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! 🙂
@ Christophe..
I apologize for the quick brush off, as I am just heading out the door and will be gone all day. I just saw your comment, and don’t want to leave you without any answers, but don’t have time right now. In the meantime, I would suggest you read here…
I think you might find the some of the answers you are looking for…
The link is to the latest thread that might deals with issues similar to yours, but frankly, you might need to read a lot more of the links I have suggested. If you did, you would become a minor expert as what to do… 🙂
Under the OVDI, taxpayers are subject to a penalty of 25 percent of the highest aggregate account balance on their undisclosed account(s) between 2003 and 2010. If the value was less than $75,000 at all times during those years, the penalty is only 12.5 percent.
These account balance penalties are in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties. Plus, participants are required to pay taxes and interest on any monies (such as interest income on foreign accounts) they previously failed to report. Finally, they must pay an accuracy-related penalty equal to 20 percent of the underpayment of tax, plus interest.
The FAQs also mention
– Pay failure to file penalties under IRC § 6651(a)(1), if applicable;
– Pay failure to pay penalties under IRC § 6651(a)(2), if applicable;
They potentially double the tax liability.
Can someone translate those in English? I read them, but it is difficult to understand.
Christophe…
I am not much help on those 2 items. I have not heard of anyone reporting that these additional penalties have been levied inside or outside the program.
It seems many lawyers are advising to get into OVDP, with the intent of opting out. I don’t understand that strategy. Can someone explain the benefits of it?
In many cases, we roughly know the approximate cost of being in the program. Getting into it is more expensive because of the 8 years amended taxes that we have to do.
Most people tend to believe that in most cases, the FBAR fees will be less outside of the program. So why enter in the first place?
Can someone also comment on the risks of quiet disclosure vs doing nothing and be compliant from now on. Both are at risk of audit (and maybe more in the case of quiet disclosure), and the IRS mentions it will treat quiet discosure as no disclosure and may prosecute.
Doing a quiet disclosure seems like it’s the right thing to do if we owe taxes and it seems it would be taken into consideration in case of audit, but it’s not what the IRS claims. Any thoughts?
Thanks.
Christophe…
I think you worry too much about the hyperbolic warning on prosecution. Remember that was language that was written for the UBS clients that were about to have their names revealed in 2009 after successful DOJ actions. These guys had serious risk of prosecution if their names were exposed. The IRS wanted them to front up, so they could collect the penalties without further searching or going through a lengthy prosecution effort. If they just went the QD route, it would make the IRS job of finding them harder, so they threaten them not to do it. However, you have to keep that threat in context, as the IRS doesn’t have 5000 attorneys to prosecute either. The point is, these guys had been engaged in a real Tax evasion scheme, and were subject to serious criminal prosecution risk. The IRS wanted them to just turn themselves in for OVDP processing. Did it work? I don’t really know, as the IRS only tells us that about 12,000 came forward in the OVDP. How many were UBS type whales, and how many were minnows like me? The IRS doesn’t say.
As you know, the IRS doesn’t make any distinctions in their “one size fits all’ approach to penalties, but the Minnow who was just negligent or unaware has no prosecution risk, or that is my reading of Jack Town’s opinions. The audit out opt, should be no different than a QD audit, if done. I suppose the benefit of the Opt Out audit, is that they might NOT do one, as the Opt Out Guideline language indicates that the Management Committee decides the appropriate level of additional examination, and might just let a person go without additional penalties if the argument is good enough. That is essentially what happened to Moby and Sally and the Opt Out that Jack reported.
Have you read the Opt Out guidelines? If not, I would suggest you do.
They are here… Read paragraph 5.
Of course in a QD, there is a small risk that you will be audited too, but an audit is an audit and either as in the Opt Out or a QD they should be the same, and guided by the same IRM.
Here is what Jack Townsend said in this regard…
Jack TownsendApr 6, 2012 05:32 PM
I respond only the your question as to whether the audit penalty will be higher if you are picked up for audit rather than have an audit after either OVDI with opt out or quiet disclosure. I don’t know the perfect answer to that question. The IRS could have told us but it did not. Since it did not, it should apply the same audit results however the audit arises — whether OVDI with opt out, quiet disclosure with audit, or go-forward with audit. In other words, the IRS should not punish you whichever mode of audit applies unless it has told you that it will apply better audit results for any particular avenue for the audit.
What the IRS did say was that, upon opt out audit, you would get the same results as you would get in an audit — no better and no worse. So, if you choose quiet disclosure or go-forward, and then happen to be audited, you should get the audit result — no better and no worse.
