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.
@Michael: Here is the hypothetical we are discussing based in part on @Halifax’s facts. The taxpayer inquires of a practitioner licensed to practice before the IRS under Circular 230, whether he should enter the IRS’s OVDI program but here is the problem:
There was a sale of personal residence during one of the eight years which he would have to disclose to the IRS. If he goes through the program the proceeds from the sale of the house would be included in the bank statements required to be turned over to the IRS. This in turn, could possibly greatly increase the penalty base under the terms of the program. The house sale proceeds would be subject to the 27.5% tribute exacted by the IRS against the tax cheats the OVDI program was originally designed to bring back into the fold. @Halifax is not a tax cheat. He just doesn’t want any trouble from the IRS and simply wants to know what he should do.
The practitioner reads IRS publication 523 “Selling Your Home” and reads that while the sale of the house may not be taxable at all or in full, it is still something that has to be reported to the IRS on form 1040 for the year of the sale, possibly on Form 8949 and Schedule D and the lawyer reads enough to know that he probably needs to have a qualified return preparer take a look at it and get back to him. The tax lawyer also knows that there is an issue about whether the value of a personal residence owned outright by the taxpayer has to be included in the penalty base in the event the client elects to do the OVDI program.
Let’s say @Halifax, at the time of the sale, just assumed it wasn’t taxable and didn’t bother reporting it at all and the return preparer whom the practitioner consults, advises that there will be a small gain and she would recommend that an amended return might be a good idea.
The tax lawyer advises @Halifax that he doesn’t have to go through the program because he has concluded that @Halifax should not have to submit the proceeds of the sale of the home to the 27.5% penalty. The lawyer says he can “just not worry about it” for now, and try to do a better job filing his returns prospectively. Alternatively, he can just “accurately amend some number of old returns (and comply going forward) without entering the program (QD) “.
In my humble opinion, I think @Halifax would be getting some bad advice and I think the tax lawyer could be overlooking a few things which should give him pause here.
Section 10.51(4) “Disreputable Conduct” of Circular 230, includes in the definition, the “(4) [g]iving [of] false or misleading information, or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof, or to any tribunal authorized to pass upon Federal tax matters,”
As I said above,
There is one purpose for a quiet disclosure in the offshore arena, and one purpose only: to try to fool the government into thinking that everything is just hunky dory. It says in effect, “you don’t have to examine me, thank you. Just move on to someone else. I have already decided I am right so don’t waste any time on me.” A quiet disclosure under some facts could be construed as a deliberate attempt to deceive the government to avoid the possibility that someone with a statutory duty to do so, might want to take a closer look and see perhaps if your so-called quiet disclosure is incomplete in some way in its failure to address all of the tax issues in the year of the amendment or for years preceding the quiet disclosure or even issues in a future year.”
I would humbly suggest that a quiet disclosure under these facts would be precisely what the drafters of Circular 230 had in mind when they used the phrase, “participating in any way in the giving of false or misleading information.”
The client has been advised that an amended return is probably in order. The tax lawyer knows that the client is at risk for the payment of 27.5% tribute if he enters the program. The tax lawyer knows the program has a published protocol for presenting an argument to the IRS that the 27.5% penalty should not be imposed under the appropriate circumstances.
The tax lawyer also knows the IRS is on record for saying the proper conduct for a Circular 230 practitioner under facts exactly like this is to go through the program and use the opt out procedure. The tax lawyer has no evidence or any basis whatsoever to conclude that the opt out program doesn’t work. The tax lawyer also knows that there is substantial authority for the proposition that if there is no connection between the value of a personal residence and any tax noncompliance, the value of the home does not have to be included in the FBAR penalty asset base. The tax lawyer has no basis to conclude that opting out will not get the client relief from the 27.5% tribute.
The tax lawyer knows that international compliance is the number one priority of the Commissioner’s current enforcement program. The tax lawyer has concluded that the penalty would be outrageously unfair in this situation so he advises the client to sneak in the back door and get something filed to increase his chances of slipping the return past a GS-5 technician at a Service Center instead of going through the front door and addressing the question head on with people who have been trained in this area and who know what the announced position of the IRS is on amending a return, using the opt out procedures, and applying the mitigation provisions of the IRM with regard to non-willful FBAR penalties.
Also, how could this possibly be the best advice for the client? At best the client will spend the next three years in terror every time he goes to his mailbox to see if the caper worked or whether the IRS has concluded there is something fishy on that pier in Halifax and they think a chat is in order? Suppose just before the expiration of the three year statute of limitations the client is audited and the agent wants to see if there was any willful failure to file FBARs. I would much rather defeat that argument in an opt out setting than after a notice of audit following a quiet disclosure.
