Check this out. My question for all is this:
How on the basis of these facts, specifically not knowing about Mr. FBAR in the past, could this be construed to be “willful non-compliance”? Are you saying that the IRS might just make a decision to treat this as willful.? It doesn’t seem to me that in this letter you have:
“now admitted in writing that you are in willful non-compliance with your federal income tax and FBAR filing obligations for the past six years.”
Isn’t the test for willfulness: “The intentional disregard of a known legal duty?” If you don’t know of the duty, how can the disregard be intentional?
This would seem to me to be a very unlikely response from the IRS. If they do respond this way, the outcome is clear:
The word will get out and nobody will ever attempt to bring themselves into compliance again.
Love you hear all your thoughts on this.
Thank you Mr. Mopsick for a very thought provoking post!
Compliance Dilemma For Americans Abroad With No Tax Liability To The United States tinyurl.com/84ukwrj#FATCA#AmericansAbroad
— Mopsick Tax Law, LLP (@MopsickTaxLaw) May 21, 2012
@A Broken Man, up until last year, it never even occured to me that I would have tax deficiencies to the US because I permanently moved to Britain shortly after finishing university back in the late 80s, having married a Londoner. My understanding was that tax treaties prevented double taxation and as I was already filing with the UK, didn’t think it was necessary to file more than a nominal return for which I claimed the FEIE. For simplicity’s sake, and to avoid having to use an accountant, believed this was sufficient.
Had no idea about the saving clause that allowed for double taxation for US persons, nor that tax-protected savings and investment plans perfectly legal where I live were not recognized by the IRS. At the time, was happy to add to my US-based brokerage account but then the Patriot Act meant I’d no longer be allowed to add to my mutual funds there with a foreign address, plus IRA’s were off-limits as a non-resident.
The worst thing was that I mainly invested in mutual funds in the UK because it seemed safer to spread my risk instead of buying individual stocks, as I’m not wealthy and had lost money in BP and bank stocks. Had had simply no awareness of all the arcane PFIC taxation rules, nor the requirement to file FBARS.
If I had sought out a US-compliant adviser and accountant from the start instead of being a DIY investor and filer, I probably wouldn’t have even owed any US tax, nor would I be living in chronic fear of life-altering penalties. I will always regret this but resent being made out to be sneaky for wanting to avoid being turned into fish fertiliser, especially when my omissions and lack of compliance had been unintentional. I feel morally innocent, especially as I am honestly trying to put everything right in spite of huge cost and stress.
We know that basically, with a few exceptions, Americans Abroad would pay no US taxes because of the Earned Income Exclusion and the Tax Credits. So the only way to get money from them is to start a program (FBARS) that they would not know about and then penalizing them for not complying. Even the IRS Tax Advocate knows and protested against this trap.
@Thatisme, I agree that they may indeed consider the most valuable FBAR an unfiled FBAR. However, I still believe they will mainly focus on enforcing penalties through the new Fatca 8938 form because it will be easier to enforce than Fbar which would require a court case.
If they were not accepting reasonable cause then we would be hearing about people getting hit with FBAR fines. But so far, they seem to be focussing on criminals and only hitting minnows via the misc. fbar penalties in the OVDI programmes.
Though this could of course change, especially after it becomes mandatory to file fbars directly online. But I still think they will use 8938 more for clobbering since it’s directly via the IRS as a title 26 penalty vs the fbar’s title 31 penalty which would require Fincen to pursue through the courts, as I understand it, so would more likely be reserved for egregarious offences.
Just in case anyone finds it interesting, here are the comments I posted (in a different forum) with respect to the article that Steve cited to me (link in one of my prior posts above). I’m curious what folks here may think on the various points raised.
Personally, I think the article is ridiculous. Full of information that is misleading at best.
Here are just a few excerpts with some commentary thereafter:
While [QD is] tempting, especially since amended returns are appropriate under the law, the IRS made plain in 2009 and 2011 guidance that this strategy is not in a taxpayer’s best interest.
