. January: account 1 has $50K and account 2 $5K; February both accounts have $5K; March account 1 has $2K and account 2 $45K.
For OVDI is the maximum aggregate the Jan total ($55K) OR is it $95K? The latter looks ridiculous — can someone confirm?
Case 2: Again 2 accounts just that the money moved from account1 to account 2. January: account 1 $50K and account 2 0K; February: account 1 0K and account 2 $50K (due to transfer from account1 to account2)
What is going to be here? If it is 100K it is absolutely meaningless — One would be paying penalty twice on the same money!!
In the OVDI route (regardless of opting out) is there some way to avoid these ridiculous calculations if details of the above are furnished right at the outset?
Now for the non-willful go-forward. Suppose there are 5 accounts with the following amounts. account1: 20K, account2: 1K, account3: $500, account4: $200, account5: 2.5K. total is $24,200. So would this be seen as 5 violations totalling to 10,000*5 = $50K whereas one would be better off doing OVDI an pay the 27.5% of 24,200?
Is IRS really that unreasonable? If it is then does one have to go thru complicated appeals processes to make them see reason? What are the odds in calculations such as the above to get them to see reason assuming non-willful?
Well, first off your statements seemd all onver the place but since I am in a similar boat I have decided that going OVDI is like suicide especially if you are legit. Let those bastards come after me and I will defend myself in court. Do not bend to IRS. They are heinious bluffers and their regime is corrupt. Challenge them with the 8th and watch them fold.
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@liliput1965
Regarding rental records…
My wife had kept a diary of when we had a causal holiday rental. So, she had notes that said, for example, Brandons booked from June 16th – June 23rd.
It was these notes that I used to construct the number of days that we rented.
Also, we had deposits of rental money that we were able to tie to the booked periods, and the records she kept of payments to the neighbor who watched the house and deposited the money. For the times that my wifes notes were lacking, and all I saw was a deposit for XXX dollars, I extropolated from the dollar amount what rental period it must have been… IE, $1000 deposit = 1 week of rental, etc.
I then constructed all of this into a spread sheet, with rental periods, names, money and days in various columns and added it all up. I printed that out as my record to send in with my examination, even though it was not asked for. I took the approach of overwhelming my examiner with detail and paper as if this was a full blown audit. It was not that, by the way. She did complain, that mine was the biggest file, with all my notes, letters, records, and self audits I did. I figured if they wanted to audit a minnow, I was going to make it messy and time consuming for them as I know how to produce detail.
Now, if in an Opt Out audit, they wanted to see the supporting data behind the numbers I was producing on a spread sheet, I did have my wife’s diary and notes (with some lapses of detail) as a back up. It was never asked for, and I never provided it.
Hope this helps.
“I was going to make it messy and time consuming for them as I know how to produce detail.”
We’ve noticed that. 😉 And for us, it’s a good thing. I can imagine the groans however when they received your packages.
Em 🙂
@ Just Me
That reply was hard for you I’m sure. You really had to resist putting some detail into it, didn’t you. 🙂
@bulliedbyirs
I understand it gets confusing, and frustrating understanding the various considerations and how penalties might apply both inside the OVDI and outside it. However, there is no short cut to careful reading of the OVDI FAQs which provide your answers. Let me see if I can clarify it for you.
A highest aggregate is a highest aggregate. Think of it as the the high water mark of the tide regardless of where the water came from, or how it might have ebbed and flowed through a year. It is pretty easy to figure by just looking through your daily account balances until you find your highest amount in that year.
General Statement about Penalties: Highest aggregate for both reporting on an FBAR and for reporting in the OVDI do not necessarily relate to the highest aggregate for purposes of applying a penalty either inside the OVDI or outside it.
There are allowances for reducing the highest aggregate for tax compliance assets (see FAQ 35, and 36) and for transfers of funds between accounts. See FAQ 37) The IRS is not going to double count funds, but it will be on you to provide the documentation that funds are double counted. That will take additional work from you to make it clear to an agent that funds are double counted and should not be.