Also, you can be sure that if the client wants to assert the “reliance on the advice of a professional” defense to the assertion of penalties, you are not going to win that argument with the IRS simply by saying so. The practitioner should expect the agent to ask the taxpayer and his representative to fully document the steps taken by the client and the practitioner to reach the conclusion that a “back door” opinion was the right way to go. The practitioner might find it a bit embarrassing to have to explain why he chose to not advise going through the program when he knew that if the home value was in no way connected to noncompliance in the past it wouldn’t have to be included in the asset base in any event.
That said, Michael also suggested that I have recommended a “statemented,” disclosure. I have never used that word and I am not sure what it means but I think you mean just invent your own noisy disclosure and submit the amended returns with a good faith cover letter telling the IRS what is going on here. That is a noisy disclosure and should be permitted under part 9 of the Criminal Investigations section of the Internal Revenue Manual assuming the letter is complete, fully discloses all the facts, and there is an agreement to cooperate fully with the IRS.
I would never say that a noisy disclosure which is not made through the program is just simply one of many options for the taxpayer under these facts. In my opinion, UNDER THESE FACTS, I do not see a quiet disclosure or prospective compliance as a proper option for the tax attorney. The attorney might suggest disengaging from the client but he would be well advised to put in writing why he could not advise a “back door” approach. The client should also be advised that if he goes ahead anyway and tries to sneak in the back door, he might have a harder time arguing against the assertion of penalties after an audit notice than he would had he made a noisy disclosure under the program or not.
Respectfully submitted,
30 Year IRS Vet
I am a citizen of another nation. I live there. The US can believe whatever it wants but it has no jurisdiction over me. All of the above is tax accountant wanking.
Steve, I don’t see any reasonable way one can equate a quiet disclosure with the provision of false or misleading information. To me, the argument that some false or misleading statements within an accurate amended return is absolutely absurd. I’ve heard it several times now, and it’s ridiculous every time. Filing an amended return says nothing more than “I made an error, and now I’m fixing it.”
Perhaps you could elaborate on what the false or misleading statement actually is, and why it’s false or misleading. Allow me to examine your quoted language for what you choose to pretend the quiet disclosure says.
“you don’t have to examine me, thank you. Just move on to someone else. I have already decided I am right so don’t waste any time on me.”
Let’s go step by step.
“you don’t have to examine me,”
This is true. The IRS does not have to examine the taxpayer.
“thank you.”
I’m not sure if this is something that can be true or false. It’s a common polite phrase. To my knowledge, no one has every considered it false or misleading in any way.
“Just move on to someone else. I have already decided I am right so don’t waste any time on me.”
I have no idea why an accurate amended return says any of these silly things, but which one is false or misleading?
Perhaps, what you mean to say is that the quiet disclosure, somehow, says something like “my unreported income has nothing to do with foreign accounts or other foreign assets.” To infer that from an accurate amended return that says nothing of the kind is, to my mind, rather outlandish.
In any case, whatever the magical false or misleading information is, I’m particularly curious where it may be said to exist if the taxpayer simply complies going forward. Is it in the amended returns that aren’t filed? Does it live in the next return, which is fully compliant? Is it just floating in the air somewhere?
Attached is an excellent article by Scott Michel and Mark Matthews, who are both heavyweights in this area. And Mark Matthews also happens to be the former Deputy Commissioner for Services and Enforcement at Internal Revenue Service.
Both point out that, on the right facts, either the quiet disclosure or the “comply going forward” route can be appropriate.
Holy Christmas, we’re making this complicated. The OVDI FAQ says:
“Q: What is the objective of this initiative?
A: The objective remains the same as the 2009 OVDP – to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws.”
So: 1) This is an amnesty program for criminal tax evaders; 2a) if your undisclosed foreign accounts weren’t used to avoid US taxes but rather were for doing things like buying groceries and paying off the mortgage and 2b) you don’t owe any US taxes because of the redundant but comforting protections of the FEIE tax treaty and the THEN WHY WOULD YOU GO IN OVDI?
Also FWIW if I’d gone into OVDI anyway I’d be in a 5% penalty bracket, being a citizen of Canada and resident since birth who pays all his Canadian taxes correctly and in full. (FAQ 52.3)
Very interesting conversation. It seems the debate here is really why would a practitioner advise OVDI and opt-out vs quiet disclosure vs just go forward, for cases that they think are not criminal, but know that they’ll opt-out because of the huge in-lieu of penalty that the taxpayer will never agree to.
