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?
Another thing that has occurred to me is that fbar penalties are article 31 statutes which require the DOJ to pursue a fine via the IRS through a court case; conversely, article 26 penalties can be directly imposed by the IRS themselves which is why I believe that their real compliance weapon will be to catch people out who don’t correctly and thoroughly disclose information on all their foreign assets and accounts.
Hence, I believe that ‘son of fbar’ form 8938 will turn out to be the IRS’s main weapon rather than FBAR fines, which are more like the ultimate nuclear option. They would thus be over the top to routinely hit expats and accidentals with the draconian fbar penalties, especially as it could arguably be a breach of the 8th amendment against unreasonable and excessive fines…
However, a chapter 26 penalty for failure to attach the Orwellian 8938 would ‘only’ be a fine of $10,000 which would still be very harsh for a minnow but not quite life-changing. It could thus be a much easier revenue generator than the fbar. It will also thankfully possible to plead for reasonable cause in obviously innocent ommissions, etc.
Mona,
You may be correct on the distinction difference between the Title 26 nature of the 8938 vs Title 31 FBAR penalty, however… I would not under estimate the penalty for the 8938. It could be (likely be) much more than $10,000. It could be harsher for the Minnow in some ways. It is not “only” a $10K fine.
It is a $10K per 30 day period up to $50K. Ouch!
Accuracy related goes up to 40%, not just 20%
Reasonable cause not allowed for Foreign jurisdictions/laws. US law trumps everything!
Statute of Limitations goes up from 3 to 6 years if underpayment is more than $5,000.
And of course, the IRS would not choose just the 9838 penalty, they would assert both!
The collection of the 8938 will be easier, and in that I think you maybe right, but not 100% sure.
From the instructions:
Continuing failure to file. If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000
No penalty will be imposed if you fail to file Form 8938 and the failure is due to reasonable cause and not to willful neglect. You must affirmatively show the facts that support reasonable cause claim
The fact that a foreign jurisdiction would impose a civil or criminal penalty on you if you disclose the required information is not reasonable cause!!!
If you underpay your tax as a result of a transaction of an undisclosed financial asset , you may have to pay a penalty equal to 40 percent of that underpayment.
If you do not include in your gross income an amount relating to one or more of specified foreign financial assets, and the amount you omit is more than $5,000 any tax you woe for the tax year can be assessed at any time within 6 years after you filed your return.
Yes, it’s quite scary. I’m just so relieved that I discovered my mistakes last year rather than this year.
I’m guessing that last year will have been the last year quiets had any hope of passing through. People who waited till this year would have almost certainly had to go through the official ovdi program to suffer a similarly onerous examination to Just Me.
True, he got a huge reduction in penalties, down to $25,000 from $172,000; but it’s still very harsh, given that he is settled in NZ, on the other side of the world. He shouldn’t even have had to pay that.
In some ways, I would have considered it a trap to raise my hand; but with the potentially Orwellian reach of fatca, people realise there’s no way around it.
Mona,
I just posted some comments back to Anon123 on the Drudgery Post…
http://isaacbrocksociety.com/2012/01/28/the-ovdi-drudgery-for-minnows/
I think you need to follow the links I have there over there that reference comments over at Jack’s blog. I would be read everything above and below Anon123 “Wow” comment. 🙂
@Just Me, thanks will have a look 🙂
@just me …and others. I am trying to find details regarding civil lawsuits outside of OVDI/P in federal court to collect non-willful FBAR penalties against Minnows – besides the standard facts (incl. Jack Townsend blog) : You are not bound to accept any action the IRS takes to assess the FBAR penalty. The IRS through DOJ Tax will have to sue to collect the penalty. Tax Court lacks jurisdiction to address FBAR issues at both the assessment stage and collection stage. A federal district court would have jurisdiction over such FBAR case under Title 31.
My second question is regarding procedure details: assuming you are done with your civil audit and the examiner will present you his conclusion regarding FTF,FTP,FTD (no accuracy-related penalty due to QAR`s) and FBAR non-willful penalties and now you either go through Pre-assessment Appeals or Post-assessment Appeals and FTA to successfully reduce/abate those partially (emphasis is on partially) due to resonable cause and lets say you are able to reach an agreement on the first 3 penalties but not on FBAR`s . You pay the FTF,FTP;FTD penalties but refuse to pay the FBAR. What happens now ? Is the case passed over to collections and I receive NOD letters and later on form 668 – tax lien .
Assets in the US are very small (checking account) and living abroad but what is the next step from the IRS and DOJ or will the collection clock continue to tick until I die or visit the US and get arrested ?
@Mike Tarrantes
The question you ask, I don’t have the answer to. I would ask that very specific question to Jack… He would be better placed to answer it
As far as I know, for a Minnow, it has never been reported as going that far. I think there would be a settlement before hand, as you might blink and pay some lessor amount just to end the process and get on with life. They depend on the intimidation.
That said, I don’t think, and I could be wrong, they can assess a lien on an FBAR penalty until they have an actual judgement in front of a federal court. Very few go to court, and it is very hard for them to prove “willfulness” which is necessary to get a judgement.
Additionally, I can’t imagine that the DOJ attorney would actually take the minnow case from the IRS as even in victory, such a collection is practically impossible. Also the fear of loss in court due to excessive penalty constitutional issues is one they don’t want to test. They only like cases they can win on, so they can maintain their 97% (?) victory percentages. Their percentage just went down!
They just lost this one, which should be encouraging news..
http://federaltaxcrimes.blogspot.co.nz/2013/03/acquittal-in-pflueger-involving.html
@just me … yes I guess I will try Jack….. has been very quiet regarding details on the web over the last 6 weeks
@just me ….. btw it should be clear for everybody here at IBS that there will be a fallout from the revenues generated from OVDI/P ,VD and FATCA. Lets assume that by 12/2013 we are at 6.5 billion (forget those unrealistic annual predictions) . Fantastic the IRS will say but unfortunately their is – as always – a flip side to this number and that is called demand.
I expect this equity bull market to go on a bit further maybe 5-7% from here but (besides the usual EURO issues) Obamas tax terroism will cause spending/savings pattern to change (it already has to some extend) – especially for the higher tax brackets (which nobody seems to think is possible). I am normally not a doom and gloom advocate but mark my words DOW 10,000isch will come again to a theater near you and than the IRS can pad themselves on the shoulder with tax and revenue fallouts 4/5 X as high as their tax witch hunt has produced.
I don’t understand how someone could be a defense lawyer regarding FBARs, etc, and offer a seminar to share information with compliance professionals on how to most-effectively implement FATCA worldwide.
Good cop, bad cop?? 😉
I feel like Little Red Riding Hood… gotta watch out for wolves in sheep’s skin clothing?!? *lol*
@Mark Twain
I don’t have the answer to your question. I would say, there are a lot of imponderables about many peoples positions on issues that lack ideological consistency. The flaws of human nature, perhaps.
@Mike Tarrantes
I see you asked and got your answers…
http://federaltaxcrimes.blogspot.co.nz/2013/03/acquittal-in-pflueger-involving.html
@just me … no unfortunately I didn`t but that is not Jack`s fault, there a just no published cases yet but I found some references within IRM and that helped Jack 🙂