30-yr IRS Vet offers his advice about the 2012 27.5% Overseas Voluntary Disclosure program.
[Editor's note: The Isaac Brock Society does not endorse tax professionals. We endeavour to provide peer-to-peer discussion to help readers (1) to determine better whether they are in a situation that requires professional help; and (2) to gain the necessary knowledge to evaluate the quality of that professional service if they decide that they need it (see OVDI Drudgery for Minnows). The following post is from a 30-yr IRS veteran who is now in private practice at Mopsick Tax Law. We offer it for two reasons: (1) Everyone at the Isaac Brock Society is an adult, able to make decisions for him or herself--thus, our M.O. is not to censor opinions, but to engage in vigorous debate. (2) It may be, given the situation and the risk tolerance of certain individuals, that 30-yr's advice is appropriate and helpful. Notwithstanding, we will offer critical responses both in the comments and in later posts. Also, we have written a press release, especially for Canadian residents, regarding the 2012 OVD program. Petros]
During the past few days in which I have had the privilege of communicating with you, I have learned something quite obvious which is, everyone who is dealing with the FATCA problem has their own unique factual situation. Despite the IRS’s wishes, “one size” does NOT “fit all” and there is no single solution or strategy for everyone.
Notwithstanding anyone’s opinion about the wisdom of the law or the fact that the United States taxes on the basis of citizenship as opposed to residency, what you decide to do is really based on each individual’s tolerance for risk and uncertainty. Some people will be quite comfortable doing nothing. Some people will decide to “become compliant” from this point forward. Some will make a “quiet disclosure” and simply file FBARs and U.S. tax returns for the past two or three years and for some, the formal IRS Voluntary Disclosure program will be the route they choose to take. Based on my experience, while there is still a high degree of uncertainty under the formal program, it remains, in my opinion, the way to go with the least amount of risk.
Here is why: the formal program almost guarantees no criminal investigation but more importantly because very few of you are really at risk for criminal investigation if the source of the unreported money is legal (not from a criminal activity), there is also a commitment on the part of the IRS that there will be no civil fraud investigation which brings the risk of a 75% civil penalty which can go back for many years, even beyond the eight years of the formal VD program.
For those of you who are considering the possibility of entering the program, here is a brief summary of how it works. The applicant, regardless of how many years there are of a failure to file tax returns or FBARs, or failure to pay tax, must file correct delinquent returns and FBARs for the past eight years (starting with 2004). Any years beyond that period are essentially forgiven by the government and not pursued. The disclosure and the returns must be accurate and entirely truthful. The client must provide eight years of bank records and any other documentation the IRS requires to verify the truthfulness of the returns. If there is a corporation or trust or other entity which the applicant controls, that would have to be disclosed as well. The eight years of delinquent returns must be accompanied by a payment of the tax and interest on the eight years of delinquency. In addition there is a 20% penalty computed on the amount of the understated tax. The kicker for many people is there is an additional penalty of 27.5% of the highest aggregate ONE YEAR balance of the applicant’s previously undisclosed bank accounts during the past eight years.
In exchange for the filing of the returns and the payment of penalties, the IRS will not pursue any criminal investigation and, very significantly, it will not seek a 75% civil fraud penalty which could go back for an unlimited number of years. (there is no statute of limitations for fraud). The applicant would essentially be given “a clean bill of health” with the IRS and agree to remain in compliance in the future.
There is also the possibility of future IRS inquiries regarding other independent IRS investigations of any people who may have purposefully counseled the client to evade or avoid US taxes.
That much is certain about the program and my firm has successfully navigated over fifty families through this program since the first VD program was announced in 2009.
Here is the new part and something which I think has a special appeal to Canadians and other “accidental” US citizens. While there is very little discretion on the part of IRS agents to whom these VD cases are assigned, to show any flexibility on the 27.5% penalty, the 2011 program added a new “opt out” procedure which remains in effect under the new program in which the applicant can elect to leave the program and have the chance to argue that there was reasonable cause for their past failure to file, to meet with an independent IRS Appeals Officer, and present an argument as to why no penalty at all should be asserted.
The “opt out” procedure is brand new and practitioners have yet to have any experience with it but it is there. The IRS says opting out will not result in penalties greater than those for which a taxpayer may be at risk for under the program but we simply have no experience to date on how that is working for people and I do know that Washington has not issued any guidelines to date to the hundreds of field offices around the country where these cases would be handled. I predict that this where all the action is going to be for Canadian dual nationals who choose to enter the program simply because of the equity of their situations and the absence of any real wrong doing.
One of you asked if I would be willing to review the facts of people who might be interested in the Program. I would be happy to do so if you want to write to me at my web site or call me at (916) 550-5363.