cross-posted from citizenshipsolutions.ca
by John Richardson
Introduction …
Most meetings with Mr. #FBAR take place in "The Twilight Zone" https://t.co/9UJw0GxGIf pic.twitter.com/uqjqYsKKtZ
— Citizenship Lawyer (@ExpatriationLaw) February 5, 2017
This post is one more of a collection of FBAR posts on this blog. The most recent FBAR posts are
here and here.
The “unfiled FBAR” continues to be a problem for certain Homeland Americans with “offshore accounts” and all Americans abroad, who continue to “commit personal finance abroad”.
Be careful what you "fix for"! What to do about the unfiled #FBAR https://t.co/sAh01HpWin via @ExpatriationLaw = "small steps = big results"
— Citizenship Lawyer (@ExpatriationLaw) February 5, 2017
The above tweet references a recent post which discussed how to “fix past compliance problems“. The introduction included:
This blog post will hopefully encourage those with U.S. tax issues to consider whether they can deal with minor/unintentional FBAR violations as a “stand alone single problem”. There may be no need to escalate and expand one single problem into a multi-dimensional full blown tax problem that may end up with unintended and unanticipated costly professional fees as well as undue time spent! Read on and learn why. Keeping a calm head is most important, even if it is most difficult
to do in the face of the scary situation of not being in compliance with the U.S. tax and regulatory regime.
Introducing Mr. and Mrs Kentara – When the innocent enter the “Twilight Zone” …
The facts (as reported by Virginia La Torre Jeker in her outstanding analysis) …
In Kentera v. United States, 2017 U.S. Dist. LEXIS 12450 (ED WI 2017), the US District Court dismissed a complaint filed by a husband and wife living in California. The Kentera’s were seeking review of FBAR nonwillful penalties asserted by the IRS. The nonwillful FBAR penalties were assessed pursuant to an audit after the couple withdrew from the IRS’ 2011 Offshore Voluntary Disclosure Initiative ( VDI).
The facts of the case are taken from the plaintiff’s complaint, which can be read here. In summary, they are as follows:
In 1984, after the death of his father, the plaintiff-husband, Milo Kentera, inherited a Swiss foreign bank account at Banque Cantonale de Geneve (Swiss Account). The account was automatically transferred to the plaintiff at the death of his father, so the plaintiff did not take any action in creating this account. Sometime soon afterwards, Milo added his wife’s name to the Swiss Account. The balance in the account was under USD10,000 through 2004 but increased somewhat in 2005-06 going over the USD10,000 FBAR filing threshold. The Swiss Account increased significantly in 2007 upon the sale of the plaintiff’s parents’ Montenegro real property. Some of the sales proceeds were distributed to plaintiff Milo and deposited in the Swiss Account, with the balance paid to Milo’s siblings.
Neither of the plaintiffs were well-versed in US tax matters. The husband was a pharmacist and his wife was a homemaker. Since 1984 when the account was inherited, the plaintiffs always disclosed the Swiss Account to their various accountants on tax organizers and always disclosed the account on their federal income tax returns (Schedule B). However, when the account first exceeded USD 10,000 in 2005, their first accountant failed to prepare or file an FBAR for the plaintiffs. Their second accountant continued this FBAR failure for a number of years despite the fact he clearly knew of the existence of the account from the prior tax returns given to him by the plaintiffs; he also failed to ask if any foreign interest was earned on the account, and consequently,interest income was omitted. In 2010, a third accountant acknowledged the existence of the Swiss Account on the plaintiffs’ return and included interest income from the Account, but she also failed to prepare or file an FBAR. Please note, certainly a tax professional should have been well aware of the FBAR filing rules by the time a 2010 FBAR should have been filed (i.e., June 30 2011). At this time the first IRS OVDI had been in full swing, having been initiated in 2009 and many professional and non-professional articles were written about the problems with FBAR.