@Steven, you seem to say that a taxpayer would be better positioned in an opt out audit than being audited because of a QD or just going forward. Why is that? Jack Townsend, on his blog says that the result of the audit should be the same in all 3 cases.
In some cases, it might be worse on opt-out, because the taxpayer potentially owes more back taxes in the 8 years disclosure that he may owe in the 3 year statute of limitation. One might think the IRS will try to come up with the difference in FBAR penalties, that is if the taxpayer can even get the first 5 years of backtaxes that he paid when entering the program. There is also the risk that the FBAR penalties might be higher outside of the program, but a lot of people seem to think that the IRS will be reasonable and use discretion, because of the potential unconstitutional aspect of it. Also, for FBAR penalties, the IRS has to refer the case to DOJ for prosecution and for these cases, the practionner knows that there should be no ground for prosecution (otherwise, entering the program is a no-brainer).
@Steven, I really think that the solution you proposed earlier that will be published in Tax Notes is the right one for these cases. Why haven’t you tried it yet? What would be the risk for the taxpayer, except being audited right away?
I think all of us ordinary folk are absolutely doomed if Steven and Michael literally have to write novels to explain how to handle the sale of a house, after the fact, when someone is just trying to get tax compliant. At least I think that was what that was all about. We know the US tax code is complicated but being complicated to the point where it can blow your mind while sending you to the poor house is criminal, in my humble opinion. The debate is interesting though.
I think a desperate US citizen/person living outside the USA might have good reason to request to enter a type of witness protection program and get a whole new identity which includes a birth certificate from the nation of residence. All nations wishing to defend their sovereignty should offer this service to anyone who is facing unreasonable threats of penury by the IRS. I’m only half kidding. It could come to that one day. After all, it is in any nation’s best interest to prevent money earned within its borders by its own residents from flowing into the coffers of the US government which could actually use that money to invade that nation if it deemed that nation unworthy of its own sovereignty.
@ all.. Thanks for the participation and active discussion. I appreciated the tone and quality of the discourse. I just got back to Seattle and thought I would add some more thoughts, musings and rhetorical questions.
@Phil McNamam Amusing comment.
Yes, but wanking will only make you blind, or condemn you to eternal damnation if you care to believe some religious leaders, but the IRS does have “effective” jurisdiction over the world as evidenced just recently at the FATCA hearings where the world’s financial establishment bows down in patronizing praise of the IRS tax evasion efforts, just pleading as a beholden supplicant for minor adjustments here and there, and a little more time to be compliant, rather than tell them to go “wank off.” The IRS penalties and consequences actually do happen, as contrasted to the other wanker threats. 🙂
@steve and Michael. Thanks for the debate and the many comments back and forth. You do disagree, but with the different point/counterpoint comments, I have gained a better insight into the issue, so thanks for the continuing education. I do appreciate it.
I think we have some better clarity of definitions related to what each considers a QD, and with Petros and Renounces additions, the options for folks are better clarified. I can see why I would never make a good attorney, as the complexity of the issues make my head spin. It takes a lot of concentration for me to center on the relevant issues and it is interesting how you have navigate the backwater eddy currents of all the circulars, publications, and tax law references to understand the issues. I certainly see why reasonable attorneys can disagree.
@Michael, That Scott Michael and Mark Matthews article is a good one. I have referenced it many times, it is on my required reading list onthe OVDI Drudgery.
@Steve, I appreciate you being a contrarian, and providing the prosecutor point of view. Just to be clear, I don’t hold you personally responsible for current IRS actions or policy errors. You are not required to defend their every misguided action.
I would like to clarify some things about your QD POV. If I understand you correctly then, in your mind it is the IRS offshore jihad that trips the “sneaky” breaker, so to speak.
With what has been happening the last 3 years, in your opinion one is considered “sneaky” if you ignore the OVDI admonitions and take a normal amended return process (QD) to correct a tax filing error related to offshore accounts?
If this jihad and focus wasn’t there, then “sneaky” wouldn’t apply?
Does “sneaky” only apply to the intention of the taxpayer at the time of original compliance failure, i.e., taxpayer was willfully hiding or not reporting offshore accounts/income, but now wants to be compliant, just not go the OVDI route, so “sneaks” the QD in playing the audit lottery?
