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! 🙂
@ovdikills
I am pleased that you are calmer now. Yes, do file for your 2011 extension so you have more time to consider your options. I know when one first learns of these programs, and with all the fear that the IRS and practitioners put into you, it is really a confusing muddle trying to figure out the best course of action. It is easy for us to say, do this, or don’t do that, but frankly, you shouldn’t just take advice from a blog. None of us are experts here, or attorneys. Ultimately you have to take your own council which only gets all the better as time passes and your knowledge base increases. If you are not hasty, and take your time, your knowledge will grow. At some point you may want a final check off with an OVDI attorney just to assure yourself that you are taking the best course of action for you.
I will say it again, if I were you, and if your facts are as you represent them, considering your compliance issues really only go back to 2009, considering your new immigrant status, considering your desire to stay in America and be compliant with its tax laws, considering what I know from my experience, I would be choosing to amend my 2009/10 returns, pay any tax I owe, file my past FBARs with a “reasonable cause” letter of explanation for why they are late, and then sleep well knowing if audited, I have nothing to hide, and so nothing to fear.
That is me speaking, and not you, so you have to decide for yourself if such a route is one you want to take.
Now to your questions:
Question 1. “Do you guys know if I go in for OVDI do I need to submit all the bank statements along with the package?”
I say this gently, but if you are asking this type of question, you are relying to much on others to do your reading for you. I think you need to spend some time on the IRS.gov web site and read all the rules and regulations for yourself, rather than relying on a CPA or some stranger on a blog.
I am not up to speed on the FAQs for the 2011/12 OVDI. If that is what it says there, then you will have to, and if it is not, then you don’t. In the 2009, I had to wait until they contacted me, and sent me a letter requesting my statements, but not sure if that is the case now….. Oh, I will just go an look…
Here you go. You need to read these all in detail if you think you are still considering the OVDI. That should be enough to put you off the entire process.
2011 Offshore Voluntary Disclosure Initiative Documents and Forms
OVDI Frequently asked Questions
Submission requirements
Item 10 deals with the Financial account records you asked about.
It does appear that if your account is < $500,000 you don't need to send statements. That is different than when I was in the program. However, they are going to have to be available on request.
If you decide to join, you will just need to read and follow all these instructions. That is what a CPA or an Attorney would do, and charge you big dollars for reading what you can read and doing what you can do! There is nothing rocket science here requiring any special expertise. It is just clerical work.
Question 2. “do the agents keep questioning you on each and every transaction say for about $2000-$3000 checks coming in and going out?”
Simple answer NO!
If you read over my case study, you will see, that the Examiner never asked me one question about any transactions on all the Bank Statements I sent them. Nothing!
However, the statements that I sent in, had a detailed colored legend for every in and out transaction. It was a pain doing, but it helped give me confidence that I could answer any question without hesitation. Maybe since I was so prepared, they could see it wasn’t worth bothering to ask anything. The main point is, the OVDI is not a detailed examination, like an audit. They were looking for reasonability, not fine details. However, since I approached it as an audit, I was not fearful of what they might find if they decided they wanted to do one.
Question 3. If i go through OVDI and then do an opt out, will I know the fines before hand or will that only be calculated after opt out.
When you decide to Opt Out, you will read the Opt Out procedures. In those procedures, they will instruct you just what to do. You will lay out the facts of your case and tell them what you think is the appropriate penalty. If you are smart, you will say you should have no FBAR penalty due to reasonable cause, and the only penalty you would be willing to pay is the accuracy penalty. That is what Moby and Sally did, and it was accepted.
There have been some reports of others that were fined $500 per year following the mitigation guidelines of the IRM. I don’t know the facts of those cases. I really don’t think you have to worry about multiple small accounts. I have yet to hear of them even trying to assess a per account penalty. Remember the FBAR Statute language is “may” not “shall”. Big difference, and so they are not likely to do multiple account FBAR penalties.
Here are the Opt Out procedures. You will want to read them and understand the process before you enter the OVDI.
Question 4. “Do I know of any good international CPAs?”
No I do not. I used one to do my first amended return and my first Foreign Tax Credit form 1116. He got it wrong and couldn’t explain it to me, and for that I paid $1,000 dollars. I did not go back. After that, I just got Turbo Tax and using the 1116 form he did as a guide,I went to school on it. I just worked it in Turbo Tax until I understood it enough to amend all the other years.
