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.
Petros
Some of the ‘whales’ have millions of dollars, indeed one (a Russian American billionaire) has billions. He didn’t really fight in court either, although he did recently sue UBS (and the case was dismissed). In any case, I was responding to a question asking why practitioners aren’t urging their clients to challenge the government and refuse to plea bargain. In most cases, I would guess the evidence against them is overwhelming, and they (or their lawyers) don’t think the constitutional arguments would stand up, even if they spent millions. Lawyers would probably benefit from long legal battles with the government, after all.
@ plodder Thanks. Well this is a case of appearance rather than substance. A violation of a whales’ rights doesn’t appear egregious because the whale had mens rea. But we expats have no mens rea, and therefore, perhaps IRS and Justice would have carefully to avoid prosecuting us lest they have this big stick that they use to bash the whales taken away from them because the unconstitutionality becomes clear when applied to a minnow.
@Petros, was also thinking this
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@plodder
I believe you might be new to posting on Isaac Brock. Welcome, always interesting reading to see the opinions of our new posters. Thanks.
Just definitions for the non lawyers amongst us… (save you the google search)
mens rea
As an element of criminal responsibility, a guilty mind; a guilty or wrongful purpose; a criminal intent. Guilty knowledge and wilfulness. A fundamental principle of Criminal Law is that a crime consists of both a mental and a physical element.
@ Just Me: Thanks for the explanation. I mention the question of mens rea in another post: http://isaacbrocksociety.com/2012/03/18/ignorance-is-an-excuse-in-the-case-of-fbar/
The fight I would like to make would be to argue the legitimacy of the IRS assessing me a capital gain and associated penalties on the sale of my principal residence in Canada, something tax exempt for 1st class Canadians, not for the 2nd class dual citizen. But then it would have to be pro bono, as I am not going to use any more of our precious retirement savings on this matter. My MP, John Weston, suggested that Article 25 of the treaty may eliminate this tax, but our US tax lawyer disagrees (wow, two lawyers who disagree with each other!) I can’t help but feel the treaty let us down, but then how many US persons-who care to inform the IRS about it- have profited by more than $250,000 on the sale of their principal residence in Canada except recently, and after the laws changed in 1997?
@Plodder
Your remarks are well taken and all too true.
The lawyer owes his first duty to the client rather than the “cause” and, as is almost always the case, the client with his ass in a crack is clearly focussed on extracting both cheeks with the least pain possible.
And, as any lawyer ought to know, Constitutional challenges are rarely successful. All laws and statutes are written in the shadow of the Constitution and are constantly being scrutinized. The Bank Secrecy Act that originally authorized FBARs has already survived a (rather weak) constitutional challenge as a complete body of legislation which, although it does not rule out a subsequent challenge of a particular element, makes that challenge that much more difficult.
That said, sooner or later someone – either the DoJ or an unhappy taxpayer – is going to make a misjudgment and the right case for testing FBAR’s legitimacy with motions for pretrial discovery flying back and forth will be the result. When it happens, I want to be there.
I believe that full discovery – civil or criminal -is what Treasury is most concerned about avoiding.
I think Treasury knows that FBAR’s very right to exist depends upon what was probably a “pro forma” finding of law enforcement utility made by the Sec. of the Treasury in 1972. Upon what evidence or logic that finding was originally made remains a mystery that FOIA and/or discovery and/or a trip to the dustier shelves of a first class law library might reveal.
But, even if the government could defeat a substantive due process challenge to the very legitimacy of the existence of the FBAR, the effort in doing so would, in my view, expose a 40+ year history of near complete uselessness of FBAR data framed by a nearly unblemished record of law enforcement or regulatory indifference in enforcing FBAR filing obligations during that same period.
The coincidence of sudden law enforcement interest in FBAR following the grotesquely inflated penalties introduced by the JOBS Act in 2004 and the subsequent suggestion by TIGTA in early 2005 that FBAR offered what it euphemistically described as “compliance opportunities” whose value could be measured in heavy coin will be too obvious; especially when viewed in the light of the Service’s failed 2003 OVDI and its subsequent behavior in the 2009 and subsequent VD initiatives.
That exposure would make it embarassingly clear that any civil penalty for an FBAR failure to file that exceeded a parking ticket would be disproportionate to the offense under an 8th Amendment analysis. That, in turn, would pull the plug on the Service’s use of FBAR to provide “leverage” where the threat of criminal sanctions would not inhibit a QD.
In short, it would put an end to the continuing fraud that the OVDI programs have come to represent and, hopefully, will encourage the powers that be at the Service to put an end to this OVDI nonsense and get back to the good ol’ QD that the Service – and its Knechte – are trying so hard to discourage.
One last observation – and I am not being entirely facetious here: money garnered in the course of an OVDI gets added as a “notch” on the handle of the Director’s shootin’ iron.
