86 thoughts on “IRS says it’s “OK” to own PFIC’s through a “US” tax deferred account”
One thing I didn’t mention is that just preparing the tax return can be problematic. Form 8621 requires a separate form for each tax lot. My wife’s account had reinvested dividends. So we had hundreds of tax lots. So each sale of a PFIC (and we had 6 or so) has it’s own form. Each tax lot splits the form on say a sale. Each dividend has a form per tax lot.
I produced a spreadsheet with about 800 lines for each sale and dividend split by tax lot. My lawyer did parallel calc on only the sale side which was small. Or final numbers matched on sales. The dividend work dwarfed the sale side and only I did it.
So think about this for a bit. I needed to produce something like 500 form 8621’s. I couldn’t spend the time to enter the data into the tax s/w. It would take ages. I knew my officious agent would want the actual forms. My lawyer said so many forms would annoy her and she would instead take a spreadsheet. My lawyer gave her a spreadsheet but I wrote a C# program using itextsharp to take the spreadsheet I had and automatically generate the form 8621 and insert them into the tax returns.
Like I expected she wanted the real returns. She had already been saying how hard it would be to comply with their rules. By the end of the day I dumped the massive tax returns on her. It must have burned her up inside. Totally useless. Hundreds and hundreds of forms to wade through with little value. She redid the calcs and came up with bigger PFIC taxes.
I looked at her numbers and saw her mistake in minutes, My lawyer pointed her to the temp regs with the non-PFIC days and she caved:
>I revised the pfic calculations and came very close to the amounts you computed. I will make changes based on amounts you provided on the amended 1040 for 2010.
So my self prepared, hacked up by a computer program tax returns got accepted into OVDP even though my lawyer had originally said they had to be prepared by a CPA. I couldn’t stand paying the huge fees a second time. I was so happy at this point.
Within a few days we got here to exclude one PFIC account even though it had the same account number as another non-compliant account.
I paid my Obama taxes at that point to be rid of the whole thing.
The IRS has been sitting on my 2011 tax return for 7 months as the original was filed expecting we would take the OVDP modified mark to market calc. Once I get this over with the whole lot is done. That’s not part of OVDP though. We have exited the program knowing never to talk to the IRS again.
George,
Wouldn’t it be great if the U.S. powers that be came to their senses and allowed something that was so COMMON SENSE? What a moral solution for this horrendous monster that has come into the lives of *US Persons Abroad*.
Would it be a “job destroyer” for all those jobs created by the HIRE Act?
@ Neill, thanks for that. That is what I understood. As to the US/UK treaty, strangely enough, it is one of the most comprehensive around. Many other US DTAs don’t have same level of pension plan exclusion provisions. Well done on successfully negotiating the PFIC provisions. Amazing how many tax professionals don’t fully understand that law, much less the IRS and especially, ordinary taxpayers.
@Neill
your case seems different …. I filed Form 8833 to claim a treaty position with regards to employer pension contributions (article 18,23,24)
Publius, I agree the Yates & Co. proposal makes is so well done. God-willing it is being given serious reading south of the Canadian border.
But yesterday, my statute of limitation were over for my tax returns. I am hopeful I won’t ever be audited for the first 3 years of FBARs.
Be careful here. The tax law is now littered with exceptions for foreign accounts. Higher penalties and stuff that keeps the statute of limitations open.
For example if you own a PFIC you are required to file form 8621 each year even if no tax is due. Failure to file 8621 keeps the statute of limitations open for the return forever. Because of when it was enacted it keeps returns open from something like 2006 onward.
@anon100percent,
The UK treaty has more stuff than most treaties wrt pension contributions. I don’t know the details since I am not allowed to make an contributions to a UK pension.
The IRS never once tried to assert anything about form 8833. It came up a few weeks ago on tax almanac when I was asking a question and I looked into it then. My reading of the law suggests I have nothing to worry about.
@ Neill
…..Failure to file 8621 keeps the statute of limitations open for the return forever…….
No, not for the whole return just the specific part with Form 8621
@anon100percent
>No, not for the whole return just the specific part with Form 8621
From memory this is only if the deficiency is non-willful. So you have that hurdle to get over. Based on my interaction with the IRS they read the rules the way they want to and different ways at different times to maximize your tax and penalties.
All I am saying is that if your using the statute of limitations check like mad for all these little bits and pieces they have scattered in the code.
