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.
Mr Miller, you say about OVDI:
“Paying fees to opt out and be audited (with the potential of paying fees for litigation that are themselves life-changing), ”
Based on your own personal experience, is the IRS actually doing this (harassing opt-outs, threatening litigation etc. etc.) ? Or is that a worst case/possible scenario ? if there isn’t much money they can get from tax audits (maybe a hundred dollars here or there in a missing expense receipt or something), especially from closed years, would they really do that ? I would assume that collecting an FBAR penalty is not easy for them and they run the risk of a judge tossing out penalties.
@Michael J. Miller Point taken. I will leave it that some disagree, but I certainly do not know the number or percent. It has made for a good discussion, and appreciate your contribution.
@watcher, “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.”
This is a great analogy. Bad laws beget bad laws to the point where respect for the law is diminished, or in the case of citizenship based taxation the citizen seeks to remove himself from the equation. It’s not anti-American, it pro-freedom to do so.
@Just me, a real amnesty would be to allow the IRS the discretion to reduce the penalty to “zero”. When a nation makes little in the way of effort in making its citizens aware of their obligations, make sudden changes the way they enforce their laws, and punishes those who wish to comply with the laws, I agree it’s not about encouraging compliance. Canada’s amnesty program is less of a “stick” approach, but then the CRA doesn’t have the debacle of citizenship based taxation to try to enforce. What average citizen would continue to waste those kinds of resources year after year with little if nothing in return other than more and more threats? The only thing that will keep me in the game is hope that big change will come. I keep waiting for some.
It seems to me that a lot of this debate is purely academic, because it doesn’t seem that anyone here is planning a genuinely “quiet” QD. Most who have not gone the OVDI route are sending reasonable cause letters along with their new or amended returns and FBARs.
I’d like to see more debate about the pros and cons of noisy disclousre vs the other methods. Even Mr Mopsick advocates ND – if the letter is prepared by a lawyer. For one thing, I am wondering if having a lawyer write your letter is signalling to the IRS that you have something to be afraid of. After all, if you’ve done nothing criminal, why would you even think of hiring a lawyer?
@Mr. Michael Miller: ” There you go again.” As an attorney, I thought we were supposed to choose our words carefully. Let me see if I have this right. My views on quiet disclosures make me an “outlier” because two other lawyers who contributed to a discussion on Linked In a few weeks ago agreed with you. That becomes a “statistical” sampling which proves me an “outlier.” I gave you about a dozen reasons two days ago why you were off base and the most you could comeback with was! you couldn’t understand how giving the IRS just half the story could ever be construed by anyone as misleading ” in any way.” Then after over a hundred comments In just three days you announce that you don’t like the topic any more. Huh? I rest my case. I think we’re done here.
Respectfully submitted,
30 Year IRS Vet
@ bubblebustin I wrote about what a true amnesty is. The IRS already has discretion to have zero penalties: (1) they may choose not to investigate a disclosure; (2) they may choose to penalize zero even after an audit (this is based on the IRM). This is not the amnesty we are seeking, because obviously they already have a great deal of discretion and they are choosing instead to extort money from people.
@Howard,Steven,Petros I was told to file back 5 years, and DO NOT SEND A COVER LETTER. This is from a Lawyer/Account. Now my son is now filing (Accidental American) and has been told the same. This makes me very nervous not sending a Letter to explain, but what to do?? I have to have trust in him (Lawyer/Account..but I am very afraid of the outcome. Of course his assistant says they have had no problems going at this way, she said we have been doing it this way for a year now and no problems. I thought it is probably still too early. I am sure it will take longer than a year for the Hammer to come down on all of us..they are so backed up..What are your thoughts.. My son is still in the process and has not mailed his returns yet. LETTER OR NOT?? This is the Million Dollar Question??????
@Steven, have you tried the “noisy disclosure through the front door” that you’re suggesting is not sneaky? Why waste resources and money on both the customer and the IRS side when everyone knows the case is not criminal and it’s going to end up in an opt-out. Have you not done it because the IRS did not say it was a acceptable way to fix past mistakes? What is the risk for the taxpayer?
“@Christophe
May 27, 2012 at 11:54 pm
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.”
@Christophe
I think that is part of the issue, but not the real debate here. The real debate is what kind of obligation does the lawyer have to the client to objectively explain and analyze all compliance options.