If you have not read these OVDI FAQs in detail, I would suggest it would be a good idea to print them out, get a cup of coffee (or two) and carefully go through them. You can not afford to skim them, and your really do not need an attorney to read them for you. You just have to do it yourself, even if you would rather be reading the sports or entertainment pages of your newspaper. It is a drudgery, but I can not stress how important it is. In the 2009, I skimmed and missed important considerations, that if I had read more carefully, rather than relying on advice, might have changed my approach.
So, I really strongly suggest, you need to read them slowly again and again, if things don’t make sense for you. Just do it! 🙂 Then your example questions will be clearly answered.
Regarding application of penalties on multiple accounts:
The Statutes allow for such penalty application, but the language is “may” not “shall”, and from a practical matter, even in the most egegrious Tax criminal cases I have seen, there usually is just one FBAR penalty applied, as if the accounts were unified, even though technically they could apply individual account penalties. So, your answer is NO. My experience is that the IRS is not that unreasonable in this area, and if you read the IRM 4.26.16.4 (07-01-2008) on FBAR penalties you will see that it practically screams at the examiner not to be absurd!! I would not worry about that issue. They only charged me one FBAR penalty per year on a unified FBAR basis, even though over the period of time that I had to report, I had up to 25 accounts with the continual roll over of term deposits. Any examples or language to the contrary of this practice is just hyperbole, in my opinion, to scare you with what they can do, not what they actually do in practice. Discretion is applied, and often reasonably so, in spite of IRS warnings (and FAQ examples) to the contrary! They cry “wolf” too much! 🙂
Updating post with new articles… Hat tip to Jack Townsend for alerting us to these articles
Excellent article by Steven Toscher and Lacey Strachan
Burden on Government to Prove Willfulness in FBAR Matters.
Link to Jack’s discussion and comments
Also…
Another worthy read for Minnows. Charles P. Rettig,
The 2012 IRS Offshore Voluntary Disclosure Initiative
Link to Jack’s discussion and comments
Just added a new link to the reading list of materials above in the body of the post.
Title: Making Voluntary Disclosures to the IRS, by Jack Townsend
Abstract: This paper discusses the IRS Voluntary Disclosure Practice, including tips for the practitioner. Topics include noisy disclosures and quiet disclosures as well,in some cases, just making no disclosure at all. The article places particular emphasis on the recent offshore financial account voluntary disclosure program and its alternatives.
In this paper, he discusses the various options which have been part of his feedback comments to so many Minnows asking “what should I do” on his blog. If you are still at the stage of making decisions, and haven’t read anything else, I would read this!
Below is a translated excerpt from a Swiss “Weltwoche” article by Steven E. Kraft, CPA, from the February 9, 2012 issue. He appears to have a lot of practical experience in dealing with the IRS and FBARs and thought it worthwhile to post here:
“Wave of the prison cell keys.
The arm of the U.S. tax authorities is long. They can prosecute people, even if they never possessed a U.S. passport. An insider reports.
Special Amnesty Program.
But what about the risk that the dual national falls into the gears of the American tax law? That he is nabbed by IRS agents at the airport on his next flight to the U.S.? In cases like the one described here, in the thirty years that I’ve dealt exclusively with U.S. taxpayers in Switzerland, I’ve never observed criminal prosecution for breach of the FBAR rules. And, although, according to IRS statistics, at least half of the U.S. taxpayers living abroad illegally do not submit U.S. tax returns and accordingly no FBARs.
Therefore one should know the following: he who has neglected his tax obligations can clear himself through a special “amnesty program” and avoid prison. Provided that the guilty party registers for the program himself, admits his criminal conduct to having evaded taxes, pays the taxes including interest and pays a fine plus a percentage of the highest balance of concealing assets during the last eight years. This percentage is currently 27.5 percent for U.S. taxpayers with U.S. residents, but only five percent of assets who qualify through their foreign residence for the program.
