I am admittedly way behind in reading the many recent good posts and comments here at Isaac Brock. I also have had a couple subjects I have wanted to weigh in on, and create new posts, but for the past couple weeks my time has been seriously constrained. However, this morning a previous post by renounceuscitizenship caught my attention. It was entitled Steve Mopsick – On the “coming into compliance dilemma”. I have been thinking about it all day, and why it is that this QD dilemma is so difficult for so many benign Minnows with the conflicting advice being provided by practitioners.
I thought I would provide some thoughts I have had, especially as it relates to the comments that Michael J. Miller posted. Now I know, I am getting into dangerous territory when I am seen to be taking sides with one good attorney over another. I certainly have no legal expertise or special knowledge that qualifies me to make comments on matters such as this. So, I am sure what I have to say is probably misguided, or wrong in some manner or another, but it is how I see this problem. It is just my novice and naive opinion. Take it for what it is worth.
QD advantages for benign Minnows
If any of you have been reading Jack Townsend’s blog recently, and hopefully you have, Jack seems to be in Michael Miller’s camp about QDs and the risks vs benefits associated with going this route. In theory, if I understand Jack correctly, he says a QD audit examination for the Minnow with benign facts and with IRM discretion applied should not be materially different than an ‘Opt Out’ examination for the benign Minnow with the same discretion applied. In fact, because of this discretion, the penalties outside the OVDI for these benign offenders should be less then the “in lieu of” penalties inside it.
However, the QD does have one significant advantage over the OVDI, IRS advice/protestations aside. It does not require one to spend countless LCUs in an extremely inefficient 2 year process and pay thousands of dollars to a practitioner for advice and help just to get to an Opt Out point where normal IRM discretion should apply in the first place.
Practitioner responsibility.
It does seem to me, on a non legal common sense basis, that a practitioner has a first responsibility to their client and not the IRS! They should present all the various options available for compliance and the risks associated with each, depending on their client’s facts. This doesn’t necessarily mean that they have to covertly compel the client to choose the IRS favorite route over another to reach a compliance objective. I don’t see it as an attorney’s obligation to tell the client they have to join the OVDI, as the only approved route for offshore compliance.
The fact that you have to examine the various options speaks VOLUMES to the stupidity of the OVDI design. The choice for compliance should be a simple straight forward one, not the convoluted, anxiety ridden, perverse and expensive process that it is now. It should be just as easy to become offshore compliant, as it for you to become tax compliant before you become Treasury Secretary!
Taking a side
I thought Michael Miller’s comments about the QD were right on point as related to the article Steven Mopsick cited. With all due respect to Steve, that article looked to me as if it was dictated and written by an IRS ghost writer by the name of Randall P. Andreozzi. I wonder if the IRS commissioned him to write it, or is he a past IRS attorney writing from a perspective that he has a predisposed inclination to support? To me “the tell” were these sentences that indicated this was not just an ordinary unbiased scholarly writer, who was pointing out the OVDI conundrums.
“People will not respond to such a program unless they are sufficiently frightened by or concerned about the consequences of remaining in the weeds. As a result, the government must generate interest in voluntary foreign account disclosure through well-publicized prosecutions and penalties to establish to the public that the risk is clear and it is present.”
That told me all I need to know about the author and where his sympathies and bias lay! I can understand why Steven, 30 years working for the IRS might have similar opinions, and I don’t hold that against him. If I had been there that long, I might self identify with that perspective. Frankly there was some aspects of the alternate way Steven has suggested to Expats about a possible different approach to compliance that I think it merits consideration. In some ways it is a QD with a microphone! Kinda a halfway house to Voluntary Disclosure. Will it work? Don’t know, and haven’t yet formed an opinion, but it has me mulling it over.
Mission Impossible
When I consider these past 3 years of IRS offshore jihad, for the life of me, I do not understand why the IRS continues to assert / imply with their FAQs, that all those who are FBAR and offshore income non compliant must just join the OVDI. Surely, in the bowels of the beast, the IRS must have one non intellectually challenged analyst who has done projections of the 25-40 million “non compliant” offenders around the world. They must realistically know they would be totally incapable of handling the all these applicants should they decide to follow the OVDI procedures the IRS has created. They could not do it. It is impossible! They do not have the budget resources for the 10s of thousands of examiners necessary to handle the additional workload that their insanely complicated, inefficient and tediously redundant program requires.