I have been here since before I could read and became a Canadian long before they changed the rules, so I’ve been happily expatriated long before I earned anything big enough to report. I do have relatives who were less on the ball than I and failed to take steps. Personally, I cannot IMAGINE going through the torture of trying to fit into two tax regimes at once. Bad enough for an ordinary working person with relatively simple savings profile. It would be simply impossible for anyone in a small business to begin to comply with that! My heartfelt sympathies to those of you who tried to stay on the right side of two incompatible systems at once. I don’t speak Klingon so I can only barely get what you have been going through.
I’ll mention a little about the horrors of gathering the data. This was the longest part of the process. I probably spent the best part of a year doing this.
Both myself and my wife are UK citizens. My wife came to the us in 2001 and I entered in 1997. We love America and we have been very successful. I came to the US in my 30’s and I had had multiple jobs already. I had two ISA’s but sold them before 2003. I had zero idea of how they were taxed. I had other accounts though. Bank accounts with small sums in them, premium bonds, A Halifax bank account my mom opened for me when I was a kid as a lesion in savings, and a couple of pensions.
Halifax demutualized at some point and this bank issued me shares and created a brokerage account for me. I didn’t know this of course. All we had was an ancient bank book stuck in the back of a draw in the UK. Of course the shares lost all their value but their high balance was a hit in OVDP since they took a year before the banks collapse.
My wife though was incredibly diligent. She had saved all the jobs she worked. She had saved even when she was a student. Money was clearly tight back then but she saved. She had five pensions, one life insurance policy for an endowment mortgage and Six ISA’s.
We had to get the balances for pensions going back to 2003. We realized there was no tax due so we just needed to get balances for FBAR. The life insurance I guessed would escape taxes. My CPA said it wouldn’t. We had to get a professional opinion on it and that cost be $500. It was tax free. So I just needed the balances from 2003.
The PFIC stuff though was hard we needed to know the tax lots which meant we needed records going back to the early nineties. Stuff changed names, stuff split, stuff got rounded up, companies got purchased or went out of business, dividends got issued and reinvested We made hundreds of phone calls. Wrote loads of letters. Gradually over that year we put together the record. All the time it was horrible but I had no idea it would just keep going on and on.
Knowing what lay ahead would have crushed me at any time in the process. I didn’t know so I just kept getting depressed and doing the stuff they wanted.
Near the end of the process it had been so horrible we talked about leaving the US. They had treated us so badly I was thinking about leaving. Then I read about the exit tax. A huge financial prison they enacted while I was here to make leaving as hard as the OVDP and with huge taxes as well. I was a prisoner in the US with no vote but all the obligations of somebody who can.
It was only when I decided to understand the tax code wrt PFIC and foreign accounts that stuff turned around for me. I could fight them a little and start to feel good again.
I noticed a problem in the tax reporting of BNY Mellon wrt PFIC’s. In trying to lessen my tax burden I tried to understand why they reported the way they did. They were completely unhelpful. After a bunch of conversation it became clear that I couldn’t lower my taxes. They had reported incorrectly to the IRS. They had been such a pain in the ass that I dropped the dime on them with form 211. I was accepted into the whistleblower program with only publically available info and our 1099 they sent us. I hope I can get some money back.
@Neill
It appears you were in the 2011 OVDI. You say the IRS became more lenient over time. Can you tell me when when it was that they actually started dealing with the contents of your submission? I ask, because at a point the IRS began to recognize that benign actors were being caught up in this program intended for bonafide tax evaders.
Sorry, I may have miss you saying, but do you live in the US, and were living in the US at the time you entered OVDI? It seems to me that one is treated differently depending on whether you reside within or outside the US. The IRS has been giving penalty refunds to people who paid more than the 5% penalty base in the 2009 OVDP if they meet certain criteria.
@bubblebustin,
We have resided in the US continuously since 1997 for me and 2001 for my wife. So we entered the OVDP while US green card holders. We have not been eligible to be US citizens though as we had to go back onto H1B for a time. So I actually relinquished my green card in 2003/2004 to go back on my original H1B. They didn’t put me on a name and shame list though.
All our foreign accounts were created when we lived and worked in the UK or were created by some process outside of our control. No money moved from the US to the UK. Some money moved from the UK to the US as we wound down some stuff.
Our argument was that our stuff was normal for a UK citizen and that we didn’t know the rules.
We entered the OVDP I guess just before FBAR filing time (Jun 30th) 2011. We filed the FBAR for 2011 disclosing accounts then entered OVDP immediately to give them no time to come after us. Unfortunately 2011 taxes were conditional on mark to market calc of OVDP. My CPA didn’t file 8621 so I had no choice but to correct it later.