What does it mean to say that amended returns are “appropriate.” Some will tell you otherwise, but the Supreme Court has held that there is no obligation to file an amended return. The choice of the word appropriate was probably used to mislead the reader into thinking it’s a requirement, while allowing the author plausible deniability, since the term “required” was not actually used. Also, the 2009 and 2011 guidance does not make plain that the strategy is not in a taxpayer’s best interest. It makes plain that the IRS may not like it, and that all of their options are on the table. Whether it may or may not be in a taxpayer’s best interest varies from case to case; and it’s our job to advise on this point. This “observation” seems particularly shameful, since it’s designed to herd the taxpayer into a formal voluntary disclosure under the pretext that a QD would never be advisable.
In its published Questions and Answers of May 6, 2009, the IRS clearly stated that quiet disclosures do not satisfy the reporting requirements.
What does this mean? Well advised taxpayers understand the difference between a QD and a VD. And they understand the risk that the QD may generate an audit. But then again, it may not. And the taxpayer is still entitled to present all the reasons for why he (1) didn’t commit a crime; (2) didn’t commit fraud; (3) didn’t willfully failure to file the FBAR; and (4) had reasonable cause. The nefarious suggestion seems to be that, by making a QD, the taxpayer is now purposively breaching some new obligation. Clearly false.
More recently, on June 1, 2011, IRS representatives revealed that the Service is opening examinations against taxpayers who have submitted quiet disclosures. The government has developed a process by which to “filter” these submissions to facilitate proper processing either civilly or criminally.
Obviously the iRS is looking at QDs. They’d like to find every single person who does a QD for offshore income. What portion they find remains to be seen. All part of what should be considered in the cost-benefit analysis. If, for example, you have great facts and should be better off outside the program, even with an audit, why wouldn’t you also like to enjoy the possibility (even if it were as low as, say, 20%) of not being audited.
As noted previously, the civil and criminal penalties for FBAR violations depend primarily on the intent of the taxpayer. If a taxpayer is aware of the disclosure programs and the FBAR reporting requirements, and implements a quiet disclosure so as to play the “audit lottery” and avoid the penalty regimes, such a strategy might well be interpreted by a judge or jury as negligent, reckless, or perhaps willful.
This statement is outrageous. The implication is that the taxpayer is doing something wrong (i.e., negligent, reckless, or perhaps willful) by electing a QD. Again, the author should be ashamed. All that matters is the taxpayer’s state of mind when he filed or failed to file the applicable return or other form. The IRS may, perhaps, tend to presume everyone with an offshore account (or everyone with an offshore account who does a QD) to be willful, but that’s very different than what’s written.
It is also important to note that quiet disclosures are inherently deficient in other respects. For example, disclosures made on amended income tax returns report income, taxes, and interest, but nothing else. Amended returns do not show accuracy-related penalties or relevant information required on the FBAR form (such as the highest balance of a foreign bank account in the subject tax year).
If the point is that an amended return is not an FBAR, well …. sure. That’s not really a point worth making. They’re still perfectly permissible (and sometimes desirable). Again, the suggestion is that they’re nefarious or improper in some way.
In summary, a poor article intended to herd taxpayers into the program. Whether the author honestly believes everyone should be in the program, or simply wants to make as much profit off of these people as possible isn’t for me to say. I do have a hunch.
@Michael, I’m guessing that he either is personally sympathetic but also trying to make a living by officially sticking with the program or is being a wolf in sheep’s clothing. Luring us to be open (like I have been) but on the lookout for people he might want to bring to the IRS’s attention.
While I want to believe he is on our side, I’m no longer completely sure. I don’t have anything to hide as such but have perhaps been to open. You just never know…
After all, I would still assume that these tax attorneys benefit from the status quo and the fertilizer mills…:P
@Michael – here in general is what I think of your comments:
https://twitter.com/renounceus/status/205023425486532608
and I have a few to add or my own.
Let me begin by saying:
“You can take the man out of the IRS, but you can’t take the IRS out of the man.”
At least one of the authors of this article (check his firm site) is a former IRS lawyer. There is a saying in the movie The Godfather that:
You keep your friends close and your enemies closer.
(Now, I am talking to you Mr. Mopsick – I don’t believe that all former IRS lawyers are somehow the enemy of the public. I mean only that it is important that one reads anything by any lawyer who has worked with the IRS. Let me add, that I thank you for your enormous contributions to the Isaac Brock Society.)