Regarding PFICs… Fortunately I did not have any foreign mutual funds and did not have to deal with this.
Here is something from Phil Hodgens that might be helpful for you….
HOW GAIN ON DISPOSITION OF A PFIC IS TAXED
and
PFIC DISTRIBUTIONS BY NONQUALIFYING FUNDS MEAN ORDINARY INCOME
Finally, regarding 2008 taxes, I thought I heard you say at the beginning of all this, that you were not a tax resident in 2008, so why are you amending that year at all? You didn’t arrive until July 2008. You do need some tax advice here, as if you weren’t tax resident yet, then it doesn’t seem to me that you should have filed in the first place. However, I don’t know the tax law here, so can’t really say..
cheers
M
‘100% of the IRS targets are US citizens who are actively hiding income and assets, not immigrants, ‘
The IRS has targeted a few immigrants (not recent immigrants and most were probably US citizens), but your flat out statement is not correct. Not that ovdikills is likely to be targeted at all ..
JUst Me
I am not entirely sure that the government needs to go to court to collect the penalties. There seems to be some dispute over this. if someone lives outside the US, it would be impossible to collect, but I gather ovdikills is a recent arrival. That incidentally changes the situation a little bit since for a green card there may be statements that one is up to date on tax obligations and the like (which means that simply complying going forward is not possible). I think QD would be the best approach. [ FWIW, I think some of Petros’s advice suggesting expatriation is likely the exact opposite of what an immigrant intends to do, so most immigrants from poorer countries who have better prospects in the US (FBAR or no) would be reluctant to do that. And invoking various constitutional arguments — well, thats the kind of stuff that gets you to lose money very fast]
Note: Comments in [FWIW] edited per Gyro request
@ gyro A person can waive constitutional rights. The government knows that and hopes that you do it, through OVDI, or even FBAR. But it has an expensive, uphill battle if it wants to charge minnows in court over FBAR: the perfect excuse for an unfiled FBAR is ignorance (it is written in the law)–will Justice take a minnow to court for $10,000 per account? Hasn’t happened yet. I consider it better to cede none of my rights to the US government. Thus, before I fill out a FBAR, I’m going to want to see the specific warrant with my name on it. Otherwise, I consider it importunistic for the US government to even ask that information. Then, I will not cede my Fifth Amendment right, because I could be criminalized by my failure to report (thus, the seed of the protection against FBAR is the potential criminal charges); finally, the IRS is afraid to assess heavy fines outside the OVDI–and will likely never do so (until the United States is so obviously desperate for cash–after the coming great hyperinflation in other words), because they know about the victim’s Eighth Amendment rights.
So how much has it cost me not to cede or waive my constitutional rights regarding FBAR: not thousands. Actually nothing at all. Now it is up to the Justice Department to decide that this little now Canadian is worth the effort of bringing civil or criminal charges against for penalties it can’t collect in country from which I cannot be extradited.
Petros — I have no opinion on what you chose to do. That’s your own business and since you are outside the US, you are unlikely to be harassed in any way.
I was pointing out since ovdikills is in the US and apparently does intend to stay in the US, asserting various 4th and 5th constitutional arguments is a sure way to get into serious trouble. Lots of tax protesters try these in the US every year and go to jail. [The one exception might be the Eight Amendment if heavy fines are indeed assessed against ovdikills, which I deem highly unlikely]. it is misleading to suggest that your positions (again, except the 8th Amendment) would make a reasonable defense in a court. That’s OK for you, you’re not likely to see a US court, but its not valid for someone within US jurisdiction who doesn’t necessarily want to leave until good and ready to do so.
@ gyro FBAR is not directly related to tax evasion. It is a mere reporting requirement under the Bank Secrecy Act and not part of the Internal Revenue Code. Thus, the IRS cannot lay charges, but can only recommend action to the Department of Justice. This means that the body of case law that applies to the tax code is dubiously relevant for FBAR. Some of the law articles which have dealt with FBAR, and indeed the courts themselves in some cases, have indicated that for whales (whales have constitutional rights too), the law may not be enforceable on Fifth Amendment grounds — a quite simple concept that one cannot be forced to incriminate oneself, and in the case of FBAR, to report incriminating bank information. There is also a Fourth Amendment challenge, since the FBAR requirements are a general warrant whereas the US constitution allows only specific warrants; the Eighth Amendment has the IRS petrified to apply FBAR to all but the most serious offenders (think, Tony Soprano, where the money itself is laundered from criminal sources). Minnows have little to worry about in terms of draconian fines.