If my agent did become more lenient it was in Dec of 2013. I contacted the IRS agent directly and told her I was looking to opt out. I knew the tax law and had done the taxes using sec 1291. This was a stick the IRS had used to say I couldn’t comply with the tax laws. So opting out was easy in term of compliance. We also had great evidence. We had reported some bank accounts and their income etc. We did have one action we had taken on closing the accounts that was a worry.I wanted to lower my PFIC tax and balance penalty. Then I though I could live with it. As it turned out the agent went looking for more and actually saved me a bunch of cash. Everything she audited was correct (even when she didn’t think it was) or was overstated to my detriment.
So my final bill was much lower than my give up goal. To opt out meant more costs, loads of uncertainty (and every time the IRS pulled a fast one on us) and loads more time doing god knows what at the whim of another agent.
I paid.
Another thing to note is that the modified mark to market PFIC calc offered by OVDP has income that’s included for federal and AMT. Here is what they say in the FAQ:
>Regular and Alternative Minimum Tax are both to be computed without the PFIC dispositions or MTM gains and losses. The tax from the PFIC transactions (20% plus the 7% for the first year, if applicable) is added to (or subtracted from) the applicable total tax (either regular or AMT, whichever is higher). The tax and interest (i.e., the 7% for the first year of the voluntary disclosure) computed under the OVDP alternative MTM can be added to the applicable total tax (either regular or AMT, whichever is higher) and placed on the amended return in the margin, with a supporting schedule.
Now that’s really a scam. If you read the instructions for form 8621 your PFIC income gets split into 4 buckets:
1) Capital loss (if you make a loss on a sale)
2) Ordinary income (for non-pfic days)
3) Sec 1291 tax (maximal tax rate anyone could pay for the year of the PFIC days)
4) Sec 1291 interest (interest on the sec 1291 tax compounded daily)
#3 adds only into federal tax to pay. It adds no income. So if your subject to say $2k in AMT the first $2k of sec 1291 tax is tax free! It increases federal taxes to pay but not AMT. If you are paying AMT then fed taxes are smaller. Increasing federal taxes doesn’t increase your taxes!
This is a bug in form 8621.
For somebody who has relinquished you can use my scheme to make a packet:
so the whole process took approx. from 5/2011 to 3/2014….. that is nearly 3 years !
Sorry but I have to laugh when you wrote that the examiner became more lenient when you “threatened” her with opt-out . Just like a shoe salesman that offers you a discount to stay with the product.
@anon100percent
I got the year wrong sorry. You file the 2011 FBAR in Jun 30 2012. I checked my email and we first spoke to the lawyer in Jan 2012. We got all the account balances (and enumerated the accounts) for that one years FBAR. We filed the FBAR with undisclosed accounts and extended the 2011 tax return till Oct 2012. Then the big slog went on preparing the disclosure.
I had realized we had problems (though no idea how bad) in Dec 2010. I was starting to realize the ISA’s might not be protected by the tax treaty. I really had no idea what they said mind you or what it meant. We sold all the PFICs except one that we sold in Jan 2011 (we missed it). My wife wanted to be compliant.
By the time Oct 2012 came I had enough information for the CPA to do the tax returns for OVDP and the 2011 return under the assumption of mark to market. $36k in taxes and a balance penalty of $70k. Problem is we had a big loss in 2008 (fake caused by mark to market) and the IRS denied the refund. Then the totally unacceptable bill became unbelievable.
We tried to get the IRS to move on the ISAs, the tax refund in 2008 etc. Nothing. In fact they told us if we took too long they would just keep all the money anyway even if we changed the way we did our taxes. They told me I couldn’t go to sec 1291 because it would likely cost more (a lie) and it was too complicated (well yes it was) and I couldn’t afford to get them done. They threatened me with criminal prosecution (all boilerplate responses of course).
All the time there was a new thing they wanted money for and a new trick they pulled out.
So I guess all told it took a couple of years and a few months.
I would come home from long days at work and just spend hours getting data, putting stuff in spreadsheets, thinking through different approaches, trying to understand the tax law and basically dying inside.
@Neill
Thank you for the explanation. It seems to me that the more you have to lose, the more likely it is that you’d enter any one of these so-called amnesty programs. As much as it was a mistake for us to enter OVDI, the alternatives to doing so weren’t so rosy either – even for benign actors. Still, knowing what I know now as a result of learning from the NTA’s 2011 Report to Congress that benign actors were being railroaded into OVDI, we might have just started filing going forward, only our FBAR’s would have raised flags and with no SOL’s on first time filers could have potentially led to many years of sleepless nights – maybe even for the rest of our lives.
