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! 🙂
Oh, they like to play these very technical legal semantic games. They are trying to make their assertions of willful behavior easier.
Mark my words….the day is coming, when if you don’t have http://www.irs.gov/ as your home page on any or all of your browsers on your computer, you are then willfully failing in any tax matter not reported correctly! $10K penalty per browser for non willful failure will soon be part of the newest amendment slipped into to the Bank Secrecy Act by Senator Carl Levins amendment to a Surface Transportation bill. It will be part of the additional FBAR penalties that can be assessed! 🙂
Bend over Americans, a new regime of compliance is being created.
@Just Me,
re; 10,000. fine for ‘improper browser homepage setting’,
I strongly suspect that it has been duly calculated that it is far more efficient to use these penalties to ‘make up for’ the years in which no US tax could be assessed, and thus none collected because none was owed. So, the retrospective retroactive penalty ‘in lieu of’ was born to recoup by a side trapdoor what could not be done through the front door.
You would expend several lifetimes vainly trying to pay those layered 10,000. multiples off in the modernized US version of indenture – and every year exposed to the pitfalls would be another year of potential jeopardy. Sort of like a twisted harvest ritual, where there must be a certain number of human sacrifices annually by lottery – culling those living abroad.
@ Just Me
Thank you so much for your message. I read 30 Yr IRS Vet opinion and have to say I agree with your opinion and Watcher’s that there is a big difference between what the IRS should do and is doing. I understand that we feel that the program is not for many of us but the fact remains the IRS has been using it for years now and has not yet made any adjustments for minnows so I don’t see any indication of their understanding for my situation. Have there been any cases of minnows doing QD that got audited or opted out that have been treated fairly? I have not been able to find much info on that. I think Mr Townsend in his report indicated that so far his QD clients had not been audited yet but that is not to say that the IRS won’t take action on them later.
I will be sending out my first FBAR to be in compliance for this year and am still debating of what to do otherwise. Will it be ok to wait to decide to enter into the program after mailing out the FBAR?
I have not yet been able to piece together your whole journey in the program but have been reading as many comments as possible. What was the unfair treatment you received in the program? If I enter will I not just be charged the 12.5% penalty or are there other unknown twists waiting for me there?
My biggest holdup to do QD is the worst case scenario of an audit. Do I understand it correctly that I could be charged a max of either 5000k or 10% of balance for each year of not filing the FBAR, meaning 5k x 8 yrs? If I have to decide between 12.5% in the program which will be maybe 6k or 40k then I don’t see any other option but to enter.
I do think this battle should be fought because it won’t change unless we stand up for it but personally can’t add it to my load of deployments and disabilities. I hope you will find the time to answer my questions. Thanks again.
@ Christophe
Thanks for your reply. As I’ve asked Just Me I am still trying to understand the penalty under an audit. For level 2 is it 5k or 10% per year of not filing the FBAR? If so I could mean 5k X 8 years for me which is a much worse penalty than in the program.
@ Chester 12
I read that closing the accounts does not alleviate you from not filing the FBAR in past years and if discovered you were trying to hide this will put you in the worst position.
*Why do you assume the IRS would be the least bit interested in you unless you jump up in front of the firing squad?
*Why do you assume the IRS would be the least bit interested in you unless you jump up in front of them. Read 30 year vet’s ‘make my day’ comment.
@ Expat in the UK
I understand where you are coming from. Thank you for sharing those numbers. That does raise some eyebrows as to what will happen to those who have not yet filled. Good luck to you!
@sergeant’s wife
Let me see if I can answer each of your questions in order.
The problem that the entire Tax Practitioner community has, is that the IRS is NOT transparent on how it handles QDs or Opt Outs. Unless someone, comes forward and shares their story, or allows a Tax Practitioner to share the story, we really have no way of knowing. Secrecy creates fear, and that is what the IRS depends on. Look how well it works on you!
That said, we do have some examples of Opt Outs. One of the most notable is reported here on Isaac Brook. Moby’s Opt Out success. Also, if you look on Jack Townsend’s blog, you will see that there was a Sally who Opt Outed with no penalties. Her story starts on this thread on 12/30/2011 04:04 PM .
I would continue to monitor this latest Opt Out blog post as there are other minnows like IJ and Anon5% who may be Opting Out, as have said other Anon’s. I am pretty sure that their stories will be shared there.
