The IRS uses the threat of severe FBAR penalties to frighten taxpayers into the Offshore Voluntary Disclosure initiatives (OVDI). Thanks to a document uncovered by Showdown, we now know that the IRS is bluffing. This is an example of bad faith.
UPDATE: This post has been invalidated by more recent action by the IRS. It turns out that the IRS isn’t bluffing at all: Please now see:
Eighth Amendment’s no excessive fines clause circumvented through plea bargaining
By all accounts it seems that the government is prepared to exercise exhorbitant fines against people, and is therefore willing to risk an Eighth Amendment law suit. The practice of accepting huge fines under a plea bargain agreement, however, is protecting the government in many cases.
Original Post:
In the 2011 OVDI FAQ, the IRS gives the most substantial reasons that a taxpayer should enter the program:
Q3. Why should I make a voluntary disclosure?
A3. Taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.
Later, in the same FAQ, they explain what the possible penalties are:
Q12. How does the penalty framework work? Can you give us an example?
A12. Assume the taxpayer has the following amounts in a foreign account over a period of six years. Although the amount on deposit may have been in the account for many years, it is assumed for purposes of the example that it is not unreported income in 2003.
Year
Amount on Deposit
Interest Income
Account Balance
2003
$1,000,000
$50,000
$1,050,000
2004
$50,000
$1,100,000
2005
$50,000
$1,150,000
2006
$50,000
$1,200,000
2007
$50,000
$1,250,000
2008
$50,000
$1,300,000
(NOTE: This example does not provide for compounded interest, and assumes the taxpayer is in the 35-percent tax bracket, files a return but does not include the foreign account or the interest income on the return, and the maximum applicable penalties are imposed.)
If the taxpayer comes forward and has their voluntary disclosure accepted by the IRS, they face this potential scenario:
They would pay $386,000 plus interest. This includes:
If the taxpayer didn’t come forward and the IRS discovered their offshore activities, they face up to $2,306,000 in tax, accuracy-related penalty, and FBAR penalty. The taxpayer would also be liable for interest and possibly additional penalties, and an examination could lead to criminal prosecution.
The civil liabilities potentially include:
Note that if the foreign activity started more than six years ago, the Service may also have the right to examine additional years.
In this very frightful example, the IRS makes absolutely no distinction between account holders: The full-blown penalty could apply to anyone with an account adding up to $1,000,000. Moreover, this penalty could greatly exceed the funds that are in the account. The FBAR penalties alone are $2.175 million for an account with only 1.3 million in it.
Let’s say you are an ordinary Canadian resident or even an ordinary US resident. You have your offshore account with a million dollars in it, like they say. But let’s imagine that this money is yours, and that you earned it through legitimate business and it is not drug money or derived from any other criminal venture. What are your chances of receiving this extortionate FBAR penalty? Zero. That’s right. There is zero chance that the IRS will apply this level of penalty to your case. Why? Because the IRS knows about the Eighth Amendment. Showdown referred in a comment to an IRS document (p. 80-81) which says (emphasis mine):
Even before Congress increased FBAR penalties in 2004, the IRS published tiered penalty mitigation guidelines in the internal revenue Manual (IRM), directing examiners to apply less than the statutory maximums. In 2008 the IRS updated these guidelines, explaining that the maximum FBAR penalty amounts can “greatly exceed an amount that would be appropriate in view of the violation.” It required examiners to apply even lesser penalties or a warning letter in lieu of penalties in many cases. It explained that applying multiple FBAR penalties is to be “considered only in the most egregious cases.” Because the statute only specifies “maximum” FBAR penalty amounts that the IRS “may” impose, it would be inconsistent with the statute for the IRS to assert the maximum penalty amounts in every case. Some have gone so far as to suggest that in the absence of these taxpayer-favorable IRM provisions, the FBAR penalties can be so disproportionate as to violate the Excessive Fines Clause of the Eighth Amendment to the U.S. Constitution. Thus, examiners have long been required (under “existing statutes,” as implemented by the IRM) to assert FBAR penalties of significantly less than the statutory maximums in all but the most egregious cases.