This is a case where even a US whale is probably better off with go-forward compliance than OVDI–for fear that their account information may be given to the United States via FATCA. The minnow in the US, worried that his account would be found out, should do likewise. I only recommended doing no FBAR, for ovdikills, as something for the risk tolerant–but he obviously, by every indication, is not risk tolerant.
The risk tolerant person may decide that on 4th and 5th amendment grounds they will not waive their rights by giving incriminating evidence to Justice. The government can’t force you to waive your constitutional rights, but they are extremely elated when you do so: i.e., OVDI.
@gyro
Thanks for your comments…
Regarding your.. “I am not entirely sure that the government needs to go to court to collect the penalties. There seems to be some dispute over this.”
I think I know of what you are speaking. I am not an expert on this, but will reproduce what Jack said…
It would appear there would be some minor risk if you were due a refund that they could offset against, but that is very controllable by the taxpayer. Just don’t over pay!
Cheers
Jack TownsendMar 5, 2012 03:10 PM
Yes, generally the IRS has to go to court to collect the FBAR penalty.
However, apparently the IRS can collect the penalty by offset against refunds. See Steven Toscher and Michel R. Stein, FBAR Examination, Appeals and Collection Procedures in the Post-Amnesty World, Journal of Tax Practice & Procedure 61, 68 (December 2011-January 2012), here:
Here is the relevant part of the article (with footnotes)
There are two separate collection limitation periods with respect to FBAR penalties: (1) two years from the later of the assessment date and (2) 10 years from the assessment date during which it can collect through certain offsets. n98 FBAR penalties constitute debts owed to an U.S. executive agency, and the IRS is authorized to collect debts using any of the methods enumerated in 31 USC §3711 (2008). n99
n98 IRM 8.11.6.3.1.1(2) (11-01-2011).
n99 See 31 CFR § 5.4(a)(6) (authorizing “treasury entities” to collect debts by offset of tax refunds or benefits, private collection agency, credit bureau reporting, administrative wage garnishment or litigation); see also 31 CFR § 5.1 (“treasury entity” includes the IRS).
Source: “Opting Out” #2 (3/2/12)
Hi,
I am a green card holder who moved to the US back in 2000.
I was never aware of the FBAR requirement until this year and never declared my bank account and interests until this year when I did and filed FBAR for 3 account which had about $50k till 2005, then $17K after I transfered some money to buy a house in the US in 2005. I wanted to do the right thing.
I am married to an American and have kids here, and will likely apply to citizenship at some point.
Is this year’ filing likely to trigger past FBAR issues.
My EA is advising to amend 8 years of back taxes, which if not done in the context of ODVP will certainly trigger an audit where they’re going to find out that I haven’t filed FBAR for the past 10 years.
The undeclared income is around $400 per year, except for 2005 where it is close to $11,000.
I am so afraid of the penalties that I am considering the ODVP program, for 2 reasons:
1) the penalties outside of the program might be extremely high, because of my long history of non compliance.
2) My life and family are here and I don’t want to face issues renewing my green card or becoming a US citizen.
I’ve had sleepless nights since my decision of filing this year.
Any thought are appreciated.
Thanks so much,
-Christophe
Just as a clarification, I filed the FBAR for this year only.
@Christophe…
Well, Mission accomplished. They have got you with the Fear and Sleeplessness! They love it that you are feeling that way, as it makes for rash decisions that might not be in your best interest. Relax a bit, as you are not under a gun right now. Look yourself in the mirror, and do you see see a willful criminal staring back at you? If not, then your penalty risk is not what the IRS likes to imply it “could” be. They always point out the “Maximums”, and that is “never” the case.
Now…
As I have often said, it is hard for me to give specific advise on a blog, (although sometimes I slip up and do) and you would be silly to take it anyway, seeing I am just a guy who has experienced the pleasures of the OVDP, but really have no legal training and do not have a legal mind.