Now, and I speak to the IRS on this (I hope someone at the IRS with an ability to influence things is reading), if the IRS really intends to change the audit results to make OVDI with audit more favorable, then it should announce that policy clearly along with some guidelines about how much worse off the taxpayer will be if he or she does not join OVDI and opt out.
Until the IRS does that, you are entitled to the audit result however you get audited — whether on the OVDI opt out, the quiet disclosure or the go forward. And the IRS will be egregiously in bad faith if it does anything other than that.
Jack Townsend
Hello to all, I am new to this world of FBARs and foreign income. After reading many blogs my worries were not in vain as I see now I have a lot of company.
I would like to share my situation with you in the hope that one of you would be willing to provide some advice and experience on my situation.
I just filed late FBARs with “I had no idea we had to file these” (truthfully) for tax years 2006 – 2010 (5 years of late FBARs). For 2011 I started claiming the FBAR along with clicking yes on the schedule e that we have an overseas account, which I did not know I had to report until about 6 months ago.
My wife and I wired 200,000.00 to her home country to purchase an apartment in 2006. We opened an account to do this. We purchased the apartment in 2007 and in 2008 began renting the apartment. We have been claiming the rental income on our schedule 1040 but I was not aware of reporting the bank account along with interest. There is no excuse for breaking the law but I have had someone do my taxes for over 20 years and all I ever read on the 1040 was how much I owed or was to be refunded. I never read the entire form much less the dividend schedule where it obviously asks if you have a foreign account.
For 2011 tax year the interest and account has been noted on the 1040 schedule. The dividend was about 50.00 for 2011. The previous 5 years that the interest income was not reported amounted to an aggreage of about 260.00 (or 50.00 each year). So, far I have taken the advice of file the late FBARs with an explanation of total ignorance, albiet true, started claiming the account on the 1040 with interest.
In 2008 my wife opened a second account at the same bank to only transfer money from the original account because the bank said we would not get charged a special fee for withdrawals from the second account. So, over the last 3 years we have had two accounts reflecting amounts over 10,000.00 The primary account never got over about 55,000.00 with the exception of when we transferred the money in 2006 to buy the apartment which was about 200,000.00.
We are now very worried about the penalty regime which like everyone else fears, based on the penalty scheme we could be ruined financially if they applied these heavy fines. Again, we took the advice of one tax expert to start reporting now and move forward without doing any quiet disclosures.
I read the story of one man from New Zealand who was in the same boat as me and he was fined up to 172,000 but later got it down to 5000 per year for five years of late fbars. After reading this I would really appreciate what you all think of my situation. I never considered the VD way because as a lay person I was able to understand I did not fit into that category.
Right now, I am at the cross-roads of amending past returns for some minor rental income errors for 2 years and claiming the dividend income of about 50 per year for those years too as well as claiming hte foreign account(s). I thank you all for your time reviewing this.
One alibi, I recently read in one blog that when someone like submits late FBARs a machine at the IRS automatically spits out a 10,000.00 per year fine letter for each account. In my case, since I have two accounts which is basically money from the same account I could get hit twice with 10,000.00 fines for the years I have had 2 unreported account. Is this possible and if so, what appeal or defense could I have to ward off the IRS beast??
@ Pina1 Please read http://isaacbrocksociety.com/2012/03/18/ignorance-is-an-excuse-in-the-case-of-fbar/ , so that you will learn that ignorance of the FBAR is in fact an excellent excuse for not making the filing.
@Pina1…
Quick reply so you know someone is reading your questions, but don’t have time for a lengthy response, but will try to get back to you….
First of all, the person you read about was ME, and if you want to read what a wonderful experience it is in the OVDI, this might sober you up on considering it. Doing the “right” thing is often exactly the “wrong” thing to do.
Secondly…. I would suggest that you limit your blog reading to just a couple blogs, which I have found to be the best. All the links are above. If you try reading every blog on the internet, you will just drive yourself crazy, and the ones I have provided are the very best!
Third… Relax a bit, as you are compliant right now, and have time to decide what to do. From the sounds of things, you have been declaring your off shore income, so just getting current on your FBARS probably is all that is necessary with the “reasonable cause” letter. (but to be truthful, I just skimmed your single paragraph comment, and may need to digest it more.)
Fourth.,… In spite of what you read on some blog, there is no automatic $10K penalties for FBAR failure. Everything on penalties is in the area of “mays” not “shalls”. That is the way statutes are written, so I won’t worry about that right now. Penalties are assigned, based upon agent discretion in a normal audit. In your case, on the surface of it, your risk is minimal, but again, I don’t have a great grasp of your facts, and frankly I am not an attorney or really qualified to give personal advice.