It seems unlikely, if the money is legitimate, that the IRS would charge a penalty at all. If taxes are owed, perhaps a small FBAR penalty. But in case the penalty is confiscatory, the IRS is well aware that the Eighth Amendment protects the taxpayer. I will soon post some more about the Eighth Amendment, but it is sufficient at this point to say that fines must be proportionate to the crime and to the damage done to the government, and if the tax code already applies fines and interest against unpaid taxes, it seems unlikely to me that the IRS would risk applying any FBAR fine to foreign accounts because the Supreme Court could possibly strike down the entire FBAR law as unconstitutional under the Eighth Amendment.
In other words, the IRS is bluffing about the maximum penalties. Unless you are crook, they will be afraid to apply it to you. Thus, the IRS threatens the maximum penalty in bad faith, having the intention of scaring people into the Overseas Voluntary Disclosure programs wherein the taxpayer agrees to what seems to be a more reasonable fine of 20, 25, or 27.5%–when in fact, outside of the OVDI, the IRS would be afraid, in my opinion, to apply even such “reasonable” fines to law abiding citizens who have some minor tax irregularities.
@Steven,
First, I want to thank you for your educational inputs on US tax law and how the tax issue litigation works in the court. It may help me to prepare to “DIY ”
I am not Jack and Jill type, but I joined OVDI after learning the fact of my own non-compliance, with a hope doing it right. I was willing to pay penalty on my own errors/mistakes even include the in lieu penalty.
However, after so many flip/flop on RRSP ruling inside OVDI, I have to agree with Just Me/Moby and I have to be suspicious on your claim of those “smartest/finest/ folks” in IRS.
Is that so hard for those smartest/finest folks to tell the difference between government registered retirement plan from other tax non-compliance assets ? Why can’t they simply set up a ruling on this very simple and very common assets among Canadians living inside US ?
I have no doubts — they are super intelligent — and then based on the facts — I have to conclude that they are money driven minded and they have very simple agenda — that is to get as much as they can from taxpayers who make innocent mistakes on certain filing requirement that is so subtle that most professional taxpayers were not aware of. They use fear mongering tactics, they mislead taxpayers with maximum penalty.
Moby, who never claimed being into finest school, did reveal the truth of this subtlety by using google trends to search all these IRS required filing documents.
Do you know how public have been aware of these 4 forms ?
IRS form 1040, TD F 90-22.1, Schedule M, and IRS form 8891
f1040 has been known since early years (make sense as people file every year)
TD F 90-22.1 is unknown before middle of 2009 (that is the fact — until the OVDI/OVDP started)
Schedule M is known in 2009 and 2010 (this form is only for these two years, it was directly related to form 1040, so it was easy to be found)
f8891 is unknown (even today)
See reference,
http://ijdad.wordpress.com/2012/02/19/reasonable-cause-of-failure-to-report/
So those smartest/finest folks know those facts — and they take advantage of taxpayers’ fear — most immigrants are fearful and in shock !
@Steven: I agree negative stereotyping is bad. Very few US citizens and former US citizens living outside the US are “tax cheats” “tax evaders” or “traitors.”
To be labeled and pursued as such by well-educated, moral officials is immoral, offensive and distressing to responsible, law-abiding people everywhere. It achieves nothing except alienating individuals who could be their allies and ambassadors abroad.
@Steven..
You know, at this stage it doesn’t matter why, the IRS has a serious branding problem now. You can call it negative stereotyping if you like, but there are many good explanations on how they got here. Like any maligned brand, now the IRS has to start thinking in commercial terms and come up with proactive ways to repair it. It won’t be easy. The Edsel never made a comeback, and it took a ton of work for Coke to undo its classic coke fiasco. Netflix is struggling with these issues right now. Customers leave, and you may never get them back!
This will take a lot is more than just a marketing or PR campaign. It will take more than just some new guidelines buried at IRS.gov somewhere as a footnote. The TAS has been pointing that out how the IRS has been shooting itself in the foot and destroying its credibility. It is time they start listening. Maybe they are, and we have yet to see signs of it. We will keep watching with intense interest.
@JustMe: IRS is planning to spend $15 million on Public Relations, according to an article OMG posted last week. They think that will fix the problem.
Now we know why they are so desperate to get their hands on our money. That and their trillions of dollars of debt, of course!
Yes, I saw that article. Thought it was an Onion story at first.
https://twitter.com/#!/FBAR_Compliant/status/170967285207539713
Reblogged this on Renounce U.S. Citizenship – Be Free.
