Tax lawyer Michael J. Miller offers a scenario in a comment: A recent immigrant to the United States, Tom, had an offshore account with $1,000,000–the best manner to going forward is not OVDI!
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Thanks to all for the kind welcome. It feels a little bit like moving into a new neighborhood and everyone coming over with a freshly baked apple pie to say howdy. But I digress.
Here’s the hypothetical I promised. Suppose a nonresident alien, Tom, has a single non-US, interest-bearing bank account, which, at the outset of our story, had a balance of say $50,000. Tom sells his old home (outside the US) for $948,000 on December 31, 2009 and the proceeds go into his account, bringing the balance to $998,000. As of January 1, 2010, Tom becomes a US resident. In February 2010, he closes his non-US account and transfers the entire $1,000,000 (including $2,000 of interest since December 2009) to his newly opened US account. Due to Tom’s ignorance of US reporting requirements (and his accountant’s lack of attention to detail about foreign accounts), his 2010 return checked the “no” box (in response to the question about foreign accounts); he failed to include the $2,000 of interest income; and he failed to file an FBAR. Tom’s accountant never asked about foreign accounts, and it never occurred to Tom to bring it up.
Inside the program (absent an opt-out), Tom must pay a 27.5% penalty of $275,000. Absent some other, very bad, facts, I would say that any attorney who advises Tom to join the program and pay the $275,000 is incompetent (or, worse yet, more interested earning fees than serving his client). Outside the program, Tom could expect to pay an accuracy penalty, equal to 20% of the tax owed, and perhaps a single penalty of $10,000 for a nonwillful failure to disclose the account on a 2010 FBAR. On these facts, even talking about the penalty for a willful failure to disclose the account on an FBAR is ridiculous. Moreover, the maximum possible penalty, even if the violation were willful, is $100,000 because the 50% would be based on the balance on the date the FBAR was due, which is zero. (Just to clarify, the max penalty for a willful failure (per account, per year) is the greater of $100,000 and the balance of the account on the date the FBAR was due, i.e., June 30 of the following year.)
And, just to complete the loop, I would think it should be obvious, but I’ll say it anyway, this simplified fact pattern would (absent other, very bad facts) present no risk whatsoever of criminal prosecution. If I were Tom in this instance, I might or might not amend my 2010 return, but I’d laugh if anyone told me to do a voluntary disclosure.
I’d also be disinclined to file a late FBAR for 2010 in this scenario, but this is a point about which I believe reasonable minds can disagree.
@Michael J. Miller,
Tom would be so brave for not to amend 2010 if he knew his filing responsibility but chose not to do so — would that be willful act ?
I would suggest Tom to do QD — and his facts would support for a reasonable cause.
I would also add that for most immigrants and expats without bad facts (such as entity or money in tax haven) —none of them should pay FBAR penalty. The simple fact is that FBAR is so subtle and non-discover-able by ordinary taxpayers.
Can you reference one single FBAR court case that penalty was imposed on taxpayers other than those who were in the criminal prosecution entered a plea deal to pay 50% of total balance penalty ?
@ij Tom already filed an incorrect 2010 return, and he already missed the 2010 FBAR deadline. Anything that Tom now chooses to do, or not do, is relevant only insofar as it may suggest something about his state of mind when he (a) filed his 2010 income tax return, and (b) failed to timely file his 2010 FBAR. He commits no crime by leaving 2010 as is, if he so chooses. He may wish to amend (and possibly file the late FBAR), as a matter of strategy – e.g., so that an IRS agent will more readily conclude that Tom’s errors were inadvertent – but this is a choice, not a legal obligation.
@Michael J. Miller
“Tom’s errors were inadvertent – but this is a choice, not a legal obligation.”
That is interesting point. I could have done the very same as suggested — then I was concerned the SOL of FBAR back to 6 years.
Anyway, too late to know, and thanks for sharing with us.
Michael J. Miller is obviously one of the good guys. See his article on unfair double taxation here
http://robertsandholland.com/publications.htm
have we filled the role for Stephen Harper in the 1812 movie. yet? Although conservative in canada he would be considered a left wing socialist in the US. Perhaps Michael J would rather have a different role. Any room for Michael J Fox in the movie? How about title song by celine Dion?