Well, the most egregious of the OVDP, was that they had a FAQ 35, that basically allowed for discretionary relief just like you should get in a normal examination. This was the basis of a lot of Practitioner advice to minnows that they should enter the program. The IRS removed that FAQ mid stream, and refused to make the ruling public. The Examiner would not allow me to use it due to the change in position. The TAS called it ‘Bait and Switch’.
The other rule, was in the FAQs, but frankly I missed it, as did the attorney advising me in the beginning. The IRS said they were going to apply the penalty not just on bank account activity,(which the FBAR is all about) but also on assets if there was even minor income associated with it. This was a BIG surprise to the tax practitioner community, and came as a BIG surprise to me too, as I had missed it. (Willful blindness when I read the FAQs, is what they would say! LOL) The Examiner could not get her Technical adviser to remove it from the penalty application,even though she was in sympathy that it should not apply.
There could be surprises, if you do not read the FAQs very carefully to be sure you understand them 100%. I can not stress enough you need to fully understand all the FAQs as to what penalty basis is. Also, remember there are no de minimis rules, and the thresholds are very technical. One dollar on the wrong side of a threshold changes the bill significantly. (IE, did you chose the right FX rate for the end of the year when calculating the highest aggregate? If you did that wrong, you could be in for a surprise if your highest is higher than you thought?)
There is no reason, logic or discretion allowed inside the program, and there are only none thinking “black and white” determinations. Be very very careful.
Also, in the OVDI, some have been surprised that the IRS is asserting the penalty on retirement accounts in their home country, (RRSPs in Canada) or that a home will pulled into the basis for calculating the highest aggregate. You need to be very sure you understand every FAQ correctly and so that there are no surprises later.
Keep that in mind in these types of programs, you need to self assess your own natural tendencies toward detail. If you have a CPA in your genes, you will probably be fine, but if you are like a lot of normal people, you will be tempted to skim, or your brain will glaze over when confronted with all of this. You need to understand even your non conscious tendencies to avoid difficult fine print!
I would say you don’t understand it correctly, because you are focused on the mitigation charts and the very legal and technical calculations of what the maximum penalties “may” be. However, the reality of the IRM discretion is that they are probably NOT that severe.
I would focus more on the general principles that are laid out at the beginning of the IRM on FBAR Penalties. Read them very carefully items 1-8 IRM 4.26.16.4 (07-01-2008) FBAR Penalties As 30 year IRS Vet has said, this practically screams at the Examiner to be reasonable.
An attorney, arguing with an examiner about penalty assertions would be constantly bringing the examiner back to these paragraphs in mitigation arguments. They would anchor your appeals for discretion. Remember, the guiding principle is supposed to be improved compliance, not punitive penalties, especially for minnows!
Hope this helps. It is intended as a cautionary tale about why the OVDI should be carefully considered and not rushed into. I doubt a good attorney, not looking to fleece you, would advise this route for you. But, maybe it would be worth your peace of mind to pay for an hour’s consultation with a knowledgeable OVDI attorney.
Taking advice from a blog is fraught with its own problems and risks, as we can not possibly know all your facts adequately, and we are not legal experts and speak only from limited personal experience. I am not an attorney, and have no knowledge gained from study and practice of law. So, take what I say, with its own grain of salt! 🙂
Posting that here, since I can’t create new posts, but it’s probably worth one:
Scammers pose as IRS in attempt to get data
A new scheme is packaged in a spam email with the heading “Report of Foreign Bank and Financial Accounts (FBAR).”
The article describe how the scammers ask the victim to file a FBAR style form and fax it back.
Excellent Post….thank you for sharing this. When I was preparing my US income tax return about a week ago for year 2011 (filing late by Oct 15, 2012), Turbo tax software asked me the question if I have any foreign account containing $10,000 or more as per FBAR. I was surprised to see plethora of information about so called FBAR requirements and related issues after searching on the internet. Last week, I spoke with a dozen tax attorneys; most of them seem to rush me to do OVDP even without listening to the details of my particular situation. It seemed like no one cares about benign minnows anymore.
This comment is to respond to the comment from Andy directly above.
@Andy
These lawyers are at best incompetent and for sure dangerous. NOBODY SHOULD ENTER OVDP WITHOUT AN EXHAUSTIVE ANALYSIS OF YOUR SPECIFIC FACTS – THIS IS WHERE IT IS WORTH SPENDING THE MONEY! I would be curious to know how many of these lawyers that you consulted were located in the U.S.A. I believe that they are more prone to just tell people to go into OVDP.