Here is the problem as I see it:
Some lawyers are interpreting circular 230 (part of he rules for practicing before the IRS) to mean that they should stream people into OVDI. I believe that this conflicts with a lawyer’s duty to the client. A lawyer’s duty to a client is a “fiduciary” duty. This means that the lawyer must have total loyalty to the client (obviously within the law). A lawyer’s loyalty to the client clearly is the primary consideration and should override most any other consideration. (Obviously the lawyer cannot condone or facilitate illegal behavior.) A lawyer is a professional who provides counseling in the law.
Bear in mind the following:
– the client is not required by law to enter OVDI
– the client is not required by law to amend tax returns
– there is no law that says that a client cannot make a quiet disclosure
– a client who now has knowledge of his tax and FBAR requirements must (at the very least) comply on a “going forward” basis
My thoughts on this:
In my opinion, a lawyer who feels that his Circular 230 obligations to the IRS should override his fiduciary obligation to his client, should NOT encourage the client to enter OVDI. The lawyer should simply say that under the circumstances he (lawyer) cannot meet his required fiduciary obligation to the client and NOT act for the client at all. But the reason communicated to the client is NOT that the client must enter OVDI. The reason is that the lawyer cannot meet his ethical obligations to the client which include exploring all legal options.
Would be interested in people’s thoughts on this aspect of this discussion.
I would also be interested in our resident lawyers answering the following question:
What is your ethical obligation to the client who consults you to help with tax compliance issues? If you believe that Circular 230 is the dominant consideration, please explain why it should override the fiduciary obligation to the client.
@saddened
I suspect that the answer to your question depends on what the past tax returns and FBARs would reveal.
It is clear that his is NOT a “one size fits all” approach.
What do you see as the harm in including a letter?
@renounceus, I don’t see any harm, I was just told that it brings more attention to it, but too me never filing (this is for Accidental American Son) and all of a sudden all these returns start coming in, I would think you would have to have a reason for not previous filing.. But the Lawyer says NO Letter. It just makes me nervous when I see everyone talking about a cover letter and my Lawyer is saying not to send one.. I am just really concerned.
@renounceuscitizenship. Great Comment. Thanks. I think you’re right on point.
@saddened123
As your son is an accidental american and he has never filed, I do not understand why he is filing now. I assume he does not have an american place of birth. If such is the case, would he not be better to just not file tax returns? Or is his choice to remain a dual citizen?
@Christophe, great points, I agree completely, as you might well have suspected from my prior posts. In my view, if a tax advisor honestly believes (for whatever reason) that Circular 230 precludes him from providing his client with complete guidance as to all legal options, based on the interests of the client (as opposed to the lawyer), then the correct answer is that the attorney simply ought not practice in the area. Advising a client in a way that either conceals a permissible course of action, or discourages that course of action for reasons having nothing to do with the interests of the client, ought never be an option.
@saddened
Well, they either audit or they don’t. If they audit, then the same issues will be raised with or without the letter.
I have a suggestion for you – interesting what others think of this.
You are very worried and nervous (as are all of us). Why don’t you sit down and write a reasonable cause letter yourself. Include in the letter your worry about whether or not to send the letter with all of the filings and the reason that you are not – specifically that the lawyer is saying “No letter”. Get the letter notarized and make a copy of it. Then take the original and send it “registered mail” to yourself (remember that you have a copy of what it says). The fact of being registered and notarized will prove when you wrote and what your state of mind was at two points:
1. At the time that you were originally supposed to file the returns and FBARs – i.e. (I am assuming) you didn’t know about the requirements;
2. At the time of filing the past returns you did NOT send a reasonable cause/letter of explanation because the lawyer told you not to.
This would (I think) help you demonstrate down the road (if this becomes necessary) that your failure to send a reasonable cause/letter of explanation was based on advice from your lawyer.
Now!!!!!!! This is not legal advice. It is a suggestion to help you deal with the emotional strain that all of this is putting on you.
For reasons that may or not be valid, I have the impression that you don’t have much if any tax owing anyway, making this (I would think) less of an issue.
But, listen – get this dealt with now! All of us have far too much of lives invested in this!
Also, I am going to echo something that I heard the Treasury Department is advising:
You might want to consider renouncing your U.S. citizenship.
Renounce! Be Free of this crap!
Hope this helps.