Additionally they know, that millions of benignly non compliant Minnows would actually get a better deal outside the program, in an Opt Out, using normal IRM discretion should they be audited. However, since they can not possibly process them all inside the OVDI to the Opt Out point, for the above stated reasons, they are totally disingenuous in their assertions that such Minnows should not do a QD as a route to compliance. Hell, they should be begging them all to do QDs, so they can just pick and choose who they want to audit as a much better way to screen for the egregious failures, while allowing the Minnows reasonable cause escape from the draconian penalties. Let’s face it, just amending and filing back returns and FBARs plus paying some taxes and interest penalties with the associated LCU cost and professional fees is penalty enough for the new found need to be compliant! Why does the IRS want to pile on?
It’s the Penalty Money!
I have come to the conclusion that someone has callously came up with projection of how many they can actually force into the OVDI through their threats of more serious penalties outside the program, and can therefore take them for more penalty money then would otherwise be possible given the IRS resource constrictions and IRM penalty reducing discretion in normal audit processes.
This is not about improved compliance, Commission Shulman’s assertions not withstanding. This is about the best (worst actually) way to produce maximum penalty revenue, pure and simple.
Looking Back
What is obvious to me now, is that going back to when the 2009 OVDP was designed, it was intended for the egregious homeland Whale. It was conceived as “easy money” that could be generated off the UBS client lists about to be exposed, without having to go through lengthy DOJ criminal prosecutions. It then evolved over time to create technical adjustments with lesser penalties for more benign non compliance, as they realized their nets were filling up with Minnows for which the program was never intended. They started to lower the penalty levels and threshold amounts for certain financial conditions, going all the way down to the most “innocent of innocent”, the non resident accidental American who didn’t even know they were American!
Under the program, should this poor non resident fool join the OVDI, they would “only” have to pay a 5% penalty of their entire “offshore” assets for the privilege of now being compliant to an obligation they did not know, could not have known, was required! Say what? Read that again.
FAQ 52.2 states: Taxpayers who are foreign residents and who were unaware they were U.S. citizens,…. is entitled to the reduced 5% offshore penalty.
Why would the IRS insist that a person like this have to join the OVDI process in the first place, and then grant them an “entitlement” of a reduced 5% penalty for a condition by their own definitions has a “reasonable cause” exception to any penalties outside the OVDI program using IRM discretion? For this they are supposed to be thankful and forever grateful for the benevolence of the IRS and the leniency of the 5% OVDI penalty entitlement? Geez, lucky them!
What Should the Penalty Be?
So let me see if I get this right. The IRS uses hyperbolic threats with DOJ press releases of criminal prosecutions, and produces examples of severe penalties in their FAQs, to frighten even these most innocent non resident accidental American Minnow into joining the OVDI, so they can extract a 5% tribute for the new found knowledge of U.S. Citizenship and its bizarre taxation and reporting requirements? That sure is a new definition of an “entitlement” in the perverse world of IRS logic. 5% is 5 basis points too high! They should pay nothing, nada, zilch, zero! Instead, the IRS says, “5% please, thank you very much!” It is stunning when you think about it, and let it fully sink in what they are doing!! I hadn’t really focused on it until Moby pointed it out to me. He is right! It is beyond stunning, it is bizarre! It is the “smoking gun” that apparently shows their OVDP program has now morphed beyond good intentions to ferret out homeland Whales to premeditated and deliberate actions to fleece the most innocent of Expats abroad. I just don’t know how any attorney can defend these actions, and with a straight face blindly follow IRS OVDI guidelines and not advise clients about other compliance routes with this glaring example staring us in the face.
In the case of these non resident accidental Americans who didn’t know they were American, they would surely get a “go and sin no more letter” and no penalties at applied at all if they were audited under “reasonable cause” provisions of the IRM. Now, why would an attorney advise this type of client to enter the OVDI and pay 5%, when this is obviously not appropriate in the first place? If audited, after doing a QD, this Minnow should get the same IRM “reasonable cause” discretion as in an Opt Out or normal examination. In my non legal opinion, it would almost be criminal for an attorney not to provide consideration of the QD, as an alternate route to compliance.
