Two solitudes – To “OVDP” or to NOT “OVDP”

To OVDP:

Does bringing the past into “compliance” mean that one must enter #OVDP ? One lawyer thinks so isaacbrocksociety.ca/2012/07/23/wil…

— U.S. Citizen Abroad (@USCitizenAbroad) July 31, 2012

To NOT OVDP:

@uscitizenabroad digitaljournal.com/pr/814599prweb.com/releases/2012/…

— Alvin S. Brown, Esq. (@USTaxAttorney) July 30, 2012

When it comes to the “compliance dilemma”, the thinking seems to be:

“To OVDP or to NOT OVDP” – Note the Isaac Brock press release on OVDP 2012

That question has consumed created enormous “life altering anxiety” and a large number of LCUs life credit units). Readers of this blog will have seen a number of compliance options acknowledged and considered. These range from “compliance going forward” at one end of the spectrum to OVDP at the other. At a minimum it is important to consider the ramifications of all options. That said, there are a large number of lawyers who believe that entering OVDP is the “default option”. At least one lawyer as stated his view that compliance means OVDP. (The validity of this position was strongly questioned here. At least one other lawyer has stated that he has “always gone in under reasonable cause”.

In any event, I have come to see that the question is NOT:

“To OVDP or to NOT OVDP”.

The question is:

“To reasonable cause or to NOT reasonable cause”

In other words, if “reasonable cause” is a viable option, then there is NO reason to enter OVDP. Therefore, the logical starting point is to assess whether “reasonable cause” is available.

The IRS is barred by statute from imposing FBAR penalties if there is “reasonable cause”. Yes, I understand that at the initial level, the IRS will determine whether there are sufficient grounds for “reasonable cause”. Some of the factors that will be considered in assessing “reasonable cause” have been identified by Attorney Alvin Brown here. (See the end of this post.) In making the “reasonable cause” determination, Mr. Brown notes that in a general sense:

Whether a failure to file or failure to pay is due to “reasonable cause” is based on a consideration of the facts and circumstances. Reasonable cause relief is generally granted by the IRS when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them. In determining whether you exercised ordinary business care and prudence, the IRS will consider all available information, including:

(go to the article to see the list – but Mr. Brown notes that:

No single factor will determine “reasonable cause.” It is a “facts and circumstances test.”)

(I highly recommend another article by Mr. Brown where he describes various information returns. I referenced it in an earlier post on the “To OVDI or not OVDI” decision.)

Bottom Line: Mere ignorance of the FBAR requirement will NOT be sufficient to meet the test for “reasonable cause”. But “ignorance of the FBAR requirement” coupled with a “reasonable reason” for “ignorance of FBAR” will go a long way toward meeting the test. In other words the question is:

Is it reasonable for one to NOT have known about FBAR?

Two possible developments in the evolution of “reasonable cause”

The Williams decision: Two things have happened in the last week that “may” be relevant to considerations of “reasonable cause”. The first is the decision of the 4th Circuit in Williams.  Some will argue that the Williams case will make “reasonable cause” arguments harder to make (I am not convinced of that).

In view of the 4th Circuit’s decision in Williams, Mr. Brown’s article is a welcome and timely reminder that “reasonable cause” is indeed available. His article does NOT reference the Williams decision.

I intend to write  a separate post considering how “deeming one to have knowledge of the contents of a tax return“ may relate to “reasonable cause”.

The Moby Research Indicating Possible IRS misconduct: This was uncovered by none other than the Isaac Brock Society.

This is absolutely extraordinary. The story appears in a post titled: “Moby Guest Post: Patriot Act s361b – The Missing Congressional Reports on IRS FBAR Compliance Efforts“. This post, which was the result of a request for information under the FOIA (Freedom of Information Act)  is a must read for any person concerned with law, justice, fairness and transparency in any free society. The gist of the post is captured in the authors summary as follows:

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.

The gist of the post is that at the time that enforcement of FBAR was transferred from FINCEN to the IRS (2004) the reference to FBAR disappeared from IRS publication  54 (which is the IRS tax guide – prepared by the IRS – for U.S. citizens abroad). This is best described to Todundsteur as follows:

*I found fascinating the information concerning the absence of a reminder or notice of FBAR (and other information return) filing requirement in the 2008 version of Pub 54.