Did the IRS abate any of your tax penalties under the Internal Revenue Manual?
@Neill
I am glad to hear that you have come out of it.
It has long been known that immigrants are much more likely to get caught up in these issues.
One thing I was wonder on this issue is whether it might be possible to get the Mexicans on board. According to the U.S. Social Security Administration’s website, all private-sector employees and cooperative members entering the labor force on or after July 1, 1997 have been required to open individual accounts called afores.
According to Moodys Gartner http://www.moodysgartner.com/downloads/2014-03-10%20FATCA%20IGA%20Report.pdf
“Mexico has a type of account commonly referred to as an AFORE,31 that is a self-directed fund through which the taxpayer may directly invest his or her social security contributions. AFOREs are passive foreign investment companies under § 1297 and therefore likely Financial Institutions under the U.S. – Mexico intergovernmental agreement.32 Just like RESPs in Canada, AFOREs are also removed from the definition of Financial Account in Annex II, § III(c)(i) of the U.S. – Mexico intergovernmental agreement.
are pretty much like the Canadian RESP and are considered…f Mexican AFOREs and Australian superannuation accounts are not excluded either as EBOs or Deemed-Compliant
Financial Institutions for FATCA purposes, they will occupy the same unenviable and incongruous position of being classified as both a Financial Institution and a non-account.
35 ”
The big immigrant group is the Mexicans and I wonder how that is going to pan out (imagine if you don’t speaThey are a big group and may actually have massive PFIC problems. There are 3/4 of a million people in Mexico who were born in the U.S. Most of them are dual nationals: there are only about 60,000 visa granted to U.S. persons.
A response from our lawyer this morning re the topic of this thread, if PFIC’s are covered by the treaty:
“…I think the IRS is not pursuing that’s Treaty protected — kind of a firewall. So we’re not reporting PFICs inside RRSPs”
A definite maybe.
@bubblebustin ,
>Did the IRS abate any of your tax penalties under the Internal Revenue Manual?
No. They followed OVDP to the letter. No deviations. If we could show there was no unreported income in 2003-2010 on an account we could get it out of OVDP balance penalty. We had to argue that it was a separate account but this wasn’t defined in the OVDP I guess.
That revenue manual stuff is for opt out. The IRS is also free to ignore that. That’s been ruled on in court. So our worry was that every time the IRS could stick it to us they did. They would invent some stuff. They wanted to know details of pensions I assume to find something wrong to bring them into the balance penalty. So opting out was a lottery. So I just worked on minimizing the penalties and tax. In the end it just wasn’t worth risking opt out. Sure we would have felt better fighting some more since we felt the government set a trap for us. I got two small victories and I quit. I am sure that’s not what people want to hear on this board.
The whole balance is wrong. The IRS telling the world what is excluded from FATCA. Who’s running Canada? It seems not Harper.
…….”only our FBAR’s would have raised flags and with no SOL’s on first time filers could have potentially led to many years of sleepless nights” …….
The FBAR civil penalty statute of limitations is 6 years from the date of the violation, generally June 30th. The criminal FBAR statute of limitations is only 5 years. The FBAR statute continues to run whether or not the FBAR was filed !
Now, to take these concepts home to the OVDI/P situation, participants are required to file amended returns and delinquent original FBARs (or in some cases amended FBARs). Those filings will not start new SOLs. Obviously, if a taxpayer accepts the inside the program settlement, the SOLs are irrelevant. However, if a taxpayer opts out, SOLs are relevant. In most opt out cases (shouldn’t occur if there is civil or criminal fraud potential), some income tax years otherwise included in OVDI/P will drop off because the 3 or 6 year statute of limitations will have expired for some years. The same is true for the FBARs (6 year SOL). (Some readers worry that the IRS will apply the FBAR penalty in a way to make up for the revenue lost when early income tax years drop off; I have no data on this, but I would not be surprised if that did happen)
@anon100percent
It’s not the SOL on FBARs that I’m referring to.
A first time filer reporting an account of approximately $1.5 M might pique their curiosity as to where the source of funds had originated, and with no SOL on tax filing, one would expect that the IRS would not stop until they’re satisfied that the’ve uncovered any taxable event that may led to that balance, no?
One thing I didn’t mention is that just preparing the tax return can be problematic. Form 8621 requires a separate form for each tax lot. My wife’s account had reinvested dividends. So we had hundreds of tax lots. So each sale of a PFIC (and we had 6 or so) has it’s own form. Each tax lot splits the form on say a sale. Each dividend has a form per tax lot.