Therefore, whether good or bad the article has a lot of value. You can, to a large extent, glean some insight into how the IRS views the program and the people in it.
The first thing that strikes me is that most of the discussion assumes that everybody in the program deserves to be in the program because they are somehow a “tax cheat”. It is as though the article “assumes the righteousness of OVDI”.
I agree with all of your comments in your analysis. That said, this particular comment of yours very helpful:
“The implication is that the taxpayer is doing something wrong (i.e., negligent, reckless, or perhaps willful) by electing a QD. Again, the author should be ashamed. All that matters is the taxpayer’s state of mind when he filed or failed to file the applicable return or other form. The IRS may, perhaps, tend to presume everyone with an offshore account (or everyone with an offshore account who does a QD) to be willful, but that’s very different than what’s written.”
Now, here is my interpretation of this “you shouldn’t do a quiet disclosure stuff”. The presumption against “quite disclosure” seems to come from the following:
http://hodgen.com/the-official-irs-position-on-quiet-disclosures/
“A single question dominated the Offshore Voluntary Compliance Update panel during the American Bar Association Section of Taxation meeting in Washington on May 8. Practitioners wanted to know what special treatment, if any, the IRS would afford taxpayers who declined to enter the government’s special voluntary disclosure program (VDP) and instead filed amended returns revealing previously unreported income from offshore accounts.
The answer was not what those in the packed room wanted to hear. These “quiet disclosures” will not place affected taxpayers on terms equivalent to those who came clean about their offshore activities under the VDP. That means harsh civil and criminal penalties could await those who engaged in quiet disclosure.
But disclosure is disclosure, complained many attendees. Not so, responded IRS officials Ronald Schultz, senior adviser to the deputy commissioner (services and enforcement), Tax-Exempt and Government Entities Division, and Rick Raven, deputy chief of the Criminal Investigation division.
The message was clear: Taxpayers are either in VDP or they’re not. There are no shades of gray. Raven reminded the audience that the inquiry concerned taxpayers who knew about VDP and had ample opportunity to participate in the program, but consciously chose to ignore it. The IRS will not let them slip in through the back door via an amended return.”
Note that this comes from a meeting of the “Offshore Voluntary Compliance Update” sponsored by the ABA. One must remember that OVDI was conceived as way for criminals to come clean. Therefore, I would think that this warning about quiet disclosures should be understood in the context of possible criminal activity. How it could be understood in the context of some accidental American living in Canada is beyond me. But, again the author of this article is presuming criminality.
The point is this: If you are not a criminal then you better have a very good financial justification for entering OVDI!
As I was reading the article I felt like I was reading something out of Orwell’s 1984. Almost as though OVDI is nothing more than a normal way of life. Why not put every U.S. person outside the U.S. in the program? Why not treat Mr. Shulman as “Big Brother”?
Where I do find the article helpful, is that it (assuming that this is to be believed) provides a good overview of the OVDI process itself. In particular, the reminder that an OVDI “opt-out” should not be thought of as traditional voluntary disclosure, is good. For that reason alone it is worth reading.
Finally, it is clear that the author thinks one of two things – either:
1. OVDI is the only compliance option; or
2. He wants to convince everybody to enter OVDI.
Either option is as bad as the other.
Finally, Mr. Miller – thanks very much for your comments and your willingness to bring some sanity to the anxiety at the Isaac Brock Society! And once again: Thank you Mr. Mopsick for your very tangible assistance in helping U.S. citizens living abroad. I just share Mr. Miller’ view that the article he is referring to:
http://www.aicpa.org/Publications/TaxAdviser/2012/may/Pages/Hibschweiler_may12.aspx
is dangerous!
@monalisa
‘or is being a wolf in sheep’s clothing’.
I choose to believe Steven is NOT a ‘wolf in sheep’s clothing’. He was, after all, the lawyer on this site, that suggested to many of us, who had ‘relinquished’ decades ago, that we would be silly to now come forward. I believe the expression he used was that the IRS would say “Come on and make my day”, if we were to start filing tax returns. Doesn’t sound like a ‘wolf in sheep’s clothing’ to me. Just my opinion.