Sometime in approximately September 2011, the plaintiffs entered the recently announced IRS 2011 OVDI program. They amended tax returns to include omitted interest income from the Swiss Account and filed completed FBARs for the 6 year period, 2005-2010. In August 2013, the IRS provided Plaintiffs with a Form 906, Closing Agreement assessing a miscellaneous penalty of $90,092. The complaint stated that plaintiffs “withdrew” from the OVDI program the following month. I believe the plaintiffs “opted out” of the program, but am not sure. They were soon the subject of examination by an IRS agent. The IRS agent recommended that plaintiffs be assessed non-willful FBAR penalties under the Bank Secrecy Act, and later proposed assessing the penalties as follows:
1) As to the husband, Milo Kentera: $500 for calendar year 2006; and
$10,000 per year for calendar years 2007, 2008, 2009, and 2010, for a
total penalty of $40,500.2) As to the wife, Lois Kentera: $500 for calendar year 2006; and $2,500
per year for calendar years 2007, 2008, 2009, and 2010, for a total
penalty of $10,500; andPlaintiffs protested the penalties at IRS conferences, but their protests fell on deaf ears and the IRS sent each of the plaintiffs a letter of an “appeals determination,” upholding the IRS’ proposed FBAR penalties against each of them. The plaintiffs then filed the complaint in District Court. In their complaint, plaintiffs asserted that the IRS incorrectly assessed the FBAR penalties. First, on grounds that the Bank Secrecy Act prohibits the imposition of an FBAR penalty if the violation was “due to reasonable cause.” 31 U.S.C. § 5321(a)(5)(B)(ii)(I). [I note here that the statute requires not only “reasonable cause” but also that “the amount of the transaction or the balance in the account at the time of the transaction was properly reported”.]
My initial thoughts …
The facts suggest that Mr. and Mrs. Kentera were people who believed in compliance with the law. The history of their tax filings suggests a conscious effort to comply with the applicable laws. They also (like everybody) were completely at the mercy of their tax advisers. The “offshore account” (which was not opened by them) was disclosed to their tax preparers. The tax preparers failed to advise Mr. and Mrs Kentera to file their FBAR (a requirement that few in 2011 knew about).
This series of events took place during the “2011 IRS Reign of FBAR Terror“. At this time many lawyers and accountants strongly recommended that people (1) correct their mistakes (the nonwillful ones that were the result of not knowing about Mr. FBAR) and (2) correct those mistakes by agreeing to the OVDP/OVDI penalty program (that is/was analagous to a form of “Civil Forfeiture“).
The evidence strongly suggests that Mr. and Mrs. Kentera were ordinary people, trying to do the “right thing”. They were victimized by advice to enter OVDI and then victimized by the IRS because they entered OVDI. (To get a sense of the context of how people were victimized by trying to do the “right thing”, read Phil Hodgen’s April 5, 2011 post here. There were many other posts written during this period. To see how Green Card holders were victimized by the OVDI program see here and here.)
How could the IRS possibly assess this kind of FBAR penalty?
All “armchair quarterbacks” must remember the context in which individual decisions were made. In 2011, there were NO streamlined compliance procedures. There were no delinquent FBAR submission procedures. There were no Delinquent Information Return Procedures.
That said, there was also NO requirement that people enter OVDI.
Tragically those who tried the hardest, and acted most quickly, to fix their non-compliance problems were the most harshly treated. (In fact, the history of the IRS assault on Americans abroad has shown that that those who did NOT rush to fix their problems fared much better. You may remember the “This is your last best chance to come into compliance” threats directed to those (including Americans abroad)with offshore non-U.S. bank accounts.)
To put it simply: The Kentera’s were victims of their desire to be in compliance with the law. It is regrettable that their law abiding sentiments coincided with the 2011 atmosphere of threats from the IRS and fear mongering from the compliance industry.
Why OVDP is extremely dangerous …
To enter OVDI or OVDP is to enter a program where you interact with the IRS outside the provisions of the Internal Revenue Code. You agree to interact with the IRS outside the framework of the existing laws. OVDP is appropriate for ONLY the very small group of people who may face serious penalties and (criminal) punishment.) OVDP is completely inappropriate for Americans abroad (where all of their assets are foreign and all assets are therefore subject to penalty assessment).
