I just became aware of this: McBride #1 – Court Holds Government Must Prove FBAR Willful Penalty by a Preponderance (11/11/12). I thought it might be interesting for all of you.
What I found most interesting was Townsend’s commentary:
Based on the detailed findings of fact, the Court first determined that the Government need prove willfulness only by a preponderance of the evidence rather than by clear and convincing evidence. Since the Court’s recitation of facts was so damning, it is not clear that the Court would have reached a different conclusion even if the burden were clear and convincing. Nevertheless, here is what the Court said about its holding on the preponderance of the evidence burden…
What is irritating is that there seems to be little or no caselaw available as to minnows (the vast majority of people involved with our issues at IBS, Maple, ACA, and elsewhere.) I should hope that cases such as that mentionned by Townsend would not be used as precedents where smaller amounts were at stake, especially in the case of USPs in bone fide residence abroad who might have FBAR/FATCA/double taxation issues as to assets and income obtained through bone fide and legal activity abroad. Townsend’s description of the case leads me to believe that the defendant engaged in operations destined to hide the proceeds of activities conducted in the US, such proceeds which may have been subsequently hidden abroad. What appears to be the problem here is that the focus is on civil litigation, and not criminal (where the standard of proof would be beyond a reasonable doubt). This is a major problem that we have: because civil and criminal penalties are mixed in such a way that it would be difficult for the minnow to disentangle the two and apply 4th, 5th, and other bill of rights protections.
As I have always said, I believe that there must be further potential defenses/causes of action based upon national sovereignty and dominant nationality issues, as well as non-US Constitutional protections that are in analogy to the 4th, 5th, 6th, 8th, 9th amendments (as well as the 1st as to punishment for so-called “frivolous arguments”), as well as many other protections that are better defined in some non-US constitutions than they are in the US Constitution, and that go beyond the US Constitution. I wish we had more information about people–especially “minnows”–that actually used such arguments in court– if anyone has actually had the oppourtunity to do so as yet.
Disclaimer: Townsend says on his blog that what he writes there is not intended for laypersons, but rather for tax professionals and tax students. I am not a lawyer nor a tax professional or student, and this present post is not legal or tax advice.
The fact that we have no minnow data might meean that they’re mainly going after the whales, and that if it were not for the threats and amount of fines against anyone who has a foreign account and is not compliant, our fear would be unfounded. The only couple data points we have about minnows are ij, Moby, and some others who joined OVDI and were kind enough to make the conclusion of their case known. I’d be interested to have some data points on minnows that just get audited ouside OVDI, but again, maybe we’ll never know, because it won’t be worth their time going after these people once they see that the tax due is very little. Let’s hope they’re reasonable and won’t waste resources.
*@ Christophe
I would certainly like to hear more about the outcomes of non-OVDI cases, particularly for those who are outside the US and seeking to become compliant. I have spent a fair amount of time searching for this kind of information. A tax adviser in the UK indicated that their firm (and indeed the wider network of tax and legal firms they were in contact with in the UK) were not aware of an FBAR penalty ever having been asserted to date. I also found a comment from an Australian advisory firm that indicated the same thing. I suspect the major caveat is, however, that the vast majority of their experience is relatively recent (2009 onwards?) and therefore still well within the statute of limitations.
*Edelweiss, exactly my own worries and concerns!! I don’t know which firm you used, but my London-based accountant has also tried to reassure me that while she can’t promise anything, they have so far only encountered a few audits for clients who still had substantial assets located within the US. They said that technically I could be in deep sh*t but the fact that I’d accumulated close to 50 p
fic’s, many of which only had a few hundred pounds in them, would make my unintentional mess appear obviously more innocent. After all, if I had been aware of all the awful laws and restrictions and had been trying to cheat the US govt, would have obviously been a lot tidier and more clever about it. They said that the tax attache in London expected compliance but had enough sense to realise that someone like me wasn’t their intended target though was unfortunately swept up in the same net as the whales and obvious tax cheats.
I have also read some of her posts made on Taxation Web forums where she astutely has implied that many other professionals have taken advantage of minnow expats like me and calculatingly overcharged them and intimadated them into entering into OVDI.