What is most interesting is to examine the past versions of Pub 54 available at the IRS website:

http://www.irs.gov/app/picklist/list/priorFormPublication.html?value=54&criteria=formNumber

There, you will find that PRIOR to tax year 2004 i.e. in all versions of Pub 54 for 1994-2003 there WAS a reminder concerning the filing requirements for various information returns (FuBAR, 3520, 5471, etc.)

What happened in calendar 2004 to change the IRS’s mind about including this warning to the group of people who had the greatest need of it?

Well, for starters beginning in 2003 the IRS by internal memorandum assumed FBAR enforcement duty from FINCEN.  They also got tagged with the responsibility to design a new and improved FBAR form which – in a mere 4 years of herculean effort – they succeeded in publishing in October 2008.

The 2004 calendar year also saw the massive hike in FBAR penalties in the JOBS Act of that year.

And it was in 2004-2005 that the TIGTA report came out suggesting that there were “compliance opportunities” in FBAR enforcement going to waste.

The information on a filed FuBAR was and is utterly useless to any organization in the US government. But, with the massive penalty hike of 2004, its non filing suddenly offered “compliance opportunities” i.e. the use of extortion to coerce settlements or as it is expressed in Washington: “leverage”.

A cynic might suspect that these clowns stuck the FBAR warning back into Pub 54 when it became obvious from what Bradley Berkowitz was telling them in 2008 that the first OVDP was going to have to depend for its effectiveness on occupying the high moral ground vis-a-vis tax cheats.

Really disgusting – and very sad.

In response to Todundsteur, the Moby (the author of the post) summarizes:

*@Todundsteuer

Great spotting. I didn’t spot the earlier Publication 54′s like you did. So, to recap, here is the timeline:

– Up until 2003: Pub 54 issued every year for expats, with information about FBAR included
– 8 April 2003: Treasury delegates FBAR enforcement and compliance activities to IRS via Memorandum of Agreement
– 24 April 2003: IRS issues 361b report covering 2002 and states: “IRS took responsibility for assessing whether better education and guidance regarding FBAR compliance is needed, and for implementing such improvements, as appropriate.”
– 2004: IRS updates Pub 54, and **removes** information about FBARs
– 2004-2008: Pub 54 makes no mention of FBARs
– 2009 onwards: Pub 54 updated to include FBARs again

Wow. Just, wow. This behaviour by the IRS is unbelievable. Expats never had a hope of ever knowing about FBARs with this kind of outreach/education from the IRS.

It is clear that the IRS is the biggest obstacle to tax compliance for U.S. citizens abroad. The fine investigative research by Moby suggests that:

IRS conduct in relation to to Publication 54 may be a strong fact in demonstrating “reasonable cause”. After all if a question is:

Is it reasonable for one to NOT have known about FBAR?

and the IRS has was taking active steps to NOT MAKE THE EXISTENCE OF FBAR KNOWN, then:

IRS conduct surely contributes to demonstrating, that it was reasonable to not have known about FBAR, and that a failure to file the FBAR was due to reasonable cause!

___________________________________________________________________________

FYI: Here are the reasonable cause factors identified in the Alvin Brown article:

Whether a failure to file or failure to pay is due to “reasonable cause” is based on a consideration of the facts and circumstances. Reasonable cause relief is generally granted by the IRS when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them. In determining whether you exercised ordinary business care and prudence, the IRS will consider all available information, including:

•     The reasons given for not meeting your tax obligations;
•     Your compliance history;
•     The length of time between your failure to meet your tax obligations and your subsequent compliance; and
•     Circumstances beyond your control.

F-Bar reasonable cause may be established if you show that you were not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances. Among the facts and circumstances that will be considered are:

•     Your education;
•     Whether you have previously been subject to the tax;
•     Whether you have been penalized before;
•     Whether there were recent changes in the tax forms or law that you could not reasonably be expected to know; and
•     The level of complexity of a tax or compliance issue.
•     Reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account.
•     Evidence that the foreign account was established for a legitimate purpose.
•     Evidence that there was no effort to intentionally conceal the reporting of income or assets.
•     Evidence that there was no tax deficiency related to the unreported account.
•     There may be other factors in addition to those listed that may weigh in favor of a determination that the failure to file was due to reasonable cause.
•     Ignorance of the law, if reasonable along with a good faith effort to comply with the law if you could not reasonable be expected to know of the F-Bar requirement.
•     No single factor will determine “reasonable cause.” It is a “facts and circumstances test.”