But, once you enter OVDP …
In my humble opinion, Mr. and Mrs. Kentera were subjected to this penalty because they entered OVDI. Because, they entered the program, there must have been a presumption that they somehow “deserved to be there”. As Virgina La Torre Jeker points out:
The point to be taken is the IRS’ apparent lack of sympathy with the taxpayers’ arguments concerning “reasonable cause”. It will be remembered that the IRS has discretion to assess FBAR penalties after taking into account all the facts and circumstances. See the IRS Manual regarding FBAR penalties here. Current IRS procedures state that an examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty and that instead an examiner should issue a warning letter. The IRS has established penalty mitigation guidelines, but examiners may determine that a penalty is not appropriate or that a lesser (or greater) penalty amount than the guidelines would otherwise provide is appropriate. Examiners are instructed to consider whether compliance objectives would be achievedby issuance of a warning letter; whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty; the nature of the violation and the amounts involved; and the cooperation of the taxpayer during the examination.
For more about FBAR penalties and the “FBAR Penalty Mitigation Guidelines”, see the discussion by Michael Deblis here.
What happened was that Mr. and Mrs. Kentera “signed up” to pay an FBAR penalty when there is a good chance that one would never have been imposed in the first place!
Incredible! What should/could have resulted in a “warning letter” resulted in a full blown FBAR penalty (plus the professional fees to attempt to reverse the penalties).
Why did people do it? Why did people enter OVDI in the first place?
The problem of people being “ushered into OVDI/OVDP” by their advisers has been the subject of much discussion. See the following discussion of Jack Townsend’s blog:
"Presumably, the couple entered OVDI on the advice of an attorney and, ultimately, were assessed…" — Stephen Kish https://t.co/XiPlOsz1GB
— Citizenship Lawyer (@ExpatriationLaw) February 4, 2017
"I'm a bit curious why there was omitted income, given that the account was (we are told…" — Michael J. Miller https://t.co/MEq0a4Wz9Y
— Citizenship Lawyer (@ExpatriationLaw) February 5, 2017
I’m a bit curious why there was omitted income, given that the account was (we are told) consistently disclosed on the taxpayers’ return, but mostly I’m curious why they were in OVDI in the first place.Presumably the taxpayers and their counsel could have predicted from the outset that they would need to opt out if they were unwilling to pay the 25% offshore penalty; and I generally see little merit in going into OVDP if you know (or should know) in advance that you’ll be opting out.
Obviously, the compete set of facts (most of which we don’t know) is critically important, so I’m certainly not purporting to reach any conclusions, but I think it’s fair to at least wonder if a non-program disclosure might have been more appropriate in this instance. I do vividly recall that some practitioners were vehemently opposed to the whole notion of a “quiet disclosure,” although I do not recall any coherent reason ever having been advanced for such opposition.
Conclusion: “Look Before You Leap …
To #OVDP or to NOT #OVDP – the greater the attempt to fix past compliance issues, the greater the punishment. https://t.co/HblKpihu0C
— Citizenship Lawyer (@ExpatriationLaw) February 5, 2017
I certainly agree with Virgina La Torre Jeker’s conclusion which states:
The IRS disposition of the case was disappointing, to say the least. One has to ask why, on these facts, the taxpayers joined OVDI in the first place? My guess is that the fear factor was ramped up significantly and they may not have been given full detailed advice by their tax advisor as to all of the possible options, risks with each one and so on. One must also remember that at the time the taxpayers joined OVDI, the Streamlined options did not exist. The case demonstrates that
one must be very careful in taking actions. Get a second or even third opinion.”
Yes, yes and yes!!
If you have FBAR problems …
Get a second or third opinion! Be careful what you fix for!
(For those who want further reading (including the details) see the following court documents:
United States Motion to Dismiss – here.
Memorandum in Support of United States Motion to Dismiss – here.
Mr. & Mrs. Kentera’s Brief in Opposition to United States Motion to Dismiss – here.
United States Reply to Mr. & Mrs. Kentera’s Opposition Brief – here)
John
Richardson
I never realized that if two people had a joint account that the IRS could assess FBAR penalties to both persons.
That would mean that the nonwilful FBAR penalty could be 50% x 2 persons x 6 years = 600% of the financial wealth that is held in joint accounts.