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I have a very large OVDI induced headache. We have recently contacted TAS and are waiting for the IRS’s response to our OVDI submission. The nice lady at TAS said we may be able to eliminate our penalty on our cap gain on the sale of our home through the first time penalty abatement. Our highest FBAR year was the same year as the house sale. Anyone have any info on this penalty abatement? Also my MP John Weston who is the Feds point man on the dual situation gave us some hope that we may not have to pay the cap gain under article XXV of the treaty. Our lawyer says not true. I asked TAS if their legal would investigate this. Another qualified opinion on this would be greatly appreciated!
Re: Capital gain on the sale of house in Canada –
See #7 at http://www.moodystax.com/blog/33-us-taxation-services/170-us-citizens-resident-in-canada-common-circumstances-where-us-tax-may-be-payable.html
This is only one of the twelve mismatches!
@Bubblebustin
Headache indeed. I don’t have an answer for you. However, if you don’t get a response here, another place you could ask your question might be over at the Jacks Blog…
This thread regarding Opt Outs is getting a lot of comments now, so I would probably ask there…
Would also encourage you to read it and the thread prior to it on Opting Out. You might want to give that some consideration.
http://federaltaxcrimes.blogspot.co.nz/2012/03/opting-out-2-3212.html
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Just posting this for what it is worth:
http://mopsicktaxlaw.blogspot.ca/2012/09/aba-taxation-section-vents-about-ovdi.html
“This
past weekend, the powerful and influential Taxation Section of the
American Bar Association met in Boston and to no one’s surprise, the
offshore voluntary disclosure initiative was a front and center focus
which practitioners used to voice concern over the issues we have been
talking about in these pages for month…..”……
Blog entry goes on to focus mainly on the experiences of whales, and not minnows.
Maybe they’re not bluffing after all.
http://federaltaxcrimes.blogspot.com/2013/06/us-civil-suit-for-4-years-of-willful.html
In this post, Jack mentions that the IRS is suing for 4 years of willful penalties – i.e. 4 years x 50% of the high balance – or twice the amount in the foreign account.
Maybe this is a good thing – a case that will go all the way to the supreme court that will rule that the FBAR penalties are unconsitutional. It might take a while, though.
@Chris
This will be a very important case to follow. The IRS assessed the penalties in June and August of 2011 of 50% of the high balance for each year in the 2004-2007 period after he did a quiet disclosure for 2004-2007 in October 2008 and March 2009 and after nearly 2 years of not having paid them the US has now filed suit. He is a US resident and the case involves entities (Lichtenstein foundations?).
I wonder if assessing the theoretical maximum of 300% of the yearly high balance is the standard practice for the IRS to try to force a guilty plea. Given that he has failed to pay the assessments for nearly 2 years, it would appear that he is willing to fight this.
I just closed my OVDI case and lost all my savings. I believe the IRS agent had made errors or that the OVDI penalty is unfair in the way that they target a percentage of the VALUE OF YOUR PROPERTY as penalty which often means a lot of money! Why go by the value I have no idea. Even my CPA was surprised. But I wind up paying almost half a million dollars for a property + multiple accounts. But the multiple accounts was a common practice where money get transferred between them in my country, not for any fishy business. I never had time to seek help since it was required to pay within days or else there would be crazy interests. I did consulted a tax attorney and he suggested to opt out, BUT there is a risk that IRS would do a standard audit and look for anything and potentially would mean I pay even more. That is not fair that is really not an opt out, since no one in their right mind would take that risk. The worst part is that I actually called up the TAS and I was constantly told that I was a criminal and should be happy I paid up!
@Frankie, the US based TAS agents do not always understand the workings of OVDI if they usually deal only with US residents. If you feel okay about answering this specific – was this a TAS agent contacted at a US office, or via Puerto Rico?
@Just Me, and @Moby and @Not that Lisa and @ij, have provided opt out materials for others to read so that it might be useful to others trying to decide whether to opt out, and provide a window into experiences in opt out – although of course everyone has different unique facts and circumstances. See http://isaacbrocksociety.ca/wp-content/uploads/2013/06/Not-that-Lisa-FINAL-My-OVDI-Odyssey.pdf and http://federaltaxcrimes.blogspot.ca/2013/06/an-ovdi-odyssey-opt-out-success-story.html http://isaacbrocksociety.ca/2012/03/10/moby-opt-out-update/ http://isaacbrocksociety.ca/2012/02/04/letters-to-shulman-or-a-case-study-of-ovdp-communication-attempts-with-the-irs/#!