OVDP is the wrong option for most “minnows”. Furthermore, it has the potential to bankrupt you. One question I never see addressed is the question of where somebody is to get the money to pay the penalties (assuming no success on reasonable cause opt out). If you need to sell assets to pay the penalties, this could generate further tax liability creating even more problems.
See the following additional posts on and comments on this issue:
http://isaacbrocksociety.ca/2012/05/31/the-conscience-of-a-lawyer-and-the-fbar-fundraiser/
And more recently:
http://isaacbrocksociety.ca/2012/10/08/new-article-from-roy-berg-on-ovdi-opt-out-vs-new-minnow-procedure/
and the comments on this topic that begin here:
http://isaacbrocksociety.ca/2012/09/10/how-i-really-feel-about-citizenship-based-taxation/comment-page-3/#comment-55726
A very interesting comment on whether to enter OVDP here:
http://isaacbrocksociety.ca/2012/07/23/williams-case-reversed-willfulness-no-longer-means-willful-judges-legalize-irs-tyranny/comment-page-2/#comment-42910
And in relation to the new IRS streamlined procedures:
http://isaacbrocksociety.ca/2012/09/01/new-filing-compliance-procedures-for-non-resident-u-s-taxpayers-effective-september-1-2012-a-preliminary-analysis/
Found interesting new post on Jack Townsend’s site.
Worth reading in full, and checking back to see if more information is added there:
http://federaltaxcrimes.blogspot.ca/2012/11/article-on-tax-crimes-subjects-at.html#more
…….”1. An IRS representative said that
Again, if they’re talking to Whales, they should mention it. Such generic threats, without a specific target audience just instigates fear. More of the same.
Are they talking to immigrants, Americans abroad, or the guy who hides his money in some tax heaven. Why do they persist in not giving better guidance? WHY ARE THEY NOT LISTENING???
“we are looking at those who decided not to continue to come through. Will it be Criminal
Investigation? I don’t know; it could be a civil audit“
Are they saying they’re looking at all the first time filers? Such language really goes against compliance. It would be the same as saying “if you have a bank account, don’t disclose it, because otherwise you might be crininally prosecuted”. Police state.
I am more and more disgusted when I read stuff like that. As my wife tells me, maybe I should just stop reading. I am just obscessed by it.
@Cristophe, now there is this on Phil Hodgen’s site too – should be read in entirety:
http://hodgen.com/yet-another-fbar-minnow-to-the-guillotine/
…..”From Tax Notes Today, 2012 TNT 215-1:
The IRS Criminal Investigation division monitors the information it
receives under the Service’s offshore voluntary disclosure initiatives
to ensure that taxpayers who inquire about the programs follow through, a
CI official said November 3.”….”
…..”The paranoia is justified. A government speaker at the California
State Bar Tax Section’s annual meeting said that Criminal Investigations
is following up any inquiries they can to see if the taxpayer entered
the Voluntary Disclosure Program. If not, expect a letter from Criminal
Investigations……..
………”The government is not your friend. In any way whatsoever. If there is a
lesson the world should have learned since the whole Voluntary
Disclosure Debacle started in 2009, it is that ordinary people should
stay the f— away from it. The IRS, in its enthusiastic embrace of
procedural due process (if we process everyone through the system in the
same way, we are being fair) will impose equal penalties on the
grandmother living on Social Security and the multimillionaire tax
evader. Because equality matters.”…….
And, that answers the question about whether things are any better today, for ‘Canadian grannies’ than they were when Mr. Disingenuous Ambassador Jacobson made his baseless claims: see address
‘U.S.-Canada Relations: Issues and Opportunities’
Ottawa, October 18, 2011
at http://canada.usembassy.gov/ambassador/news-and-speeches/18-october-2011-ambassador-jacobsons-remarks-to-the-canadian-club.html
“The third coffin sighting arises from recent media coverage of an
issue that has been around for about 100 years, since the United States
imposed an income tax in 1913. From the beginning, my country has taxed
the incomes of American Citizens no matter where they live, no matter
where they earn their livings.
This is different from the way Canada — and some other countries — do it.
The good news, however, for US and dual citizens living here in
Canada, is that you get a credit for taxes paid to a foreign country.
And because tax rates in Canada are typically higher than the rates in
the United States, most US and dual citizens living in Canada who pay
their taxes to Canada don’t owe any tax to the United States though they
do have to file a US return as all other American citizens do. (I might
add for the record that someone some place might have an anomalous tax
situation where they pay tax in Canada yet still owe tax in the United
States. And I’m certainly not here to give anyone tax advice.)
