This is a response to @Mona that I did over on another discussion thread. Petros has suggested I make a post out of it as a stand alone, which I am doing with some amendments to my previous rushed comments.
Mona said to Roger… ” I still think that they should allow for reasonable cause. I do see what you’re saying though, especially with the possible fbar penalties. But outside of the ovdi and ovdp programmes, do you know of anyone who genuinely hadn’t known about fbar and pleaded reasonable cause still being hit with draconian fines? There don’t seem to be any cases specifically mentioned on any of these blogs.”
Here is my response:
Prior to 2008, penalties for FBAR filing failures were rare, but that was before the task of applying those penalties was transferred from FINCEN to the IRS. Now, for “reasonable cause”, the IRS says to Canadians there will be no penalties if no taxes are owed. However, as we know, the IRS definition of what is reasonable, and your definition are probably world’s apart. What if you owe $100? Does that allow them to ignore their “reasonable cause” non penalty suave they have applied to soothe your fears? I have learned long ago to not make any assumptions as to what they should “logically” do, as I have been wrong too many times. 
We can only speculate on what they will do based upon what limited evidence we have in the past 2 years as to what they have done. The Internal Revenue Manual does give guidance as to what the IRS should do, if it follows its own manuals, but even that gets muddled depending on the Examiners ability to navigate that maze of qualifiers and technical definitions and depending on who the technical adviser is.
The problem with FBAR penalties which are less than the “in Lieu of” penalty, or less than the maximum penalty within the OVDP and OVDI, is the lack of visibility. It is only by anecdotal information sharing that we determine or judge how the IRS is acting for those who “Opt Out” or assert “reasonable cause.” There is no data base or clearing house one can look to and see how the IRS is handling these cases, or even how many there are.
Currently I only know of 4 where no penalties were asserted in the OVDP. I hope there were more, but this is all I have heard about. One in a pre FAQ35 withdrawal as reported on Phil Hodgen’s blog by someone called Damsel in Distress pre ‘Opt Out’ days. There was another I heard about by Asher Rubinstein. Post “Opt Out” procedures, (after June 1, 2011) there has only been two reported. One, by a Sally reported on Townsend’s blog, and one by Moby again reported here, and on Townsend’s blog. There maybe others, and if anyone knows of any, I wish they would share. There has to be, but how would you find out? Perhaps by a extensive survey of attorneys around the nation who have been handling OVDP / OVDI who would be willing to share their results. Now that I think about it, that would probably be a worthy project if someone had the time and energy to get the various attorneys to respond!
The thing that concerns me, and concerned the Tax Advocate Service (TAS), is that there are many who should have been given relief, but probably rolled over and paid the “in lieu” of 20% penalties. They really should not have, but fear of the unknowns forced their hand and kept them in the programs that they should have Opted Out of. However, in the original 2009 OVDP, there were no procedures for “Opting Out” until June of 2011.
Of course, there are others that have been reported where a lesser penalty than maximum ‘wilful’ penalty has been asserted, like in my case. Some attorneys trumpeted success at obtaining lower penalties during the OVDP, but after examination, those were only granted using the FAQ35 relief in the OVDP which of course was later rescinded. There is no such relief in the OVDI, except to “Opt Out”.
The FAQ 35 relief mentioned is where the IRS have hit you with “only” a ‘non willful’ $5k per unified FBAR penalty per year, but that still is a significant cost anyway you look at it. For me that was $25K, which is a hellva lot better than the $172K they wanted, but was still harsh. I had to make a business decision to suck it up, take it and move on (if you call blogging about this stuff “moving on”). But…., think about what that means, in practical terms. The IRS is saying, we agree you were not willful, but we basically don’t think your “reasonable cause” argument is good enough, so we are going to fine you $5K each year anyway, because we can!
And, that for you dear Canadians should give you some pause in thinking you might have relief under the “reasonable cause” argument. You might find yourselves surprised. I hope not, but there are the sober considerations you need to keep in mind, it seems to me.
So, when it comes to how the IRS is going to treat you as Rumsfield has said, “there are many known unknowns”, but with it comes to FBAR penalty application it often is operating in the unknown unknown realm due to the lack of transparency in what they do. We are left to speculation, based upon logic of what we think “should happen”, and that is fraught with problems.