@Kalc: Are you auditioning for the role of the PM? If so, it’s yours.
I agree. I often tell both my Canadian and American friends most right wing Canadian poliicians are more left wing than left wing American politicians. There may be debate and discussion about how to best manage universal health care, but there is agreement universal health care is a fundamental right. Contrast that with the US.
Consider the issue of same sex marriage. I remember when the Conservative Premier of Ontario (Ernie Eves) was asked if he would appeal a court decision. He shrugged and replied something like “Why should I care who loves whom.” It wasn’t long after it was a done deal across the country. Yes, with some debate and dissension, but, (for the most part) respectful. Even many who were opposed did not object to a legal civil union.
The rancour on this issue in US is exact opposite. One a similar vein, one Republican candidate (from my home state!) wants to allow states to be able to ban contraceptives. Can you imagine that coming into the political arena in Canada? Pierre Trudeau said it all 45 years ago: “There’s no place for the state in the bedrooms of the nation.”
OK, KalC, now I’ve done it. Opened up the issue of same sex marriage and Pierre Trudeau in a forum about taxes. I look forward to what kind of what the reaction is.
Hi Michael,
What if Tom happens to be a dual Citizen Canadian who had
been in Canada since 1995 had inherited $1000000 and had
the funds in a Canadian Bank. He has never filed US tax returns. In your opinion, what should he do?
I was nominating Michael j for the role.
@Blaze – There is something really dysfunctional about the American political process. I’ve wondered if I’ve just been out of the country too long because I don’t get it. They’re talking about contraception at a time when the biggest threat to Americans is probably the European debt crisis. If Europe goes, the US is next and bye bye recovery and hello recession. It does boggle the mind. I’m making the effort to figure this out because I will vote in 2012 but I find that I’m having to use techniques from Raymonde Carroll’s Evidences Invisibles (how to approach a foreign culture) to wrap my head around these conversations because they seem so utterly absurd. And yet people in the US seem dead serious about them.
Speaker Skip O’neil said “all politics is local”
I better understand the politics of BC 4500 km
to the west than that of my home state some 300 km south of Montréal. The US is like a patient that obsessively concentrates on small problems because s/he can not or will not address large issues.
@Desi — I don’t think I can responsibly give a bottom line conclusion without all the pertinent facts. Having said that, it would take some further, negative facts before I’d be likely to advise paying 27.5% under the OVDI in this situation. OVDI might nevertheless be a “desirable” option, however, since it may be possible to reduce the 27.5% to 5%, assuming that Tom has been fully compliant in Canada. Depending upon an individual’s financial situation and temperament, it certainly might be desirable to make the whole issue go away if the 5% is possible.
One thing I sometimes like to do in this type of situation is have a qualified US tax return preparer prepare, for example, the last six federal tax returns to see what they look like. The less tax that would be owed (and, indeed, it may be zero), the less likely it would seem (everything else being equal) that Tom’s noncompliance was intentional. Let’s assume, for the sake of discussion, that Tom would literally owe zero US tax (though I would urge caution, since this need not be the case), and that he has no non-US corporations, trusts, or other entities that should have been reported, so that his only “problems” are not filing 1040 (with worldwide income), and failing to disclose a single non-US account on the FBAR. In that case, his failure to report the one account on an FBAR seems, quite evidently, to be nonwillful (absent other, bad facts). As a result, the maximum penalty would be $60,000 ($10,000 for each of the six years open under the applicable statute of limitations, i.e., 2005-2010). If Tom complies with all of the rules for 2011 (including 1040 (with new Form 8938) and FBAR), then once July 1, 2012 rolls around, that potential FBAR penalty of $60,000 becomes $50,000 (max) because it would now be too late for the IRS to assess any penalty for 2005 (even though no 2005 return or FBAR was ever filed). On these facts, I might consider all of the following (in no particular order): (1) going into the program, but opting out and making an argument for zero FBAR penalty by reason of reasonable cause; (2) going into the program, but arguing for the 5% penalty (and, failing that, opting out); (3) filing late returns (showing zero tax due) for some number of years and possibly FBARs with a note explaining the situation and asserting reasonable cause (as the IRS suggested recently in a release directed at US citizens living abroad); and (4) complying prospectively, with no other action. Note that (1) and (2) involve significant attorneys’ fees, as well as the assurance (as opposed to merely the risk) of IRS attention, so I’d be more inclined to recommend for a client that has a lot of anxiety about the situation, doesn’t want it hanging over his or her head, and can afford some extra fees/potential penalties to make that happen.