….or does it apply even for non willful compliance failure when at the recognition point you try to become compliant via another means rather than that the IRS preferred OVDI route where QD then becomes “sneaky”, in your opinion?
Or, are all attempts to correct pass tax compliance errors related to offshore accounts regardless of reason without some kind of noisy VD disclosure process which you have described, “sneaky” in your mind?
I am really trying to understand this and not be argumentative for argument sake. Let’s say if I just discovered that I had miscalculated or not reported a capital gain, and amended a return to correct this, would that only be “sneaky” if there was an IRS jihad against Capital Gain offenders occurring at the time, but not “sneaky” if there was no such focus?
Frankly, I don’t see why amending a return is ever considered “sneaky” at all, as it certainly is not illegal to do one, and it does require a statement of why you are amending, (that is soft noise) That is a disclosure that can hardly be called “sneaky”, unless you lie, or just leave off the statement, but then you would have some real “sneaky” jeopardy.
Is there a very narrow criteria allowed in some publication that I have never read of what returns you are allowed to amend without walking to the front door of the Criminal Division of the IRS and shouting “Here I am, please punish me, as I know my taxes and interest that I just paid on my amended returns certainly are not enough for you. Give me my additional punishment too?”
The IRS and by extension, the tax legal system sure believes we all should demonstrate masochistic behavior, if that is the case. There is punishment (or threat of punishment) for both voluntary disclosure and non voluntary disclosure. It must be something in our Judeo-Christian culture that demands vengeance upon those that are making amends for past failures. Justice is not complete by just voluntarily paying up tax arrears until punishment is administered. Doesn’t matter if the confessions is quiet or noisy. The IRS wants punishment, or the opportunity to apply punishment as it sees fit. Maybe that is what pisses off the IRS about QDs and why you may consider them “sneaky”. While it still gets the tax revenue, which if you were a business you would be happy to have, but the lack of visibility of its return processing is so poor, that it can not see that it has collected past due tax money easily. So, it wants you to shout it out from the roof tops via a VD, so it has the opportunity to apply its punishment regime should it want to, and usually it does, or why else have an IRM with such detailed instructions on how to do it!
I guess that is why the Catholic church always required that you had to do penance after confession, as while the lord did forgive, he always wanted a pound of flesh too just to teach you a lesson. So, the OVDI “in lieu of” penalty is the IRS equivalent of saying 12.5 Hail Marys and reciting the Rosary 27.5 times? (not so bad now as compared to medieval penance requirements) You are forgiven, and you won’t now be condemned to hell, but forgiveness without punishment and demonstrated penance, (a few Hail Mary’s or 27.5% of your assets) just isn’t satisfying enough for God or the IRS I guess. Given the punishment levels, I would say that God has progressed, and the IRS has regressed during our evolution to modernity!
I think I like the Canadian process better where they are happy to have you come clean with no penalty at all. Just disclose, pay up taxes and interest, and go and sin no more. No need for the CRA to assess draconian medieval penance too. How civilized is that? No wonder the Canadians commenting here respect the CRA, and no wonder so many of us hate the IRS way of conducting business.
Finally, coming back to your assertions that the IRS doesn’t do anything just for penalty collection purposes.
Your quote…
You know, I really want to believe that. In fact for a long time I have been a defender of the IRS OVDP actions as just benignly misguided, and not intentionally malevolent. I do think it started that way, but it is not the way it is ending up.
My views have changed when the circumstantial evidence began to pile up, and now we have multiple smoking guns and lots of evidence that this is more than about simple compliance.
I have seen Shulman time after time refuse to do the right thing, from stone walling Nina Olson’s TAD to bragging in the multiple press releases about all the money they are bringing in at the same time failing to provide any meaningful statistics about their program or answer any legitimate questions about what portions of their revenue is tax collection and what portions is OVDI penalties or what portions are homeland participants and what portion have addresses overseas. They have turned down ACA FOIA requests.
I have seen Shulman ignore my letters without any meaningful response to what are reasonable pleas for re-consideration of what they are doing.
The need to appeal to the TAS to get any relief in my situation, and the recognition that my examiner just wanted me to pay up my penalties like her 25 other minnows did, spoke volumes to me what this program was all about. It was the penalty collection.
She wasn’t going to do the right thing unless pushed hard from someone with greater authority outside her reporting structure. She was there to collect the maximum allowed, and if it wasn’t about the penalties as you assert, then why was FAQ 35 discretion removed mid stream from the OVDP and never returned? That was the first smoking gun that this was about the money, not measured justice and compliance.