Hello All: I do have an article under review now with a major tax publication in Washington, D.C. on the issue of compliance by Americans abroad but the editors have asked that I not publish it on my own blog or anyone elses until they publish it first. Once they do, I would be honored to see it reproduced on the pages of the Isaac Brock Society. I think that puts us out a few more weeks. Sorry for the delay.
There is no ulterior motive here and I have no intention of outing anyone to the IRS. I am simply raising issues. As far as who’s side I am on, I am clearly on record for being against citizenship based taxation when it works the injustice which is unfolding for many Americans living abroad. That said, as an attorney I am ever mindful of not counseling anyone to do anything which might be perceived as an invitation to violate the law.
What I wrote in my recent blog should be obvious. Common sense and good judgment should predict the result in the facts I have outlined. Nevertheless, in my hypothetical, if you write the IRS a letter acknowleding that you now understand your obligation under the tax laws and tell the IRS you have no intention of correcting something on an open statute of limitations which was on its face contrary to law, THE IRS COULD ARGUE that you are in willful violation of a known legal duty to correct something which is easily correctable.
As far as quiet disclosures are concerned, I don’t advise anyone to do anything with the IRS which I cannot defend by going through the front door. Not the side door or the back door, but the front door.
Mr. Miller, I appreciate the emotion and passion you bring to the debate but in my humble opinion, “me thinks you doth protest too much!”
Respectfully submitted.
30 Year IRS Vet
Sorry, but I believe some of you are being unfair about Mr. Mopsick. He has only tried to help and the subject obviously interests him. Saying things we may not agree with or like to hear does not make him a “wolf”. The IRS forms, policies and programs are so unclear and open for interpretation that the viwepoints of a former IRS lawyer are invaluable, even if we don’t agree with them. Let’s not punish the messenger. 🙂
@rodgrod @all
Well said, rodgrod.
My personal opinion is that it has been great having both Steven and Michael posting on this site. They both have much to add.
@all
@Mr. Mopsick
@Mr. Miller
We are enormously lucky that both of these lawyers are talking time of their busy lives to share their views on an important issue – an issue where there is no agreement. Mr. Miller and Mr. Mopsick are disagreeing on the issue of “quiet disclosures”. I bet there is even a third option or fourth opinion out there.
We are getting the benefit of some very expensive legal advice, with no strings attached. We are also getting the benefit of why they think this way!
Please, let’s do all we can to keep the discussion going!
Thanks again to all!
Steve, I could ARGUE that I’m the starting power forward for the Lakers, but since I’m 5’5″ and not particularly athletic, it would not be a particularly credible or rational argument. Similarly, if I had a foreign account problem and elected to comply going forward without amending my prior returns, the IRS could ARGUE that I was in violation of a “known legal duty to correct something which is easily correctable” but that would be silly, because the US Supreme Court has held that there is no duty to file an amended return. If you’d like the citation, just let me know.
I’m glad you appreciate the “emotion and passion” that I bring to the table. I acknowledge yours as well. I wish you would call me Mike or Michael, notwithstanding that we are in heated disagreement on a number of key points. As for the protesting too much, I could say the same of you.
I am happy Steve is blogging here. It may have taken him a while to figure out that “citizenship-based taxation” is unfair. But the fact that he did, puts him far ahead of most Homelanders.
@Michael
Would that the Lakers got blown out this year help your argument at all?
Only kidding.
Thanks again.
@Renounceuscitizenship, actually it might undermine my argument by suggesting I reallydid play power forward for them.
And, lets not forget about the 3520 and 3520A for TFSAs and all sorts of other perfectly-legal-and-government-approved-and-registered-where-we -actually-live savings, which no-one knew about either. And the myriad of other arcane forms – with their multiple layers of liability and punishment – on perfectly legal and disclosed-where-we-actually-work,live-and-earn-savings. There is a lot of discussion of FBARs, but the 3520 is a monster too.
It would be good to hear an explanation of why TFSAs, RRSPs, and the equivalent in Europe or the UK, etc. cannot automatically be treated as IRAs, and the US equivalent. Draconian laws should be able to withstand close scrutiny and offer a detailed and robust rationale – even if ill-conceived.
