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
everyone is speculating. is A US subpoena valid in other country?
‘1. I do not have asset in the US, I am a citizen of NZ, so irs can not get my money in NZ?’
To the best of my understanding, although the IRS can prove (according to law since you didn’t dispute it) that you owe them money, NZ will not help them collect. However, if the IRS attacks you, you’d better take care not to put assets in Canada and other places where the IRS can obtain collection assistance.
However, if the IRS ignores you, you probably won’t have to worry about that.
‘2. the way irs collect tax deficiency might not be the same as they collect fbar penalty. I checked online it says irs has to file a complaint to federal court and you will have to appear in that court. irs can not collect far penalty until the judge in the court decides how much you have to pay for fbar penalty. Is that right?’
I have no personal experience with FBAR penalties, but as far as I can tell, you’re right.
‘3. I did not get a sailing permit before I departed US, if I file dual return. will that raise flag from irs?’
I don’t know. After renouncing I have also departed the US several times without sailing permits. I’m not really sure how I was supposed to obtain a sailing permit. I wonder if they’ll attack me for that someday.
‘you mentioned “If you want them to think you’re still in the US, you’re really asking for trouble.” Even they think I am in the US, from next year onwards, I will have no US income to be reported by my employer to irs. Even I do not file return, I should be fine, right?’
For future years that is true. However, if the IRS attacks you for 2018 or earlier, and if your last known address is in the US, they meet legal requirements by sending notices to your last known address and you will regret. I think you would be safer by giving them your real address.
“is A US subpoena valid in other country?”
There is a treaty by which participating countries can request other participating countries to enforce a subpoena. I’ve only read of one case, where the IRS decided it could use the treaty to request the UK to make a person (a US citizen residing in the UK) appear at the US embassy in the UK.
@Norman Diamond, the case you mentioned is a tax/fbar case or something else.
“For future years that is true. However, if the IRS attacks you for 2018 or earlier, and if your last known address is in the US, they meet legal requirements by sending notices to your last known address and you will regret. I think you would be safer by giving them your real address.”
In your opinion, if they attack me 2018 even I am overseas I will have to pay the fine?
I am just asking your opinion, what are the chances for irs to attack me? Just your opinion. thanks.
@eric
Plaxy is a charmer, aren’t they. Despite Plaxy’s complete lack of empathy, plaxy’s comment pretty much summarizes how your situation will be viewd by the IRS, and sadly, by far too many Americans.
You are trapped. There are two options, each are horrible for its own reasons.
1. Comply with U.S. law and set yourself up to forever be a victim of ID theft as the US gov. has repeatedly demonstrated that it will not keep personal data safe.
2. Ignore US law and constantly live with the threat of prosecution for tax crimes. As plaxy points out, you have violated US law and thus are subject to extradition. Does that mean they will pursuit? Does it mean NZ will turn you over? Will these change?
Incidentally, that is much the same situation I face, whether I renounce or not.
This is why I advise people to not go to the US. It has become a trap.
@Japan T what is your situation?
@Norman, so your thinking is once irs attacks(sent notice), they will keep on chasing it even later on they knew I am overseas?
Eventually, they will send a drone. The good news is, you won’t know anything about it.
“the case you mentioned is a tax/fbar case or something else.”
The IRS wanted to question a person. I think that was before FBAR administration was officially assigned to the IRS, so it had to be a tax case.
“I am just asking your opinion, what are the chances for irs to attack me? Just your opinion.”
As far as has been observable by frequent participants in this blog, the IRS has not attacked anyone who lives (lived) outside the US for income they receive (received) from outside the US during that time. However, we’ve seen a few cases where the IRS attacks people who now live outside the US but had lived inside the US at the time they received income.
Also of course no matter where you are, if you volunteer for OVDI and Streamlined etc., or if you submit an honest return and tell the truth on it, the IRS will attack you. Non-compliance breaks US law but compliance brings penalties.
===
“so your thinking is once irs attacks(sent notice), they will keep on chasing it even later on they knew I am overseas?”
It will not matter if they belatedly learned that you moved overseas. They already sent notices to the last known address that you had given them, so they already met their statutory requirement. So you’d better not ever put assets in the US or in any US-cooperating country where you’re not a citizen.