In contrast, money flowing in from QDs doesn’t get any publicity and because it cannot be easily ascribed to a particular Director’s “initiative”, the Director can’t use it to pad the statistical evidence of his “triumph”.
Silly as it may sound, the IRS’s attempt to discourage QDs may be due, at least in part, to the bureaucratic imperative to “keep score”.
@Todu, I share your cynicism. I also believe that the IRS will shift from the FBAR to the ‘son of FuBAR’ 8938 as its main means of extracting civil penalties for lack of compliance. As it’s directly under title 26, it will be far easier for the IRS to fine people.
@todundsteuer ‘…IRS’s attempt to discourage QDs may be due, at least in part, to the bureaucratic imperative to “keep score”.’ …to the detriment of citizen and taxpayer.
“When governments fear the people, there is liberty. When the people fear the government, there is tyranny.”
-Thomas Jefferson.
@Mona
I agree.
But the service still has the problem of lack of 3rd party reporting of foreign accounts or assets. FuBAR, and son-of-FuBARs and the entire panoply of information returns (3520, 5471, 926, etc. ad nauseum) depend almost entirely on 1st party reporting which, for “revenue enhancement” purposes, makes them useless to the government as soon as they are filed.
Detection of non-filers and “revenue enhancement” through Son-of-FuBAR et al. is the problem FATCAT is supposed to solve.
But, except for Form 8938, FATCAT is a long way from becoming a reality and even if widely implemented it will almost certainly fail to detect anyone but masses of innocents abroad or the occasional unlucky/lazy tax evader.
Which is pretty much where we are today except that masses of innocents @ $10K per asset and no need to get the Service’s expensive and precious few carbon-based units involved in collection will likely be a good deal more remunerative than this whole OVDI circus.
@Todundsteuer
Mate, from my perspective and limited expertise, you hit the nail on the head with this analysis. Never underestimate the perverse incentives that motivate bureaucrats to notch up Faux victories on their score card terms.
It has long been my frustration, that no analytical or real data driven analysis has done on these OVDIs, except for the two worthless stats that Commissioner Shulman likes to trumpet about. 33,000 tax cheats come clean, and $4.4 billion of revenues collected. Tells you nothing of substance, but it is their claim to victory. They get to define success. With a non questioning media, those become his notches of success and am sure will be on his next resume’.
I have commented on this before at… http://bit.ly/JrOnHH
btw…. Thanks to you and @Plodder for your contributions to the discussion.
I just heard this breaking news, and thought I would digress for a moment to put things into perspective. You might have missed this.
Nasa announcement: Hubble Shows Milky Way is Destined for Head-on Collision
This QD vs VD argument will soon be ended…in cosmic time units (CTUs), not LCUs, of course. 🙂
@justme, not coinciding with the end of the Mayan calendar? But I do think that the cosmic collision will happen before we get a response to our OVDI submission.
@Just Me
I think I posted this here before some where, but it’s just too good not to post 😉
@UncleTell,
You have, but I think it should be mandatory every now and then to re-post it when we all get so serious about these issues. 🙂
Maybe we should take over the IRS 🙂
I was going to say hijack, but that is probably on the DHS list 😉
@UncleTell…
It has been a long time since I have seen that one. Thanks for the afternoon diversion!
Jack Townsend of the well known blog, Federal Tax Crimes, has published a paper which is available at Social Science Research Network on May 15th.
Title: Making Voluntary Disclosures to the IRS
Abstract: This paper discusses the IRS Voluntary Disclosure Practice, including tips for the practitioner. Topics include noisy disclosures and quiet disclosures as well, in some cases, just making no disclosure at all. The article places particular emphasis on the recent offshore financial account voluntary disclosure program and its alternatives.
This reference has also been added to The OVDI Drudgery for Minnows.
@Just Me
Are Jack and John Townsend related? The paper was written by John A. Townsend. 😕
@Just ME
OOppss I just saw it. Jack is John’s nickname 😳
Wanted to add this update about Quiet Disclosure from Jack Townsends recent report…
Report on Webinar on Opting Out and Litigating FBAR Penalties
See these items, but encourage you to read them all..
I am one of those unfortunate Canadian whose working in the US on a visa for the past 5 years. I wasn’t aware of the Fbar filing or that i have to inform the IRS about the interest i made in my bank account which is maybe 600$ per year for the past 5 years.
I was told by an attorney to join the OVDI program and come clean the problem with this is that after i pay the irs and the attorney my bank account becomes zero?
How is this even possible that for a mistake i made i had to fork my entire life saving?
Life Sucks
The OVDI was NEVER meant for minnows like you. Dump the attorney-he’s only interested in his fee. Comply going forward. Make sure the account is less than 50K.