To my knowledge there is no Foreign House Report (FHR). Did the IRS just make this up?
The Fifth Amendment protects a person from the arbitrary deprivation of life, liberty and property without due process of law (“nor be deprived of life, liberty, or property, without due process of law”).
Just Me has informed us that that the IRS included his principle residence in the 20% 2009 OVDP penalty scheme, because he’d made a few dollars renting it out. But I don’t understand the justification for this in the law, since the FBAR law is part of the Bank Secrecy Act. The concern of the FBAR law is to determine the flow of money to prevent money laundering, terrorism, and criminal tax evasion. Houses are not bank accounts. So how is the IRS justified in adding a citizen’s home to the penalty scheme of the 2009 OVDP. It looks very much like the IRS wished to deprive poor Just Me of his property without due process of the law. I.e., the IRS is making this law up out of whole cloth and is in contempt of Congress over this one just as they are with what we have called “DATCA”.
Who gives the IRS the right to do that? Certainly not Congress, since they did not include undisclosed house in the FBAR law. There is no, “Foreign House Report” (FHR), is there?
Bureaucrats who violate the law or make up law to suit their own ends should be subject to punishment; whatever they wished illegally upon a fellow citizen, that amount should be added to their bill.
Next up “List all your wife’s jewelery report”. How much did you pay for that engagment ring?
@omg Excellent point. What other possessions can the IRS include in the penalty scheme? How about a first born child report penalty?
Sell your wife’s jewellery to a gold dealer, and fail to report it. You will be in trouble for not reporting a capital gain. But who puts government or banking officials in jail for devaluing currency?
Remember how Carrie from Sex and the City had $40,000 worth of shoes but no money to put a down payment on a condo? You never know how much money women have invested in stuff the IRS can’t see.
@omg Ok, now you are just making fun of the IRS. That’s not nice. 🙂
omghe’sstillanamerican
btw,…. jewelry could be considered an asset for purposes of the OVDI highest aggregate penalty base in the 2011/2012 program. 🙂
Asset is pretty broad in its definition…
From the 2011 FAQs. Number 7…
Pay, in lieu of all other penalties that may apply, including FBAR and offshore-related information return penalties, a miscellaneous Title 26 offshore penalty, equal to 25% (or in limited cases 12.5% (see FAQ 53) or 5% (see FAQ 52)) of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure;
I have over $5,000 worth of Hermes scarves. Thank God I’M not an American.
Here is the relevant portion of the Bank Secrecy Act (FBAR):
I’m getting nothing here. Nothing about jewellery and now houses. It seems to be interested in financial accounts. It is not a FHR or FJR but a FBAR.
Not to speak for the IRS, but I think their position would be, that the Commissioner has regulatory power to establish programs like the OVDI, and determine “in lieu of penalties’, separate from the original FBAR penalty they are using as their blunt instrument of choice to threaten folks to “come clean.”
They wouldn’t state it exactly that way, but it is important for us to understand how they think. That took me a long time, and that is where there is value of 30 year IRS vet’s insights. He knows how they think, which is much much different than us mere mortals.
I have heard it said/stressed by the IRS multiple times, that the penalty regime within the OVDI is “not” an FBAR penalty. If you only want those penalties and the provisions of the IRM discretion, then you have to either Opt Out, or never enter in the first place. Their position is, you can take it or leave it inside the OVDI, in regard to our “in lieu of penalty” . But if you accept it, we are going to apply it uniformly and without discretion. They deem that fair. In exchange you have certainity as to cost, and no criminal prosecution. Great for the tax cheating Whales, and real crappy deal for the Minnow! Too many minnows have probably paid the OVDP penalties, when they could have done much better outside the OVDP process, but how would they know? That was not what Practitioners were advising when all this crap started.
The IRS did not do a good job of explaining what they were doing, as they were so focused on getting those Whales, drunk as they were on the DOJ UBS success, that they literally did not give any consideration to the unintended consequences of the Minnows. I don’t think they every considered they existed. I wrote them to warn them in my letters to the Commissioner, but they took no heed.
