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
@plaxy, your logic is in a mess.
“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.”
an obligation which is currently unenforced is still an obligation. Are you trying to tell me this law is very good, very fair?
“[a citizenship] obligation which is currently unenforced is still [a citizenship] obligation.”
Maybe. To date, the US hasn’t tried to deprive an expat USC of citizenship for not filing US tax returns. Personally I doubt if the US would ever risk anything so silly, and I doubt if it would stand up in court if they did , but IANAL.
“Are you trying to tell me this law is very good, very fair?”
No, I’m pointing out that a US citizen or resident alien who signs the jurat untruthfully is breaking US law; but an expat US citizen who signs the jurat truthfully or doesn’t sign the jurat all, is not breaking US law.
“To date, the US hasn’t tried to deprive an expat USC of citizenship for not filing US tax returns. Personally I doubt if the US would ever risk anything so silly,”
Right, why provide a service for free when they could get US$2,350 for doing it?
have a look at the below news, NZ bank freeze bank accounts
https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=12081478
My understanding is you will have to tell bank your residency, if you do not. Bank will freeze your bank account, because they are not able to correctly report your information. So far, at least for now bank will not freeze account because you are not compliant with irs regulation. It is just the matter of bank reporting, if bank can report, they are in compliance. they do not care if you are in compliance with irs or not. I did not find any news about bank freeze account because its client is not compliant with irs. So for now bank is not helping irs to collect money by freezing/closing account. I believe enforcing the law/assist irs to collect is not banks’ responsibility for now.However things may change, just like Japan T is worried, they may put into legislation all the participating banks have to help irs to collect. It may happen in the future, it may not. @all, opinions everyone. Thank you.
@eric
Yes, it’s common in some countries for banks to freeze accounts if customers refuse to answer questions about tax residency. It’s probably not required under FATCA or CRS, but is rather a consequence of their own overenthusiastic compliance policies. I was threatened with something similar on an investment account when I said I’d prefer not to answer citizenship questions.
As you correctly point out, this does not mean that banks are in any way assisting the IRS with collection, or that they care at all about US tax compliance status.
What is more interesting to me is this question: what do NZ banks do to verify or validate customers’ answers. If a Kiwi with dual citizenship, particularly with a US birthplace, answers “no” will the bank follow up somehow, or simply accept their answer?
PS Caveat to the above. In Switzerland, which is a very extreme case because of their history of having started this whole mess, it’s not unknown for some banks to demand proof that their US-citizen customers are properly US-tax compliant. That is not required by FATCA, but is rather the banks’ own paranoia after what happened to UBS.
@Eric,
The problem has more facets than only collection on behalf of the IRS. The reporting in and of itself is a major concern. The IRS data base is not at all secure. There have been threads here Brock in the past on how simple it is to get into IRS’s data base, A gold mine of information for criminals world wide.
The IRS is not asking for the information so that they can choose a better birthday gift for you, they have plans for it. If they can force your bank and/or your nation’s tax agency to provide them with information, they can force them to do other actions too. I believe they will. For example, the IRS may not force your bank to collect anything, but as they have already demonstrated that they have the power to force your bank to freeze your accounts if you do not provide information, is it really a stretch of the imagination that they then too could for them to freeze your accounts until you pay whatever they say you owe? I don’t think so. Others do, though.
But that is why I first suggested that you look into the history of all this. That is the only way to get a feel for where this is going. Also, you will undoubtably learn that many things that were said could not/would not happen have happened and are happening.
@Eric
Actually you personally don’t need to care about this at all. You’re out, your money is out, you are not a US person and not reportable under FATCA. If you were reported at all (which is not clear) then it was only for two years. Once you figure out what to do with your final return, you can ignore this whole silly mess.
@Japan T
FATCA does not *directly* force banks to freeze accounts. This is not required by any IGA, as far as I’m aware; “recalcitrant” accounts (where the client refuses to cooperate) are to be treated as reportable, not frozen. Banks freeze accounts or deny service because they are excessively concerned with compliance – more than they need to be, particularly in Model 1 countries where the IRS is kept at arm’s length by their own national tax authority acting as intermediary.
In Canada, as we know, it’s sufficient to merely ask the US personhood question, with no attempt to validate the answer. Banks obviously are not very concerned about the consequences of US citizens “self-certifying” incorrectly (i.e lying) or they would ask for place of birth, and documentary proof. (Interesting note from the CRA guidance: “9.21 The implementation of the Agreement in no way requires or encourages financial institutions to refuse to open an account or to otherwise deny service.”)
Indeed, the US would have nothing to gain from trying to revoke the US citizenship of an individual living in a non-US country. And fear of losing the citizenship is probably not the reason some expat USCs file US tax returns.
Nononymous:
“(Interesting note from the CRA guidance: “9.21 The implementation of the Agreement in no way requires or encourages financial institutions to refuse to open an account or to otherwise deny service.”)”
Is there an issue date for that guidance, by any chance?
Nononymous:
“In Switzerland, which is a very extreme case because of their history of having started this whole mess, it’s not unknown for some banks to demand proof that their US-citizen customers are properly US-tax compliant. That is not required by FATCA, but is rather the banks’ own paranoia after what happened to UBS.”