How do you explain their continued refusal to anything to make it easier for Minnows to become compliant by refusing to create a front end filtering process and insisting on a super inefficient back end Opt Out process. They have not moderated their FAQ threats that most certainly assure that they are extracting extra penalties by scaring minnows into staying inside the OVDI instead of Opting Out which is effectively taking additional penalties which in a normal examination process would never be collected.
And finally, to the question no one from the IRS has been able to answer or adequately explain yet, (and frankly you are not responsible to answer for the IRS either, so I get that point.) Why are insisting that accidental Americans who did not know they are citizens have to join the OVDI program, so they can grant to them a entitlement of only having to pay a 5% tribute? WHY? How do you explain that, if this isn’t about penalty generation? That is another smoking gun of penalty collection intent.
…Or, is this just an example of …,
as you say, that in action is just making a benign procedure or policy mistake and not recognizing it? Maybe. It is possible, I suppose. I recognize that stupid things do happen that are not necessarily willful activities, although the IRS is not so good at understanding that either, now are they?
…Or, do all of these spent cartridges scattered about at the OVDI crime scene represent something else, a collective smoking gun of zealot behavior within a close knit upper management circle that is responsible for creating the OVDI and wants to generate revenues to curry favor with the Administration that they can trumpet about in self congratulatory press releases? Ego and Hubris are not constrained by reason and common sense, and something is seriously wrong here that is becoming more and more difficult to defend.
I think it is the latter behavior that is destroying the reputation of the many good people that work within the beast, and probably want to exercise discretion and do the right thing when given the opportunity. You speak eloquently for them. I am sure many of them are…
I too have met a lot of them, but there is something rotten in the leadership that allows this OVDI to continue as constructed in spite of the Tax Advocate admonitions and reports to Congress and the many good ideas that have been suggested as to alternate approaches for offshore compliance initiatives.
If they can’t do right by accidental Americans who by their own words were
without requiring them to join an OVDI, and then imply they are “sneaky” if they want to file a QD, then I have to say…”something is very rotten in Denmark”.
As a side note… I wonder what Geithner did with his failures? Were they a QD that was just discovered when he was nominated as Treasury Secretary, but that was ok as there was no jihad going on regarding his particular class of tax failure? Or did he do a noisy QD, or even a VD and was then let out of all penalties due to Examiner discretion?
@Phil McNamam. No jurisdiction? Depends on what country. To the best of my knowledge, under the Canada-US tax treaty Canada will collect outstanding taxes for the US from US persons who are not Canadian citizens.
@justme. Wow, and thanks. I don’t hold much hope for the US, as I agree with you that it’s a leadership issue. Leaders can’t seem to get it together to do anything for the common good. Democracy must be really annoying for the people who really run things down there.
Your judo-christian typo (or was it?) gave me a chuckle though.
Well, better become a Canadian citizen. Why haven’t you?
Well, we still don’t seem to have a firm answer to @Halifax’s question. Now we know why lawyers are so expensive.ubbl
@bubblebustin and Phil: Correct CRA will collect taxes for IRS on a Canadian resident who is not a Canadian citizen. They will NOT, however, collect any penalties owing for failure to file FBARs for either Canadian citizens or residents.
I believe both bubblebustin’ and @Halifax are Canadian citizens.
@Michael, Steven: I don’t know Halifax’s situation, but if a Canadian citizen put the proceeds from the sale of a jointly owned home in an account of a Canadian spouse who has absolutely no connection to US, why would there been any need to report this in an FBAR in either a quiet of a noisy disclosure to IRS? Even under FATCA, there would be no requirement for the Canadian only spouse to be reported to IRS.
@Halifax (referring to himself in the third person, like Miss Manners) is Canadian – now only Canadian.
The money concerned can be not just a spouse’s, but also the bank’s. Suppose a couple buys a house in Canada for $400,000. Spouse 1 (Can/Am dual) puts in $100,000, Spouse 2 (Can only) puts in $100,000, they borrow $200,000, which flows through their joint account, which both of them have signing authority on. If Spouse 1 then enters OVDI at some point in the next eight years, the fine is a percentage of $400,000.
Yes on the Canadian citizenship. I <3 Canada. My husband just had knee replacement surgery, the most expensive part of the whole procedure was the parking at UBC hospital. Yes, we pay high taxes for this and many reasons, but at least for us we have seen the direct benefit of it and all Canadians enjoy a longer life expectancy because of universal health care. Come the end of 2012 Americans may just end up with huge tax increases and fewer benefits than they have now if Congress can't come together on a budget going forward. The fact that 900,000 soldiers are waiting 6 months or more to be considered for disability is an absolute disgrace and a sign that they're in a mess. And millions are being spent on presidential campaigns!