The strategy of just becoming compliant now going forward is certainly one that has been discussed a lot at Jack Townsend’s blog. That is a tough call considering your history, but basically you are playing the lottery audit and are assuming the risk (minor though it might be) that you will be called out. I am assuming you will or have filed your 2011 taxes and the form 8938 too and declared any of the minor passive interest or income you have had this past year.
Given how bogged down the IRS is with the OVDI program, and how they are still processing OVDP participants from 2009, taking almost 3 years, by the time they got around to flagging you for audit, if they even bothered given the minor amounts involved, the statute of limitations would have been passed for most of the years in question.
But say they called you for an audit today (won’t happen), your open years would only be back to 2008 on income (3 years) and 2005 for FBARs (6 years) I think that is right, but you might want to check to be sure when the actual day of SOL occurs. Even for those open years, the penalty guidelines and agent discretion in the IRM would probably allow an examiner to issue a much lessor penalty than what they would hit you with in the OVDI.
In the meantime you could do the work to assemble your account information and get yourself prepared for an audit so if it came, it would not be a big rush or headache. I wouldn’t be afraid of it, unless you are really hiding something you don’t want them to see. If it is only that $11k income from back in 2005, depending on your Stateside income, it probably is not considered substantial enough for them to even open up the year and accept the amended tax return outside the OVDI. I think the tax liability arising from that $11K has to exceed 20% of the total liability for the year. They will just tell you that you can apply for the refund of it. They did that for me for one year too. If I had not been in the OVDP, I would have gotten the money back.
However, don’t take any of this as advice to sit pat, but since you have already exposed yourself with the FBAR filing, I would not be in a rush to enter the OVDI either until you fully educated yourself on the risks of not doing so. I would definitely read Jacks entire recent thread about Opting Out, as he does lay out the options and why the risk of audit and penalty is not as great as some minnows think…
“Opting Out” #2 (3/2/12)
Take your time, and don’t do anything rash. You still have time to also consider the QD (quiet disclosure) option if that makes you feel better. You would only have to do that for the open years, and not all the way back to 2003. So you can think that over too. Remember, in spite of IRS warnings on QDs, they are directed mostly at the Whales, and people amend returns all the time for things they forget or make mistakes on. Your failures fall into that category of innocent mistakes. You would just use “reasonable cause” language in the letter you sent with past FBARS along the lines of what Moby used in his Opt Out.
Continue to educate yourself, and once you feel like you have a strong foundation of knowledge, then consult for an hour or so with a good OVDI practitioner not just some CPA or enrolled agent down the street. If they start out wanting a retainer and their advice is that you should get into the OVDI program to let them represent you, then run out the door and find another one. They are just trying to use fear to generate fees.
I don’t wish the OVDI on my worst enemy. For sure you would be still working on it 2+ years from now if past practice is any guide. You would still be dealing with fear and frustration of how they calculate the OVDI penalty. Out side the program as you are now, you probably do better. So, being inside will not give you any more peace of mind. They are not going to send you to jail for your minor failures, so get that notion out of your head and you might sleep easier. Ultimately, it comes back to the drudgery of getting knowledgeable enough yourself to understand all the risks, and then trust your own council a bit for real peace of mind!
If losing the greencard / citizenship is the fear, then you might want to re-evaluate the cost and the value of having it. If you are planning to remain in the US forever, then the offshore complexity and penalty risk is just the cost of having it.
Cheers
@Just me
Thank you so much for your reply. Yes, the main fear is the loss of the green card or not being able to renew it. My wife is American, and not really willing to leave the US, so that would mean I can say goodbye to my family too.
If the ODVP process takes that long, then I entering it might not be the best, as I will be investigated when it’s time to renew my card that expires in 12/2014.
You said:
“You would still be dealing with fear and frustration of how they calculate the OVDI penalty”.
I thought the penalty schedule was pretty clear:
120% of taxes owed + 12.5% of $60,000 or so in my case.
Am I mistaken?
Also, is it wise to enter ODVI by yourself or advised to hire a lawyer? Their fees for representing you are over $10k for the ones I contacted.
Thanks.
Christophe, the ODVP is for people who were intentionally hiding assets abroad. You were not doing anything intentionally. If you enter the OVDI the IRS agents have no discretion. They MUST penalize you. If you file normally and send a cover letter explaining your ignorance then they are allowed to waive penalties. Have you seen the penalty mitigation guidelines?: http://www.irs.gov/irm/part4/irm_04-026-016.html#d0e1317
@Christophe…
Well, there are always surprises inside the OVDI. I would be sure that you have read all the FAQs very very carefully.