Readers at the Jack Townsend site http://federaltaxcrimes.blogspot.ca/2013/09/elimination-of-duplications-in.html#comment-1049974993 are discussing the making of charts and tracking transfers in order to eliminate the duplication of accounts due to transfers from penalty calculations.
There have been other discussions about PFICs and the treatment of Canadian mutual funds. This is not something that I know enough to comment on.
@Frankie, if you haven’t paid up yet, consider spending a couple thousand dollars to consult with Jack Townsend (http://federaltaxcrimes.blogspot.com/p/before-contacting-jack-townsend-please.html), Michael J Miller (http://www.robertsandholland.com/MMiller) or Alvin S. Brown, Esq. (http://blogs.forbes.com/people/ustaxattorney/)
They are experienced lawyers in that field who can offer good advice.
When the OVDI penalty includes the value of your property because you rented it out, it seems unlikely that an opt out would produce a worst result as it would not be considered in a regular audit.
But your situation needs to be analyzed by an experienced attorney. Your case is delicate, because of the max value of the accounts, including you house, which if I compute right is about 1.8 million, right?
That’s not small peanuts anymore. But I also infer from your post that you’re an immigrant. Immigrants should get more leniency. They were never told about FBAR, and this is basically a trap.
Have you opened a case with TAS? It might not be too late. Once you have a case, Not that Lisa could give you the name of her attorney in charge of OVDI which has been very helpful. in her case.
Best of luck.
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This is all so ridiculous. One cannot write this stuff. It is all about frogs sitting in warm water and “negotiating” with criminals because the frogs are scaredy cats and don’t want to lose their precious material and financial possessions. The thing is, the “negotiator” has his hand on the dial and is turning the heat up. This scaredy cat mentality makes it like shooting fish in a barrel for the IRS. If people really sat down around their family tables and discussed the criminality of the US government, and made the same tough decisions that the Patriots did 256 years ago, then the government would listen, and the IRS would go away… not without a fight, but it would indeed go away. History has proven that bad people who fight for a bad cause always lose. People say I should have a guilty conscience for what I am doing. Well, I say that if I make the bully understand that he is going to get a black eye (or worse) if he decides to shoot at me, then the guilty conscience gets placed where it is deserved… on the bully. What is really embarrassing is that I read all these posts about people wasting their lives slaving away under the lash of these usurers and never waking up to the reality of it. And these userers even have got us sheep bickering and accusing amongst ourselves. You simply cannot write this stuff. In a hundred years this will be a lesson on the stupidity of the masses, and how easy it is to control their addiction to paper and metal by removing their will to choose.
I have not earned any US currency in over thirteen years. I am not represented by my government. Everything I do have, I earned myself, and under another foreign currency. When I left, I left everything for them to take back, including their filthy US currency. It is, after all, theirs. They printed it, and they fooled me into using it for years. Well, they can have it back, but they had better not makes laws that say they own me, because they do not. When a government determines that I have to pay “rent” even though I do not live on their soil or use their filthy currency, or that I am not an Entity and moreover a numbered drone not worth protecting or even as being recognized, then that is when I draw the line in the dirt and am willing to die (sooner… if the need be) for my views, because their views have nothing to do with my views, and I guess that makes them terrorists, or enemy combatants, in my view.
Dear IRS, please do not think I will bow to your will any longer, just because you try to frighten me into paying rent long after I voluntarily moved out of your rat slums. And I am not afraid of losing anything but my will, my dignity and my right to breathe free air. That is what this is all about in, summary.
@ Sydney
Hear! Here! Love the rent analogy. The USA deserves a good strong dose of defiance.
Thank you, Sydney. Your words were good for my soul.
In United States of America vs. Mongol Nation, Case No. CR 13-0106-DOC-1, United States District Court for the Central District of California upheld the 8th Amendment prohibition of excessive fines.
https://www.washingtonpost.com/u-s-v-mongol-nation/5e051a50-fbdc-4dc7-9866-8ed179bdc047_note.html?questionId=58f55769-eb99-434c-8498-6c741c7d0e77&utm_term=.aabd7bde4bae
Got it.
Mr. Dewees needs to join the Mongol Nation.
A few million more should too.