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
@Japan T
It was perfectly clear to me what counted as income. No confusion there.
You were an American and as such probalbly have similar thoughts on what other Americans may have on the subject.
True. But it was pretty clearly stated on the form as I recall. There is no special 1040 for people on work visas. But whatever. An honest mistake, though none too clever from someone seven years in the US, particularly post-FATCA.
The more interesting question is what to do now. As a great believer in IRS ineptitude, I personally would pretend it never happened, file the final return and be done with it.
Problem is, most people still have not the slightest clue about FATCA.
But I must say that it strikes me as odd that you think one who has spent 7 years in the US post FATCA should know yet can just forget about it, post FATCA.
Yes, inept they are, but they have our FIs doing their dirty work for them now.
Eric can forget about FATCA because he and his money are out. Eric’s bank will do no dirty work because Eric’s account is no longer reportable.
We are talking about how to fix or cover up a minor past oops, not an ongoing problem.
Nononymous:
“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.”
And you were far from alone. It’s the drawback of taxing worldwide income: not being able to get third-party snitching on what income a taxpayer is receiving.
Hence FATCA.
@plaxy
FATCA would not have helped, as the unreported foreign income was not interest or dividends, but scholarships from foreign sources. As I was barely scraping by as a graduate student I had no interest in giving the IRS a cut of my meagre allowance.
Actually I should add that had I only received scholarship income from outside the US, I would never have filed in the first place. But I was also working part-time, and submitted returns for refunds on whatever small amount was withheld, if I remember correctly.
Nononymous:
“FATCA would not have helped, as the unreported foreign income was not interest or dividends, but scholarships from foreign sources. ”
Unfortunately, FATCA doesn’t discriminate on the basis of what income the accountholder is receiving; FATCA just aims to report non-US accounts held by US Persons. Including non-US-accounts held by non-US-resident individuals born in the USA.
And your point? FATCA doesn’t report income except for interest/dividend income on reportable accounts. My foreign income arrived as a cheque in the mail, deposited to a US account. Hence it would not have been reported by FATCA, were FATCA in place at the time.
And had that cheque been deposited in a reportable Canadian account, it would not have been reported either. Only the year-end balance is reported, I believe. (Except if you live in Japan, where every transaction is reported, and every Starbucks purchase is carefully logged and scrutinized by IRS agents.)
My point is pretty obvious, I think. US-resident taxpayers took note of the advantages offered by foreign accounts, opened foreign accounts and stowed money in their foreign accounts. The US devised a way to get reports on foreign accounts to counter this – creating a problem for non-filing US-born residents of (some) other countries, where previously no problem existed.
This innovation was interpreted hopefully by tax advisers as a crackdown on non-filing expats. Unfortunately a lot of non-filing expats were confused into “coming into compliance”, and had a thoroughly miserable and traumatic and expensive time of it.
All for nothing, as the point of FATCA was simply to patch the gaping hole that used to make it so easy for US residents to not report income from foreign accounts.
So it goes.
Yes, that is the basic narrative, with which we are all very familiar.
I was merely pointing out that FATCA would have had no impact on my ability to successfully not report my foreign income back in the day, since it was not interest income.
And that FATCA may have no impact on Eric since we aren’t certain that his account was ever reported.
Nononymous:
“Yes, that is the basic narrative, with which we are all very familiar.”
That’s what I said – that I would have thought my point was obvious. You asked for an explanation so I explained.
“I was merely pointing out that FATCA would have had no impact on my ability to successfully not report my foreign income back in the day”
??? I don’t get that at all. Who cares if FATCA does or does not have an impact on US residents’ ability not to report their foreign income? Not I.
We seem to be talking at cross purposes. Never mind.
I actually have no idea what we’re talking about either. I’ll stop too.
@ Japan T, I think Japan may have signed model 2 iga, so bank in Japan directly reports to irs. That might be the reason why you are so concerned about bank will do dirty work for irs later on. At this point banks just report
Anyway I talked to a couple of lawyers before, irs will not criminal charge someone just because he or she does not disclose the foreign bank account even there might be interest generated. However if your money is from illegal source, drug dealer etc, they might prosecute you.