The case I was thinking of, or at least one such case, is Broadhead v. Commissioner, TC Memo 1955-328 (excerpt quoted below). In this case, the IRS made an argument of the kind that Steve suggests (e.g., failure to amend makes the original error willful), and this argument was rejected. [My recollection is that the Supreme Court has also confirmed the absence of a duty to file amended returns, but since I’m too lazy to look for other cases, I’ll offer the following as my authority (or at least some of it).]
“Faced with proof that petitioner was not aware of the accounting error giving rise to the understatement of lumber sales until after the return was filed, respondent now says that petitioner ‘willfully and deliberately attempted to evade and defeat his income taxes when he refused to file the amended return after being advised to do so by his accountant.’
The respondent had the burden of proof under the issue. He established no more than the cause of the understatement; lack of knowledge by petitioner of the bookkeeping error until after the return was filed; the preparation of an amended return by the accountant of petitioner, and that petitioner never filed the amended return, even though advised to do so by his accountant. Petitioner was not required by statute to file an amended return, and if one had been tendered for filing, respondent could have declined to accept.”
http://isaacbrocksociety.com/2012/05/03/thank-you-and-congratulations-to-mr-steven-mospick-he-is-now-part-of-aca-tax-advisory-panel/
http://isaacbrocksociety.com/2012/04/18/thank-you-mr-steven-mopsick/
Reblogged this on Renounce U.S. Citizenship – Be Free.
@Mr Mopsick, thank you for replying and reassuring us of your opinions and intentions. I’m sorry if I come across as paranoid but I also sense that you can appreciate that I can find the inevitable ambiguity of legal argument confusing and frustrating at a time that I feel vulnerable about my situation (as others also do). I also appreciate your participation here, as well as Michael’s.
It’s important that we try to work towards a positive outcome for all concerned, including America’s long-term benefit (which I believe tax reform could help). The vast majority here want to be decent and do the right thing but naturally with the least damage to themselves.
Why no mention of the Dec fact sheet? It has no mention of any VDI, and instructs a “noisy” disclosure (i.e., with a reasonable cause letter) with 6 years of returns. I know I bring this up often but it seems that it’s often overlooked in these kinds of dicsussions. True, the fact sheet doesn’t specifically address those who have filed in the past and now need to ammend (due to schedule b/FBAR issues), but it certainly doesn’t rule that out…
@Howard
I agree totally with you – in my opinion the December 11 FS should be the starting point for U.S. and dual citizens in Canada. Now, it is the starting point, and one would want to behave rationally and carefully, but it is the only thing I have seen from the IRS that does not focus on penalties, but focuses more on compliance.
Here is a link to some very lengthy commentary that I wrote on it at the time:
http://renounceuscitizenship.wordpress.com/2011/12/18/update-on-the-irs-fs-for-u-s-citizens-and-dual-citizens-living-outside-the-united-states-no-additional-relief-for-canadians/
But, one caveat – the December 11 FS does seem to aimed at very simple situations.
I don’t believe that I have ever seen Steven comment on this Dec. 2011 FS – would love to know how he understands it. Love a comment from on it as well.
@Howard and Renounce, my accountant seems to think that the IRS will have regarded amended returns with schedule B would often be generally lumped in with non-filers. Many others may also have assumed that it had been sufficient to report passive income to on one’s resident government’s tax return, especially if extensive i.formation sharing agreements are already in place.
Hi All: the December FS is useless to me. It does nothing but repeat the obvious and what we already know;
There was nothing new in it.
@Steven
Thanks. During the summer and fall of 2011, leading up to the FS, the practitioners and media were certainly not talking about the possibility of “reasonable cause”. In fact, many lawyers were advising clients to enter OVDI even if they had the facts that may well have supported reasonable cause. Anything short of OVDI was being treated as a possible problematic “quiet disclosure”. So, although the Dec FS does nothing more than repeat the existing law – it is at least an admission from the IRS that they will apply the existing law in relation to “reasonable cause”. That was a help – at least it seems to me.
So, to lead with a presumption of the Dec 11 FS is to lead with a presumption of “reasonable cause.”