In answer to your question Mona, No… “there don’t seem to be any cases specifically mentioned on any of these blogs” where draconian penalties have been applied. However, what is your definition of draconian? Is $5k per year non draconian? Therefore, I have to caution you, that lack of specific cases reported on blogs means nothing as related to evidence of what could or would happen in individual cases. For one thing, it is too early in the process yet to know or get good anecdotal reports on how the IRS is going to treat Canadians. Secondly, for each person that comments on a blog like this one, there are probably 10 that don’t bother to inform anyone. But there I go, speculating about who reports or doesn’t and which blog they report on! My point is there is no clearing house of information related to FBAR penalties, and so I just do not know how we can assert anything yet about what will happen. I do hope with time, your desire for logical results will be proven in fact. Time will tell. But time is the enemy too. Will the IRS acceptance of “reasonable cause” diminish with time, as they assert that you have had plenty of time to become aware of your failures, and thus your feet dragging to file your FBARs is no longer reasonable? Is that an unknown unknown?
One of things that frustrates me is that I am pretty certain that the FBAR requirement is a violation of the NAFTA at least as to how it applies to Canadian and Mexican accounts. However their doesn’t seem to be anyone in the legal community that wants to fight this. The NAFTA treaty is pretty detailed in allowing the supply of cross border services unless a specification derogation was made of which I cannot seem to find any for the Bank Secrecy Act. The problem is to win you have to fight it at the NAFTA secretariat which costs “mega bucks.”
Here more right from the text of NAFTA
1. No Party may adopt any measure restricting any type of cross-border trade in financial services by cross-border financial service providers of another Party that the Party permits on the date of entry into force of this Agreement, except to the extent set out in Section B of the Party’s Schedule to Annex VII.
2. Each Party shall permit persons located in its territory, and its nationals wherever located, to purchase financial services from cross-border financial service providers of another Party located in the territory of that other Party or of another Party. This obligation does not require a Party to permit such providers to do business or solicit in its territory. Subject to paragraph 1, each Party may define “doing business” and “solicitation” for purposes of this obligation.
What about people who’ve lived all their adult life in an adopted country who had assumed (especially as a dual citizen) they could invest in tax efficient vehicles which are actively encouraged by their government…then fifteen years later learns to her horror about all the clauses that allow not only double taxation, but punitive pfic taxation. All these investments were thus in vain. I feel so bitter and scared. Over 25 accounts,etc….some of which had a zero balance but still had to be listed for fbar (and of course the new 8938 which will force me to list virtually all my assets where I live…even travel cards and pre-paid cell phone accounts with a cash balance)….I feel raped. I’m so scared that they will try to hit me with forty fbar fine times six years which could add up to over two mlin dollarskjvyp
They must know all about me withit being close to 600 pages of amended returns showing this increase in passivd income that I had thought only needed to be reported to my domestic tax authority…had obviously misinterpreted the tax treaty due to the clauses allowing for double anamolous taxation on some investments, etc…i’d been a diy investor and filer.
What a mess I’m in. I honestly feel like the sacrificial lamb. Unlike others here, I want to be a good citizen and put it all right…I’m not a tax protester but am utterly dismayed…feel so vulnerable, as though my legs were open in stirrups for an internal exam…lol
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I’m moving all my US assets to where I live, so no low hanging fruit. They’ll have to come over here or if they hit me with enourmous fines, would simply never be able to go back…:'(
I swear, I simply hadn’t understood. I am willing to be completely compliant though it will be my cross to bear
I just want a quiet life. Have far too many ties to America to even consider renouncing…will just have to budget for my specialized accountant plus some double taxation each year (about $3000-4000) in annual total costs…that’s money that could have gone into a pension fund or even a nice holiday…such is life
Mona, Calm yourself a little. ‘prepaid cell phone accounts with a cash balance’ ! I don’t think so unless your intention is to baffle them with bulls**t. Actually that’s not a bad idea. Then they won’t have as much time for the rest of us.
Fair point, *lol* 😀 😀
Well as my mom said, when it finally comes down to it, it’s only money 😛
@Mona
There has been a lot of talk and speculation on this blog.
Nobody has a crystal ball…..but so far so good.
Although I have issues with how this is all being handled by our Governments and the IRS….i still feel there is room for a diplomatic solution here.
You are not alone, (and never will be). There is a solution to every problem, and we are working toward that goal everyday.