In 2011 when we started the Isaac Brock Society, I was strongly impressed by Phil Hodgen’s stories of OVDI/OVDP nightmare stories, that one could under no circumstances ever trust the IRS with one’s bank account information. I reasoned as such: If the IRS was going to put such heavy fines on innocent expats in an amnesty program, how could you send your information to them outside such a program.
The only way to avoid problems altogether would be to not file FBAR and to stay out of the USA.
“The only way to avoid problems altogether would be to not file FBAR and to stay out of the USA.”
I agree Petros. However, for those of us who need to travel to US due to having relatives there (who can no longer travel due to infirmity), there is another safeguard. Put you money in a credit union, like Vancity, which does not do FATCA reporting on Canadian residents. The problem with this is associated investment firms all do FATCA reporting on any suspect US person.
I didn’t do FBARS but had no investments at the time. Only cash in an exempt credit union. I’ve travelled to US with no problem but still find any such trip very unnerving. Also have heard nothing from IRS since renouncing and filing all other forms with no money owed for taxes.
All this has been mentioned before but I bring it up again due to the complexity of trying to deal with FATCA and FBARS. The above mentioned approach has given me relative peace to live my life in Canada.
@ Petros, re; “I never realized that if two people had a joint account that the IRS could assess FBAR penalties to both persons.”
Sick isn’t it?
Or when an account belongs to a USPerson and a NON-us person the whole thing is attributed to the USP. How convenient. So if a Canadian couple with ONLY one spouse or family member accountholder, beneficiary, co-executor, etc. is a USP with an FBAR reporting obligation, the whole thing is the basis for the FBAR penalty, rather than a portion.
And as you point out, if there are multiple USPs involved, then the penalty is further magnified in relation to the overall value of the account. And of course, NO actual US tax is necessary to have been assessed or owed. So that penalty bears no relation to actual US tax assessed or lost.
Plus there can be layered penalties – if for ex. it was an account that the US says required some other information reporting form like the 3520 and 3520 A. The accounting fees alone for an estate as a ‘foreign trust’ can wipe out a significant portion of the estate assets depending on what the estate includes – since the complex reporting is for the ins and outs of the accounts – ex. bills paid out of an estate account, or perhaps if non-US mutual funds were involved etc. – very time consuming, and requiring specialty advice and preparation.
What a scam.
“I never realized that if two people had a joint account that the IRS could assess FBAR penalties to both persons.”
The implications of FBARs and FBAR penalties are so outrageous that ignoring them or “hiding” cash in a FATCA exempt credit union is quite understandable. We just need to take precautions or totally avoid trips south of the border. Our bank accounts in our home countries are our own business.
I discuss the very real fact that the IRS commits accounting fraud against US persons here: http://isaacbrocksociety.ca/2011/12/19/the-term-aggregate-in-irs-speak-is-a-fraud-perpetuated-on-us-persons/
@badger: It could be that the US person in a mixed marriage is not the bread winner and 100% of the “foreign” account really belongs to the non-resident alien. In which case, the IRS is more like Tony Soprano than Robin Hood.
It is not so much that the IRS is a thief or no. So much is clear. The question is really what sort of thief.
The interest in your money is to deprive you of the possession of it, They want it to redistribute to the dependent class, making that class over 50% of the citizens of the U.S. When the wealth creation has ceased the dependent class will insist on more and riot for it. That is when a dictator will emerge from the current or just past ruling class, who will rule with an iron hand. The new U.S. Government will try to reverse it, but the debt will swallow us unless we find a way to repay it before it does.
” It could be that the US person in a mixed marriage is not the bread winner and 100% of the “foreign” account really belongs to the non-resident alien. In which case, the IRS is more like Tony Soprano than Robin Hood.”
Bingo!
BTW, has anyone found what does pass muster for “reasonable cause”?
Thankfully this forum has used the unfortunate examples such as that described here to warn many other people. Again thank you.
I wonder if this couple had just started filing FBARs, even filing 4 or 5 or 6 years worth, quietly, with no explanation, would the IRS have even raised an eyebrow?
While CBT should be eliminated, if it isn’t one thing the US could do, if it were fair-minded, would be to exempt bona fide foreign residents (set a minimum time for instance, like 2 – 3 years) from FATCA. It could also index the reportable amount yearly, or make it much higher for foreign residents. It could also make it so that there are no fines if no tax is owed, or cap the fines at 10% of an undeclared account’s balance. And change the name of the Financial Crimes Enforcement Network. Oh never mind.
