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
@nononymous
“FATCA does not *directly* force banks to freeze accounts.”
Sure it does. Different institutions are going to react in different ways to the same situation.
Believe it or not, there are those who do not enjoy the relaxing strains of the bagpipes. Quite the opposite, the run screming with their hands over their ears when the find themselves blessed with a piper’s tune.
Suppose it could be the kilt that causes their distress but I bet it was the pipes as I react in a similar fashion to AKB 48.
Not the reception planned be either performer but caused by their act all the same.
Yes, I realise the IGA eliminates the FATCA requirement. It’s the tone of the guidance (“in no way”) that (to my ears) makes it sound defensive. And the FAQ does seem to me to confirm that perception:
“FATCA has raised a number of concerns in Canada – among both dual Canada-U.S. citizens and Canadian financial institutions. One concern is whether the FATCA reporting requirements, which would compel financial institutions to report information on accountholders that are U.S. residents and U.S. citizens directly to the IRS, would be consistent with Canada’s privacy laws.”
The FAQ argues (if I understand it correctly) that by signing the IGA, Canada solves both the invasion of privacy concerns and the denial of service concerns by making invasion of privacy okey-dokey and denial of service not mandatory.
The same position is taken by the EU, when questions about invasion of privacy and denial of service are raised, to explain why the EU can’t help. They don’t mention the fact that the GDPR regulations have been changed specifically to legalise the invasion of privacy, and the regulations entitling EU citizens to open a bank account have been carefully written to avoid entitling EU citizens to any kind of account that could conceivably be FATCA-reportable if held by a US Person.
Apologies – I should have made clear that my previous comment (http://isaacbrocksociety.ca/2017/02/05/part-2-be-careful-what-you-fix-for-mr-kentera-meets-mr-fbar-in-the-twilight-zone/comment-page-16/#comment-8517445) is in response to Pacifica.
i meant to add tht that is why I keep saying that we also have to look at what FIs are doing in reaction to FATCA and not just at FATCA and its IGAs.
My banks are providing far more info on all US persons regardles of their balance than required even on those who meet FATCA’s reorting threshold. They ARE doing because of FATCA. They did not do this before FATCA and they state that it is due to FATCA that they are now doing so.
I expected them to do so. I expected that many FIs would do so. Any many are in a variety of countries.
“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. “
I too do not think they are paranoid. Dealing with US tax and information law and reporting is a huge headache for us mono USCs. So much so, many are naturalizing in another country to rid themselves of it. Why would we surprised that our FIs don’t want the headache of having USC customers?
Personally, I do not blame them.
“Yes, I realise the IGA eliminates the FATCA requirement. It’s the tone of the guidance (“in no way”) that (to my ears) makes it sound defensive. And the FAQ does seem to me to confirm that perception:
“FATCA has raised a number of concerns in Canada – among both dual Canada-U.S. citizens and Canadian financial institutions. One concern is whether the FATCA reporting requirements, which would compel financial institutions to report information on accountholders that are U.S. residents and U.S. citizens directly to the IRS, would be consistent with Canada’s privacy laws.”
The FAQ argues (if I understand it correctly) that by signing the IGA, Canada solves both the invasion of privacy concerns and the denial of service concerns by making invasion of privacy okey-dokey and denial of service not mandatory.
The same position is taken by the EU, when questions about invasion of privacy and denial of service are raised, to explain why the EU can’t help. They don’t mention the fact that the GDPR regulations have been changed specifically to legalise the invasion of privacy, and the regulations entitling EU citizens to open a bank account have been carefully written to avoid entitling EU citizens to any kind of account that could conceivably be FATCA-reportable if held by a US Person.”
Yep, that’s how it’s always done, isn’t it. Sounds like that barning quote from a past Canadian politician to me.
I said:
“The same position is taken by the EU, when questions about invasion of privacy and denial of service are raised, to explain why the EU can’t help.”
The EU of course has no need to cover its back, not being an IGA signatory. And consequently the EU sounds smug rather than defensive.
@eric
You need have no further concerns. You are done, you are out. Once you sort what if anything to do with your final return, this is not an issue for you.
As for the rest, we can argue semantics for the next 24 hours – hey, it’s something to do – but really all I’m saying is that in some countries FIs (over)react to FATCA by doing more than the minimum required in the IGA. Nowhere that I’m aware of is it required in legislation to freeze accounts if customers don’t answer citizenship questions, or deny service to US persons. That is banks playing it safe, going above and beyond what is asked of them.