Fifth… Spend some time reading slowly links I have provided, and the comments you see here. Blogs are wonderful for information sharing, but remember, it is not wise to take advise from a blog especially right now. Your knowledge level is low regarding all the aspects of this IRS offshore jihad and the various strategies that are often case specific in dealing with compliance issues. You are not in the position to even adequately assess the advice you might receive. In the end, you have to take your own Council, and that means you really have to do your own drudgery here, or rely on a practitioner whose advice could be exactly wrong too!
If you spend the time reading and digesting as I have suggested, the right course will become clear to you in the fullness of time.
Will try to get back later today or tonight.
Cheers…
@JUST ME: Thanks for yuor time and shared knowledge. I am confused about one thing. We decided on our own to file the 5 late fbars by attaching a statment of ignorance to file and mailed them in to the Treasure. Does that constitute a “VOLUNTARY DISCLOSURE?” I am confused about the program you said you entered under and mine. Is there a difference when someone like me just sends in their latede FBRARs and waits and than someone who “officially enters some special IRS program like OVDI?” Basically, I am confused about what status I fit under. I was reading that what I did constitutes a “VOLUNTARY DISCLOSURE” What can I expect next to happen and how long could it take before I receive something from the IRS? Thanks, again.
@Pina1
No, filing late FBARs does not constitute a Voluntary Disclosure as defined by the IRS OVDI programs.
To do a Voluntary Disclosure you have to front up to the Criminal Investigative Division of the IRS with a full package of past disclosure information as provide in their FAQs…
If you have also filed amended income tax returns for the same years as the FBARs you have done a QD.
Now this is discouraged by the IRS, but remember that their guidance was directed at Tax evading homeland Whales who were truly at risk of criminal prosecution. They hadn’t considered minnows. So, not sure which you are, but you have to take some of the warnings and maximum penalty threats with a ‘grain of salt’. It is somewhat hyperbolic blustering. The IRS only knows threats as a means to encourage compliance. It is part of their genetic make up!
Now, if what you have done is a QD, then you either wait to see if the IRS flags you for an examination or not. Basically, you are now playing the audit lottery. It may or may not work out for you depending on your situation and facts. If your facts are fairly benign, and not engaged overt egregious tax evasion schemes, then the opinion of experts like Jack Townsend is that the QD audit would produce penalties no worse than the Opt Out audit of the official OVDI program. In all anecdotal minnow cases being reported, these Opt Out penalties are less (significantly so) than the OVDI “one size fits all” penalties inside the program.
This is where you may need a GOOD OVDI practitioner to examine your facts with you and decide on a good course of action once you have done all the due diligence drudgery and are well informed to assess the opinions and options the practitioner presents you. You need to walk into that office well educated, so the decision making is a collaborative one, and not just you accepting the “so called” experts advice. There has been much misguided advice given the past 3 years, and I don’t wish that for you!
Hope this helps
@JUST ME Thanks for your insight. I have not done any amended returns for the tardy fbar years. I took the advice of one “self-declared international expat tax expert” by just filing the late FBARS and moving forward in compliance. So, I think I understand your explanation that because I have not amended past returns (QD) then I will not be flagged or worse off if I am audited? Also, I have not done anything egregious. The only egregious thing I have comitted is not knowing I had to declare the bank accounts on my 1040 and claiming the 50.00 in interest earned each year on the accounts for 5 years. And not filing the fbars. What this would boil down to according to the penalty scheme would amount to maybe 25000 (5000 for each year) or 10000 for each year which would be getting fined an outrageous amount of money for not reporting 250.00 in dividends over the delinquent years. Would I have a defense and why would I need a lawyer. What can a lawyer do for me that I cannot do for myself? The facts are simple maybe….
@Pina1…
Sounds like you are small potatoes if you are really talking about that little of past unreported interest.
You are taking a blended response… filing past Fbars but not amending taxes. I don’t know if that causes any risk for you anymore than amending would. I don’t know how the IRS matches up FBAR filings from FinCen with amended returns or not, and then what criteria they use to decide to examine more. My guess, with your profile, you would be way way way down the list. Their resources are limited. I wouldn’t lose any sleep over it or worry about FBAR penalties.
Sounds like you have decided your course of action, so I am not suggesting that you have “to go” to a practitioner. I am saying, that if you do, for whatever reason, then be sure you have done your due diligence. It looks like you are.
Best wishes. You are the model that the IRS should want. You discover your errors and you take corrective action. That should make them happy, and they should leave you alone, but they don’t take direction from me! 🙂 LOL
@Pina1, are you a US citizen or green card holder?
@Christophe: U.S. I guess I just have to sit and wait it out over the next 3 years to see if they come knocking. What a way to live.
At least, you don’t face the risk of being deported.