@bubblebustin;re Canadian universal health care – that is why I don’t mind paying my taxes in full, in Canada – (rather than the potential of paying on top of that, to a distant government (US) who provides nothing in return). We pay taxes in full, in the non-UScountries where we live and work, we get good services – in the countries where we live and work. We don’t have to be afraid of being wiped out by the astronomical un-insured charges to treat an unavoidable ailment. We don’t have to spend hours, (or pay someone) to sort out invoices and disputes between the individual providers and the private insurers – a common occurrence.
To get our healthcare, we don’t have to deal with the IRS – as the designated enforcer for the health care program in the US – a ‘sick’ joke if ever there was one – http://www.accountingweb.com/topic/fitness/irs-gears-health-care-law-appeals
and
see: ‘IRS Already Gearing Up for Health-Care Crackdown’
By Elizabeth MacDonald
Published March 29, 2012
“HOW THE HEALTH-REFORM PENALTY WORKS
………..If the IRS finds you have fallen short of the law, it would hit you with a penalty tied to your household income (which may be that of an individual or several family members). But this is more than just your paycheck earnings. Under the new health law, the IRS penalty would be based on “modified adjusted gross income,” not adjusted gross income that you normally report at the bottom of the first page of your tax form 1040, before you take deductions or personal exemptions.
The modifications add back in things like non-taxable interest and excluded foreign income to this number.
Next, to assess the fine, the IRS would take the total household income divided by the number of household members who must have insurance under the law. This raises questions of responsibility for your other household members to abide by the new health reform law.
All of this could mean a heavier enforcement hand at the IRS.
The IRS will need more training in privacy requirements, in order to avoid a drop in tax compliance, the TAO said, as taxpayers may feel they need to protect their confidential household income information for everyone who lives under the same roof.”………….
from http://www.foxbusiness.com/investing/2012/03/29/irs-already-gearing-up-for-health-care-crackdown/#ixzz1wBGhcWJq
@bubblebustin
‘And millions are being spent on presidential campaigns!’. Yes, the biggest disgrace. And what is most disheartening is that at the end of the day, whether they elect the same President or a new President, this mess they have created will still be here.
They have yet to realize that ‘other empires’ ie Roman, were here alot longer but they eventually fell. The US that we were born into is long gone. I don’t hold out alot of hope that it will return.
@Halifax: Great news. Good summary of Yours (Spouse 1), Mine (Spouse 2) and Ours (Bank) and how OVDI could penalize the flow-through money. I wouldn’t even be surprised if IRS tried to call that money laundering through offshore property holdings.
@Michael and Steven: I’m going to present another scenario involving sale of a home and other assets.
Maple and Leaf Canada are both Canadian citizens. Maple was born in Canada. Leaf was born in US to Canadian parents attending university there. His family returned when Leaf was six months old. He has never had a SSN or passport. His Canadian passport shows his US place of birth.
Both have studied, worked, earned an income, saved, invested and paid taxes only in Canada. The honest, frugal, responsible couple had Registered (RESP) Education Savings Plans for their children, which were used to finance the children’s college and university educations. They have begun a new RESP for their first grandchild and plan to do so for any more grandchildren.
Maple and Leaf also both have Registered Retirement Savings Plans (RRSPs, Tax-Free Savings Accounts (TFSAs) and a Registered Disability Savings Plan (RDSP) for their adult disabled son. Leaf is the RDSP trustee. All of these savings vehicles are encouraged through tax incentives by the government of Canada for its citizens and residents.
Maple and Leaf purchased their home for $65,000 in the 1970s. In Toronto’s hot housing market, they recently sold the home for $980,000 ($104,000 over asking price!)
Maple and Leaf purchased a condo for $520,000 leaving $460,000 for investment. Because they learned of the IRS issue last year just before the sale, they put the $980,000 in an account in Maple’s name only, paid the $520,00 for the condo from that account and left the remainder in an account in Maple’s name only.
Leaf and Maple have no plan to report anything to IRS. They have also changed their usual vacations of two weeks golfing in South Carolina each spring to two weeks in Bermuda and two weeks in Arizona each winter to two weeks in Costa Rica.
