On Friday, the Government Accountability Office released a new Report to Congressional Requesters on “Offshore Tax Evasion”, which warns that the “IRS Has Collected Billions of Dollars, but May be Missing Continued Evasion”. It provides more in-depth information about the characteristics of OVDP participants, and also reveals some details about the treatment of (and government attitude towards) people who make quiet disclosures.
For those U.S. Persons abroad too busy or in too good a mood to deal with the depressing drudgery of being insulted by the GAO for seventy-two pages, Stephen Ohlemacher of the Associated Pressreleases has helpfully regurgitated the contents of the report and all its fallacious assumptions, without bothering to commit any actual journalism such as, you know, interviewing actual “offshore” voluntary disclosure participants who have been well and truly screwed for daring to save where they live (as Amy Feldman did back in 2011), or breaking down some of the appalling statistics in the report.
Who were the actual OVDP participants?
The first question we all at the Isaac Brock Society have about OVDP participants: how many were home-grown Whales, how many were immigrants and immigrants’ kids with money in the old country, and how many were emigrants or accidentals residing abroad for decades? Well too bad, the GAO can’t tell you and they clearly don’t give a damn anyway. While the word “offshore” appears on literally every single page of the report besides the back cover, the word “immigrant” is mentioned on precisely two pages, and “expatriate” and “abroad” appear zero times. The sole discussion of immigrants:
In our case file review, we found examples of immigrants who stated in their 2009 OVDP applications that they were unaware of their FBAR filing requirements. We found they had often opened banks accounts in their home country prior to immigrating to the United States. IRS officials from the Offshore Compliance Initiative office stated that although there are several FBAR education programs, none are specifically targeted at new immigrants. Furthermore, these IRS officials were unaware of any IRS work with other federal agencies such as the State Department or the Department of Homeland Security to educate recent immigrants about their foreign account filing requirements.
Okay, so why not?
These officials stated that one of the challenges that they face in their office, which is part of IRS’s Large Business and International Division, is that taxpayer education and outreach is the responsibility of IRS’s Wage and Investment Division and that issues concerning FBARs fall under IRS’s Small Business/Self-Employed Division.
Yeah, that’s a really good excuse for ruining people’s lives: “not my job, I’m just following orders!”
Statistics on minnows in the OVDP
At page 13 of the report, in the table “Selected Penalty Information for 2009 OVDP Individual Taxpayers with Closed Cases as of November 29, 2012”, one of Just Me’s long-standing questions is partially answered: how much of the much-touted $5.5 billion collected by the OVDP consisted of actual tax owed, and how much was penalties? I reproduce the relevant portion of the table here, and add my own calculations of certain ratios (in italics) in the bottom two rows:
| 10th percentile |
25th percentile |
Median | 75th percentile |
90th percentile |
|
|---|---|---|---|---|---|
| Offshore account(s) balance | $78,315 | $190,365 | $568,735 | $1,595,805 | $4,054,505 |
| 2009 OVDP penalty | $13,320 | $35,670 | $107,949 | $310,476 | $793,166 |
| Additional tax owed, tax years 2003–2008 | $103 | $1,661 | $12,748 | $60,449 | $190,399 |
| Ratio of penalty to tax owed | 129 | 21.4 | 8.46 | 5.13 | 4.17 |
| Penalty as proportion of account balance | 17.0% | 18.7% | 18.9% | 19.4% | 19.5% |
This is Tax Justice, American style: just as the law prohibits both the rich and the poor from sleeping under bridges and stealing crusts of bread, both the rich and the poor paid between a sixth and a fifth of their account balances as Offshore Penalties for an indulgence against the unpatriotic sin of daring to save outside the Land of Milk and Honey, not even counting the extra tens of thousands of dollars of lawyers’ fees. We’re talking about retirees and people nearing retirement (over half of OVDP participants were above age 55) who in four decades of working had managed to save five figures and were expecting to be able to use it to enjoy their golden years, or for the younger ones to use it as a down payment on a house so they could start raising a family — not to pay thirteen thousand percent penalties to the government of a country they don’t even live in — in some cases, a country from which they had emigrated decades ago as teenagers or in which they had never lived at all.