Have you received a letter back from the Department of Treasury acknoledging the receipt of your FBARs and telling you to not forget to send them from now on (the warning letter as they call it)?
I know in my heart that I am not a tax evader, and that I didn’t try to cheat. I know OVDI is not for me.
Yet, all lawyers I have talked to (even specialized in OVDI) recommend it, maybe because they have sworn to uphold the law, and that is the only way to fix things within the law.
Most claim a quiet disclosure will likely trigger an audit (especially sending 6 years of FBARs and 3 years of amended tax returns), and that there are serious risks of doing it.
None of them recommend going forward, because it’s apparently against the law. And it seems the IRS won’t accept a noisy disclosure outside of the program (i.e. going to a IRS CI), and will force you into it.
It seems that going forward might be the less risky thing to do, if we don’t want to loose our life savings within OVDI, especially, as Jack Townsend mentioned, if the audit result should be the same if in the case of go forward or QD.
I want to pay the taxes I owe, but I am not sure I am willing to pay the FBAR penalty. For me, the cost of going into the program would be double what it on the account. It just does not make sense.
@Christophe
I know two U.S. citizens living in Canada (neither hold Canadian citizenship) who have both decided (with the advice of two different cross border accountants) to file going forward. They both filed 1040s and FBAR forms for 2010 tax year and plan on doing the same for 2011 tax year. Neither of them owed any tax to the U.S. for 2010.
They have chosen to take the advice of the accountants. I can not help but wonder if the advice of tax lawyers would be different.
In both of these cases, the individuals would most definitely be considered ‘minnows’.
I believe their hope is to ‘pass under the radar’ so to speak and certainly when I spoke to them, neither one seems worried about it. They are both planning on applying for Canadian citizenship but I believe, at least in the case of one of them, that they wish to maintain their U.S. citizenship. I told them that if that were the case, as long as the U.S. has citizenship based taxation, they would be required to file taxes in both countries. I also told both of them that I believe they would have been completely foolish to enter a voluntary disclosure program.
Neither was aware of this website and had only read about the requirement to file in the summer of 2011 when it was on the front page of the Vancouver Sun.
@Tiger. I wish I was a US citizen. It would make my decision a lot easier. I really would like to pay what I owe, but I am afraid that filing 6 years of FBARs and amending taxes will trigger an audit which could result in loosing my green card, because I checked the wrong box on the 1040.
I pretty much decided that I won’t go into the program and loose 10 years of savings. So I am now leaning towards not doing anything and just be compliant forward, since it seems like this will have the less audit risk.
And Jack mentioned that the audit result should be the same in all cases anyway.
@ Christophe
I think that is a good decision. file going forward.
@Chrstophe: no I have not received anything from treasury yet. Based on your experience down this scary road, what else can you tell me in terms of what to expect?
@just me: Thanks again for the response. Based on everything I am reading with regard to FBAR penalties and ovdi etc..it seems like the IRS is not interested in your excuse for not filing or reporting your foreign bank accounts and instead whatever your reason they will penalize you JUST BECAUSE YOU DID NOT FILE THE STUPID FORM. Do you think this is true?
@Pina1: I am really not experienced. I’ve read a lot about it on this site, Jack Townsend’s blog and the IRS web site.
If the IRS accepts your reasonable cause letter, it is likely to send you just a warning letter, waiving penalties.
If they decide to audit your last 3 years of taxes, it does not seem you risk much: they were done by an accountant and from what you said, you don’t seem to owe much. Since you haven’t amended them, the amount due plus interest is also subject to a 20% accuracy penalty (which should be waived if you decide to amend them). But if you don’t owe much, it is likely to cost you more to pay an accountant to amend them than the 20% penalty in case of audit.
There is a good post here, which can hep people decide between go forward and quiet disclosure:
See Anonymous Apr 20, 2012 06:32 PM
Hope this helps.
@Pina1: if you get into OVDI, the IRS examiners can’t negotiate and have to apply the rules (you pay taxes due + interests + penalties on 8 years) + in lieu of FBAR penalties of 12.5% or 27.5%.
Outside of the program, many people say that if the IRS thinks you don’t have a reasonable cause, and wants to assess those FBAR penalties, the IRS has to defer the case to DoJ for trial to collect these charges. Most say this is unlikely to happen for minnow cases, where the process would cost more than what would be collected. It seems that what you risk is just to pay what you owe if you’re audited, but the insane FBAR penalties are highly unlikely.
You should not worry too much. (Funny that I am the one to say that, when I am having anxiety attacks at night. I feel a little better now that I think I made a decision. But in my case, what I worry about is the potential False return charge in case of audit and the impact on my green card, but you are a US citizen).