To be truthful, I would wonder why this non resident accidental American would now want to complicate their life with this new compliance regime. The preferred IRS OVDI alternative is actually another form of an Exit tax piled on top of the accidental American who surely would want to renounce their citizenship, if they only they could jump through this newly discovered expensive hoop!
Dystopian Program
So it has come to this. The IRS has created an Orwellian monster in this OVDI program that penalizes the most innocent of innocent, threatens them if they don’t to do an OVDI, presents examples of terrible penalties that can apply outside program, knowing full well, that such a person would never be levied those penalties if they Opted Out, or if they were audited after doing a QD.
It is just morally bankrupt for the IRS to continue to imply that “all” must chose the OVDI route, or threaten attorneys with circular 230 sanctions for advising alternative compliance paths for benign Minnows. Frankly, the cost to the government to process all of them, and the cost in LCUs and practitioner fees to the Minnow just to get to a point as much as 2 years later where they can Opt Out to receive a lesser penalty under IRM discretion than applies inside the program and equal to a QD audit examination represents “Stupidity on Steroids” and is beyond belief.
Why didn’t they redesign the OVDI?
So why, one may ask, didn’t they pause and reconsider what they were doing, as the OVDP nets begin to fill up with Minnows? They should have said, “Whoa!, we need to redesign our OVDP to let these Minnows have a safe harbor escape at the front end, rather than continue a back end Opt Out process. We need to concentrate our limited resources on the Whales.”
However, they don’t think that way. Their mindset is different than yours and mine, and I would say they are not normal rationale operators. They are lost in a technical and legal maze of such complexity that they are trapped in their own Gordian Knot. So it is probably not so amazing that the IRS did just the opposite, by consciously eliminating the FAQ 35 discretionary relief half way through the OVDP. Instead, in its place, they have instituted at the lowest level a 5% penalty to be sure they extracted some pain from those that could not have known they were non compliant in the first place!
They obviously don’t get it, or worse, do get it, and don’t care. This is the equivalent of financial water boarding for Minnows.
This is just a callous attempt to raise revenue on the backs of the most innocent and vulnerable! They just want the money.
In the meantime, millons/billions of dollars are lost to fraudulent anonymous Corporate shell games, that they and Congress don’t have the time to bother with while they continue their offshore Minnow to fertilizer conversions.
Or, maybe, it is just a Big conspiracy with Senator Carl Levin, using little known FBAR penalties and the 2010 Hire Act FATCA provisions to provide full employment for life for their all their examiners! This was job creation after all. (I joke, I think?)
In conclusion, what this tells me, is that the IRS, once it is set upon a course of complete irrationality related to world wide citizenship tax compliance, is like a drone heading for a GPS waypoint. It is locked in, and incapable discerning there are innocent women and children inside that compound it is targeting. And just like the FAQ 35 withdrawl, they remove any discretionary control levers from the hands of the remote operator to assure that the mission remains on auto pilot and can not be recalled. It is frustrating to watch, even now that I am no longer being targeted myself.
For Canadian Minnows (citizens and residents) who are slip sliding into the IRS maelstrom …
When they throw complexities at you, why not fight them with simplicities? (Here, “kind” Sir IRSS is my 1040 and my best attempt at a FBAR and penalties you say? … I don’t think so!) You always have the border shield between them and you. The worse they can do is to turn your shield into their barrier and that’s a risk you might have to take. When you know you’re innocent, you shouldn’t have to accept their insistence that you are guilty just because you haven’t proven otherwise to their satisfaction. To take this even further, the least affected by having complexities thrown at it is a dishonest Whale because it has the size and resources to slough them off and an inch or two off its thick hide is barely noticeable; whereas honest and often unaware Minnows are easily drenched by complexities and take an inch or two off their thin hides and they are mortally wounded. Another advantage a Whale has is that if things get to be more punitive than it is willing to bear it can swim off to another ocean and live a happy life; whereas Minnows do not have the fin power or the finances to swim to another ocean and they face a miserable life with the IRSS sharks forever circling them BUT just remember, as long as the Canadian government doesn’t throw them to the sharks, they can only catch Minnows if they cross the border. And that net they “say” they set up to catch the Whales might just have so many tiny openings in it that a Minnow will successfully cross the border too … maybe … if it has to, I guess (borrowed that from Red Green — Canadians will get it). If a Minnow had to during a family emergency for instance take a run at the border and did get caught I know whose side Canadian public opinion and support would fall on. We’d be there to bail that poor Minnow out, for sure. We’d even clang our Tim Horton’s cups in protest against the bars of the border gates.