I can only speak from a Canadian perspective, but I am upholding the Dec IRS Fact Sheet with respect to reasonable cause, which was also re-enforced by our Government, namely the FInance Minister. (Not to mention the IRS basically admitted that they had an ‘obligation’ to advise).
As far as I am concerned, reasonable cause and owing tax are apples and oranges.
If i was tax compliant in my Country of residence…and for some unforeseen reason i owed the IRS money because my Country of residence had different tax rules than the almighty US of A….how does that interfere with my reasonable cause???
Your reasonable cause was being ‘unaware’, (like the rest of the 98% of expats). Having to owe tax to the IRS has nothing to do with it .
Donkeys and Zebra’s man
IMHO!
Mona,
I think I can take care of your worries about multiple FBAR penalties per account. While they can do that, ie, the Statutes allow it, but in practice, they all recognize that it results in absurd penalties. The term “absurd” is not just my characterization, but was how one IRS attorney referred to the multiple penalties possibility…
Read page 24 of this by Hale Sheppard
http://www.hbtlj.org/v07p1/v07p1_sheppard.pdf
“There is no requirement to assert a separate FBAR penalty for every possible technical violation encountered and doing so could lead, in some cases, to an absurd result.”
You might also give yourself come comfort by reading the actual IRM 4.26.16.4.7
FBAR Penalties – Examiner Discretion
http://www.irs.gov/irm/part4/irm_04-026-016.html
I know of no incident, even when the IRS has referred the case to the DOJ for prosecution have more than one FBAR penalty been asserted. I think I can say, your fears are misplaced here, as I have learned. In this area, the IRS can be considered to be reasonable and logical in their penalty assertions. I had up to 25 accounts too, and I also had that fear, but in the end, it was misplaced.
Hope this helps
Mach and Just Me, thank you do much for your kind words of reassurance and encouragement. Perhaps they might end up hitting me with perhaps a single $10,000 fine for the whole motley lot. Harsh, but at least not life-changing
Just Me: this is a great post. I’m glad I recommended it.
But more to the point, I should mention that the fears that you are mentioning are far from hysterical concerns. I’ve found you to be level headed and very moderate in your reactions. Thus, I think that anyone reading this should realize that we are not here dealing with an over-the-top, partisan tirade. Not in the least. This post represents the level-headed moderate opinion of a man who has direct experience with the IRS.
Not me, not you, not anyone determines what “reasonable cause” is. That remains the sole discretion of the IRS. That is the reason, knowing this, that I felt that the US has negotiated in bad faith with the Canadian government, and said as much on January 5.
Also……don’t you think that they have enough to do right now as everyone is running to get compliant?
I spoke to an Accountant in Vancouver today to send him some clients…he said he couldn’t take them because his Firm was way too busy!.
I think they are going to allow reasonable cause when it is clear that it was reasonable (hope that makes sense)…otherwise they are going to have to hire an additional 94,000 IRS agents to clear the backlog.
@Just Me Mona’s case is pretty upsetting actually because she has mentioned a few times that her investments have resulted in punitive level taxes–on investments which are perfectly legal vehicles in her own country but trigger taxes in the United States–that she didn’t know about, and that getting into compliance wipes out a decade or more of investing–as if 2008 didn’t already do enough damage for most people. FBAR fines would be adding insult to injury to her case. She’s already been wiped out by US taxes.
And herein lies a big problem. She did these investments to shelter her investments from the British taxes, only to be side swiped by the IRS. It is perfectly immoral what the US government has done in her case. And this is why we have to fight against the incursion of the IRS into the lives of American expats.
FWIW there is still no known case in Canada of someone outside OVDI who filed FBARs as part of a catchup filing and got nailed with penalties.
@broken man Give it time. Most of us hadn’t even heard of FBAR before 2009 or later.
Petros…
I have total empathy for Mona and her plight. Been there, done that, as they say! I wished I had the outlet of this type of blog to work through the various aspects of what was occurring to me as I navigated the OVDP mine field.
I will try to post something else this week, to give her an idea of my discovery, fears and then communication with Shulman about the misplaced nature of the program way back in September of 2009. Maybe it will help her with her arguments for some reason and discretion in an “Opt Out” situation. I am not real familiar with where she is in the process, and I do not know all her facts. I can not possibly discern from a distance the factors regarding her situation that the IRS will use to determine willful or non willful behavior.