I produced a spreadsheet with about 800 lines for each sale and dividend split by tax lot. My lawyer did parallel calc on only the sale side which was small. Or final numbers matched on sales. The dividend work dwarfed the sale side and only I did it.
So think about this for a bit. I needed to produce something like 500 form 8621’s. I couldn’t spend the time to enter the data into the tax s/w. It would take ages. I knew my officious agent would want the actual forms. My lawyer said so many forms would annoy her and she would instead take a spreadsheet. My lawyer gave her a spreadsheet but I wrote a C# program using itextsharp to take the spreadsheet I had and automatically generate the form 8621 and insert them into the tax returns.
Like I expected she wanted the real returns. She had already been saying how hard it would be to comply with their rules. By the end of the day I dumped the massive tax returns on her. It must have burned her up inside. Totally useless. Hundreds and hundreds of forms to wade through with little value. She redid the calcs and came up with bigger PFIC taxes.
I looked at her numbers and saw her mistake in minutes, My lawyer pointed her to the temp regs with the non-PFIC days and she caved:
>I revised the pfic calculations and came very close to the amounts you computed. I will make changes based on amounts you provided on the amended 1040 for 2010.
So my self prepared, hacked up by a computer program tax returns got accepted into OVDP even though my lawyer had originally said they had to be prepared by a CPA. I couldn’t stand paying the huge fees a second time. I was so happy at this point.
Within a few days we got here to exclude one PFIC account even though it had the same account number as another non-compliant account.
I paid my Obama taxes at that point to be rid of the whole thing.
The IRS has been sitting on my 2011 tax return for 7 months as the original was filed expecting we would take the OVDP modified mark to market calc. Once I get this over with the whole lot is done. That’s not part of OVDP though. We have exited the program knowing never to talk to the IRS again.
George,
Wouldn’t it be great if the U.S. powers that be came to their senses and allowed something that was so COMMON SENSE? What a moral solution for this horrendous monster that has come into the lives of *US Persons Abroad*.
Would it be a “job destroyer” for all those jobs created by the HIRE Act?
@ Neill, thanks for that. That is what I understood. As to the US/UK treaty, strangely enough, it is one of the most comprehensive around. Many other US DTAs don’t have same level of pension plan exclusion provisions. Well done on successfully negotiating the PFIC provisions. Amazing how many tax professionals don’t fully understand that law, much less the IRS and especially, ordinary taxpayers.
@Neill
your case seems different …. I filed Form 8833 to claim a treaty position with regards to employer pension contributions (article 18,23,24)
Publius, I agree the Yates & Co. proposal makes is so well done. God-willing it is being given serious reading south of the Canadian border.
For those who want to read that again (or for all, please read it for the first time!) what real LEADERS should make sure change (as they don’t want this collateral damage on their collective conscious) : http://isaacbrocksociety.ca/2014/01/27/todays-must-read-us-senate-finance-committee-submission-by-john-richardson-willard-yates-stephen-kish/.
I also admire the simplicity and common sense of George’s comment: http://isaacbrocksociety.ca/2014/04/15/irs-says-is-ok-to-own-pfics-through-a-us-tax-deferred-account/comment-page-1/#comment-1459833, as I compare it to the account Neill and bubblesbustin describe at the same post.
@AlmostFree,
Be careful here. The tax law is now littered with exceptions for foreign accounts. Higher penalties and stuff that keeps the statute of limitations open.
For example if you own a PFIC you are required to file form 8621 each year even if no tax is due. Failure to file 8621 keeps the statute of limitations open for the return forever. Because of when it was enacted it keeps returns open from something like 2006 onward.
@anon100percent,
The UK treaty has more stuff than most treaties wrt pension contributions. I don’t know the details since I am not allowed to make an contributions to a UK pension.
The IRS never once tried to assert anything about form 8833. It came up a few weeks ago on tax almanac when I was asking a question and I looked into it then. My reading of the law suggests I have nothing to worry about.
@ Neill
…..Failure to file 8621 keeps the statute of limitations open for the return forever…….
No, not for the whole return just the specific part with Form 8621
@anon100percent
>No, not for the whole return just the specific part with Form 8621
From memory this is only if the deficiency is non-willful. So you have that hurdle to get over. Based on my interaction with the IRS they read the rules the way they want to and different ways at different times to maximize your tax and penalties.
All I am saying is that if your using the statute of limitations check like mad for all these little bits and pieces they have scattered in the code.