This is all just my opinion, still subject to change, not applicable to every person’s situation, nothing legal (I don’t even know a lawyer). Hope I got all my disclaimer ducks in a row.
@Joe Smith
The key thing I have taken away from all of Flaherty’s(Canada’s Finance Minister) communication to date is it is basically impossible for the US to collect tax and penalties on Canadian citizens with no income or ties to the US. Flaherty I think keeps saying this for a reason which is that is basically what this whole thing will come down to at the end of day. Don’t assume the US Congress is not capable of imposing tax law that is basically impossible for the IRS to implement. If you can’t actually collect tax in Canada on Canadian citizens FBAR, FATCA et all aren’t worth the paper they are written on. Generally the first rule of imposing taxes is to impose those you can collect. I do think we will hear more at some point in the future from both Governments although I would not assume it to be at all a final solution without legislative changes in the US(which I wouldn’t hold my breadth for)
@ Steven, thanks for this explanation. I’m revising the definitions as follows:
(1) OVDI— go in the front door, and pay 27.5% extortion fines of your financial wealth, including the value of your principle residence (if it is abroad).
(2) Quiet Disclosure (a.k.a Go-forward disclosure)–report your accounts from this point forward, forgetting about the past delinquencies in filing of either FBAR or taxes. This avoids negative consequences of FATCA, but it may lead to questions (hence an audit) about when these accounts originated and where the money came from, and what income the account holder failed to declare in the past.
(3) Noisy Disclosure – filing going forward, and sending back dated FBARs–with a letter saying that you were heretofore unaware of the filing requirements. If the IRS doesn’t accept your reasons, then they have all the information that they need to assess up to 300% fines of your financial wealth.
(4) The Petros Approach: Renounce your citizenship, tell the IRS to put their FBARs where the sun don’t shine, and live happily ever after, keeping your real estate and retirement funds fully intact. This approach works if you live in Canada or some other country which has promised not to collect taxes for the IRS from Canadian citizens and not to collect FBAR fines ever. It requires no legal fees and few filing fees if any. It may result in permanent exile because the United States is a barbaric country and a pariah among the nations. This may also be problematic if one expects Social Security or other US source income.
(5) Full-ostrich approach — just keep living your life as if this nightmare wasn’t even happening; don’t file taxes and don’t file FBARs. Or if you file your taxes, pretend that FBARs don’t exist. This option may be impossible with FATCA around the bend, and it could force the person to chose one of the other four options.
No doubt this is a trap. The IRS knows that Amerians Abroad have Earned Income Exclusion and Tax Credits. So most of them would not have to pay any taxes after filling all these papers and reports. Then they created this trap: penalties for not filling the reports that they now know about. Even the IRS Tax Adviser knows this. Very unfair. Things that are done as a desperate way to collect money from innocent people. Tjhis is not the America I thought I knew.
@ Joe, Tim The next thing would be to implement an arrest at the border approach. I.e., if the IRS receives the account information, they then assess penalties. If the person refuses to pay, then the IRS or appropriate agency issues an arrest at the border warrant. The person is held in a US prison until they pay every last farthing of what they owe. This would be (6) The Chuck Schumer Option.
and if you do not cross the border?
and if you have less than $1,000,000 in your accounts and are not found out?
@Petros, What is filing 5 years back with FBARS and no cover letter called?? Suicide?
@Joe, Petros, et. al: I met with my branch manager at TD yesterday. She scoffs at the idea that FATCA will proceed in Canada. She thinks there are simply too many reasons why it can’t and shouldn’t be done in Canada. I hope she’s right–but I suspect she may be doing her own full ostrich–or maybe she’s just naive to still believe Canada won’t sell out to the Americans..
She mentioned Financial Consumer Agency of Canada. (http://www.fcac-acfc.gc.ca/) Has anyone heard of them? I’m sure Tim has. Does anyone know if they could or would help us resist FATCA?