Behind this differentiation in rates can be seen the primary focus of the IRS which is to prosecute U.S. residents and provide an incentive to foreign residents to become legally compliant. In contrast, the IRS is very much less interested in citizens abroad who maintain account relationships there for the purpose of their ordinary living expenses and show no signs of exotic tax evasion techniques. This has an obvious reason: Most of them owe the U.S. Treasury little or nothing because their foreign taxes will be credited in full against their U.S. tax liability. So yes, married couples with dual citizenship and resident in Switzerland live more complicated lives. But less dangerously than Americans in the US, who did not comply with FBAR rules.”
@l’innocente
Thanks for that addition. Appreciate it. Do you have the link?
More info on 2012 OVDP program from Jack Townsend’s blog:
http://federaltaxcrimes.blogspot.com/2012/06/some-info-on-ovdp-2012-61912.html
The point to note is the statute of limitation for the 2012 program depends if you filed correctly or wrongly your 2011 return:
For taxpayers who decided to filed correctly 2011 (i.e. disclosed the accounts and paid taxes on interest), but still decide to enter the program, the SOL will be 2003 through 2010.
If the person filed 2011 wrong, the years will be 2004 through 2011.
For people filed an extension to decide what they want to do, well, they’d better do some math 🙂
And this put again lawyers in a weird position, because the end result might be better for the taxpayer if he/she filed a last false tax return for 2011 before entering the program.
@Christrophe,
I saw that, and appreciate you posting it here. It was very bizarre, and in typical manner creates other technical barriers and complications with unintended consequences to consider. They never make anything simpler with their clarifications. They just can’t help themselves.
I posted a comment, which Jack has now responded to. I will wait with interest to see the IRS announcement and/or the Tax Notes account of the meeting.
I haven’t found the link to the tax notes mentioned in Jack’s blog. Also can you please post when you hear news that the new FAQs for the new program become public?
Thanks!
@Christophe… Sure will. Expect that it will come with another annoucement about all the “success” of the previous programs in getting tax cheats to come clean! 🙂
@Just Me and anyone else who can offer advice to a military family
First off I can’t thank you all enough for sharing your experiences and wisdom with us newbies. I’ve been reading for days now on this site and Jack Townsend’s and others.
Given that my post is at 2 in the morning I don’t have to explain my mental state and anguish over this. Believe me I am trying to do my homework as I am well used to this with being in the world of disabilities but the time and energy this is taking away from my special needs child does not seem worth it.
As I found out about my requirement I thought it best to join the program and suffer the short pain but am having second thoughts after reading some of your commentaries again that the program is not what it seems to be and is just not just and to do QD instead.
My exposure is never having filed an FBAR for balance 30-60k and not having reported interest of $300-600 a year. This is for accounts my parents set up for me as a child and me continuing to use it when I worked as a young adult and while working in my home country again during overseas military tour.
I have some foreign tax credits and foreign income exclusion while being stationed in my home country a couple of years ago but it’s only for a few years and maybe not enough to net zero taxes due. I have a lawyer and a cpa with rates I can manage but they are not aware of much of the info I have learned so far with my own research.
I called one of Mr Townsend’s recommendations but could not afford the 10k retainer. I’ve been debating on getting Mr Townsend’s advice but feel like I’m running out of time to do further research. My current lawyer says I should submit my disclosure letter before filing the first FBAR which is due next week because if not I would be doing QD which is not viewed favorably and would not show good faith. Is this so?
Any advice anyone could give on joining or not would be so appreciated. I’m still leaning to just do what they want because I already have enough battles in my life and can’t take on another one.
