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, thank you very much. Two things I am worried about. One thing I left US without telling irs. I worked a few month this year, so will have to do tax return in 2019. Not sure what to do, just file return as usual. Another thing is the social security, I am so scared to get benefit from US after I reach 65. Not sure if they will check my fbar if I claim benefit.
@eric
I think you just need to file some sort of fancy partial-year return in 2019 for the income you earned before leaving in 2018. That’s it. You don’t need to have notified the IRS or otherwise told the US government that you’ve left – you haven’t done anything wrong.
Otherwise keep the paranoia in check. They will never find out about the missing FBARs. No reason not to sign up for Social Security when the time comes.
“One thing I left US without telling irs. I worked a few month this year, so will have to do tax return in 2019. Not sure what to do, just file return as usual.”
A dual-status return will tell them that you left the US. I gave you details before. Other commenters seem to be evenly divided, one telling you to ignore my comment and not file anything, and one telling you to file something but not with details.
There is a question but no answer as to whether or not, during 2019, you should submit FBARs for the portion of 2018 that you resided in the US. As far as we’ve been able to see, the US has not attacked anyone outside of the US for either filing or not filing FBARs.
Please see the post below, some people reside outside US, doj still sue them. Not sure if it is because they are US citizen or they have asset inside US
http://www.patellawoffices.com/blog/protecting-your-assets/2016-us-dept-of-justice-doj-tax-division-fbar-penalty-collection-cases/
@eric
You need to relax.
Well, there are several cases in the article Eric links to involving US persons living overseas, which I think you asked about earlier.
This just gives me another reason to tell those I know in Japan to not go to the US. If you work for even a short time, you must report all your assets to US law enforcement even if not taxes are owed.
The article that eric pointed us to is worth reading. The first case is the Pomerantz case where a lot of us have laughed at the incompetence of the US government, but the other cases are not so funny.
What they have in common is that the persons are US citizens living outside the US with accounts outside the US.
Since eric isn’t a US citizen we don’t know if the US would attack him the same way.
As for people who are US citizens but haven’t got the message yet about “sauve qui peut”, the US Department of Justice is hard at work reinforcing the message.
for Pomerantz case, why you think US government is incompetence?
Also from the article, there is no extradition for all the cases, just fine, but the fine is very harsh.
@eric
Pomerantz is a dual US-Canadian citizen so the US cannot collect against him in Canada. He’s sitting in Vancouver laughing at them. The IRS tries to sue him in Seattle but they can’t figure out how to serve the papers because he won’t sign when Fedex tries to deliver them. It’s quite funny.
The penalties may be harsh, but who cares if the US can’t actually get your money?
From the article: “Collection on FBAR penalties is made that much more difficult with respect to overseas financial accounts and assets, which generally are beyond reach of the government.”
So, going through the list:
1. Pomerantz. Can’t be touched, as a Canadian citizen in Canada. Not sure why the US even wasted a stamp sending him notice of the lawsuit.
2. Flume. US citizen living in Mexico, entered the US to attend tax court. Dumb.
3. Patel. US resident?
4. Desai. US resident?
5. Heard. US citizen in Greece. Panama Papers apparently. Article states that complaint was filed, not that money was collected.
6. Schoenfeld. Swiss bank mess. US resident?
7. Lanz. Swiss bank mess. Lives in Austria. Article states that complaint was filed, not that money was collected.
8. Baroni. Swiss bank mess. Lives in Panama. Article states that complaint was filed, not that money was collected.
9. Park. No idea what’s going on here but looks like they are after the children in the US.
Moral of the story appears to be that the US has been singularly unsuccessful in collecting FBAR fines from anyone who does not live, set foot or keep their money in the US, regardless of citizenship.
If those people do not pay, what will happen next? will US government extradite?
The late Que Te Park’s FBAR issues were the least of his heirs’ problems: transferee liability was denied the IRS: https://www.leagle.com/decision/infdco20171005k15 (comment http://www.wealthmanagement.com/estate-planning/transferee-liability-denied-fbar-debt-conflict “Park didn’t leave any probate estate in the United States at his death from which to collect, and he may not have left property in the United States.”) One reason “he may not have left property in the United States” is that the FTC had seized and paid over “$11.8 Million to Consumers Defrauded by Q-Ray Bracelet Scam”. https://www.ftc.gov/enforcement/cases-proceedings/032-3011/qt-inc-q-ray-company-et-al The FTC had sought $16 million https://caselaw.findlaw.com/us-7th-circuit/1114234.html The case related to Park’s sale of fake pain-relief bracelets that supposedly emitted “Q-Rays”. (“Why pay $200 for a Q-Ray Ionized Bracelet when you can get relief from an aspirin tablet that costs 1¢?”)
There are numerous reported cases involving Que T Park and his estate and heirs (among them 467 F.Supp.2d 863, 605 F.Supp.2d 999, 472 F.Sup[p.2d 990, 448 F.Supp.2d 908, N.D.Ill. 16 C 10787 (Oct. 5 2017, granting the Park children’s motion to dismiss the claims against them, case described at https://www.law360.com/articles/890079 ) (all found on Fastcase and PACER), and a bankruptcy proceeding, N.D Illinois, 07-03227. https://casetext.com/case/in-re-aqp-liquidating-2 The search for assets comprises various foreign trusts and accounts. The Anderson case (FTC v. Affordable Media) suggests that contempt proceedings might be used against anyone with information or effective power over foreign accounts: http://www.fraudsandscams.com/andersoncase.pdf
Links to many more FBAR enforcement proceedings, involving others, through November 2017 are here: http://www.nyulawglobal.org/globalex/Fatca_Citizenship_Based_Taxation.html It’s notable that around 2010 many account holders in Swiss banks moved their money out; those who transferred assets to Swiss private banks were revealed in later data transfers. The statute of limitations for 2011 expired at the end of June 2017 so those who became quietly compliant (or at least moved funds into non-FATCA, non-FBAR assets) may have liability only for any fraudulent filing (relating to the source of funds and earnings on them) or for failure to file form 8938.