@ Blaze, Things have changed since April 2011. I talked to my branch manager and I was informing her about FATCA. She’d never heard of it. My request was, “Please treat me as a Canadian and not as American. Can I have your assurance that you will no longer treat me as a Canadian?” She got back to me after speaking to legal. They responded that they would follow the bank act of Canada and would you please put your request in writing. I said that could lead to a paper trail showing that I was a wilful violator of FBAR. Now, I don’t care. The Canadian government has said “no” to FBAR fines (this was the announcement that made me come out in the open), so I am now arguably the world’s 3rd most famous renunciant, after Eduardo Saverin and Superman. I’ve said to the IRS a big Clint Eastwood, “Go ahead make my day!”
@ Saddened, I have few masochistic tendencies. When I realized how dangerous filing in the US had become, I had already by several months, started the process of relinquishing my citizenship. I had been filing until 2009 taxes (which was 2010) when I first learned about FBAR. Then only after renouncing did I file late 2009, 10, and on the advice of Tim, I am waiting to the last moment to file 2011 with my 8854. Hopefully, I will not be a covered or specified expatriate, because while I agree with Joe, I still have family in the US. I won’t cross the border if they plan to arrest me though.
ARE WE SAFE WITH LESS THAN ONE MILLION AND NOT CROSSING THE BORDER? sorry for sticking caps!
@ Joe: What is your definition of safe? You mean, do the full ostrich, and cross the border? Then, along comes a FATCA, and low and behold your banks decide they want to continue investing their other clients money in the US so they sell the rest of us into slavery. Then you get a fine, you refuse to pay, they put out the arrest warrant. That’s the FULL SCHUMER option (Schumer for POTUS, anyone?).
Is it safe to cross the border now? Sure and no. My neighbor’s family had a car accident. 30K for heli-evac. $140K hospital bill. His father-in-law was uninsured. Is that safe? For now, I think the tax issue is less worrisome than the car accident scenario. I’m just saying its probably best to be insured to the hilt if you decide you want to go to the US.
@Petros: You say it best: “Get your ass and your assets out of US.” Now, there’s a great quote for the Economist, Bloomberg’s or Wall Street Journal. I wonder how Schumler and Casey would respond to that.
@Petros, If I may: I think most people would define Quiet Disclosures as trying to correct past mistakes by sending amended returns, but without explanations, and past FBARs with or without a reasonable cause letter. That goes along with fling correctly from now on.
The Go Forward approach as defined by Jack Townsend is filing correctly from now on, but not trying to address past mistakes (i.e not amending anything or sending delinquent FBARs). This is slightly different.
By threatening people of harsh punishment if they try QD instead of going into OVDI, the IRS is I think loosing a lot of potential “easy money”, as it’s been mentioned before.
Regarding OVDI penalties assessed to minnows, I am surprised we haven’t heard of a single case of lawsuits against tax preparers.
@Steven: after having worked 30 years there, I thought you might know people and have some influence.
The depressing thing is that they know about the issue, as it was raised by Nina Olson. Lawyers like Phil Hodgen have met with them and raised it as well. And yet nothing is done to adjust the program or provide better guidance.
@Blaze
I know all about the Financial Consumer Agency. They administer a big part of the law that doesn’t allow for compliance with FATCA and yes you might want to contact them.
@Petros
My feeling at the very least is sending in a whole bunch of returns(lets five full years) all at once probably brings attention to yourself whereas if you are only a year or two behind(and have been filing for many years) sending each one in one at a time somewhat staggered apart is a better strategy. Someone such as yourself has until July 15th plus whatever time you can get with an automatic extension. Take advantage of it. Don’t use E-File or anything that makes their job easier. Send it in snail mail. Make them work.
@Petros
My hunch is a lot of renounciants are sending in form 8854 with five years of back returns. While this strategy has been recommended by many I suspect it does generate a certain amount of attention. Someone just sending in 8854 with a 2011 return who has filed in the past generates far less attention. Basically if you send in five years of back returns you are admitting you haven’t been compliant for a long time notwithstanding the fact you aren’t a citizen anymore. If you just have a 2011 return and form 8854 they have to go back and check your previous returns which is “WORK” for them.
@Tim: Thanks. Do you have any suggestions as to who I should write to at FCAC (name, position or department)?
My Canada Post letter carrier must wonder what in the world is going on with all these letters coming to me from Ottawa. She tried to deliver an Express Post letter from Privacy Commissioner’s Office on Friday, but I was at TD (This is consuming my life!), so I will get it on Monday.