The situation, however, is different for American citizens living in
some other countries, particularly the so-called tax havens. In those
places with little or no income tax, Americans will owe tax to the US
since their deduction for taxes owed to the Cayman Islands, for example,
will be much lower than the taxes owed to the US.
And given our budgetary problems, the United States wants to make
sure we are paid all the taxes we are owed. American citizens shouldn’t
be able to avoid their tax obligations by establishing a residence in a
tax haven.
There are two particular problems with the operation of these rules
here in Canada. First, there are so many dual citizens, typically by
birth, probably more than a million. So this issue is much more common
here than in any other country in the world.
Second, the penalties — at least in a theoretical sense — can be quite severe.
So you could have a situation where some 70-year-old grandma:
She didn’t file a US return because she didn’t think she had to. And
because she didn’t owe any US taxes. Nonetheless, grandma could be
theoretically subject to serious penalties. To my knowledge we have
never gone after a grandma in those circumstances.
But there has been a lot of press about this lately and people are worried that we will come after them.
When I read all of this I was concerned. So last week I called the
Commissioner of the United States Internal Revenue Service to see what
we could do. I explained the problem to him.
The result is that both he and I are sympathetic to the concerns. We
are going to work together to see if we can’t find a way to accommodate
grandma — and others — here in Canada. But we have to figure out a way
to do it without letting the person who is trying to evade taxes in the
Cayman Islands off the hook.
My message on this one is to sit tight. We are not unreasonable. We are not unsympathetic. We are not irresponsible.
So what’s the point of all this?
Well, unlike Mencken, sometimes when you smell the flowers you are
actually in a garden and not at a funeral. And this is one of those
times. The relationship between our two countries is in full bloom.
And with the continued efforts of people like you on both sides of
the border we will be able to make the best relationship on earth even
better.“
@Badger and Christophe…
Thanks for the updates. I had seen both of those, but haven’t updated anything here in a while. Sometimes I almost forget that the OVDI processing mill grinds on, and chews up minnows caught in its nets. I did post a comment on Phil’s blog.
@Just Me, and @Christophe;
Still seeing anonymous comments alluding to what might be possible for those in the OVDs – i.e. to transition into the “streamlined compliance process”, but can’t see how they will do that given what they made prerequisites to apply to it (ex. not having filed for years 09-11, which is contradicted a bit here http://www.mnp.ca/en/media-centre/blog/2012/9/2/details-on-new-irs-streamlined-relief-for-americans-in-canada ) – I recently saw a quote from some IRS spokesperson implying that they contemplate some kind of option/process to transition some people from the OVDs to the streamlined process, but no details, no timeline etc. and I can’t find the link.
@badger – I decided to end my speculation about whether a program is in the making to convert people in 2011 OVDI to the Streamlined Procedures and called the OVDI Hotline this week. I spoke with an agent who was very nice, very knowledgeable and very clear. The answer is no, there is no “program”. However, I was told that it is possible for people currently in the 2011 OVDI program to apply for the Streamlined Program if they meet all the requirements as listed for the Streamlined Program.
The first way to “convert” to the Streamlined Program if you have not been contacted by an agent is to write a letter stating that you want to leave OVDI and be considered under the Streamlined Procedure and then submit your documents to the Streamlined Program. (Good luck with that. Considering that OVD is not coordinated with the regular IRS, I do not anticipate better coordination between these two programs.)
The second way to convert to the Streamlined Program is to wait until you are contacted by an agent and tell the agent you want to be considered for the Streamlined Program.
The Hotline Agent warned about several traps. Apparently, the IRS has had questions and done some thinking in the area of how many years will be looked at. Do not think that only 3 years will be considered. As OVD participants have filed 8 years, they will have to show that, among other requirements, for the 8 years under consideration they did not file amended returns, or owe taxes of $1500 or more in each of those years. Basically, all the terms and conditions of the Streamlined Program must apply for 8 years, not just 3 years. The 8 years to be considered for those in OVDI 2011 are 2003-2010.
I presented an example of someone who owed no taxes in 7 of the 8 years, but sold a house in one year and owed more than $1499 because the house sale was not taxed in the country of residence. I could hear sympathy in his voice, but he said, that it would still need to be determined if one was high risk or not. One could present arguments that they were not high risk, but there were no guarantees of how they would be considered as according to the technical definition, they were high risk.