That is what I have learned from the process. That is why now, 30 year IRS vet says, “the OVDI is not for everyone.” That is very true, as I have come to understand. Practitioners and the IRS should have said that from the start, but that is hindsight, and given the atmosphere at the time, and the threats coming from the IRS, I can give some practitioners a pass on this. I am trying to be generous.
Bottom line, the IRS designed a program for cheating whales, and have struggled how to handle all the Minnow they scared (rounded up) in the net. They are not a very quick adaptive organization to new conditions.
As Matthews who wrote the definitive analysis of the OVDP/OVDI says…
“They built the program for criminals, and they just can’t figure out how to deal with all these innocents who’ve been caught up in it,” says Mark Matthews, a tax partner at Morgan Lewis & Bockius in Washington, D.C, and former top IRS official.
The link to the entire report and Jack’s comments is here. It is also provided in my Drudgery for OVDI participants.
http://federaltaxcrimes.blogspot.co.nz/2011/10/article-on-ovdi-and-beyond-highly.html
So, Petros will argue that they don’t have this right to create these type of penalty regimes because of Constitutional strictures, but as we know, the Constitution has rarely stopped Congress or Regulators to date. Hell, the US can not follow the clear Constitutional requirements on War Declarations, let alone FBAR penalties.. Wished it wasn’t true, but there you go. It is what we are dealing with.
@ Just Me: Let me ask you something: Was it clear going into the program that your house would be consider a financial account?
From your testimony it appears that is not the case. Why would it be? Because you entered the program in order to alleviate total ruin, as FBAR is a weapon of financial destruction. FBAR is a violation of the 8th amendment against excessive fines–not to mention a number of other constitutional rights. But now they create a program–a sort of plea bargain, whereby you agree to their rules–you would think that the rules would have some basis in law, but as you explain, the fines are not “FBAR fines” they are some other make-believe fine, which you have to pay with real money, because the IRS has created a new thing–a program that isn’t based on law. So the OVDP, to the degree the fines are not based upon some law that’s out there, is an alternate reality. The IRS made an agreement with FINCEN to enforce FBAR, not to make shit up (that’s what I wanted to call this post: “OVDP Foreign House Report fine: the IRS makes shit up” (or something like that).
Your story further shows, and Nina Olsen argued as well, that the rules to this new make-believe game that the IRS has created, not out of the FBAR law, but out of the threat of severe FBAR fines, could be changed after the fact. Not only did they not tell you that your house would be included in the basis of the fines, but they failed to mention that they would remove FAQ 35 from consideration.
I understand your point about the Constitution. Sure the courts and the federal government have shredded it. Otherwise they have trouble explaining how they could assassinate an American citizen. That too appears to be a violation of the 5th Amendment. Nevertheless, my job isn’t to say what is and what can’t be changed. My job is to point out what is wrong and why.
The problem with the IRS making up law, is that it contravenes the will of Congress and thus the will of the People. Don’t you think that if the people wanted citizens of the United States to be fined for a portion of their foreign house (for which there is no report to avoid a fine), that they would have created a law to that effect? But apparently nobody in America wanted Just Me to hand over 20% of the value of his house to the IRS, except the people at the IRS who created this 2009 OVDP program. This is the IRS thumbing its nose at the will of the People.
Why don’t we do a survey and see how many Americans believe that it is right that an American abroad must pay a penalty of 27.5% of the value of their house to the IRS because they didn’t know they were supposed to file FBARs. Let’s just see if it would be more than say about 5% of the people on the extreme left of the spectrum.
The IRS takes the position that is simply administers the law. This is clearly not the case. OVDP and OVDI are not “laws”. They are arrangements created by the IRS. The only legislative authority they could possibly have is something to the effect that the IRS has authority do what is reasonably necessary to administer the IRC and enforcement. OVDP and OVDI were subcomponents of general voluntary disclosure. In other words, they are just deals that you can make with the IRS.
What is interesting is that OVDI operated to deter people (fear of huge penalties – no discussion or reasonable cause) from filing FBARs and to deter people from coming into compliance. A voluntary arrangement, lacking any specific legislative authority, administered by the IRS is operating to make people reluctant to files FBARs and to come into compliance.