When they retire in two years, Maple and Leaf will use some of the money from sale of their home (now in Maple’s account) to buy a winter home in Costa Rica, (instead of in Arizona, where they had previously planned on spending winters after retirement).
Why does Leaf have any need to do either Quiet Disclosure, Noisy Disclosure or OVDI? Maple and Leaf certainly won’t go to US again, CRA won’t out them to IRS (In fact, CRA neither knows nor cares about Leaf’s place of birth), their Canadian bank doesn’t know about Leaf’s US birthplace and there’s no expectation of IRS that the bank has an obligation to report on the home equity in Maple’s account.
@All: in random order,misc. responses to the responses to my screed about quiet disclosures.
@Blaze: Maple and Leaf’s Facts: of course they have nothing to fear from the IRS. I know many people all over the world with very, similar facts. They are yet another example of the consequences of not thinking through all the consequences of the Bank Secrecy Act (which gave us FBARs),and FATCA.
Hopefully, and not too long from now, the government will get it right so that they can return here for vacations and continue to enjoy all the great things we have to offer the whole world.
@Phil MAcNamam: points well-taken but this IS a problem for people with money, annuities, or recurring periodic payments from US sources. Remember in dealing with the IRS, there are essentially two separate functions, determining the tax and collecting the tax. The former can be delayed for many years. The latter can be swift and merciless.
@Cristophe: the result in all three cases SHOULD BE the same. The difference is how you get there and how long it takes to get there.
@JustMe: this isn’t so much about bowing down or masochism as it is about money plain and simple. TheFATCA hearing, except for Joe Green and the Democrats Abroad, was all about bankers and international money managers who above all, were there to protect their market shares and please their stockholders and the principals they represent. I don’t write the things I write out of any overriding duty to protect my old bosses at the IRS but rather after 30 years of working there, I have a pretty good idea of what the IRS will do under certain scenarios and how they will react to what THEY PERCEIVE to be the various challenges they are presented with in carrying out their Congressional mandate to enforce the Internal Revenue Code.
I raise the ethical issue because it is there to think about, notwithstanding the protestations of some practitioners who take a “what me worry?” approach now matter what I say, and no matter how many times and different ways, the IRS says to don’t do it this way.
You’re trying to get the IRS, of all the scary agencies of the United States government, to go your way on something. Why on earth would you start off with a chip on your shoulder when It is YOU coming to THEM, because you want them to fix something for you?
If I take a position with the IRS it’s going to be one I can support under the law because it is correct. If my position is the correct one then I want to talk someone as soon as possible and tell them why I am right and I want an appointment with the IRS which I will patiently wait for after coming through the front door.
The whole quiet vs noisy thing is really about what is the best way to represent your client and accomplish your objective of getting the fear of the IRS out of your client’s lives and make them go away. In the ten years I have been doing this stuff after leaving the IRS, I am happy to report that no matter how far off course the IRS seems to be when I start out, there is always a boss or a boss’s boss to talk to who has the smarts and power to fix something that should be fixed or at least give me a credible explanation as to why something is just not going to happen.
@30 Year Vet: “Hopefully, and not too long from now, the government will get it right …”
I admire your optimism, but speaking as a non-US citizen I think you’re wearing rose tinted glasses here. Sorry.
The US govt not only has it so very wrong, but has exacerbated the wrongness in leaps and bounds over the past decade or so. I do not see any chance whatsoever of a reversal of policy. And that’s what it would take. A complete reversal. Not a messy “compromise” or some sort of minor “relief” for a limited range of circumstances.
The game the US has been playing here is not Monopoly, but Jenga. With FATCA it has finally added the piece that causes the entire tower to collapse. And there’s no fixing that now. Too late.
Renunciations are snowballing. Well educated immigrants avoid the US in favour of more welcoming nations. New businesses start up in other countries to compete directly with the US. And congress responds with outrages like HEART, FATCA, and now (God help us) Ex-PATRIOT. These aren’t the actions of a govt proposing to “get it right”.
@Steve,
So we do agree, it is “All about the Money” which includes penalties. 🙂 The OVDI is not about compliance as much as it is about collecting penalties, as that can be the only explanation for expecting an accidental American who did not know they were a citizen to pay 5% penalty.
@Steven: Thank you for your reply. I’m with Watcher. We have been given no reason to believe anything will change. Instead, we are faced with increased threats and intimidation coming out of Washington. I cringe to think what “get it right” would mean to these bullies.
It’s like when one spouse has affairs over and over. Finally, in danger of losing the marriage, the cheater says “It won’t happen again.” It’s too late. The damage is too deep. The other spouse has moved on. Still, the real cheater continues to stalk and harass.