I have to think, hope, speculate here, that the IRS will not be so inclined to assert “willfulness” on her, as they will someone in the Homeland who was a UBS type Whale. She should cling to that perspective, I think, and do her drudgery, then get some good advice for her decisions. The link to Townsend’s discussion on Opting Out, is must read material for her…. Especially this one….although read the entire thread top to bottom and no skimming! 🙂
http://federaltaxcrimes.blogspot.co.nz/2011/12/opting-out-of-ovdi-and-ovdp-what-is.html?showComment=1327499011988#c8299560776264709246
@Just Me I know you have empathy–though I wasn’t sure you knew her particulars. I was trying to show my own empathy by being appropriately outraged at her situation. The comfort you had offered her would seem small consolation to me, but clearly, she saw it as comforting. I think that anything you are willing to offer her that could help is what this blog is about, and I thank you.
@Petros…
It definitely is outrageous, I agree. I just want her to consider that the “worst case” FBAR penalty is unlikely, as the IRS also recognizes the absurd, at times! Of course, the way they have gone about deploying the OVDP / OVDI is absurd, and they still haven’t recognized that, so I remain skeptical!
Great post – would like to focus on your specific line:
“Now, for “reasonable cause”, the IRS says to Canadians there will be no penalties if no taxes are owed.”
I assume that you (are not talking about OVDI) and are basing this on FS-2011-13, December 2011 which may be found at:
http://www.irs.gov/newsroom/article/0,,id=250788,00.html
I actually wrote an extensive post on this in December which is here:
http://renounceuscitizenship.wordpress.com/2011/12/09/irs-issues-information-for-u-s-citizens-or-dual-citizens-residing-outside-the-u-s/
I don’t believe (based on the information in the FS) that “no taxes owing” is a pre-requisite for the IRS to accept “reasonable cause”. In my post I wrote that:
“The IRS is delinking the FBAR issue from the tax return issue. (This is what OVDI failed to do). In other words (at least the way I read this), you could owe some tax and still plead “reasonable cause” on the FBAR issue.”
This position finds support in the FS itself as follows:
“6. Possible penalties for failure to file FBAR
If you fail to file an FBAR, in the absence of reasonable cause, you may be subject to either a willful or non-willful civil penalty. Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation. See 31 U.S.C. § 5321(a)(5). Note that this penalty is applicable only in cases in which there is willful intent to avoid filing. Non-willful violations that the IRS determines are not due to reasonable cause are subject to a penalty of up to $10,000 per violation. There is no penalty in the case of a violation that IRS determines was due to reasonable cause. For more information about the FBAR penalty, see Form TD F 90-22.1. For information about the reasonable cause exception to the FBAR penalty, see IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR).
Example 3: Same facts as Example 1, except that the highest balance in Taxpayer’s checking account exceeded $10,000 and, after reading recent press and thus learning of his FBAR filing obligations, Taxpayer filed an accurate, though late, FBAR. The FBAR was accompanied by a written statement explaining why Taxpayer believed the failure to file the FBAR was due to reasonable cause. The IRS will determine whether the violation was due to reasonable cause based on all the facts and circumstances. Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.
Factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account, that the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause. No single factor is determinative. (INCLUDING WHETHER NO TAXES ARE OWING – IT TALKS ABOUT A DE-MINIMUS SITUATION)
Factors that might weigh against a determination that an FBAR violation was due to reasonable cause include whether the taxpayer’s background and education indicate that he should have known of the FBAR reporting requirements, whether there was a tax deficiency related to the unreported foreign account, and whether the taxpayer failed to disclose the existence of the account to the person preparing his tax return. As with factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause, there may be other factors that weigh against a determination that a violation was due to reasonable cause. No single factor is determinative.
THE AMOUNT OF TAX OWING SEEMS TO BE A FACTOR BUT IS NOT DETERMINATIVE.
Current IRS procedures state that an examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty and that instead an examiner should issue a warning letter. See IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR). The IRS has established penalty mitigation guidelines, but examiners may determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate. Examiners are instructed to consider whether compliance objectives would be achieved by issuance of a warning letter; whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty; the nature of the violation and the amounts involved; and the cooperation of the taxpayer during the examination.