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I have been here since before I could read and became a Canadian long before they changed the rules, so I’ve been happily expatriated long before I earned anything big enough to report. I do have relatives who were less on the ball than I and failed to take steps. Personally, I cannot IMAGINE going through the torture of trying to fit into two tax regimes at once. Bad enough for an ordinary working person with relatively simple savings profile. It would be simply impossible for anyone in a small business to begin to comply with that! My heartfelt sympathies to those of you who tried to stay on the right side of two incompatible systems at once. I don’t speak Klingon so I can only barely get what you have been going through.
I’ll mention a little about the horrors of gathering the data. This was the longest part of the process. I probably spent the best part of a year doing this.
Both myself and my wife are UK citizens. My wife came to the us in 2001 and I entered in 1997. We love America and we have been very successful. I came to the US in my 30’s and I had had multiple jobs already. I had two ISA’s but sold them before 2003. I had zero idea of how they were taxed. I had other accounts though. Bank accounts with small sums in them, premium bonds, A Halifax bank account my mom opened for me when I was a kid as a lesion in savings, and a couple of pensions.
Halifax demutualized at some point and this bank issued me shares and created a brokerage account for me. I didn’t know this of course. All we had was an ancient bank book stuck in the back of a draw in the UK. Of course the shares lost all their value but their high balance was a hit in OVDP since they took a year before the banks collapse.
My wife though was incredibly diligent. She had saved all the jobs she worked. She had saved even when she was a student. Money was clearly tight back then but she saved. She had five pensions, one life insurance policy for an endowment mortgage and Six ISA’s.
We had to get the balances for pensions going back to 2003. We realized there was no tax due so we just needed to get balances for FBAR. The life insurance I guessed would escape taxes. My CPA said it wouldn’t. We had to get a professional opinion on it and that cost be $500. It was tax free. So I just needed the balances from 2003.
The PFIC stuff though was hard we needed to know the tax lots which meant we needed records going back to the early nineties. Stuff changed names, stuff split, stuff got rounded up, companies got purchased or went out of business, dividends got issued and reinvested We made hundreds of phone calls. Wrote loads of letters. Gradually over that year we put together the record. All the time it was horrible but I had no idea it would just keep going on and on.
Knowing what lay ahead would have crushed me at any time in the process. I didn’t know so I just kept getting depressed and doing the stuff they wanted.
Near the end of the process it had been so horrible we talked about leaving the US. They had treated us so badly I was thinking about leaving. Then I read about the exit tax. A huge financial prison they enacted while I was here to make leaving as hard as the OVDP and with huge taxes as well. I was a prisoner in the US with no vote but all the obligations of somebody who can.
It was only when I decided to understand the tax code wrt PFIC and foreign accounts that stuff turned around for me. I could fight them a little and start to feel good again.
I noticed a problem in the tax reporting of BNY Mellon wrt PFIC’s. In trying to lessen my tax burden I tried to understand why they reported the way they did. They were completely unhelpful. After a bunch of conversation it became clear that I couldn’t lower my taxes. They had reported incorrectly to the IRS. They had been such a pain in the ass that I dropped the dime on them with form 211. I was accepted into the whistleblower program with only publically available info and our 1099 they sent us. I hope I can get some money back.
@Neill
It appears you were in the 2011 OVDI. You say the IRS became more lenient over time. Can you tell me when when it was that they actually started dealing with the contents of your submission? I ask, because at a point the IRS began to recognize that benign actors were being caught up in this program intended for bonafide tax evaders.
Sorry, I may have miss you saying, but do you live in the US, and were living in the US at the time you entered OVDI? It seems to me that one is treated differently depending on whether you reside within or outside the US. The IRS has been giving penalty refunds to people who paid more than the 5% penalty base in the 2009 OVDP if they meet certain criteria.
@bubblebustin,
We have resided in the US continuously since 1997 for me and 2001 for my wife. So we entered the OVDP while US green card holders. We have not been eligible to be US citizens though as we had to go back onto H1B for a time. So I actually relinquished my green card in 2003/2004 to go back on my original H1B. They didn’t put me on a name and shame list though.
All our foreign accounts were created when we lived and worked in the UK or were created by some process outside of our control. No money moved from the US to the UK. Some money moved from the UK to the US as we wound down some stuff.
Our argument was that our stuff was normal for a UK citizen and that we didn’t know the rules.
We entered the OVDP I guess just before FBAR filing time (Jun 30th) 2011. We filed the FBAR for 2011 disclosing accounts then entered OVDP immediately to give them no time to come after us. Unfortunately 2011 taxes were conditional on mark to market calc of OVDP. My CPA didn’t file 8621 so I had no choice but to correct it later.