“However, we’ve seen a few cases where the IRS attacks people who now live outside the US but had lived inside the US at the time they received income.”
I guess those cases involve big amount of money, not like us.
Or it’s possible that the account was not reported under FATCA, or that it was reported but the IRS won’t do anything with the data, and there will never be any repercussions from Eric’s unwitting (though possibly naive) failure to report a modest six-figure account for two years prior to leaving the US. I wouldn’t automatically assume that poor Eric is going to be smote by a meteor one day in the near future.
“Old thread. I assumed Eric was the topic now.”
Consequences of not reporting worldwide income to the IRS while resident in the US, are different from problems arising as a result of not reporting worldwide income to the US while not resident in the US.
One is residence-based taxation, the other is citizenship-based taxation.
One is tax evasion, the other is not.
One’s off-topic, the other is not.
IMO
@plaxy, lots of people with work visa do not know they have to report worldwide income. Most of them assume this only applies to USC and LPR. It is not intentionally, however the US law is disproportional punish them. It is just like someone come to your country and was asked “how much you have”, if the guy does not tell them, he got all or half of his money forfeited, is that fair?
Actually, taxing residents on their worldwide income is the norm, among the liberal democracies. New Zealand taxes residents on their worldwide income. Canada taxes residents on their worldwide income. Britain taxes residents on their worldwide income.
You made a mistake, apparently, even though the requirement to report foreign income is actually stated in the 1040 instructions.
Fortunately, procedures are available for correcting the mistake, as I explained to you yesterday.
Use them or don’t use them, it’s up to you.
I don’t believe Eric is naive. Why would anyone think that they would have to report wealth they have at home to a country they are living in only temporarily? Why even if they live there permanantly? This wealth was earned in his homeland and thus already been taxed and may still be being taxed and possibly taxed in the future there. What justification does the US have to demand such information?
Our situations are similar in that I in the same trap with the same two bad choices. I, however, am a US citizen. Additionally, I have a nonUSC spouse and children.
@Japan I believe you might be worried more than me, since you are USC.
I quoted Norman’s comment below, looks like everyone has different view from Plaxy
“Also of course no matter where you are, if you volunteer for OVDI and Streamlined etc., or if you submit an honest return and tell the truth on it, the IRS will attack you. Non-compliance breaks US law but compliance brings penalties.”
Yes, until recently the only way for the IRS to know one even exists, if they live abroad, is for one to alert the IRS to the fact by trying to comply.
FATCA changes that.
“Non-compliance breaks US law but compliance brings penalties.”
For US citizens.
For US residents, non-compliance with US tax law breaks the law of the land.
For USC expats, it doesn’t.
@Japan T, so as Plaxy suggested you are a USC expat, so you did not break any law, you should have no problem. right?
Scuse me, plaxy didn’t say anything of the sort.
A USC expat doesn’t break the law of the land by not filing US tax teturns.
I have not broken the law of the land in which I live, but have broken the law of the land from which I hail.
@Portland , what is your opinion on my 2018 tax return I will fill early next year?
Looks like I need an accountant to help me do the dual return, complex.
Possibly naive. The first time I filed a 1040, after moving to the US, I very quickly figured out that one must report worldwide income. I then chose to ignore it, but did so consciously.
Problem is, what is income? Not only might there be different ideas of income, such as wages only, but I’d bet the IRS has more than one definition for “income”.
Eric, it’s not that complicated. Don’t get overly confused, or paralyzed with fear, based on comments above.
You and your money are safely out of the US. The IRS is not going to come after you. They may not even know that you did anything wrong.
First, talk to your bank and try to find out whether the account was reported. If not, excellent, just file your final return and forget about FBARs or amended returns – you are in the clear.
If the account was reported, even if it was only for two years, then you have a decision to make. Option 1: assume that the IRS won’t do anything with the information, and file your final return without declaring it. Option 2: backfile FBARs and amended returns and pay a small amount of tax owing. I expect there would be no additional penalties, but if there were, you are gone so they can’t be collected.
I don’t know what to advise because we don’t know the risk – pure speculation. But again, you and your money have left the US, and the IRS will not pursue for such modest sums.
As I’ve said before, I don’t know how best to file your final return but I suspect that pretending to still be in the US so that you don’t have to give your NZ address is probably a dumb move that will create further complications.