@Michael
Right on!
@amr, I think that, collectively, there is still relatively little experience with opt-outs, so it’s largely a lot of guesswork. If I recall correctly, I was referring to the possibility suggested by Steven Mopsick that he would litigate a particular issue if, after putting a client into the program and then opting out, the IRS were to act unreasonably.
I did have one client in the 2009 program for whom I opted out. (She was placed in the program before I got there. Putting her in was silly.) After receiving a few harrising calls from the IRS agent [the same agent — whether or not he actually processed my opt-out letter, I don’t know], he ultimately agreed to reduce the FBAR/miscellaneous penalty from $140,000 or so to $40,000. What this says about how reasonable the IRS is or is not, I don’t know.
In any case … yes it is extremely difficult for the IRS to collect FBAR penalties. The IRS can technically “assess” the penalty, but the collection mechanisms that apply for purposes of tax liabilities and related penalites do not apply. With very limited exceptions, this requires the Department of Justice to bring a lawsuit in District Court. In the case of a “minnow” where the IRS is insisting on penalties that seem patently ridiculous (putting aside the key factual question of what is or is not ridiculous in a given case), I don’t see the Justice Department wasting its time.
@tiger, He probably should have not filed but on the advise of the Lawyer and me (out of fear) he is now having his returns done.He is planning on renouncing, but he probably should have done that first and then filed. We have been so confused and upset about this whole ordeal. I felt and my son as well that in order to have any peace down the road we must renounce and not have to wonder if in 5-10 years it be even worse. We don’t want to be worried day after day. Just get rid of US Citizenship all together. I am sick of it, I can’t sleep or even think half the time..
@Michael: In the case of Canadian citizens and residents, taking a person to court would be absolutely futile. US Courts have no jurisdiction in Canada. CRA has said it will not collect FBAR penalties for either residents or citizens. They will also not collect any tax liability for IRS for on a Canadian citizen even if the citizen is also a US citizen.
I know some people are still afraid IRS will prosecute them criminally or level civil fines against them for failure to file FBARs or pay FBAR penalties (which right now are phantom penalties because no penalties have yet been determined).
If CRA won’t collect, I’m virtually certain Canada would not extradite a bona fide Canadian citizen or resident to stand trial on such a ludicrous matter in a foreign country–especially if the person is a minnow.
I don’t know what the practices and policies of other countries are, so I can only speak to the situation in Canada.
@renounce, Sounds like a good idea!! You better believe we are going to renounce, I can’t take this anymore.I am still waiting for Canadian Citizenship. I am not renouncing for tax purposes but to have my life back and not have to worry day and night.It would be nice to sleep more than a few hours at night, and not be so nervous that my stomach stays in knots all day. I can’t take this stress much longer.RENOUNCE AND BE FREE!!!
@Saddened: Once you become a Canadian citizen, you can actually relinquish rather than renounce if you take the oath to Canada and the Queen with the voluntary intention of expatriating. It sounds to me like that would be your intent. You then would not have to pay the $450 fee and should be able to do it in one meeting.
Once you have your Canadian citizenship (why is CIC taking so long?!?), I would suggest you immediately contact US Consulate for an appointment. This would show that it was fully your intent to relinquish. If you don’t get a quick appointment, I would suggest you send a registered letter and an e-mail to Consulate advising them that you had relinquished on becoming a Canadian citizen. This would then give you some documentation of your intent. I don’t know if IRS would be forced to accept that as proof that your reported your relinquishment to DOS, but it’s worth a try.
Your son, however, will not be able to relinquish because he is Canadian citizen by having been born in Canada. He has never taken an Oath to Canada, so renunciation is the only option for him–other than just ignoring the issue altogether, (which is personally what I would do in his situation).
Great advice from Recalcitrant to send a registered letter to yourself. I hope doing this might help to quell some of your anxiety over this.
@Saddened –
I agree with all the people who think your son should ignore the issue. However, if he wants to pursue a relinquishment, there’s a possibility that he could use his first passport application as an adult as an expatriating act.
@Saddened –
Me again –
FWIW your son will have to assert a claim to US citizenship, get a passport and SSN and all the rest of it*, in order to renounce it – it does seem like an exercise in awakening a paperwork monster that will devour an enormous amount of time and money before it’s eventually slain.
* In principle, if he’s of the appropriate age, this may include draft registration
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