She sensibly pointed out that if she hadn’t been confident that she could have handled my case with a loud quiet disclosure, she would have had to refer me onto a tax attorney who would have then determined if I would realistically need to go into OVDI.
My case was awkward because I had assumed with the tax treaties that it was sufficient just to declare my US-sourced income and UK-earned income for which I was claiming the foreign earned income exclusion, as was also declaring my UK passive income on my British tax return…had thought that with the information sharing agreements already in place that this was enough. I was a DIY filer and investor so realised that filing all these details on my 1040 would be complicated and expensive via an accountant so had just been filing a very basic nominal return over many years. Of course, I now deeply regret this with hindsight.
The amountvof under-reporting
Christophe is right. The only minnows are in OVDP, which is a make-believe world that has nothing to do with Constitutional rights or case law. That we have cases of opt-outs by minnows who receive only a warning letter, shows that the IRS is not ready to go after minnows, yet. But the reason to oppose FATCA is that the IRS cannot be trusted with the information that will be laid bare to them. What if they change their minds and decide to go after Canadian RRSPs or other registered accounts? Well, then the Canadian government, by acceding to FATCA’s demands, could potentially be giving the farm away.
*I agree with Petros that while things seem reasonably OK now that they could eventually also go after minnows, especially once Fatca is fully running. But as I had already been filing, albeit incorrectly, I concluded that I had no other option but to get professional help and amend the earlier years. While most people would only have a three year statute of limitation, my understanding is that my SOLs will be for six years due to the extent of the under-reported investment income. This is why I’m still quite scared that I could draw even more unwanted attention if I were to renounce right now when the amended returns could still be audited. However, as I went to them first before being discovered, she is optimistic that they will accept my corrected ommissions in good faith. I also trust that she did everything correctly so that even if I were audited, there wouldn’t be any nasty readjustments…but it frightens me how little I understand what she did to come up with the figures. When I first became aware of pfic taxation, I was worried that all the anomalous rules of double taxation would literally render my investments as worthless…was desperately scared that if the tax owee was so huge that I’d be forced into the OVDI and literally be made bankrupt by not only the double tax on phantom gains but also the misc FBAR OVDI penalty and all the legal/accounting fees. Was heart-breaking to think that the fruits of sixteen years of all my hard work and investing could be so cruelly taken from me based on blood,sweat and tears of struggling. Wouldn’t have been able to have afforded the investing without my husband…all from legal, British-sources employment. Not US-sourced….
And as he suffered a stroke, he was trying to protect me in case he ever were to have another and have to spend all his savings on longterm care…so indirectly, the IRS is threatening his assets as well as mine even though he has no US-personhood.
He would prefer me to renounce but in spite of everything am hoping our efforts will result in tax reform so we won’t feel forced to give it up.
I live more in fear of the potential pfic problems and possibly foreign trust issues than fbar right now, as am optimistic that they will accept all my delinquent fbars from the still open years…though agree with Petros that they may eventually start pursuing even Canadian grandmas if fatca becomes so efficient. Could be Orwellian.
I just hope that our collective efforts will eventually have a snowball effect and finally result in special exceptions for expats and accidental Americans.
Nina Olson explains in detail how FBAR penalties were applied throughout the years in this report. Basically, until 2003, when Fincen transfered enforcement of the FBAR to the IRS, FBAR penalties had only been applied in extremely rare cases, as a result of criminal investigations. These cases were fewer than one per year. Also, in 2003 the IRS had a voluntary disclosure program that resulted in no FBAR penalties, only back taxes and interest. The situation drastically changed in 2009, with OVDP, but from what I know, the only cases where the IRS has charged FBAR penalties outside OVDP/OVDI since 2009 are these cases. All of them are clearly people who intentionally used foreign bank accounts to evade taxes, and almost all cases are from Swiss bank UBS.
I don’t think the IRS is capable of, or interested in, charging FBAR penalties from people who simply amend of file late returns. I call their warnings about “quiet disclosure” bluff, but we can’t know for sure what they might decide to do in the future.
*@Shadow, exactly. It’s why I’m feeling more hopeful about my past being ‘cleaned up’, though still resent that I’ll continue having to budget at least a couple thousand dollars annually for compliance costs. I’m also very limted in how I can invest going forward. Have had to move all my investments to a US-compliant portfolio account which has higher admin charges and thus, less net income. Almost all this income will have to be ringfenced to pay my accountant each year, going forward. Kinda sucks that by default I’ll have to continue relying on their expertise due to all the complicated paperwork.