Drone strike.
@Nononymous: the Park case also seems to be part of the Swiss bank mess. For anyone who reads Korean, there’s detailed coverage here (seems he had accounts in Switzerland with Zürcher Kantonalbank and UBS, in addition to smaller ones in Korea and China with Shinhan and Woori):
http://sundayjournalusa.com/2017/02/16/%EC%B6%94%EC%A0%81%EC%B7%A8%EC%9E%AC-%EC%9D%B4%EC%98%A8%ED%8C%94%EC%B0%8C-%EA%B1%B0%EC%A7%93%EB%8C%80%EB%B0%95%EC%8B%A0%ED%99%94-%ED%81%90%EB%A0%88%EC%9D%B4%EC%9D%B4%EC%98%A8%ED%8C%94/
Also, Park was already known to government lawyers for having got rich in a very, ah, colourful fashion. The FBAR case wasn’t the first time he got hit with multi-million-dollar fines:
https://www.leagle.com/decision/20061356448fsupp2d90811262
https://www.aol.com/2011/05/09/q-ray-bracelet-buyers-mailed-refund-checks/?guccounter=1
https://www.cbc.ca/news/q-ray-makers-ordered-to-pay-16m-in-refunds-to-consumers-1.711955
Anyway, the main takeaway seems to be that five years after he died, the US government can’t even put together a coherent case to collect that $4 million FBAR penalty from his kids
http://www.wealthmanagement.com/estate-planning/transferee-liability-denied-fbar-debt-conflict
“The statute of limitations for 2011 expired at the end of June 2017”
For accounts held in 2011, the deadline for submitting FBARs was in 2012 so the 6-year statute of limitations expired in 2018. If there was fraud in an income tax filing then statutes of limitations don’t apply to income tax filings, but if there was fraud in an FBAR filing I don’t know if a statute of limitations applies.
“Drone strike.”
Irrelevant. You don’t have to be accused of any illegal action, and you don’t even have to be accused of any immoral or unjust or unmerciful action, to be killed by a drone strike.
@Niorman:
“The statute of limitations for 2011 expired at the end of June 2017”
A typo. Just expired. Except if there is a sealed complaint or indictment. Or maybe something in the post that the IRS mis-addressed. The curiosity is that 2011 was the first 8938 year, and also an active year for USPs moving funds from one Swiss bank to another, so double FBAR liability of course.
The FTC has historically been far more aggressive than the IRS, and its reach goes further in terms of seizing assets abroad. Jay Adkisson has written (and practiced) extensively in the area of asset protection trusts, including in Forbes.
In the end it is jurisdiction over the person and the threat of levy and imprisonment that gets the money for the Government and, sometimes, victims. Losses to foreign-btased scams (of the Nigerian 419 variety, etc.) are scarcely ever recovered unless there is an insurance intermediary (embezzlement of a lawyer’s trust fund, etc.)
No FBAR cases found relating to those who have subsequently renounced citizenship. Or for that matter 5471 and 3520 — forms which have so many ways in which a self-preparer can make a mistake and be subject to $10,000 penalties. Which, fortunately, apparently are not imposed in good-faith mistake cases although you wouldn’t know that from reading the IRS training manuals: https://www.irs.gov/pub/irs-utl/FEN9433_01_06R.pdf or the boilerplate 3520/3520-A letters from IRS Ogden.
Eric. you keep worrying about extradition. Ain’t going to happen,.
N.Z. (or any other country ) would never .agree. move on.
@portland
The USG is trying to get tax crimes, broadly interpreted, included in extradition treaties. The Zagaris article is maybe dated but Bruce knows more than most people do on the subject http://digitalcommons.lmu.edu/ilr/vol25/iss3/9/ And alleging common-law fraud, money laundering and terrorism in an appropriate case — especially given the expansive US-UK extradition treaty which assimilates white-collar crime to terrorism (or at least did in the Natwest Three case) — makes one stop and think. At least NZ now has its own Supreme Court…
Give me a break. Apples and oranges. in Rick’s case , they don’t know he exists.
@eric
Next year, file your 2018 US return in such a way that it’s clear that you are no longer a resident (I think that’s how it works). That is the end of your US filing obligations.
Stop worrying about the old FBARs. Don’t mention your NZ accounts on your final return. That will be the end of it.
And don’t be afraid to collect your Social Security when the time comes. Assuming there’s a totalization agreement with NZ, you only need another three years to qualify.
There is really no reason for you to be worried about any of this.
The USA does not have a social security totalisation agreement with New Zealand https://www.irs.gov/individuals/international-taxpayers/totalization-agreements That said, any US taxpayer, domestic or abroad, can contrive to file Sch. C, claiming $5,280 (for 2018) of SE earnings and Sch. SE and pay the 12.4% SS and 2.9% Medicare taxes and get 4 quarters of coverage (40 needed to get Medicare Part A and a pro rata pension perhaps subject to the Windfall Elimination Provision but no less useful for that. Indeed, in the absence of a totalisation agreement, all self-employment by US Persons would be subject to double taxation by way of SET. It takes some expertise and contrivance to take advantage of the possibilities. And to avoid unwanted double taxation. Avoiding self-employment (beyond that required to get the 40 quarters) is one point.