He did say if one clearly qualifies for the program in all 8 years, they should go for it because there will be no penalties. He was also clear that if one is considered high risk that there is no guarantee of protection from criminal prosecution or from high FBAR penalties such as is found in the wonderful (my sarcasm here) OVDI program
I realize that this response does not rule out a conversion program in the future, but if this is the current thinking, if a program does come out, it is unlikely it will be much different than what was said above.
@Lisa..
Good comments and insights. Thanks for asking the question, and getting the circular answer. They always like to stress the possibilities of criminal prosecution, and I think you just have to take all of that with a grain of salt. If you know your activity was not willful, and just benign failures, you are a minnow, your risks are closer to nil, then the high volume high risk marketing rhetoric the IRS likes to use to frighten.
I think many worry too much about the standard audit process, but I do think, again assuming no egregious willful activity, IRM discretion protects you pretty much from serious penalty harm that the OVDI guarantees. And given the constraints the IRS and DOJ has on resources, they are only going to expend them on the real Whales. They may be bureaucratically inept and hide bound, but they are not stupid! They aren’t going to spend a good lawyers time, chasing a few pennies from a minnow.
Shulman is gone, and TAS proposes..
Taxpayer Advocate suggests Common Sense changes to OVDI
Do you really think the new guy, Steven Miller will listen to Nina any more than Shulman did? Me either. I will check later to see if I can find this article, on Tax Notes, as have to assume that is where this blog got it…mvh
Not sure exactly where to put this, but might put here for now…and move it to a more appropriate thread later.
Steven Mopsick, has a new post,
Offshore Voluntary Disclosures Update: Where Is IRS Appeals?
*@Just Me, he sounds as though he’s admitting that the IRS Criminal Division are inundated with leads concerning egregious cases and thus won’t have the resources to harass minnows for benign failures. Though he’ll never openly say it, I’m guessing he’s saying in a roundabout way that quiet disclosures and/or go-forward filing would probably suffice for the average expat who hadn’t been aware of all the filing requirements. I also believe that he’s skewing his OVDI advertising to true tax evading whales who are his target clients.
@monalisa1776
I kinda think so too. I put up a comment, and lost it, and now have to start over. I was asking him exactly that point.
*@Just Me, I thought he had already tried to reassure Brockers before he grew fed up with it here.
My impression is that he deals with mostly whales so is naturally going to encourage them to go into the OVDI. I get the impression he’s one of the more prestigious attorneys. On the other hand, I gather that while Phil Hodgens appears to be outwardly more sympathetic to us that he, in fact, is quite possibly playing on our fears to drum up business…I’d gather that his target clients are less wealthy than Steven Mopsick’s.
Phil Hodgens and Michael Miller probably deal with mainly comfortably off people who are between minnows and whales who’s mistakes were mainly benign failures which could explain why they lean both towards quiet disclosure/go forward filings.
@Mona Lisa.
Steven was against QDs, and had some strong disagreements with another attorney over the practice. That discussion on that issue was here.
He thought the better practice, is to do a NON OVDI Noisy Disclosure, and basically challenge the IRS to assert their ridiculous FBAR penalties. I am sure that was client specific, and as we know, it is hard to write one rule that applies broadly.
I can imagine, that over time, his position could evolve depending on what he is seeing now, and the changing ‘risk / reward’ formula for minnows. I think he basically is an honorable man, operating from a long term IRS insider view, and probably does represent higher net worth individuals that can afford his services. I know there were strong disagreements with him, but I still learn from his perspectives.
As for attorneys, they are no different than financial advisers, or anyone with an expertise to sell. There is bound to be some conflicts of interest, that even the more reputable, non ambulance chasers, can not avoid. Only a few are so well known, that they no longer need to drum up business, and can passively wait for you to enter their door.
They are not about to give you advice to break a known law or regulatory obligation, or be NON compliant with FBAR requirements. Like any product you purchase, it is a ‘buyer beware’ world when it comes to attorney advice, IMHO.
I can’t help but feel that location is a significant factor determining the advice offered. If an adviser is in the US or part of a US law firm operating in another country, I suspect that you are more likely be advised to enter a voluntary program. In the UK, you would probably find that most UK providers of US tax services together with most UK law firms providing US tax advice would probably lean towards a quiet/loud disclosure or go forward compliance. I was told by one UK lawyer that a US law firm would invariably advise a voluntary program.
Of course, the most logical (and most benign) explanation for a location bias to advice would be that it is most likely reflective of their client base and individual or firm experience (US adviser = US resident vs foreign adviser = expat).