I would also like to add a word about how FBAR penalties are collected in the US. All of the power that the IRS has to collect taxes (and related interest and penalties) is irrelevant as to FBAR penalties. The IRS may technically “assess” an FBAR penalty, but the only way to collect is for the US Department of Justice to bring a lawsuit. Of course, this clearly happens, and will continue to happen, in appropriate cases, but I think it’s important to understand that the power of an unreasonable IRS agent only goes so far. If an IRS agent (and his or her supervisor) is taking an unreasonable position regarding FBAR penalties, one question to consider is whether the US Department of Justice is likely to be willing to bring a lawsuit, as it must, to collect the penalty.
@Michael J. Miller
“Department of Justice is likely to be willing to bring a lawsuit, as it must, to collect the penalty.”
We have not heard any civil FBAR collection lawsuit so far (except the Williams case), could it be possible that a lot cases may never been fought in the court as taxpayers could settle with DOJ for a reduced penalty ?
@Michael (6:51 am) Thanks for this excellent information about how FBAR’s must go to lawsuit to be collected. This is very important to know.
How does the government solve the venue problem that I raise in this post? http://isaacbrocksociety.com/2012/02/15/fbar-on-the-impossibility-of-a-fair-trial-for-expats/
I don’t see how a fair trial in D.C., or anywhere else in the United States, is possible for a Canadian resident. If they cannot solve the venue problem, since the D.C. law suit would be unfair in the first place, then FBAR seems unenforceable against Americans abroad. My problem with the OVDI, is that the IRS never tells its victims how hard it would be to collect their money if it wasn’t for being like a sheep before its shearers, and voluntarily laying down its wool. We have seen that this is bad faith in this post: http://isaacbrocksociety.com/2012/02/22/irs-is-bluffing-bad-faith-negotiations-in-the-ovdi/
I don’t have much expertise in the Sixth Amendment, but my impression is that it’s highly unlikely a US court would take the venue argument seriously. First, it applies to criminal matters, and we’re talking primarily about civil penalties. Second, your view seems to suggest there are circumstances in which proper venue never lies anywhere within the US, which sounds quite odd. Finally, it is very rare for a constitutional argument to succeed, and courts generally think “crackpot” right away once constitutional arguments are raised, so even in the case of a valid argument you’re pushing a boulder uphill to some extent.
As for the second point, I don’t blame the IRS for failing to advertise barriers to collection. In my view, the problem is with seeking to collect outsized penalties for failure to file an obscure form, where the IRS made no adequate effort to inform taxpayers of their duty to file. To the extent we’re talking about penalties that a tapayer fairly should be expected to pay, I don’t expect (and, for the most part, I don’t want) the IRS to volunteer information about any difficulties it may have collecting.
@ Michael
Thank you very much for your answer.
I appreciate your response as accurately reflecting the attitudes of the courts, and I don’t disagree with that assessment at all.
First, the Sixth Amendment does apply to criminal matters and I suppose if the trial is for civil penalties, then it does not apply. But then the Seventh Amendment still applies: a trial by jury for matters above $20. This jury must be of peers, not people in a far off country: “For transporting us beyond Seas to be tried for pretended offences” — I cannot be tried in any United States venue for having an account in Canada because a jury of my peers is impossible in all such venues. Therefore, I don’t recognize the authority of the United States in the matter of my bank accounts. I reserve the right not to be transported to a foreign venue to be tried for anything that I’ve done in Canada.