However, unlike many here, I still take great pride in my US citizdnship and want to ideally retain it in spite of the burdens. Money is not everything to me! And on a more pragmatic level, I feel pretty stuck whilst still within the relatively early stages of my disclosures. It will be mid-2016 at the earliest and possibly as late as the early 2020s before I’d feel safe enough to do something so controversal as renounce. As I fear I could be deemed a traitor, I worry that with a messy case such as mine, I’d risk being singled out and made an example of. So I feel intuitively safer holding out for a few more years…but if by, say, 2017 it’s obvious by then that nothing is going to ever improve, I may finally have to renounce.
It’s just that even now, an irrational part of me symlathizes with homelanders’ outrage about all the renouncing, especially for those of us who CHOSE to move abroad. While I feel that my mistakes were innocent, I can accept that I might have been arguably negligent in my duties….so for me, it’s not a black and white situation. From my vantage point it feels like entrapment but every decision has consequences so blame myself for not having kept better aware. No one made me move abroad…
I just hope and pray that the US will see sense and learn to appreciate its expats as ambassadors for team America abroad instead of merely a source of revenue.
I call their warning about quiet disclosure just plain STUPID. They’re loosing on revenue from people who would amend returns for the statute of limitation years, but not doing it because of these threats. I just don’t understand why they don’t realize that.
It’s all about the target audience. If they’re targeting rich tax evaders, they should mention it. The problem about their announcement about harsh penalties about quiet disclosure, is that they repeated it in the context of US expats in Canada. Read again the statement from Rosemary Sereti back in December 2011 at the International Taxation Conference:
http://www.moodystax.com/moodystax-blog/21-us-taxation-services/150-irs-says-no-new-relief-planned-for-canadians.html
If their goal is to get every tax penny from Immigrants and Americans abroad, they should reset their clocks: advertize broadly in the mainstream media a real amnesty program, where they don’t threaten to bankrupt people and try to extort them – just make them pay backtaxes and interest and even the 20% late penalty. That’s it. They can mention FATCA, saying they’ll eventually get the info. I bet a lot more people would come forward than with their current approach. That would be the smart way to get more revenue from “offshore” accounts.
*@Christopher, it’s been implied to me that their official stance will always sound very harsh but that in reality they can be more reasonable in certain cases. The problem though is it’s all set up as an industry in which you have to do this through an intermediator (i.e. an attorney or specialized accountant). They are more likely to retain their official hardline if you try to sort it out by yourself.
I’m effectively being forced to go through my tax preparer. In fact, I understand that the attorneys, certified financial planners and cross-border accountants (CPA’s and enrolled agents) have lobbied Congress to keep filing from abroad too awkward and complicated for anyone but perhaps a poor student or pensioner to safely be a DIY filer any longer. It’s why I am deeply ambivalent about the whole compliance industry inspite of having been fortunate to have found an honest preparer. They want to help, but only so much. It’s in their interests to maintain the status quo.
I am thus becoming more exasperated than scared. I have had to abandon any hopes of an early retirement and may in fact have to work to 70. This is quite a blow but as I don’t have any children and will probably outlive my older spouse, it’s not going to be so awful if I die having depleted all my savings…it’s the fact that I’m having to do all my financial planning as though I’d never left America that I resent, especially when they double penalize me by disallowing me to use both US and UK retirement vehicles. Short end of the stick. But I feel resigned at this stage. Life isn’t always going to be fair.
@monalisa, If I lived abroad, I would want to keep my US citizenship too, as you wrote money is not everything. Expatriation tax aside, I know people can just renounce, so ultimately what I’m trying to do by contacting Congress is to allow people to be free of US taxation as US citizens.
Another thing. With the current discussion about the “fiscal cliff”, I’ve seen many people arguing that if taxes on the rich are too high, they will just leave the country. This shows that people have no idea about citizenship-based taxation.
The principle of citizenship based taxation is wrong, but the main issues are the cost of compliance for Americans living abroad and bankprupting penalties for non compliance.
