Moby was the first publicly reported Opt Out of the 2009 OVDP.   He has been very generous in sharing his experience, and has been an inspiration to others who have had to battle the fear of what draconian penalties the IRS ‘might’ apply outside of the OVDP.  We all believe the IRS FAQ examples are hyperbolic maximums by intention to strike fear into non complying hearts, but until tested, you really don’t know.  Moby basically turned down the “in lieu of” OVDP penalty, called their bluff, and won!  If you are not familiar with his story, I would strongly encourage you to read it as originally reported on January 25th here and updated on March 10th here .  Since the last post,  he has been at work on a FOIA request related to IRS FBAR compliance improvement efforts, and asked me to share his findings.  What follows is his report.

Intro

 

I wanted to publish this information to shed further light on FBAR-related activities by the IRS in recent years, and to get more eyeballs on some information that should have been public before now.

I don’t think there is anything truly astounding, but I think there are some significant tidbits that tells an interesting story.

I hope it is of use to people in making OVDP opt-out arguments, for fighting the good fight with media, and making the case for action with elected representatives.

I’ve written up my thoughts on the reports; but I’m short on time so didn’t read them entirely/thoroughly, and there maybe further stuff of interest in there. I welcome other peoples’ thoughts on these reports.

 

Section 361b of the Patriot Act requires the Treasury Secretary to report annually to Congress on efforts to improve FBAR compliance.

 

As far as I know, only reports covering years 2001, 2002 and 2004 have been publicly accessible on-line (here). The remaining reports (2002-2010) are now available due to a FOIA request. They are posted (HERE).

 

The FOIA request

 

The FOIA request text was for the following:

1)  All annual reports required to be submitted (prior today’s date) by the Secretary of the Treasury to Congress in accordance with Section 361b of the USA Patriot Act of 2001.

2)  Where there is an instance of the aforementioned annual report not having been submitted to Congress for any year please provide for that year;

a) documentation of the authorization of the Secretary’s non compliance with the S361b requirement; and

 b) documentation describing the rationale and decision for the Secretary’s non compliance with the S361b requirement”

 

NOTES:

 

1)  Parts of the reports were redacted by the IRS. Details of redaction are listed in documents numbered 10 and 11.

2)  For search-ability, structured text was extracted from the all the static PDFs and dumped into a single file (document 09). The document is ugly and not perfectly translated (OCR has limits) but is a good way to find interesting words (or their absence). Repetitive appendices were not included for this.

 

Observations on the report content

 

Here are some tidbits from what I read:

1.  IRS responsibility for informing taxpayers of the FBAR :

The reports mention “the Internal Revenue Service agreed to take responsibility for assessing whether better education and guidance regarding the requirements to file an FBAR was needed and, if so, to implement recommended improvements”. Essentially the IRS has taken on the duty to be reach out to people with FBAR obligations. They seemingly did nothing of the sort to fulfil this duty.

2.  Identifying groups that should be filing FBARs:

The reports mention that this is something they were doing; i.e. “Develop additional methods to identify persons who may have an obligation to file FBARs”. Easy you might think; immigrants and expats would represent 90+% of the FBAR-obligation-population. See next point.

 3.  Immigrants and expats:

The reports don’t mention “Immigrant” or “Expat” anywhere at all. The word “Abroad” (as in Americans abroad”) does not appear until 2009. As the primary FBAR-obligation-population you would expect them to be getting some airtime in the report. There don’t appear to be any references to these groups using different words either.

 4.  Publication 54 – Tax Guide for U.S. Citizens and Resident Aliens Abroad:

This is very telling. Up until the end of of 2008, this 44-page guide (2008 version here) never mentions FBARs. The first time the IRS inserted a reference to FBARs was in the 2009 version after all previous versions had never mentioned it. They mention this change in the 2009 s361b report. I think that their sudden change to Publication 54 in 2009 is a filthy little action on their part. It reeks of them trying to quietly amend their previous de facto policy on not expecting expats to file FBARs.

 5.  2007 report was not timely:

 The 2007 report was bundled into the 2008 and report and released a year late. It is deeply ironic that the annual report on the subject of “the compliance of people with obligations to file an annual report” was submitted 1 year late. We all know what happens to people who file their FBARs late!

 6.  Outreach:

 They mention outreach to the public a lot. I saw very little mentioned in the way of outreach to individuals, and nothing about immigrants or expats. It seemed to focus on tax practitioners. I mention this because (as highlighted in my opt out letter, here, section 4.3); Deloitte (the biggest accounting firm in the world) was not passing the information on. Obviously the outreach was ineffective and/or insufficient.

 

Summary of my thoughts

 

I think this further demonstrates the behaviour of the IRS as being the primary cause for FBAR non-compliance amongst immigrants and expats.

The IRS had the responsibility, duty and obligation to reach out to expats and immigrants; to make the FBAR discoverable and known to people who inevitably trigger filing requirements.

The IRS seems to have deliberately ignored immigrants and expats in its education and outreach efforts, when in fact these groups should have been the primary audience.

It appears like the IRS didn’t expect or want expats/immigrants to file FBARs, in effect making this a de facto policy.

Then in 2009, the IRS has changed its mind with the OVDP holy war on expats/immigrants, and in doing so changed its (de facto) policy on who should be filing FBARs. That amounted to a retroactive application of draconian penalties.