@Sergeant’s Wife
I totally feel your pain. Your situation is very similar to mine in that I’d never heard of an FBAR, but had been filing tax returns. My situation is different in that I’m an expat married to a foreign spouse who has no filing requirements to the U.S. You can imagine his pleasure on hearing that I would have to report all of our money in all of our accounts to the U.S. Treasury Department. And as I don’t work, all of the money in our joint account is his.
As far as filing the FBARs, I don’t know what to tell you. If you join the OVDI my understanding is there will be automatic penalties. It’s the amount of those penalties that is questionable. If you do a quiet disclosure, it’s a crapshoot. I think Mr Mopsick sums it best with this article here:
http://mopsicktaxlaw.blogspot.co.uk/2012_05_01_archive.html
My tax advisor also pointed me to the IRS publication:
http://www.irs.gov/newsroom/article/0,,id=250788,00.html
which helped me to come to some decisions for my own situation. However, I think the IRS has pushed most people into a ‘no-win’ situation. It’s just deciding which option works best for you.
I was also thinking … did you pay tax on the interest in the country in which your foreign account resides? If so, does the country have a tax treaty with the US to avoid double taxation? These are questions you may want to discuss with your tax advisor to see if you would owe tax on the interest you didn’t declare previously.
I wish you the best of luck.
@Sergeant’s wife,
I am going to try to summarize your options. But in your case, it boils down to math 🙂 as from what you state, you don’t seem to be at risk of criminal prosecution:
You have accounts below 75K. If you enter the program, unless you opt out, they will make you pay 12.5% of the highest balance over the last 8 years. That is not pocket change (in addition to the CPA and lawyer’s fees). In addition, you’ll have to pay back taxes on 8 years!
Now, as Jack mentioned, make sure you’re compliant this year . And address the past as you feel.
If you want to address the past filing 1040x, the statute of limitation is 3 years, unless you owe more than 25% of your taxes. In that case it become 6 years.
Statute of limitation on FBARs is 6 years. The IRS recommends that you send the delinquent ones with a reasonable cause letter explaning you didn’t know.
If you choose this and are audited, you might just get a warning letter from the IRS for the FBARs. At worst, they might follow the IRS manual recommendation below:
http://www.irs.gov/irm/part4/irm_04-026-016.html#d0e1317
The other option is to just be compliant forward. Several lawyers say you DON’T have an obligation to fix the past. If you’re audited in that case, same thing might happen with regards to FBARs. But for back taxes, you will be penalized by another 20% in addition to what you owe + interest.
I am not a lawyer, but from what you state, it does not seem the program is for you.
I would choose from one of the latest 2 options.
Hope this helps.
Christophe
@Expat in the UK
Thanks for your response and the advice! It is nice to not feel so alone in this. Yes same here, you can imagine the reaction of my husband who fights for his country and has been in harm’s way many times that this country is putting his family through this.
He feels as many others that the program is not designed for little o’ me but I am not risk averse and understand that justice is not always served and that if they wanted to be fair then changes would have been made to the program already. So in the end I think I will not get a fair shot either way.
Did you decide not to enter the program? The 12.5% penalty in the program would apply to me given the account has been under 75k. I had read the publication you mentioned before but I don’t think I could apply it as we were overseas for a tour but have been back in the US for a few years. I did have to pay taxes on the interest while living overseas but did not owe taxes while living in the US due to the regs of my home country.
So I’m in the boat of Americans living overseas for half the time and in the boat of dual citizens/immigrants in the US for the rest of the time. We have not yet gone through all the tax amendments to see if any taxes were owed but I thought in reading FAQ 17 that even if you do not owe any taxes as a net result that that won’t help your case since the fact that you did not report the income, the interest in the first place that you are not in compliance thus subject to the FBAR penalty. Did I understand that correctly? Good luck to you too and thanks again.
@Sergeant’s wife
In all honesty, I would prefer not to say which path I chose to take because I don’t know the outcome of my choice yet so I don’t know if I made the right decision. I wouldn’t want to be an example for anyone in that regard.