Example 4: Taxpayer is a United States citizen who lives and works in Country B as a computer programmer. Taxpayer has checking and savings accounts with a bank that is located in the city where he lives. The aggregate balance of the checking and savings accounts is $50,000 during the tax year. Taxpayer complied with Country B’s tax laws and properly reported all his income on Country B tax returns. Taxpayer failed to file federal income tax returns and failed to file FBARs to report his financial interest in the checking and savings accounts. After reading recent press and thus learning of his federal income tax return and FBAR reporting obligations, Taxpayer filed delinquent FBARs, reporting both foreign accounts, and attached statements to the FBARs explaining that he was previously unaware of his obligation to report the accounts on an FBAR. Taxpayer also filed federal income tax returns properly reporting all income and no tax was due. The IRS will determine whether the FBAR violation was due to reasonable cause based on all the facts and circumstances. Taxpayer had a legitimate purpose for maintaining the foreign accounts, there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and no tax was due. Taxpayer’s explanation for why he failed to timely file an FBAR appears reasonable in view of the facts and circumstances of the case. Since the IRS determined that the FBAR violation was due to reasonable cause, no FBAR penalty will be asserted.”
I don’t read anything in this that says that “reasonable cause” is available only if no tax is owing. I do agree that the examples given work with a fact pattern of no tax owing. (Note that in the FS the IRS does refer to a tax liability that is “de minimus”. But, there is nothing in the FS that suggests that a finding of “no tax owing” is a condition for a finding of reasonable cause. That said, it is probably true that a finding of “no tax owing” would strengthen the “reasonable cause” argument. But, I suspect that people who owe small amounts of tax or people who owe tax based on things that nobody could possible have known about (For example mutual funds were not known to be PFICs until 2010) will be able to have “reasonable cause” arguments accepted for FBAR. The rationale is simple. Virtually none of the people who owe tax based on “unearned income” could possibly have known about it.
Furthermore, I could imagine a situation where no tax was owing and an FBAR penalty was imposed.
As Rumseld said: We have:
Known Knowns
Known Unknowns
Unknown Unknowns
Just my thoughts.
Good comments. Thanks. I am just stating it the way it has been reported to Canadians and how they have come to think of it, but it is good for you to parse it precisely as stated on the IRS site. You do have to get into the technical weeds with them, and think like they do to assess your risk on what they might or might not consider “reasonable”.
To your point… “I don’t believe (based on the information in the FS) that “no taxes owing” is a pre-requisite for the IRS to accept “reasonable cause”.
Owing no tax may not be a pre-requisite, but… it probably will weigh against the “reasonable cause” argument for FBAR failure if you do, and of course the IRS is more than happy to asses a failure to file your return penalty in addition. They love piling on!
If you are now submitting returns and paying up taxes owed, because the exclusions and the foreign tax credit are not sufficient to reduce your income tax from earned and passive income to zero, that seems to trigger for them the idea you were trying to avoid them, and therefore makes your lack of filing the FBAR more suspicious to them. They are by nature and profession, suspicious.
If you owe no taxes, then the “reasonable cause” argument becomes easier, however I suppose you could “imagine a situation where no tax was owed and a FBAR penalty was imposed.” However, I am at lost right now to think of an example to make your point. My non expert opinion, is that it would be highly unlikely. But then my brain is clouded with sanding fumes from the project from hell on an outside wall, and I am rushing to respond before dinner, so I might not be thinking clearly. LOL
Fear keeps people awake at night as I am now. I have been filing IRS returns since the fifties. I never was afraid. I lived in the US and in my country of origin. Now since 2009 when I by chance learned about FBARS I have spent a lot of money and I am spending a lot of time trying to do the right thing. My life has changed. And I am not young and healthy. I am scared. And ressentful because I always loved the USA
Something is wrong.
Thanks Markpinetree.
Yours is the understatement of the year…. “Something is wrong”.
Unfortunately US Homelanders don’t recognize it, and the US press doesn’t care. But we plod on, trying to get their attention. Hang in there mate!
Petros and Just Me, shhhhhh, I dove deep, saw it all as a trap but nonetheless felt frozen in the headlights…..after all, with fatca coming, didn’t see any way out from coming forward because my accounts, though not substantial, would have been reported to the IRS anyway….so I saw no way around it, especially because I will have to blatantly list all my accounts and assets directly on the new 8938 form which will be attached to my 1040. To not do so would be lying and fraud, though it seems like a breach of the 4th amendment against unreasonable search without a warrant…blatent discrimination against expats legally living abroad