Once I have that letter, I will post information on the Privacy Commissioner thread.
@ Tim Yes. I recommended the same in an earlier post: http://isaacbrocksociety.com/2012/05/08/last-date-for-8854-filing-is-june-15-2012/ I almost sent my 2010, 2011 and 8854 together with another bit of information they requested for 2009. Finally, I decided the extra stamps to send the stuff separately was probably a much better idea. Then, the 8854 goes to Philadelphia not Austin, and so it made sense to send 2010 to Austin, as per normal, and the 2011 and 8854 to Philadelphia, and wait until June 15 at the earliest to send it.
I think your idea of sending everything at a different times is an excellent idea too; interesting that Steven suggested sending tax filings to different addresses. Thanks Steven! That’s a brilliant suggestion!
If they are going to make life hell for minnows then the least we can do is repay the favor: we should consider how we can stretch the resources of the IRS as thin as possible, and create the least amount of ease for them. Especially, we should never file electronically.
@Blaze
http://www.fcac-acfc.gc.ca/eng/resources/publications/banking/TSOpenBankAcc-eng.asp
This is their Mailing Address below:
Financial Consumer Agency of Canada
427 Laurier Avenue West, 6th Floor
Ottawa ON K1R 1B9
http://www.fcac-acfc.gc.ca/eng/about/commissioner/index-eng.asp
The 200,000 CAD penalty per violation in the link above is mentioned a lot in the FATCA comment letters the Canadian Bankers Association sent to the US Government.
Your letter should be probably be directed to Ursula Menke who is the Commissioner of FCAC.
http://www.fcac-acfc.gc.ca/eng/about/commissioner/commissionerBio-eng.asp
The legal authorities of FCAC are different from that of the Privacy Commissioner’s so it might be a good idea to send something to Ms. Menke.
@Tim, Others: One of the things I’ve learned recently from TD’s letter to DOT and IRS is that even if Canadian banks violate Canadian law to close the account of a Canadian citizen or resident who will not give consent for information to be forwarded to IRS, Access to Basic Banking Services requires them to reopen an account with proper ID (none of which includes a US or other foreign birth certificate).
Tim, you probably already knew that from a legal aspect, but this was new and very interesting information to me.
@Petros
If Philadelphia is not a normal destination(and it doesn’t appear to be. Austin and Charlotte are the main places for overseas returns arriving by snail mail) I would definitely NOT send them a bunch of regular returns. It would be all too easy for them to decide anyone sending in a bunch of back returns with their 8854 to Philadelphia wasn’t compliant prior to renouncing and subject them to “special treatment”.(Not that I think at this point in time they are at all interested in renounciants). Now is there actually anything that says your final 2011 1040 has to be sent to Philadelphia with 8854 or could that be sent to Austin too. I am looking at the instructions for form 8854 right now and I actually have a feeling your 2011 1040 should be sent to Austin again and your 8854 should be sent to Philadelphia separately.
@Petros: good job. Some refinements.
(1) correct except add, ” try to opt out and argue reasonable cause. ” Also, you do not have to include your home in the 27.5% penalty base if it is not in a trust, corporation or other entity and it was not purchased with assets which are related in any way to tax avoidance.
(2) correct except add the variations I added above earlier today about trying to trick the IRS computers by staggered filing of multiple returns and selective filing of amended returns.
(3) correct except the FBARs are not back dated, they are dated as of the date of filing. Rather they are delinquent with a letter explaining why they are late. Also, once the IRS proposes anything close to 300% in penalties, Mopsick Tax Law represents the taxpayer pro bono all the way to the Supremes if necessary,
(4) essentially correct except for the part about us being a barbaric and pariah nation. Rather, I would say we are a great nation made up of well-meaning, baseball loving, honest, hard working, freedom loving, God fearing, hepful of strangers, willing to “get invovled”, caring, decent people with the prettiest girls on the planet, with a government which doesn’t always get it right. 🙂
(5) correct.
Respectfully submitted,
30 Year IRS Vet
@ Steven, thanks.
@ Christophe. I agree there is some confusion and perhaps we should have (a) and (b) definitions of Quiet disclosure.
@Tim, the 8854 instruction say to send it together with your final tax return, and the due date is when that final tax return is due. (I read them a couple of weeks ago, and I am working from memory here).