The reason I raised the taxable status of the interest you earned on your foreign income relates more to if you owe back taxes. I thought if perhaps you already paid tax on the interest in that foreign country, and that country has a tax treaty with the U.S., in theory you might not owe any taxes on that interest that you may have under-reported on past 1040s. However, I am not a tax professional. I just thought it might be something you could explore to see if you truly owe taxes from previous years. If you don’t, then that is a good thing! But a tax professional will be able to tell you more about that.
The FBARS are a completely different animal and your tax status or any related tax treaties with the country that holds your account doesn’t matter at all.
Also, please don’t feel alone. Since the Treasury Dept. only received around 500,000 FBARS last year, and it’s estimated there are 110 million US foreign account holders in the US and around the world, I think that not filing past FBARs puts us in the majority rather than the minority. I find it hard to believe that the remaining 109.5 million people had less than $10,000 in their joined foreign accounts.
*Sergeant’s wife. Firstly, The OVDI is NOT FOR YOU. It was designed for criminals at risk for criminal charges and jail time. You hardly fit that bill. If you were to make the grievous error of joining the program, you would set yourself up for years of misery.
Secondly, am I missing something? You had an account set up for you in your home country when you were a child and you used it briefly and earned $600. Close the account. end of story. Nothing further required.
@sergeant’s wife
First of all, thanks for your husband’s service, and I am really sad for you that the IRS causes such emotional stress with all of this. It just isn’t right! It is stupid policy!
I think you have been provided some good feedback, and you just need to be sure you don’t create more problems for yourself. Hopefully you are compliant on your FBARS by June 30th, and you still have time to consider carefully your path forward. Now that you have knowledge of your obligations, you have to be sure you act accordingly, as any route you take going forward, you still have some audit risk. That really shouldn’t worry you that much, if there is nothing else unfavorable in your tax background. The audits are a pain in the kester, for sure, but frankly, having survived it myself, I am less worried about those threats anymore. I think I now know better how to deal with them, without big CPA and Attorney fees. Those can be worse than the penalties.
One option that has not been mentioned yet, is the new one that 30 Yr IRS Vet (Steven Mopsick) is making, which he calls the “Make my Day” noisy disclosure. His comments on this start here, and this is my clarification questions back to him with his response here. You might ponder that option as something to consider, if just a QD and compliance going forward seems too risky for you.
Remember this. All decisions come with risk, even joining the OVDI does not eliminate every risk. There can be BIG surprises within the program too, as I learned, and they do not exercise any discretion to treat a minnow differently than a whale. Dumb!
In spite of IRS FAQs and onerous FBAR penalty threats for all, when it comes to a minnow like you, I would take all that with a grain of salt. The program definitely was not originally designed with you in mind. Sadly now, they have allowed it to morph, rather than fundamentally restructuring it. This has resulted in a OVDI camel designed by a committee who thought they were building a horse. It is full of conundrums, catch 22s, and it ain’t pretty.
I would steer clear of it. If you had gotten trapped in it, I would be recommending that you Opt Out. Of course all this assumes that we understand your facts correctly, and you were not a grevious tax evader with criminal risk. From all you have told us, you are far from the profile they were/are looking for.
If they are smart, they won’t waste one minute of time or one dollar of expense on further examination of you.
Just noticed this IRM update on Jack Townsend’s blog, with his comments… Have not digested it yet, but wanted to post it for others to see.
http://federaltaxcrimes.blogspot.com/2012/06/updated-irm-on-fbar-penalties-62212.html?
@Just Me.
They give an example of willful blindness as the following:
“An example that might involve willful blindness would be a person who admits knowledge of and fails to answer a question concerning signature authority at foreign banks on Schedule B of his income tax return”.
Doesn’t everyone fall into this category? Maybe that’s what your examiner thought when she considered you willful.
But later on, it says “the mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness. “
It’s pretty confusing. They seem to say one thing and its contrary.