Maybe they’ll fix those issues in the simplification of the tax code they’re supposed to work on.
don’t forget that this fiscal cliff stuff is going to come hard and quick. Expect all bad options regarding foreign exclusions, harsh penalties and threats, the Bill-Nelson-take-away-the-passport special, and any other draconian measures to be brought to the helm. Any and all of these are more attractive revenue-producers to the homeland than raising taxes or cutting. How was MAP-21 and the veterans-bill spending justified?
Myself, I just can’t see something gray out of black-and-white threats. I can’t see how exposing myself while working multiple countries would make for a smooth quiet disclosure. I can’t see that I would be safe if someone has partial savings and IRA’s in the homeland and partial retirement and savings in the country of residence. I can’t see paying oodles of accounting or lawyer fees to pay for advice no better than my own. I feel slightly safer to not work in USA again (one could become more exposed to being an offshorer). Staying away does not meet up with my personal preference.
*
Shadowraider wrote:
Ultimately this is why the homelander can’t understand the expat. Let me just explain: this is not about money, but about freedom from tyranny. I cannot live with a government that is far away that pretends to exert jurisdiction over me, my business and ultimately my family. I relinquished my US citizenship in order to maintain stronger ties and to aid in the protection of my home country, especially when it comes to threats to my peace and well-being from a profligate and evil United States which thinks that I should pay continual tax homage to the home country. Please try to understand. The only value in US citizenship to me was the right of return. That cannot be worth the threats to my family, so I had to give up my right of return.
@monalisa1776, If you’ve just paid one of those ‘expert crossborder tax and law firms’ several times your meagre annual part-time income from two jobs, in order to ‘become compliant’ – for ‘simple’ US returns and reporting forms (FBARs, 3520/A), with NO US tax owed, you can’t sincerely feel or say that ‘money isn’t everything’. When you’ve compromised your savings by coming forward, the only way you can live with yourself and the stupid life altering and irreversible decision you made to become compliant, is to feel that you’re in effect buying out your US indentured tax-slave price in order to renounce and be free for the rest of what remains of life, and lift the burden from that your Canadian family would eventually face. And be able to enter the US to see family members in emergencies and before death. Otherwise, you’re faced with your utter stupidity forever, and that is pretty hard to live with – and I find it sometimes almost impossible to face myself.
In fact, the fear of the IRS is now augmented and almost surpassed by the fear of the legal and accounting bills from the cross border experts. They’re billing even their time to correct mistakes that they admit they should not have made. To make it more nightmarish, they bill for the time spent reading the clients notification to them of the errors the firm itself made – even when they admit the mistakes!
And just to make it more hallucinatory and insane, of course, it didn’t do the US any good what so ever – no US tax owing (not a surprise), all accounts were legal post-tax local ones (so so sorry IRS, no tax evasion, no money laundering, no drug-lord accounts, no terrorism-funding to validate your slanderous and willfully false claims). The US didn’t gain anything from the fees paid in Canada (except that the lawyers and perhaps the accountants were very likely US taxable citizens here and might owe them US tax on their way-over-the-top-of-the-FEIE-cap salaries), and otherwise, the US gained only truly committed lifelong opposition and a lasting and deep anger.
I’m with Petros on this one.
Much as I unequivocably regret having tried to deal with this by coming forward, I regret being born an American, and feel overwhelming anxiety at the thought of being threatened for the rest of my life, and fear being under the erratic, irrational and punitive control of the US for any more of my days than I have to. There are days when the anxiety and feeling of this involuntary confinement overcome me.
@monalisa and @Shadow Raider,
Actually, it is about money — it is just not about taxes. So many do not have any resources to confront this enemy — yes, the US and its citizenship-based tax policy. Here is my take on it to Huffington Post:
Other comments on a similar “it’s not the money theme”:
*@Despairing and @Calgary, Believe me, I am often trying to convince myself as much as anything, :P. I have lots of conflicting feelings. Torn loyalties. It’s not black and white with me. I have also mentioned that I still haven’t completely ruled out renouncing at some point because I definitely agree that it’s unfair how we have to pay huge fees each year to accountants and lawyers just to stay compliant.