@Petros – your specific question – why include real estate? First, the “in lieu” penalty is not a replacement for FBAR and is therefore not required to be based on the same principles. They could ask for your first born. They could ask for anything. That is the deal that you make with the IRS if you enter OVDI (and this is a decision that should be made very very carefully).
So, your real question is: what is the justification for including the value of your house and other assets? Simple, OVDI is a program designed for tax evaders. Hence, the presumption is that the house was bought with either money from an illegal activity or money that tax was not paid on.
That is I believe the rationale and that is why (unless you are a criminal) you should be very clear about why you are entering OVDI if you enter OVDI.
Finally, if you look a the FAQs – you will see that they talk including assets that are “non-compliant”. Therefore, I would argue that even if you do enter OVDI your house should not be completed if it was paid for with after tax money. This is also why I don’t think that most RRSPs should form part of the penalty base. Here is a post on this issue:
http://renounceuscitizenship.wordpress.com/2012/01/12/canadian-rrsps-and-the-ovdi-penalty-base/
@renounce, just me
The real purpose of the 5th amendment is to protect the People from the abusive powers that the Federal government could wield. Surely, what happened to Just Me is exactly the sort of thing whereby, through all kinds of sophistry and self-justification, an arm of the federal government begins to abuse the people in manner reminiscent of despots and kings who appropriated anything in their kingdom. The history of rights in the English speaking world from the time of the Magna Carta and onwards would show us that people who love freedom must fight against such arbitrary and capricious treatment of citizens. Otherwise we pretend to have democracies but what we have is raw despotism.
I should mention here that my point about the primary residence not being subject to confiscation is actually protected from creditors in a number of states which have homestead exemption laws. In other words, one’s primary residence is so important, that many states actually protect them to an extraordinary degree. In other words, there is no way that the IRS could get a law passed in the United States giving them the right to confiscate a person’s primary residence over such a flimsy thing like a failed FBAR report from a person resident overseas.
Petros…
It kills me to argue the IRS position… LOL
But, I think their reasoning would go like this… I am just being the Devil’s advocate here for a minute….so don’t penalize me! 🙂
One…. you didn’t have to take the OVDP option. That is what my Examiner tried to tell me. It was “voluntary” they said. But given my perspective at the time, and the shock from learning that I was in non compliance with statutes I did not know about, the fear they used to market the program, and the removal of other options like QDs from consideration, it sure did not feel voluntary to me.
Two……You did not have to accept the “uniform penalty”. I could go through examination. Now what that meant, and how it was administered was unknown, as it took them about 20 months to come up with an “opt out” program, but they would say, I still had relief should I not like their uniform penalty. Never mind their threats about criminal prosecution or implied maximum penalties. They do rely on the minnows natural desire to be compliant and non risk adverse. Minnows are not as likely to call their bluff, nor are some practitioners I might add.
Note: we have not had an answer from 30 yr vet about those 50 families he helped? Did he get them any FAQ 35 relief? Did he advise them to go the examination route before an Opt Out program was designed? I don’t know. Would be interested in hearing.
I am not sure if any Minnows took any other route, other than just pay up the “uniform penalty”. I don’t know if others appealed to the TAS before me. I heard rumors there might have been one, but haven’t seen any other experiences written about anywhere, have you?
Three….. They would say, that their FAQs stated that income producing assets were to included in the highest aggregate balance base upon which the penalty was calculated. They would say I should have been able to discern what this meant. (Although I note that my examiner was surprised about this too, and fought with her technical adviser to have it removed.) The fact that neither I nor the Practitioner who was advising me picked that up, and made the leap that it included my house value which had some non substantial holiday rental is not their problem they would say. The fact that fear and compressed time frame did not allow me more measured consideration of what their FAQs said before entering the program, is not their problem, they would say.
Four…. FAQ35 was just a “reasonable cause” administrative mistake from the rush to get the program up and running. It was not the intent of the Commissioner to allow for IRM type discretion from the start. He always meant that people were supposed to compare the OVDP penalty structure against the Maximum FBAR penalty, and if the maximum penalty was less, you could take that. Just take our word for it. Sorry about that. Mistakes are made. This was not bait and switch.