If my agent did become more lenient it was in Dec of 2013. I contacted the IRS agent directly and told her I was looking to opt out. I knew the tax law and had done the taxes using sec 1291. This was a stick the IRS had used to say I couldn’t comply with the tax laws. So opting out was easy in term of compliance. We also had great evidence. We had reported some bank accounts and their income etc. We did have one action we had taken on closing the accounts that was a worry.I wanted to lower my PFIC tax and balance penalty. Then I though I could live with it. As it turned out the agent went looking for more and actually saved me a bunch of cash. Everything she audited was correct (even when she didn’t think it was) or was overstated to my detriment.
So my final bill was much lower than my give up goal. To opt out meant more costs, loads of uncertainty (and every time the IRS pulled a fast one on us) and loads more time doing god knows what at the whim of another agent.
I paid.
Another thing to note is that the modified mark to market PFIC calc offered by OVDP has income that’s included for federal and AMT. Here is what they say in the FAQ:
>Regular and Alternative Minimum Tax are both to be computed without the PFIC dispositions or MTM gains and losses. The tax from the PFIC transactions (20% plus the 7% for the first year, if applicable) is added to (or subtracted from) the applicable total tax (either regular or AMT, whichever is higher). The tax and interest (i.e., the 7% for the first year of the voluntary disclosure) computed under the OVDP alternative MTM can be added to the applicable total tax (either regular or AMT, whichever is higher) and placed on the amended return in the margin, with a supporting schedule.
Now that’s really a scam. If you read the instructions for form 8621 your PFIC income gets split into 4 buckets:
1) Capital loss (if you make a loss on a sale)
2) Ordinary income (for non-pfic days)
3) Sec 1291 tax (maximal tax rate anyone could pay for the year of the PFIC days)
4) Sec 1291 interest (interest on the sec 1291 tax compounded daily)
#3 adds only into federal tax to pay. It adds no income. So if your subject to say $2k in AMT the first $2k of sec 1291 tax is tax free! It increases federal taxes to pay but not AMT. If you are paying AMT then fed taxes are smaller. Increasing federal taxes doesn’t increase your taxes!
This is a bug in form 8621.
For somebody who has relinquished you can use my scheme to make a packet:
http://www.taxalmanac.org/index.php/Discussion:AMTBuster_(tm)
@Neill
so the whole process took approx. from 5/2011 to 3/2014….. that is nearly 3 years !
Sorry but I have to laugh when you wrote that the examiner became more lenient when you “threatened” her with opt-out . Just like a shoe salesman that offers you a discount to stay with the product.
@anon100percent
I got the year wrong sorry. You file the 2011 FBAR in Jun 30 2012. I checked my email and we first spoke to the lawyer in Jan 2012. We got all the account balances (and enumerated the accounts) for that one years FBAR. We filed the FBAR with undisclosed accounts and extended the 2011 tax return till Oct 2012. Then the big slog went on preparing the disclosure.
I had realized we had problems (though no idea how bad) in Dec 2010. I was starting to realize the ISA’s might not be protected by the tax treaty. I really had no idea what they said mind you or what it meant. We sold all the PFICs except one that we sold in Jan 2011 (we missed it). My wife wanted to be compliant.
By the time Oct 2012 came I had enough information for the CPA to do the tax returns for OVDP and the 2011 return under the assumption of mark to market. $36k in taxes and a balance penalty of $70k. Problem is we had a big loss in 2008 (fake caused by mark to market) and the IRS denied the refund. Then the totally unacceptable bill became unbelievable.
We tried to get the IRS to move on the ISAs, the tax refund in 2008 etc. Nothing. In fact they told us if we took too long they would just keep all the money anyway even if we changed the way we did our taxes. They told me I couldn’t go to sec 1291 because it would likely cost more (a lie) and it was too complicated (well yes it was) and I couldn’t afford to get them done. They threatened me with criminal prosecution (all boilerplate responses of course).
All the time there was a new thing they wanted money for and a new trick they pulled out.
So I guess all told it took a couple of years and a few months.
I would come home from long days at work and just spend hours getting data, putting stuff in spreadsheets, thinking through different approaches, trying to understand the tax law and basically dying inside.
