Liberty and justice for all United States persons abroad

The Isaac Brock Society

Posted on by Posted in Issues regarding US persons abroad 564 Comments

cross-posted from citizenshipsolutions.ca

by John Richardson

Introduction …

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”.
 


 
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; and

Plaintiffs 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:
 


 


 

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 …
 


 
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
 

564 thoughts on “Part 2: Be careful what you “Fix For” – Mr. Kentera meets Mr. #FBAR in the “Twilight Zone””

  1. “it’s the fact that the IRS assessed the penalty. They wouldn’t have done that if the taxpayer had been an innocent dual citizen (IMO)”

    Your opinion is valueless in the face of %&# +*_|~^ f%!$^\{ EXPERIENCE. They %&# +*_|~^ f%!$^\{ well do penalize innocent dual citizens.

  2. “if the US extradites someone for a tax debt worth less than the plane ticket, I’ll eat my hat.”

    It might be a tax debt of $0.00 plus a penalty debt of $300,000.00. But I agree they wouldn’t extradite for it, they’d just file liens and levies, and if the victim doesn’t go to court then the IRS automatically gets collection assistance from any cooperating country where the victim doesn’t hold citizenship.

  3. “a Rube Goldberg-esque sequence of calamities”

    a Rube Goldberg-esque sequence of procedures which Congress intentionally legislated to be the procedures.

  4. Nononymous:

    “I now depart the fever swamp girlfriend for the evening,”

    I look forward to seeing the film production of Fever Swamp Girlfriend

  5. @Portland why ND’s opinion should be ignored? what is your suggestion for my last return, dual resident with declaration, no file or just resident return with overseas address?
    “ND should be ignored by anyone who needs advice. Japan T is a mystery. Hee claims to work 16 hours a day but still finds time to spend on endless arguments on IBS”

    @Nononymous what you said below is exactly one of the lawyers said to me. US will first calculate how much is the cost to do extradition, at least a couple of million $, then how much they can get from me, not even close, so no extradition. But I understand Japan T thinking US might set me as a sample to scare others. I seriously doubt this. There are extradition from NZ to US, most of them are over murder charge or very large amount of financial cases.
    “”The US is not going to extradite a former resident over a few thousand in undeclared interest income.“

  7. The IRS imposed numerous penalties and refused to refund my withholdings. For years they refused to say why. Eventually the IRS filed liens and levies for which I had to petition Tax Court or else the IRS would automatically win. The IRS told Tax Court that the only thing I did wrong was writing illegally honest declarations on tax returns, which impedes the IRS. The IRS needs returns to be processable not accurate. You know that round pegs don’t fit in square holes, the IRS knows that round pegs don’t fit in square holes, judges know round pegs don’t fit in square holes, but it is illegal to write honest declarations. When you have to guess you have to guess, but you’d better not write on a US tax return that you guessed, you have to sign the preprinted declaration even though it’s perjury.

    Later there were news reports about former IRS data entry clerk Monica Hernandez. Well well well. Is that why the IRS didn’t penalize my illegal honesty in years when I didn’t have Form 1099, and is that why the IRS did penalize my illegal honesty in years when I did have Form 1099, and is that why the IRS still didn’t refund my overpayments.

    If the IRS issued a Notice of Deficiency then Tax Court can order the IRS to refund your overpayments (and nullify the Notice of Deficiency). But if the IRS didn’t issue a Notice of Deficiency, if the IRS only issued Notices of Lien and Intent to Levy, then Tax Court can’t order the IRS to refund your overpayments. Then you have to sue in a District Court or Court of Federal Claims. There your opponent is the US Department of Justice not the IRS. The DOJ persuaded Court of Appeals for the Federal Circuit to overturn the IRS’s acceptance of one tax return (but oddly not others) not because of my illegal honesty, but because I failed to fabricate a social security number for my wife (and for two other reasons which are really just one reason, for which Tax Court ordered that seal be maintained (because Tax Court complies with some US Supreme Court rulings) but the Federal Circuit blamed me (because appeals courts overturn US Supreme Court rulings)). Well, so I paid penalties for illegal honesty, but I’m still entitled to refunds of my overpayments, and I’m still fighting.

    This is why, if you haven’t complied with the IRS before, you’d better not start. Don’t let them know you exist.

  8. Norman Diamond:

    “I agree they wouldn’t extradite for it, they’d just file liens and levies, and if the victim doesn’t go to court then the IRS automatically gets collection assistance from any cooperating country where the victim doesn’t hold citizenship.

    If you insist on leaving your mind and your money in America, even after renouncing US citizenship – you obviously are leaving your money as a hostage to the IRS. Consequently you may indeed get IRS tax problems – liens, levies, treaty mutual assistance-with-collection problems, etc.

    These things are not problems for citizens of non-US countries who avoid putting either themselves (are you listening, eric 🙂 ) or their money in America.

  9. The IRS can file liens and intents to levy, and obtain collection assistance from some other countries, regardless of whether you do or don’t leave some money in the US after renouncing. The IRS could attempt to file or lien or intent to levy on money that I have kept in the US, but the reason the IRS doesn’t do so is that I’ve figured out what they’re doing and there’s a chance that Tax Court might tell the IRS where to go. Tax Court doesn’t really like honesty, but it’s less evil than other US courts.

  10. “The IRS can file liens and intents to levy, and obtain collection assistance from some other countries, regardless of whether you do or don’t leave some money in the US after renouncing. ”

    You’re not paying attention Norman. The IRS can’t do these things. Get your money out of America, break your tax court addiction, and you’ll never have an IRS problem again.