I’m not Swiss and don’t have any Swiss bank accounts, but I don’t think the Swiss banks were being paranoid. I expect they were trying to get off the IRS Bad Banks List. (https://www.irs.gov/businesses/international-businesses/foreign-financial-institutions-or-facilitators)
Nononymous:
“Banks freeze accounts or deny service because they are excessively concerned with compliance – more than they need to be, particularly in Model 1 countries where the IRS is kept at arm’s length by their own national tax authority acting as intermediary.”
🙂
The IGA partner country isn’t acting as intermediary to keep the IRS at arm’s length. It’s a wheeze to get round the privacy laws by requiring the FIs to provide the accountholder’s information to the tax agencies of both countries.
Better than reciprocity, from the partner country’s point of view. 😉
As per http://isaacbrocksociety.ca/2018/10/05/canadian-fatca-iga-lawsuit-update-october-3-2018-plaintiffs-memorandum-of-argument-has-been-submitted-to-canadas-federal-court/comment-page-1/#comments:
and:
IGA1 governments are definitely not keeping the IRS at arm’s length. Quite the opposite – they’re making use of America’s “peculiar institution” of citizenship-based taxation to subpoena their banks to deliver accountholders’ information without the accountholder’s consent, without a warrant, and without evidence of wrongdoing – removing the right to privacy and the presumption of innocence without so much as a by-your-leave.
Nononymous:
Banks have no need to be concerned about whether an accountholder with US indicia is lying about US tax-residence.
If the accountholder with US indicia denies US tax-residence, the bank can either accept the self-certification or, if it has reason to think otherwise (for instance if the bank has knowledge of an unambiguous US place of birth), it can simply treat the account as refractory and report it to the tax agency.
That’s why renunciation (or lying about citizenship) doesn’t ensure non-reporting; it just makes it easier to open a bank account.
Looks like Japan T has the same concern of mine. On the other hand, if foreign banks help irs to collect, that country actually has totally lost its sovereign power. I doubt it as well.
Anyway, thanks a lot everyone.
Nononymous:
“FATCA does not *directly* force banks to freeze accounts. ”
The US obviously can’t require a non-US bank to freeze the non-US account of an individual who is not resident in the US.
The government of an IGA 1 country like Canada probably couldn’t do that either, unless money-laundering or terrorist-financing was suspected.
Thebproblem with the IGA is not that it threatens to steal money from expat USCs – it doesn’t do that. It just lets their bank treat them like dirt and ignore what used to be their right not to be searched without a warrant and their right to the presumption of innocence – or refuse to let them have an account in the first place.
Of course, as with every “John Doe” summons, 99% of the information transmitted is going to be noise rather than signal.
Once in a blue moon there might be something the IRS can use as evidence in court proceedings against a US resident, or against an expat USC who’s filing untruthfully (or “minimally.”)
For expat USCs who aren’t filing US tax returns or are filing truthful US tax returns, it’s just a totally pointless and surely illegal invasion of privacy.
I said:
“The US obviously can’t require a non-US bank to freeze the non-US account of an individual who is not resident in the US.”
The mystery is why so many non-money-laundering, non-terrorist-financing, non-tax-evading expat USCs seem to assume that the US can make a non-US bank steal their money.
Is it irrational fear? Is it irrational guilt? Is it just total (understandable) confusion?
MRI scans might reveal. 🙂
@ Plaxy,
Re:
The current CRA guidance was issued 30 July 2018. This text of s. 9.21 has been in the guidance since it was first issued in 2015 (however, it was originally s. 9.16).
Thanks, Pacifica.
I was wondering if it might have been added as additional back-covering after the introduction of FATCA evoked angry objections from dual citizens. Sounds like that’s not the case.
@ Plaxy,
It goes back to the IGA itself. Not sure which section of the IGA, but prior to CRA issuing its Guidance Note, Dept of Finance alluded to this matter in a FAQ release on 5 February 2014, the day the IGA was signed.
“Under the IGA . . .The FATCA requirement that Canadian financial institutions be required to close accounts or refuse to offer services to clients in certain circumstances will be eliminated.”
@plaxy
“The mystery is why so many non-money-laundering, non-terrorist-financing, non-tax-evading expat USCs seem to assume that the US can make a non-US bank steal their money.”
Seems that it is you who keeps bringing up money. I keep saying that the money is a part of the problem but myself and many it is not an issue as we have none. It is the automatic sharing of private information that should be keep private that is of great concern. The fact that we no longer have any US legal protections such as assumption of innocences, freedom from unwarranted search and seizure etc. that are huge problems.
Still, once they’ve picked the low hanging fruit of the big accounts, they’ll climb further up the tree to the smaller fruit. They don’t care about the cost to do so, they aren’t the ones footing the bill.
What did I miss? “Indeed, the US would have nothing to gain from trying to revoke the US citizenship of an individual living in a non-US country. And fear of losing the citizenship is probably not the reason some expat USCs file US tax returns.” I do not recall anyonebeing worried about this. Infact, many would probably welcome it. “You mean all I got to do to be free of CBT is not file and lose USCship? Where do I sign up?”
“It goes back to the IGA itself. Not sure which section of the IGA, but prior to CRA issuing its Guidance Note, Dept of Finance alluded to this matter in a FAQ release on 5 February 2014, the day the IGA was signed.
“Under the IGA . . .The FATCA requirement that Canadian financial institutions be required to close accounts or refuse to offer services to clients in certain circumstances will be eliminated.””
That sounds right. The IGAs were offered by US Treasury as a way to lessen the burden of FFIs. “Sign the IGA and we won’t be so demanding and fine happy with your FIs.” An offer not to be refused.