However, the Maximum penalty comparison means that the IRS thought you were willfully evading taxes and thus subject to criminal prosecution. They thought all those in the program were Whales. They were willing to drop the criminal prosecution issue and just apply the maximum FBAR penalty if that was lower than the “in lieu of” penalty. I mean we are reasonable people here, and don’t want to be excessive!
Again, this to me shows that they clearly had no thought or idea on how to deal with Minnows. They were only interested in Whales at the time. Minnows were not on their radar or should I say “fish finder”. I almost feel bad that I might have helped increase their awareness, so it is my fault you all are having these issues now!
Anyway, that is what they would say, and of course, I would argue why this approach was wrong if compliance was really the objective for Minnows. But, frankly, in spite of later comments by Shulman, that “this was always about improved compliance”, I think it was more about revenues than anything else.
The inflexibility of the penalty assured maximum revenues, and of course, that is what they always trumpet in their success proclamations. Sure, he has upped the numbers, and 30,000 Whales sounds impressive untill you realize that a high percentage were probably Minnows, but never mind. Whatever the number, it probably is not statistically significant if you had access to all the numbers to really do a fair analysis. And of course, the unintended consequences has done great harm for future compliance and has destroyed a lot of faith in the justice of the IRS. How do you measure that? By the number of blogs and post devoted to the subject?
Now that last is all an assertion on my part, and I could be wrong, but I don’t think so. Maybe I should not try so hard to be fair to the IRS! I certainly don’t think the leaderhsip deserves it. But… I don’t think they are evil either, I just think they are bungling! And they are like many bureaucratic organizations around the world that when the realty doesn’t match the objective they CYA. They just can’t back down. It is just not in their genetic fabric to admit errors. That is why they are delayed in responding to the TAD by Nina Olson, I would bet. They are trying to come up with the best political solution that they can spin their way and not give in. Just my opinion, and I could be wrong.
and fix my typos will ya! I have to get back to work.. 🙂
thnx
@ Just Me
I am still simply stunned that you would have been admitted into the program in the first place. To owe a little bit of back taxes is not unusual nor is it unusual for people living in the US to not file taxes for several years. Obviously you are not a “Whale” so I find it absolutely shameful, reprehensible, etc that they simply did not tell you you didn’t belong there.
@ Petros
Once again, I cannot copy/paste from something to make my point but I have a printscreen that compares what is to be reported on a FUBAR and what on the 8938 and re 8938:
Undeveloped land Unclear, IRS guidance pending
Real Estate Unclear, IRS guidance pending
Personal property
such as jewelry, art cars Unlikely, IRS guidance pending
Regardless of their reasons my decision is that they are not entitled to even consider taking anything of mine/ours for simply failing to file a piece of paper. End of story.
@Just Me: Jesus condemned the Pharisees of his day (Mt. 23.23-24): “Woe to you, scribes and Pharisees, hypocrites! for you tithe mint and dill and cummin, and have neglected the weightier matters of the law, justice and mercy and faith; these you ought to have done, without neglecting the others. You blind guides, straining out a gnat and swallowing a camel!” When government prefers form over substance, then it is in the final throes of collapse. What you describe are bureaucrats so stupid and stuck on their arcane rules of their own making, that they cannot see when they are creating a disaster. And a disaster it is, with thousands of people cursing the United States and wanting to get rid of their toxic citizenship.
Petros… Good biblical quote and come back. Even non religious me, appreciates it! Justice, mercy and grace(not faith) are definitely missing in IRS practices. And boy, is it hard to learn to think like they do, or understand their arcane rules. I guess that is why people turn to 30 year IRS vets for help, and pay way more than just the ‘mere’ penalties.
@nobledreamer
Your point is well taken. They definitely need a front end filter that says, this guy does not appear to be the target of our program, let’s handle him a different way. However, they assume all our equal criminals, so this is what you get. Stupid processing. Which, frankly cost them an enormous amount of effort and wasted time that could have been better spent on the Whales they were looking for.
@nobledreamer
Did you say FUBAR ???? 😮
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