In plainer language: thousands of middle-class immigrants and emigrants owed Uncle Sam less than three hundred dollars of back taxes per year, and for that the IRS put them through a nightmare involving tens of thousands of dollars of penalties and lawyers fees, and threats of criminal charges and jail time if they dared to exercise their right to opt out. This is not tax collection; this is asset confiscation, plain and simple. But don’t expect that the U.S. mainstream media will ever report on this; they’ve spent too long demonising everyone with “offshore accounts” as giant tax evaders living it large to ever go back and publish apologies for all their propagandistic lies.
This of course won’t matter at all to Homelanders, who will continue screaming for traitorous emigrants to be stripped of all their assets and thrown into jail over two and three digit annual income tax deficiencies. One wonders how many of those selfsame Homelanders have similar levels of use tax deficiencies — apparently quite a few, given the “internet sales tax” bill in Congress right now — and how many would agree that they should face five-figure fines for that.
Quiet disclosures
The other part of this report which may be interesting to friends of Isaac Brock: the GAO’s statistical tools for detecting Quiet Disclosures.
To assess IRS’s efforts to detect quiet disclosures, we used IRS tax return data from the tax years covered by the 2009 OVDP, tax year 2003 through tax year 2008, to identify potential quiet disclosures and compared our results with those from IRS. We also used tax return data from tax year 2003 through tax year 2010 from IRS and Report of Foreign Bank and Financial Accounts (FBAR) data from the Financial Crimes Enforcement Network (FinCEN) to assess other ways taxpayers may be circumventing some of the taxes, interest, and penalties owed.
At page 23, they go on to discuss why quiet disclosures are the root of all evil, and reveal that they have been able to detect a far higher number of Quiet Disclosererers than those lazy chumps at the IRS managed. (No word on the false positive rate of their methodology, nor the actual tax owed).
Quiet disclosures matter because if IRS does not identify them, it undermines the incentive to participate in the offshore programs. IRS’s offshore compliance enforcement efforts, including the offshore programs, deter taxpayers with noncompliance related to current offshore accounts, or offshore accounts that might be opened in the future. If taxpayers are able to quietly disclose and pay fewer penalties than they would have in an offshore program, the incentive for other noncompliant taxpayers to participate in a program is reduced. When quiet disclosures remain undetected, they also result in lost revenue for the government. Further, if quiet disclosures remain undetected, then IRS will not have information on the characteristics of these taxpayers and their accounts— characteristics such as bank names, country names, and promoter names—used to build cases against others.
We identified 10,595 potential quiet disclosures, a number much higher than the potential quiet disclosures identified by IRS.28 In a series of Questions & Answers that IRS first released on February 8, 2011 to announce the 2011 offshore program, IRS reported that it had identified, and will continue to identify, taxpayers attempting quiet disclosures. In the Questions & Answers, IRS stated that it would be closely reviewing amended tax returns to determine whether enforcement action is appropriate.
Of course, harassment of people making quiet disclosures — in a good-faith effort to comply going forwards without the ridiculous waste of money on tax lawyers to herd them through the OVDP — may also affect the incentives to come into compliance at all. In contrast it will greatly increase the incentives to “ostrich” behind a passport with a non-US birthplace or renounce and wave your middle finger at the IRS, while warning everyone you know about the dangers of moving to the US rather than any civilised country in the world which doesn’t treat immigrants who dare to keep money in their old countries as criminals — but don’t expect the GAO to understand such a sophisticated concept as “blowback”.
In a footnote in 8-point font, the GAO is forced to admit:
Only an IRS examination can determine actual quiet disclosures and there are many reasons why a potential quiet disclosure may turn out to be something else. According to IRS, these include taxpayers who had legally paid taxes on their offshore income, but had not previously filed FBARs, and who were paying additional taxes with their amended returns for reasons unrelated to the offshore accounts and newly filed FBARs.