As for the NZ bank, I doubt they will tell me if they reported or not.
I am really curious about how irs deals with the data. They keep it as a reference database to check someone they are interested in or do some data match to see who’s on the top of the list.
what I want to point out here is this fatca law is not fair to USC living overseas, not fair to people come to work in the US from another country as well. It does not matter if you break the law in the land you present. It is the matter the penalty and the damage is disproportional. My situation is totally different from people permanently live in US and hide money overseas. As Japan T pointed out, it became a trap now. Lots of people out there do not anything about fatca.
@Nononymous You mentioned you did a 1040 so resident return when you first came to US by mistake, how did you do your final return? dual return or still resident return or non resident?
@eric
Message 1:
FATCA imposes no penalties. It merely reports certain information. What the IRS will do with that information remains to be seen.
Message 2:
What do you mean by “first came to the US by mistake”? I came to the US on purpose.
Also, I’m a dual citizen so there is no “final” return for me, I am supposed to file every year. I simply stopped when I left the US and ceased having US income. The last return I filed was from a Canadian address. I never heard anything from the IRS and don’t expect I ever will, as it was over 20 years ago.
@Nononymous thanks. I mean you filed 1040 by mistake, because the first one year you might not be resident.
so the last return you filed 1040, still resident but with a Canadian address?
There was no mistake. I moved to the US for grad school and began working part-time, so I filed a return the following April. Completely normal 1040. I was a dual US-Canada citizen and didn’t bother trying to figure out whether I was “resident” in the year I arrived.
After I filed my first return they sent me a letter asking about previous years’ returns and I just sent it back after writing “was a student living in Canada” on it. No reply.
The last return I filed was probably a regular 1040, but I really don’t remember. I think I filed from my Canadian address because I’d left the US almost a year previously. I never filed again after that.
eric:
“what I want to point out here is this fatca law is not fair to USC living overseas, not fair to people come to work in the US from another country as well. ”
It’s totally incorrect to class expat USCs together with US residents who untruthfully sign the jurat.
Expat USCs who file US tax returns are reporting income the US either already knows about (US-source income) or income the US doesn’t have the right to tax (non-US-source income). They’re over-reporting, not under-reporting.
Expat USCs who don’t file US tax returns owe no US tax and are breaking no laws in either country.
On the other hand, US residents who sign the jurat untruthfully are breaking the law bigtime. Different kettle of fish altogether.
Most expat USCs only have income from their country of residence
Oops – should have deleted the lines after “Different kettle of fish altogether.” Perils of phone-posting.
This distinction matters, because treating US-born citizens of non-US countries as suspected tax cheats is exactly why US citizens in (some) non-US countries can’t open a bank account unless they pay America $2350 to acknowledge in writing that they’re not US citizens.
Now there’s unfairness for you.
@Plaxy, I honestly do not understand your logic. USC living overseas do not do tax return, they break US law. In my mind I am with you, the law is unfair. They do not live in the US, they paid their tax in another country.
Ok, in a work visa case, how much interest I have, a couple thousands, what are the tax I owe, a few hundreds. for a few hundreds, may get fined way more, it is disproportional. The law is unfair. That is what I want to point out. If US does have any real amnesty, I would love to do it. As the way you suggest quiet disclosure is definitely not an option that just brings uncertainty. Let’s just assume if US has the real amnesty with 4 times penalty, I will definitely rectify the problem. The penalty is disproportional.
We break the same law of the same country that is unfair, unfair, unfair.
eric:
“USC living overseas do not do tax return, they break US law. ”
No. They’re not receiving untaxed US income – or if they are, it’s the US payer that’s breaking US law.
US tax filing is a citizenship obligation, that’s all. If a USC expat wants or needs to keep US citizenship, in theory they’re supposed to file tax returns (though in practice the obligation is currently unenforced). If they don’t care about the citizenship, they needn’t bother.
“We break the same law of the same country that is unfair, unfair, unfair.”
Nope. You committed perjury; expat US citizens who report their non-US income to the IRS are not committing perjury and not breaking any laws. Expat USCs who don’t file US tax returns are obviously not committing perjury since they’re not even signing the jurat.