Ignore all the hyperbolic warning therein which, as it is just fear mongering to get you to join, in my opinion. Once you get in, you may decide you want to Opt Out, and if that is so, why join in the first place? Just do the QD instead and wait to see if you are audited. If you don’t have anything additional to hide, then audits are not fearful. They are just a pain in the rear end. I don’t think you have any criminal risk, if you are truely a minnow with benign facts.
Your biggest risk inside the OVDI is that you have not figured your highest aggregate to accurately include FX rate changes, and if you have any other assets overseas, that will get caught up in the penalty calculation. Do you? They are not just applying this against your undeclared accounts. So be very very careful.
Also amending all returns back to 2003 is no mean feat. That will consume a lot of LCUs and dollars, especially if you use a practitioner to do it for you. You can do it yourself, in Turbo tax, so take that on board for what it is worth. I did my own.
If you are a Minnow, and don’t have bad facts, you do not need an attorney and their fees to add on top of all the OVDI expense. You can DIY the OVDI. $10K sounds like a quote from a pratitioner who doesn’t know all the detail work involved. I wouldn’t believe it! Most of the work in applying and providing the documentation is just clerical, so why do you want to pay an attorney or CPA to do that? In fact, as a minnow, I do think you might be better just dealing with the Examiner yourself. Coming in with a POA attorney, just raises flags, in my opinion. The OVDI process is tedious, but not technically difficult if you accept the fact that the Examiner will not have any discretion to penalize you less than the OVDI penalty. Outside the process, it can and mostly likely will be less.
Good luck… Think long and hard about it, and read, read, read!!!! 🙂 Remember this program was designed for whales, and then only technically modified to handle all the Minnows that are being netted. Don’t be in a rush! Don’t let them make you feel like a criminal. You are not, any more than Treasury Secretary Timothy Geithner was with his tax mistakes!!
@Christophe
One final thing. You might want to read some of my experience inside the OVDP. From “get to go”, it is posted here. That might inform your decision. 🙂
@Christopher and others…
Good response here from Jack, that I am reproducing…
http://federaltaxcrimes.blogspot.co.nz/2012/04/opting-out-3-4412.html
Jack TownsendApr 5, 2012 12:32 PM
To Anonymous Apr 5, 2012 12:18 PM
I strongly encourage you to meet your obligations from this day forward (this means filing a correct 1040 with all income and with Form 8938 and an FBAR). (If you have already filed an incorrect 1040, file an amended 1040 by 4/15/12 and it will be treated as an original superseder.)
Then deal with the past as you feel moved — properly advised — to do. This can be joining the OVDI, quiet disclosure or just go-forward (the minimal response).
But putting the problem off and failing to do your duty from this day forward is, in my mind, not a smart way to deal with the issue.
In my view, your worst case for the past is just an audit (whether by joining OVDI and opting out, by quiet disclosure or by going forward) and the audit result should be less than joining OVDI (at least based on my projection from the minimal facts you offer). No use to subject yourself to greater risk by future noncompliance.
Best,
Jack Townsend
@all, I went to my US/Accountant Lawyer today, we asked him if he had anyone that went into the OVDI program and he said he would never suggest that program, but he has 12 people that came to him for help, they were charged HUGE fines /penalties. One client had a penalty or fine of $1.5 million. He said it took him 2 years but he got him completely off. He said it took alot of work.
He did say he had one lady who paid $120,000.00, but not on his advise. He told her not to pay it, that he would try to help her with it, but she would not listen. She just wanted to get it over with, she had had enough. He said she came for advise but would not listen too him..
He said people that are not in the program, just ordinary people have not got any penalties that he has seen. He said he has completed over 300 US returns and not one has been a problem.. He said they are not looking for ordinary honest people like you , they want the people that are hiding something.. but it is unfortunate the little guys are getting put through all this misery with so much scare tactics that it is a real shame.
We asked him about renouncing and he made a face and said why would you do that?? he said I ask all my clients that mention renouncing this question?? if you didn’t have to file taxes would you want to renounce?? and he said the answer is alway a strong NO..
He said he just hates to hear so many people talking about renouncing..