But with that stupid little caveat out of the way, the demonisation can resume! Throughout the entire report, the GAO keeps pounding the table with the fallacious idea that everyone who dares to have an account outside of the US is gaining some unfair benefit at the expense of The Murican Peepul. This is best illustrated by Appendix IV, “Hypothetical Examples Comparing Account Balances, Length of Account Ownership, and Penalties Comparing Account Balances, Length of Account Ownership, and Penalties”, which compares the annual returns achieved by a person who pays U.S. taxes with a person who holds an “offshore account” and of course therefore pays no taxes whatsoever — since of course there is no other country in the world an “offshore account holder” might be residing in that would also levy taxes on bank returns.
In Appendix I, they finally get to their methodology for detecting Quiet Disclosures:
To assess IRS’s efforts to identify taxpayers who may have attempted quiet disclosures, we used the same datasets that we used to identify the 2009 OVDP population, as described above, plus FBAR data from FinCEN. To determine the reliability of FinCEN’s FBAR data, we reviewed relevant documentation, conducted interviews with FinCEN officials knowledgeable of the data, and conducted electronic testing of the data to identify errors or outliers. We determined that these data were sufficiently reliable for our purposes. To identify potential quiet disclosures we conducted a three-step analysis. First, we used IRS tax return data to identify taxpayers who filed late or amended returns for the applicable 2009 OVDP period.
We then used FBAR data to identify taxpayers who filed late or amended FBARs during the same time period to create a combined list of taxpayers. Finally, we removed from this combined list any taxpayers that we had previously identified as 2009 OVDP participants. The remaining taxpayers constitute our population of taxpayers who potentially “quietly disclosed” offshore accounts. From this population, we used data from amended tax returns to identify whether the amended returns had positive adjustments to income, and whether taxpayers filed amended returns for multiple years. We confirmed this methodology with IRS officials. The results of our analyses are shown in appendix VIII.
The most hilarious part: when you go to Appendix VIII, unlike the rest of the report you do not see any dollar amounts whatsoever, simply vague references to “positive change in tax liability” among people who filed late or amended FBARs. That tactic of lumping together late FBAR filers and amenders is itself rather amusing — by definition, an amender is someone who knew about the requirement to file before, whereas a late filer might be someone who heard about FBAR for the very first time in his entire life of living outside the U.S., and sent in the forms as soon as possible in a good-faith effort to “do his duty”.
But of course, actual facts must not be allowed to interrupt the drumbeat against evil Quiet Disclosererers. If you didn’t already understand the U.S. government’s attitude, well, as Phil Hodgen would say, consider this report a gentle tap with the clue stick.
Great analysis Eric.
The most disturbing issue addressed in the report is with respect to Quiet Disclosures (either of the “file late and hope” and “just start filing” variety). The report makes clear that if you: a) filed a late or ammended return; and b) filed a late or amended FBAR, you can expect to get audited.
This is disturbing for two reasons:
a) many taxpayers in Canada now appear to be in the IRS’s examination cross-hairs.
b) until the Streamlined Procedure was announced, there was simply no good way for “minnows” to get caught up without being dragged through the knot-hole of OVDI/OVDP.
Now, is an IRS examination the end of the world? Certainly not. “Reasonable Cause” was and is a statutory defense to failure-to-file penalties. However, can it wreck your day to receive an IRS examination notice? For most I would hazzard that the answer is “yes.”
Regarding examination:
Most of the failure-to-file penalties are subject to the IRS’s automatic assessment procedure. As a result, it is possible to lose the ability to make the “reasonable cause” argument if you don’t respond within 30 days to the IRS notice.
To quote Nina Olsen “Bad things happen to people who ignore IRS correspondence.”
Note, that “assessment” in the US context is different in the Canadian context. In the US context, taxes are “assessed” when all rights to appeal have been extinguished.
Doesn’t this put a certain degree of onus on Ottawa. Doesn’t the IRS need permission from CRA/Ottawa to actually cross into Canada to conduct an in person audit. Additionally doesn’t the whole assistance in collection issue come into play now.
I will also ask do you think the GAO will demand assistance in collection from Flaherty. What type of leverage can the GAO bring to bear on Ottawa.
Roy wrote re IRS:
This points out one big difference between Canada and the US.
One day I found a CRA Notice of Audit in my mailbox. Surprised? You bet. Terrified? Nope. Didn’t lose a minute’s sleep or stop enjoying life in the daytime. Really!