I desperately want to believe that the US is not going to be as evil as some of us are fearing. But as I’ve also mentioned in earlier posts, I am effectively in limbo till my statutes of limitation have run for earlier corrected returns. It’s so frustrating to be stuck like that, not being to resolve it till I feel it’s safer to do so. I don’t blame others who can make a clean break for doing so.
In some ways I agree with Renounce Citzenship that my situation would have been less risky has I simply not been filing at all because to have been filing with under-reported income could look worse in many ways. But I can also see how that those who haven’t filed at all are actually still more at risk because the IRS actually still theoretically enjoys an unlimited statute of limitation on ALL the earlier years that weren’t filed. At the very worst, I will have only had to wait out six years from 2009.
I do have conflicting emotions. Of course I agree that the US is behaving like an abusive, stalking spouse who refuses to let go without acrimony. Sometimes this life forces us to be heart-wrenching decisions. A lot of it too is that I don’t want to risk never being allowed to visit my aging parents again. Someone like Don who is still very young and has no ties to the US could more easily make a clean break. I sense that for Petros it still hasn’t been a completely easy decision. I sense that part of him still feels embittered that he’s felt forced to relinquish due to stupid policies.
I’ve decided that I’m going to give it till the next election to see if there isn’t any reform. If by then it’s obvious that it’s a hopeless situation, then I will quite possibly go ahead and renounce. I’ve discussed this with my parents and they accept it even if it meant i might never be able to visit them after that. We have to make difficult choices in life sometimes. I know our forefathers who immigrated often had to leave their loved ones behind for the last time, knowing full-well that they’d probably never see them again in this world.
I agree that it’s wrong to have to annual shell out thousands just to stay compliant. It will have cost me roughly $40,000 altogether to just become compliant if I combine all the double taxes owed, plus the professional fees. It certainly hasn’t been a pain-free process. (Plus, going forward, ongoing annual accounting fees of at least $2000 and possibly much more). I had a nervous breakdown and couldn’t work for six weeks. Of course it’s unfair, unfair, unfair!!!
Worse than what the Colonies suffered under King George III. They weren’t threatened with life-altering penalties for mere footfaults…I also worry that by 2017 that they may have made it effectively impossible for ordinary middle class people to afford to renounce by lowering the thresholds for the exit tax or by enforcing the Reed Act.
I thus believe that we will either have reform or that things will become draconian. Can’t see things remaining the same, obviously. I feel reassured by Animal’s ire, for instance…if they really start taking us all to town, they’ll certainly feel the heat if they don’t finally see the light…
@monalisa,
I recognize your personal take on this and try to understand your loyalty. That is yours and none of my business. Each of our staying or leaving decisions is up to us, after hopefully much research and soul-searching.
But, it is my business when a blanket statement is made by you that money is not everything and then supported by:
then I have to jump in to help defend those who have no money, those who have no choice. There are families to feed and basic necessities to look after and there is the honour for some of not giving in to the punitive threats we now see from the US. And, it is all happening in the present, the here and now. It is not the US of our good, growing-up memories. Something has changed – drastically.
Christophe says we have no minnow data. As a matter of fact, it is possible to hypothesize and to quantify an interesting perspective from the abysmal data at hand. Very roughly, divide $4.4 B by 33,000 and get $133 K. In today’s world, $133 K is a chunk of change, but it is not the monetary sinecure enjoyed by whales like Mitt Romney. Now, that $133 K is a mean: something above and something below. A handful of whales and a swarming school of minnows, with however many ordinary fish floating around in a fuzzy mid-range. Bottom line: there has to be a big wad of stampeded small fry in that murky equation, and an even bigger wad when the component of regular fish gets tossed into the net.
@Edelweiss
Re “A tax adviser in the UK indicated that their firm (and indeed the wider
network of tax and legal firms they were in contact with in the UK)
were not aware of an FBAR penalty ever having been asserted to date. I
also found a comment from an Australian advisory firm that indicated the
same thing.”
Do you still have the name or website of the Australian advisory firm you referred to? I would be very interested to know. Thanks.
@Rose
The comment appeared here
http://www.expatforum.com/expats/expat-tax/128012-fbar-compliance.html#post929521
@usxcanada
I wonder if they would have been sneaky enough to have included the $780m UBS fine in their total.
@usxcanada 133k is a middle-class salary in Switzerland. What with the high cost of living it wouldn’t go far.