He said there are so many people scared and it is all media driven. So he said tell all your friends on line, Please don’t worry that it is so hyped up were the fines are concerned.
He also said just like Jack said, just meet your obligations..because he said you just don’t know what is going to happen down the road. He was not pushy about it, but said for the last several years I have not seen any fines or penalites..for the ordinary person who was not trying to hide something..
He did make me feel better about it.
So that is my story for today!!
@Saddened123
It is good to get anecdotal reports for attorneys that are dealing with offshore account issues. Thanks for sharing what you are hearing. It might help lower the fear quotient for other minnows.
One thing for certain, once in the program, the IRS makes no distinction between offenders in their one size fits all penalty regime. Even if they know that the penalty structure is too severe for the minnow failure, they will still happily take your money. Fear is a wonder revenue collector, and I would love to know of the 4.4 billion in revenue the IRS trumpets that he has made, what portion was new taxes and what portion was penalties. Of course, they aren’t talking!
@saddened: I’m delighted to hear that. I know how worried you have been. I hope this will give you some peace dof mind–and some sleep filled nights finally.
I hope Christophe will read your comments and take them to heart before he considers ODVP. I also hope Retired and Scared and Swanee66 who have posted on another thread read about this advice and that it helps them.
Are you a member of CARP (Canadian Association of Retired Persons)? You might want to check out comments I made about CARP and Susan Eng, their Vice President of Advocacy–who is also a former tax lawyer. Badger says she’s a real “firebrand.”
Although this is not specifically a retirement issue, it may be possible we can convince Susan Eng to become involved. Something in the back of my mind tells me I’ve already seen a statement from her about this, but I wasn’t able to find anything through either Google or through CARP’s website http://www.carp.ca). In any case, CARP is a great organization for Canadians over 50–and you don’t have to be retired to belong.
@Blaze, Thank you for the Carp website, I will be sure to have a look.. Yes it made me feel alot better, he is a very busy lawyer/accountant and I do not think he needs to push for business. I do hope the post helps others relax alittle.. I was happy my husband went with me and also talked to him.. It is nice that he felt good about the visit as well.
Even though I still hate for my son to file, I guess it will be best to just get it over with and put it too rest..
Blaze, hope you are doing well! Nice too hear from you! I will keep you updated..Have a Wonderful Easter Weekend!
@just me, I do hope my post helps others with their worries. It will sure help me relax alittle more. I think the OVDI program is a horrible thing, it is such a trap. I really hope some of our IBS friends will stay away from it.. I think any accountant that allows their clients to be apart of the program needs their head examined..My accountant said he would NEVER EVER suggest it. Have a great weekend!!
‘@saddened123…
It is interesting to hear your accountants comments. I am glad it is helping to take a load off your mind so you can get back to easier sleep. I wonder what his feeling was back in 2009 when this all started? In fairness, a lot of practitioners have modified their view when they begin to realize how the IRS was behaving. It has been a sea change in IRS practice, and has destroyed a lot of trust the practitioner community had. They got caught caught off guard too. I think now that is why now there is such a wide range of practitioner opinions as what the minnow should do. They are all making their judgements based upon the observed actions of the IRS over the past 3 years in an area where they are really never been any enforcement before.
Jack sums it up pretty well in response to someone asking why the varied opinions.
Jack TownsendApr 5, 2012 08:47 AM
http://federaltaxcrimes.blogspot.co.nz/2012/04/opting-out-3-4412.html
You raise good questions. I think the phenomenon that occurred was that when OVDP 2009 first came out, there was a lot of uncertainty. As you know, the potential civil and criminal penalties the IRS claims it can assert are truly onerous — and probably even unconstitutional if the IRS tried to assert them all. No one expected that the IRS would assert all the penalties, but no one knew how onerous the IRS would be.
And very few, if any attorneys, had any real experience with the IRS’s enforcement of the FBAR penalties — civil or criminal — simply because there was little actual observable enforcement. The enforcement only becomes observable when a court case is filed, and prior to this initiative there were very few. So little was known about what the IRS would actually do in the myriad of fact patterns that emerged — from the whale to the minnow.
The only certainty was to join the program and accept the program penalty structure (including in OVDP 2009 FAQ 35 relief, which itself was uncertain). And, of course, different attorneys have varying degrees of expertise and tolerance for risk in advising clients and the client’s have different tolerance for risk.