“Nowhere that I’m aware of is it required in legislation to freeze accounts if customers don’t answer citizenship questions, or deny service to US persons. That is banks playing it safe, going above and beyond what is asked of them.”
So, all is well then?
Nononymous:
“all I’m saying is that in some countries FIs (over)react to FATCA by doing more than the minimum required in the IGA.”
Indeed they do. The IGA is intended to resolve the banks’ dilemma (comply with law vs. comply with IRS) by adjusting local law to let the bank trample all over customers’ rights to whatever degree they wish – including refusing accounts on grounds of national origin, in order to reduce their risks and costs.
So it’s not possible to deduce whether one’s account will or will not be reported, or whether one will or will not be allowed to open an account, merely by looking at what the IGA says.
The legal actions are about challenging this wholesale removal of rights from accountholders suspected of US-tax-residence.
God you’re tiresome. Of course all is not well. I was merely providing clarification to Eric, who had worried that his NZ account would be frozen on command of the IRS, by explaining the circumstances under which accounts currently do get frozen.
Back at ya. What is in the law no longer matters. It’s old news. It served it’s perpose. One must look at what FIs are doing and likely to do in the future.
One thing is for sure, doing no more that what the IGA requires is not universal.
Due to simultaneous posting, clarification is necessary. “God you’re tiresome” was in response to Japan T.
@plaxy
We agree, for the most part, about the net effect of all this – appalling. In cases where accounts have been refused I’ve not heard of any successful court challenges, which suggests that choosing not to have someone as a customer isn’t against local law. For instance permitting simple accounts, to meet the EU standard, but not providing investment accounts. (One sometimes hears of specific bank employees denying accounts to US persons, but that is often solved by complaints to management, banking regulators, MPs or the press.)
@Japan T
It works the other way too. By showing how lax FIs are in their implementation and how little power the US actually has outside its borders, we can prevent people from being scared into expensive and unnecessary compliance.
I said:
“So it’s not possible to deduce whether one’s account will or will not be reported, or whether one will or will not be allowed to open an account, merely by looking at what the IGA says.”
In theory, the bank is supposed to inform the accountholder if the account is being reported. In practice, this doesn’t seem to happen, or not reliably.
However, it does no harm to ask, and offer a “reasonable explanation” for having got born in the wrong country.
Nononymous:
“I’ve not heard of any successful court challenges, which suggests that choosing not to have someone as a customer isn’t against local law. ”
Discriminating on grounds of national origin would break EU rights law. It’s one of the arguments in the French case.
Yes, I realize that challenge is underway. We haven’t had any successful challenges yet.
Nononymous:
“Yes, I realize that challenge is underway. We haven’t had any successful challenges yet.”
No unsuccessful ones either, in Europe. The discrimination issue hasn’t reached the ECJ, and may never. It would be wrong to draw the conclusion that refusing accounts on grounds of national origin doesn’t breach EU human rights law; it just hasn’t yet been tested.
“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.”
The US can force banks to cooperate by threatening to steal 30% of the banks’ gross revenues.
The IRS told me (back in the days when they sometimes answered questions, sometimes truthfully) that the US can force banks to cooperate when banks have affiliates in the US.
‘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?”’
No kidding. Trump even said the person should pay for an American flag and a matchstick.
“@Japan T
It works the other way too. By showing how lax FIs are in their implementation and how little power the US actually has outside its borders, we can prevent people from being scared into expensive and unnecessary compliance.”
That alone does not mean it will always remain unchanged. What have a particular nation and/ or its FIs been doing up to this point also needs to be taken in to account.
“The US can force banks to cooperate by threatening to steal 30% of the banks’ gross revenues.”
The US can threaten the bank as much as it pleases. The bank’s problems are not my problems,
@Norman
Sigh. Two points.
One: The (coerced) cooperation is with respect to reporting information, not touching money in those accounts (i.e. stealing US persons money).
Two: The threat is 30% withholding on certain payments from US sources. Not gross revenues. I explained this the other day. Hyperbole is not helpful.
It’s not even hyperbole, it’s just more of the scary-scary.
““The US can force banks to cooperate by threatening to steal 30% of the banks’ gross revenues.”
The US can threaten the bank as much as it pleases. The bank’s problems are not my problems,”
Except that that is why US persons have been locked out and having their private data shared with the world.
But, it shoukd not be any of oor problem.