If the audit ruled against me, it would have been a pain in the neck, but not anything major, and certainly not even remotely life-altering.
There was not one mention of penalties, nor any threats, nor the slightest hint of any misconduct on my part, in either the notice of audit or the interview.
I spent about an hour preparing for the audit interview, so I’d know what to expect. The CRA website is very user-friendly and described the audit procedure clearly and non-threateningly. I next sought out information on the particular issue under investigation, both on the CRA website and elsewhere online. I also spoke with an acquaintance who had been audited. I wanted to put my best case forward, but I did not intend to, nor did I, lie about anything.
In the interview, I felt kind of detached, like a witness in an investigation – not like the accused. All questions were directly relevant to the matter being investigated. I was not under oath, nevertheless the examiner took me at my word. She did ask me to send a document, one which, although I’m not really sure exactly what she wanted it for, struck me as relevant and reasonable.
Two weeks later I received a positive ruling in the mail. The entire process, from receiving the notice of audit to receiving the positive ruling, was just under three weeks.
All-in-all, my audit (research, preparation, interview) took a bit less than 2 hours out of my life. It sure didn’t keep me up at night or torment and overwhelm my daytime hours. No psychological or physical problems, and no fear of financial ruin, even if I had made a mistake on my return and the ruling had gone against me.
CRA did not automatically assume that I was guilty. CRA can tell the difference between a whale and a minnow, and they can tell the difference between a sophisticated fraudster and an everyday person who might have filled out their tax return incorrectly. I have the impression that CRA can be pretty tough when they think you’re really up to something, but unless something indicates that possibility, they start out with the assumption it’s a misunderstanding, not a crime.
My experience is that CRA is run like a business. It strikes me that CRA’s main interest is simply straightening things out efficiently.
@badger
Sorry, I have no idea what process the IRS is using to move OVDI participants into Streamlined. I’ll try to remember to ask my lawyer next time I talk to him.
You ask: “how can they still justify treating all minnows in OVD who qualify for Streamlined the same as the ‘whales’ in terms of the years in question rather than the three years of returns required by ‘Streamlined’ of the minnows who came forward later?”
My question is: “Should the IRS treat us as they would any other potential candidate for Streamlined, or should our tax liability be allowed to prejudice our case?
Allison Christians has written that great paper “Drawing the Boundaries of Tax Justice” that USCitizenAbroad posted here:
http://isaacbrocksociety.ca/2013/04/26/cook-v-tait-8-does-citizenship-based-taxation-cross-the-boundaries-of-tax-justice/#more-17830
I posed my question to Allison in an email. I hope she responds.
@Roy, I don’t understand the IRS. Go Forward and Quiet Disclosures are good. That is additional money. That is compliance. What else do they want more? Unconstitutional FBAR penalties for late filing?
@Chris
It’s really insane, isn’t it?
Punish EVERYONE as the most egregious type of tax evader so you don’t ever have to worry about anyone getting off more lightly than they deserve to be! No concern for culpability, no mercy other than to allow only the most innocent pass with the least amount of scrutiny, and even that’s done with a stick when there’s no clear definition as to what defines “high compliance risk”.
OK, here’s two bits from a scan of the report. The item that rightly or wrongly most stood out (p. 64):
The IRS is currently analyzing filed Forms 8938, Statement of Specified Foreign Financial Assets, to identify specific characteristics of the filing population and to assess filing behaviors indicating potential compliance issues. This analysis includes a statistical analysis of filers (e.g., income, age, filing status) and several measures of year-to-year filing behavior (e.g., taxable income changes, FBAR filing history, and Schedule B reporting patterns). This data will also be evaluated against other indicators of compliance risk.
Translation: IRS thinks anyone who has complied with the 8938 requirement initiated in 2012 deserves to be put under a microscope, and then examined and reexamined in hope of any pretext for brutal pursuit. Stupid logic suggests that this set of compliers might be the least profitable mining opportunity around. What would be the percentage in shoving a messed-up self-identification straight into a hornet’s nest? This is like saying that the place to seek a bank robber is among all the people lined up for the teller’s wicket the next day. Precisely what a dumb cop with no imagination might do when needing to look busy – and having absolutely no idea of anywhere else to look.