That’s what Maple and Leaf have done. They’ve moved on. Maple and Leaf are loosely based on a real couple. What I didn’t mention is that Maple and Leaf’s good friends, Canadian citizens Bob and Carol (he was born in the Netherlands, she was born in Canada) have traveled each year to South Carolina with Maple and Leaf. This year and in future years, Bob and Carol are instead going to Bermuda with their long-time friends and travel companions.
Maple and Leaf’s annual trips to Arizona have been to visit her brother Ted (born in Canada) and his wife Alice (born in Ethiopia, but a long-time Canadian citizen) at the property they have rented five months each of the past six winters. This year, Ted and Alice went to Costa Rica to spend two weeks with Maple and Leaf.
Ted and Alice have been increasingly concerned about Arizona’s immigration and gun laws. Last year, they learned about IRS convoluted “substantial presence” requirements for Canadian snowbirds. They have also faced intimidating questions at the Arizona bank where they had a small chequing account.
So, Ted and Alice advised their Arizona landlord they won’t be returning next year or in future years. They will rent and spend money in Costa Rica instead. Of course, Ted and Alice’s Canadian adult children and their Canadian friends are delighted to have a new, more interesting place to visit each year.
I’m the same. After my mother’s death, I will never again visit the US. This past year, I did not visit Ted and Alice (real people, fake names) in Arizona as I often do. I look forward to a trip to Costa Rica.
Plus, I met with my bank on Friday. I ensured I have no remaining investments in US (“Get your ass and your assets out of US”–Petros). I also ensured my financial adviser is aware I never want US investments in my portfolio again. This is particularly important as in the next couple of years (like Maple and Leaf), I plan to sell my fully-paid for house, buy a condo and invest the difference (unfortunately, not nearly as much as Maple and Leaf!).
While I was at the bank, I placed a copy of my 1973 citizenship certificate in my safety deposit box. Attached was a copy of the oath I signed at the time, which included: “I hereby renounce all allegiance and fidelity to any foreign sovereign or state of whom or of which I may at this time be a subject or citizen.”
DOS and IRS can think what they like. I consider my pre-1986 citizenship certificate my divorce decree. My renunciation oath is my restraining order. Stay away from me. Likewise, I am happy to stay away from US.
Steven and Michael, it’s great that you’re willing to share your knowledge and expertise, (even though your disagreements may confuse us even more!) Steven, it’s especially great that you’re assisting ACA with your input.
In the past Steven, you have told us Washington is run by intelligent, highly-educated, moral, caring people. If that is the case, how did we get here?!? And why is it getting worse?!?
@Steven
I appreciate your contributions to Isaac Brock Society. However, like Blaze, I can not help but wonder how the US got to where it is today. And I don’t hold much hope that the “Maple & Leafs” will ever want to return.
Totally unrelated to this thread, there is another reason why people hesitate to come to the US for vacation. Petros mentioned it in another post: heathcare costs in case something happens while they’re here. It is getting difficult to find travel insurance that would agree to pay for whatever it will cost in case of an accident in the US.
Too bad, because there are beautiful places in this country.
In particular, US National Parks are wonderful.
@Christophe: Excellent point. That is especially a consideration for older people who are more likely to be concerned about health issues. Two years ago, Alice (from my example) had a fractured wrist while in Arizona and her private health plan balked at paying the high U.S. costs. They offered to fly her by air ambulance back to Canada. It was more economical than paying the American rates for health care.
Our out of country medical covered the cost of removing a fish hook from my son’s leg while visiting the US. We were appalled to hear that the hospital charged $400, which our insurer covered, but then we got a call several months later from a collection agent that we still owed another $400. We thought we were getting scammed as we already paid the bill, but as it turned out, it was a bill from the attending doctor (separate from the hospital’s) that was erroneously sent to Vancouver, (we’re assuming Washington) because the clerk didn’t write “Canada” on the record! In the end the insurer was billed $800 for a fish hook in the leg (I would hope that the negotiated that down) What a scam.
As an aside, I’m not sure I agree with the title of the thread. I think very few practitioners consider QDs controversial (putting aside the critical question of when a QD does or does not seem to be in the client’s interests).
Although Steven clearly has issues with QDs, it’s my impression that, statistically speaking, his view as a bit of an outlier. I don’t believe I’ve ever heard anyone else (including the other tax tax advisors that participated in the discussion we all had in another forum) take the same position.