    “The IRS could attempt to file or lien or intent to levy on money that I have kept in the US, but the reason the IRS doesn’t do so is that I’ve figured out what they’re doing and there’s a chance that Tax Court might tell the IRS where to go.”

    There is no chance whatever that the US tax court will ever side with you against the IRS.

    Spending your time trying to figure out why the IRS doesn’t confiscate your US money is just a touch irrational, don’t you think? Move the money and stop worrying about it.

  11. “what you said below is exactly one of the lawyers said to me. ”

    All these lawyers, and none of them can help you figure out how to get a refund without risking penalties? 🙂

    You’re not trolling, are you, eric? Surely not…

  12. “You’re not paying attention Norman. The IRS can’t do these things.”

    You’re not paying attention Plaxy. The IRS did it to me and the IRS did it to my wife who never was a US person (but who got tricked into accompanying me on joint returns, because married-filing-separately has its own $417load of problems.

    “There is no chance whatever that the US tax court will ever side with you against the IRS.”

    Except on rare occasions when the IRS tells the truth, which the IRS does do on rare occasions. But even in those cases, the IRS doesn’t have to obey the court order.

    “Move the money and stop worrying about it.”

    Again you’re not f%^ing listening Plaxy. My wife never had US assets and the IRS took its procedures anyway — but that was before I figured out what the IRS was doing. Now I would be happy if the IRS would take its procedures against me again, because I know what they’re doing, but they refuse because they know I know.

    At lease one US statute compels the IRS to investigate whether a Form 1099 presented by a taxpayer is accurate or not. The IRS would have to contact Ameritrade. Why do they refuse? Why did courts deny my motions for injunctions that would compel the IRS to audit me? What does the IRS have to hide? As a matter of fact we know what the IRS has to hide, because the Treasury Inspector General for Tax Administration told Congress.

  13. “The IRS did it to me ”

    You did it to yourself, and have kept on doing it for – what is it? twenty years?

    Don’t have US income, and you won’t have US tax withholding. Don’t file US tax returns, and you won’t be subject to US taxation. Don’t bother the IRS and the IRS won’t bother ypu.

  14. @ND

    “Don’t let them know you exist.”

    I agree with this 100% percent but how does one do this if their FIs are reporting them?

  15. @plaxy
    “All these lawyers, and none of them can help you figure out how to get a refund without risking penalties? :-)“
    I agree with you. My focus is not the refund, is to exit safely.

    @ND, are you still in the US or you are outside US for years? I do not know your story. Seems like you are outside the US for years, but did some US return causing problems? “Eventually the IRS filed liens and levies ” Did this happen recently? You are in a country which has assistant collection treaty with US? If you do not have money in the US and not in a mutual collection country with US, you can just simply ignore irs lien I guess? Anyway thanks for your information

  16. @plaxy

    So, ND did it to himself for honestly signing the jurat and Eric commited purjury for dishonestly signing the jurat?

  17. “My focus is not the refund, is to exit safely.”

    Very sensible. And luckily, you’ve already done it.

    Do nothing further, and you’ll be fine.

    Or if you prefer, file amended returns and backfile the FBARs; you’ll still be fine.

    No probs either way. Be happy 🙂

  19. “now you are sarcastic.”

    Nope. I’m laughing but I’m not being sarcastic. Do nothing further, and you’ll be fine. Fix the errors, and you’ll be fine.

    You have no problem. That’s good news!

    Isn’t it? 🙂

  20. @Eric,

    I don’t he is. I think he believes it.

    “@plaxy now you are sarcastic.

    Everyone has different stories.”

  22. Norman Diamond:

    (quoting plaxy):
    “it’s the fact that the IRS assessed the penalty. They wouldn’t have done that if the taxpayer had been an innocent dual citizen (IMO)”

    Your opinion is valueless in the face of %&# +*_|~^ f%!$^\{ EXPERIENCE. They %&# +*_|~^ f%!$^\{ well do penalize innocent dual citizens.

    Only if the dual citizen files US tax returns.

    A dual citizen who has no US income and keeps clear of the US tax system has no problem with the IRS. That is in fact exactly my experience, and is the experience of many others. That’s why we never heard of CBT until FATCA came along.

    FATCA IGAs created problems, for the US-born. Problems caused by being deprived of the rights to privacy and data protection which their fellow citizens enjoy; and in some countries, problems accessing normal financial services. Neither FATCA nor the IGAs have caused, or could cause, any IRS problems for a dual citizen who doesn’t have US income and doesn’t file US tax returns.

  23. The differences is that I blame the IRS and US tax law, not you nor ND as plaxy does. But yes, I do believe that once in the net, damned if you do damned if you don’t. They’ll pull out the bigger fish first but will eventually get down to us small fry. Unless we find a way out or to end this before then .

  24. “Neither FATCA nor the IGAs have caused, or could cause, any IRS problems for a dual citizen who doesn’t have US income and doesn’t file US tax returns.”

    Eh, you don’t even have to be a citizen, dual or otherwise to have the exact same privacy issues you in the same post. Japanese are currently reporting on anyone who meets the physical presence test regardless of citizenship.

    A dual USC living in Japan is being reported just as I am. A German living in Japan now but worked in the US before coming to Japan is being reported by his Japanese bank. A Japanese family returning from a 3 year posting in the US is being reported by their Japanese banks.

    And all of this is 4 year old news, and yet you STILL say, “Neither FATCA nor the IGAs have caused, or could cause, any IRS problems for a dual citizen who doesn’t have US income and doesn’t file US tax returns.”

  25. “The differences is that I blame the IRS and US tax law, not you nor ND as plaxy does. ”

    plaxy considers the OECD and the IGA1 partner signatories responsible for the damage caused by the agreement.

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