@ Roy Berg you say…….“Reasonable Cause” was and is a statutory defense to failure-to-file penalties. Most of the failure-to-file penalties are subject to the IRS’s automatic assessment procedure. As a result, it is possible to lose the ability to make the “reasonable cause” argument if you don’t respond within 30 days to the IRS notice…. This might be true for 1-2 years of not filing but anything beyond that 25% p.a FTF and 25% p.a FTP penalties will be assessed without your RC arguments having any impact anymore.
To quote Nina Olsen “Bad things happen to people who ignore IRS correspondence.”
Just wondering about the following scenario: US citizen renounces citizenship and files final tax forms including 8854, i.e. former US citizen is fully compliant and has logged-out of the system. That person then has a change of address. Since he/she no longer has any US tax obligations, the IRS is not informed of the change of address. Subsequently the IRS decides to pick on that person for some reason or other, but the correspondence cannot be delivered. What happens then? What if that person visits the USA years later, having no idea that the IRS may have some claim against him/her?
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….That person then has a change of address…. that is why if you want to avoid possible disater you have to make sure to provide a forwarding address at your old home to proove later that you have done everything that the correspondence can be delivered (for everything else there is MasterCard ) Hazards of Litigation !
I’ll just be an ostrich, very intentionally. There’s no way I can win one way or another. Also, I’m meeting my MP soon to discuss this matter from our side, and to provide my concerns about Canada agreeing to any IGA with the monster.
From AccountingToday site: http://www.accountingtoday.com/news/IRS-Offshore-Disclosure-Programs-Net-Billions-66521-1.html?ET=webcpa:e7025:241779a:&st=email
PierreD,
I haven’t been following your posts, so don’t know what your particular situation is, but I agree, with FATCA and citizenship-based taxation, if you’ve been caught in Canada with your pants down (by which I mean you have not been filing with the US), then no matter what choice you make, it is a lose-lose proposition if Canada signs an IGA.
Let us know how things go with your MP. Most of us who have been writing and talking to various MPs have not gotten very far. However, that’s no reason to give up. The squeaky wheel gets the oil comes to mind. We can’t let their apparent apathy beat us into quiet submission. Eventually, they will tire of us, and have do something about it.
@Calgary411,
Oh no, not another one. Someone take my computer away.
OK, everyone stop panicking. The IGA — in the small event it became instituted — remember the CCLA is on our side, calls for an electronic search on accounts up to a million dollars. If your bank has info that you are born in the USA, then move all your stuff to another bank, preferably a credit union.
Do not go to the USA and you are now laughing. Watch this again!!!
http://www.youtube.com/watch?v=zekiZYSVdeQ
. Watch this again!!!
@PierreD
The US government seems to have embarked up on a campaign that provides less incentive to come forward, and more ways you can cleanse yourself by fire.
You may want to make a submission to Canada’s Department of Finance where it’s seeking input from Canadians about FATCA IGA’s:
http://www.fin.gc.ca/treaties-conventions/notices/unitedstates-etatsunis-eng.asp
@Joe Smith,
Thanks, I needed that! 🙂
I am calm because:
1. CCLA is behind us.
2. The Charter supports us.
3. The Green Party is very behind us.
4. Other political parties are supportive as well.
5. I am a member of a credit union and can only be removed by a vote of Board of Directors.
6. IGAs call for electronic search up to 1,000,000. If I ever got close to that, I would split accounts.
7. Why would I ever visit a nation that is persecuting me and my family?
8. When I became a Canadian citizen, I intended to relinquish. Prove otherwise.
9. I am on first name basis with my MP.
.
@Joe Smith,
I like your list, and am with you on points 1 to 7. Re: #8, since I was born dual doesn’t apply(I envy those who can relinquish). Re:#9, never met him.
I think I will repeat 1 though 7 every night before bedtime. Maybe eventually I will get as calm as you.
Blaze referred to this Forbes / Robert Wood take on the GAO report: http://www.forbes.com/sites/robertwood/2013/04/29/despite-offshore-haul-irs-hunts-quiet-disclosures-first-time-fbars/
Wow! Filing is REALLY looking for trouble! Big time!