This created an environment where the advice rendered by attorneys was necessarily different advice even as to the same set of facts — because the attorneys’ background and experiences upon which the advice was given was different. Two or even three different answers did not mean that any of them was wrong. And the facts varied from taxpayer to taxpayer, so one taxpayer cannot really judge his result by other taxpayers’ results.
Over time, attorneys have become more comfortable that, on opt out audit, materially better results could be achieved because the emerging anecdotal evidence as to what was being done appeared good — at least for taxpayers who were not really bad guys (often referred to as minnows which can include substantial good guys).
But advice differs. Within a range all answers are good.
Jack Townsend
also, this important one about what to do now.
Jack TownsendApr 5, 2012 12:32 PM
To Anonymous Apr 5, 2012 12:18 PM
I strongly encourage you to meet your obligations from this day forward (this means filing a correct 1040 with all income and with Form 8938 and an FBAR). (If you have already filed an incorrect 1040, file an amended 1040 by 4/15/12 and it will be treated as an original superseder.)
Then deal with the past as you feel moved — properly advised — to do. This can be joining the OVDI, quiet disclosure or just go-forward (the minimal response).
But putting the problem off and failing to do your duty from this day forward is, in my mind, not a smart way to deal with the issue.
In my view, your worst case for the past is just an audit (whether by joining OVDI and opting out, by quiet disclosure or by going forward) and the audit result should be less than joining OVDI (at least based on my projection from the minimal facts you offer). No use to subject yourself to greater risk by future noncompliance.
Saddened123 –
Severance of US citizenship is less about taxes per se than it is about (1) ever-increasing compliance burden (2) ugly ongoing costs to comply with multiplying incomprehensible forms even if no tax is owed (3) an unpleasant direction clearly set in a long trend that seems unlikely to abate or reverse (4) likelihood that a failing state will turn even more to exaction of out-of-scale penalties (5) perpetual uncertainty (6) serious mismatches in US/Canadian tax systems (7) feeling free (8) an imperialist state that seems to be all take and no give [you can turn 65, move back to the US, and get no Medicaid] (9) dissociation from a regime that is convinced it is exceptional rather than dysfunctional.
Sorry, I think your professional needs a head check.
@usxcanada, I agree with you 100%, believe me I want out as soon as I receive my Canadian Citizenship. This is just his opinion, of course he has not been scared to death for months and he has not had to live with the uncertainty of it all..It is always easy for others to Praise the US when they are not going through the hell of it all..usxcanda it will be a great feeling to be FREE!! I can’t wait till that day!
What is the best option for a minnows green card holder that immigrated from another country and kept a account with a balance under 65K (while never reporting it on his 1040) and who started filing FBAR? Is ODVP the only option to ensure that the immigration status might not be lost?
@Green Card Holder
You provide way too little information and I am not qualified to answer your question. Only you know if your not reporting of the 65K was an benign oversight, or a deliberate attempt to hide funds from the IRS. If you are now compliant and filing your FBARs, Income taxes and new FATCA from 8938, you will have some audit risk, but probably minor. If it was determined in an audit, that your failure was willful evasion, it might result in a significant FBAR penalty, but not necessarily criminal prosecution. I am not sure how that would weigh on your immigration status. You should consult with a good OVDI attorney who can examine all your facts if you are worried about the impacts on your residency. I just don’t know enough to venture an opinion.
Thanks a lot to everyone who contribute to this blog.
Two questions that can help people make a decision regarding a quiet disclosure:
1) Regarding filing FBARs for the years we missed and the reasonable cause letter.
Is our reasonable cause necessary going to be rejected if we checked no for Foreigh Accounts on the 1040?
(It seems most people who did not file FBARs would have had to check no for that checkbox, otherwise most tax software do a good job at guiding you through the process). I am trying to assess possible penalties outside of OVDP.
2) FBAR status limitations is 6 years. IRS tax returns 3 years.
If we owe 6 years of FBARs, should we amend 6 years of returns so that we fix any unreported income and the foreign account checkbox, or only 3 years?
3) In case of audit, I am assuming that the IRS will look at both the original return and the amended. If the foreign account checkbox is checked on one and not the other, can one be charged with a false return?
Basically, would everyone agree that if we did not report the account in the first place, the safest choice is OVDP, especially, if we started being compliant?