@Fred step talking common sense.
I’m amazed that the IRS even created Streamlined, which it has been trying to claw back ever since.
What a cluster-*uck for these poor people.
I worked in US for 7 years on working visa. I already departed US, however I did not tick schedule B, did not disclosed I got bank accounts in my home country new zealand. I never filed fbar, because I do not know. I transfer the money I make back to New zealand, so this year the account balance is close to 400K USD. I got a notice from my bank recently asking me for my tax residency? I put new zealands only, because I already left US. I do not think I will go back to US. Do you think irs or doj will extradite me or fine me if they find out I am not in the US? thanks.
@eric
The US cannot extradite you. Just continue to lay low. You did the right thing by telling the bank you don’t have US tax residency.
I assume that you did not have a green card, but were on a working visa? If so, that is a good thing. Otherwise you need to get rid of your green card properly by filling out an I-407.
You have nothing to worry about, they won’t figure it out and come after you retroactively. You are out, you have escaped. Lucky you!
Also you answered the bank’s question correctly – you are no longer a US tax resident (assuming that you don’t have a green card). You didn’t even need to lie!
I do not have a green card. I read a few posts online, irs still fine someone living overseas. That’s why I asked this question. Do you think irs can seize my property or bank account overseas? thank you so much
A few countries have collection agreements with the US. If you have an account or assets in such a country, and if you aren’t a citizen[*] of that country, there is a possibility that that country might seize your assets to pay the IRS.
But, odds are that you’re safer by not complying at all. Non-compliance breaks US law but compliance brings penalties.
[* It doesn’t matter if you’re a resident of that country, it matters if you’re a citizen of that country.]
what I mean to say is if irs find out I have a bank account, they also found out I left US, will they still fine me or extradite me? thanks
Did you file US tax returns while you were in the US? If you did, then you probably do want the IRS to know that you left the US. The way to do it is file a Form 1040NR as the tax return and attach an unsigned Form 1040 as a schedule listing only income that you had during the part of the year that you resided in the US. You might have to attach other schedules to the schedule, such as Schedule B.
If you’re outside of the US when you decide what you want to answer or not answer on Schedule B, well as we know, non-compliance breaks US law but compliance brings penalties. We haven’t heard of any cases of the US trying to attack people outside of the US on FBAR matters.
Eric, please do not pay any attention to Norman Diamond. You shouldn’t do anything. Repeat, do nothing. Think for one minute. Can you imagine the cost of trying to ‘fine or extradite ‘ you?
Filing anything at all will only bring uncertainty and heartache. They cannot and will not touch you.
thanks. @portland, I just do not know what the cost of fine or extradite. As for the penalty, the way they calculate will be huge. I now have probably 400K in my account. previously much less. for fbar penalty it could be over 1 million. That is why I am asking if irs will chase me. As for treaty, as long as my country has no assistant collection rule with US, US can not seize my account or property. right?
“As for treaty, as long as my country has no assistant collection rule with US, US can not seize my account or property. right?”
As long as the country where your account is located has no collection assistance rule with the US, the country where your account is located is unlikely to seize your account and help the US.
Furthermore even if the country where your account is located does have a collection assistance rule with the US, if you’re a citizen of that country then that country is unlikely to seize your account and help the US.
Examples: Dewees was a resident but not citizen of Canada so CRA helped the IRS. I am a citizen though not resident of Canada so CRA should not help the IRS.
thanks.
@eric
Just do nothing. You will be fine. The IRS cannot touch you. Don’t worry about having not reported your NZ bank account while in the US. Not a big deal.
Not sure how you wrapped things up when you left, there’s an argument to be made for doing something to let them know that you’re gone, but they won’t be getting reports of income earned from US employers, or interest earned from US accounts, so they won’t come looking. Do NOT retroactively file FBARs or declare interest income. You’re gone. Let sleeping dogs lie.
One thing to consider, if you worked in the US for 7 years and NZ has a totalization agreement, you will likely be entitled to Social Security when you reach 65.