You see my huge problem with this is that the venue problem is very real for most of us overseas. Can you imagine trying to get a jury of our peers to convict us? I don’t mean peers resident in Washington D.C., who depend on government largesse for their very livelihood. I am speaking of people here in Thornhill, Ontario, who have their bank accounts at my bank. These are MY peers. That is the jury that the Seventh Amendment guarantees, not a jury in some foreign country. Which one of my actual peers would condemn me for not reporting my bank accounts to the United States? I can’t think of any.
This is a huge problem. And if the courts are unable to see it, well then, all the more are we justified in our disdain for the extra-territorial overreach of the United States: the abuses are much more significant towards us Americans abroad, then King George’s little tea tax that made the Bostonians so upset. King Uncle Sam threatens us with 300% fines for having overseas bank accounts.
Here is where I think venue is a real issue. Once you start talking about the US Department of Justice you are talking about a agency with over 100 semi autonomous fiefdoms called US Attorney’s Offices. If the US Justice Departments wants to bring a case it has to brought through one of these offices that would have a geographic “claim” to handling the case. Now typically a lot of big complex “international” cases are brought in the Southern District of New York(NYC) however, my impression of the SDNY is tends to be interested in big money high profile cases not small money small time cases. So now you talking about the other US attorney’s office. Well in the past the Western District of New York(Buffalo) has taken an interest in cases regarding Canada but that was more to do with Canadians crossing the border and committing criminal acts around Buffalo. You have the US attorney’s office in Detroit where the FBAR filing center is located but I wasn’t able to find anything of significance coming out of that office in terms of FBAR cases. I suppose the US attorney’s office in whatever part of the US you once lived might take an interest but perhaps not in someone who hasn’t lived their for decades. The US Attorney for DC itself is mainly concerned with cases involving the US government and its employees so I would tend to rule them out too.
@Petros
Here is an interesting reference that discusses the sixth amendment.
http://en.wikipedia.org/wiki/Venue_(law)
@ Tim, thanks.
Trial by jury of peers is a fundamental principle of justice (see the Civic Library of the Missouri Bar; emphasis mine):
Wherein the court convenes? What happened to where the alleged crime was committed? So soon we forget our history.
What I’d like to know is why the courts won’t take this claim seriously, when every lawyer in the entire countries understands a trial by jury from the local community to be a principle legal guarantee of liberty under the common law, a protection in place since the Magna Carta 1225:
@Petros
The issue with trial by jury of peers is it is tied to wherever the trial is located. Normally under Article Three of the Constitution a trial shall be held in the State where the act was committed however, if the act in question did not occur in any state Congress by legislation may specify where the trial should occur. There are other issues of standing especially in civil cases that can be brought such as hardship of the defendant. I think many including even Steven have admitted there are serious constitutional issues with FBAR its just no one has ever really fought them out in court. I suspect in a normal civil case if someone tried to sue a Canadian in US court with no ties to the US over activities occuring in Canada they case would easily be thrown out. The issue is when the US government tries to sue someone in Canada with no US ties over activities occuring in Canada how likely in that case would a US court through the case out.
Regarding the pros and cons of the OVDI, I think many will find this article interesting. I apologize in advance if it’s considered spam.
http://www.robertsandholland.com/content/598article.pdf
@ Michael J. Miller
Thanks for the above link. It was good reading and I don’t consider it spam. It is good to know that not all tax lawyers are recommending a “voluntary disclosure” program for all their potential clients. “One size does not fit all”.
I know someone here who did go through one of the disclosure programs: he is sleeping better for having done it, and in fact, as he wishes to retain his “dual” citizenship status, his plan is to continue to comply with his U.S.tax obligations.
I think where many of us have trouble with the whole idea of “voluntary disclosure” or “quiet disclosure” or complying “going forward”, is that we have most definitely relinquished our U.S. citizenship. We did it voluntarily and with intent perhaps 35 to 50 years ago. The INA said we were no longer U.S. citizens. The preponderance of evidence since the date of our expatriating act does nothing to deny that intent ie no voting in U.S.elections, no U.S. passport, no U.S. property, no filing of U.S. tax forms. So how and/or why can the IRS expect us to come forward in any manner?
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