@Neill
Thank you for the explanation. It seems to me that the more you have to lose, the more likely it is that you’d enter any one of these so-called amnesty programs. As much as it was a mistake for us to enter OVDI, the alternatives to doing so weren’t so rosy either – even for benign actors. Still, knowing what I know now as a result of learning from the NTA’s 2011 Report to Congress that benign actors were being railroaded into OVDI, we might have just started filing going forward, only our FBAR’s would have raised flags and with no SOL’s on first time filers could have potentially led to many years of sleepless nights – maybe even for the rest of our lives.
Did the IRS abate any of your tax penalties under the Internal Revenue Manual?
@Neill
I am glad to hear that you have come out of it.
It has long been known that immigrants are much more likely to get caught up in these issues.
One thing I was wonder on this issue is whether it might be possible to get the Mexicans on board. According to the U.S. Social Security Administration’s website, all private-sector employees and cooperative members entering the labor force on or after July 1, 1997 have been required to open individual accounts called afores.
According to Moodys Gartner
http://www.moodysgartner.com/downloads/2014-03-10%20FATCA%20IGA%20Report.pdf
“Mexico has a type of account commonly referred to as an AFORE,31 that is a self-directed fund through which the taxpayer may directly invest his or her social security contributions. AFOREs are passive foreign investment companies under § 1297 and therefore likely Financial Institutions under the U.S. – Mexico intergovernmental agreement.32 Just like RESPs in Canada, AFOREs are also removed from the definition of Financial Account in Annex II, § III(c)(i) of the U.S. – Mexico intergovernmental agreement.
are pretty much like the Canadian RESP and are considered…f Mexican AFOREs and Australian superannuation accounts are not excluded either as EBOs or Deemed-Compliant
Financial Institutions for FATCA purposes, they will occupy the same unenviable and incongruous position of being classified as both a Financial Institution and a non-account.
35 ”
The big immigrant group is the Mexicans and I wonder how that is going to pan out (imagine if you don’t speaThey are a big group and may actually have massive PFIC problems. There are 3/4 of a million people in Mexico who were born in the U.S. Most of them are dual nationals: there are only about 60,000 visa granted to U.S. persons.
A response from our lawyer this morning re the topic of this thread, if PFIC’s are covered by the treaty:
“…I think the IRS is not pursuing that’s Treaty protected — kind of a firewall. So we’re not reporting PFICs inside RRSPs”
A definite maybe.
@bubblebustin ,
>Did the IRS abate any of your tax penalties under the Internal Revenue Manual?
No. They followed OVDP to the letter. No deviations. If we could show there was no unreported income in 2003-2010 on an account we could get it out of OVDP balance penalty. We had to argue that it was a separate account but this wasn’t defined in the OVDP I guess.
That revenue manual stuff is for opt out. The IRS is also free to ignore that. That’s been ruled on in court. So our worry was that every time the IRS could stick it to us they did. They would invent some stuff. They wanted to know details of pensions I assume to find something wrong to bring them into the balance penalty. So opting out was a lottery. So I just worked on minimizing the penalties and tax. In the end it just wasn’t worth risking opt out. Sure we would have felt better fighting some more since we felt the government set a trap for us. I got two small victories and I quit. I am sure that’s not what people want to hear on this board.
The whole balance is wrong. The IRS telling the world what is excluded from FATCA. Who’s running Canada? It seems not Harper.
…….”only our FBAR’s would have raised flags and with no SOL’s on first time filers could have potentially led to many years of sleepless nights” …….
The FBAR civil penalty statute of limitations is 6 years from the date of the violation, generally June 30th. The criminal FBAR statute of limitations is only 5 years. The FBAR statute continues to run whether or not the FBAR was filed !
Now, to take these concepts home to the OVDI/P situation, participants are required to file amended returns and delinquent original FBARs (or in some cases amended FBARs). Those filings will not start new SOLs. Obviously, if a taxpayer accepts the inside the program settlement, the SOLs are irrelevant. However, if a taxpayer opts out, SOLs are relevant. In most opt out cases (shouldn’t occur if there is civil or criminal fraud potential), some income tax years otherwise included in OVDI/P will drop off because the 3 or 6 year statute of limitations will have expired for some years. The same is true for the FBARs (6 year SOL). (Some readers worry that the IRS will apply the FBAR penalty in a way to make up for the revenue lost when early income tax years drop off; I have no data on this, but I would not be surprised if that did happen)
@anon100percent
It’s not the SOL on FBARs that I’m referring to.
A first time filer reporting an account of approximately $1.5 M might pique their curiosity as to where the source of funds had originated, and with no SOL on tax filing, one would expect that the IRS would not stop until they’re satisfied that the’ve uncovered any taxable event that may led to that balance, no?