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
Useful to know. Eric wouldn’t be a US taxpayer abroad, having neither citizenship nor green card, so that’s one less thing for him to worry about.
@andy05, for all these fbar cases, I did not see any extradition mentioned. Do you have any idea the cost of extradition?
@Eric: You’re scared, I get it. Many of us are. When I had my OMG moment, I went through the same traumatic realizations and for six months I needed half a bottle of whiskey just to induce sleep. There isn’t a day that goes by in which I don’t think about all the horrible things associated with US tax policy toward those living outside the USA. But I get the impression that you’re working hard to stay scared. People have answered you over and over and over again: there is no chance that you would be extradited. Why do you insist on bringing it up over and over?
I know my comment doesn’t help, but you need to calm down. You need to read and learn everything you can–most of which resources are available right here at the Isaac Brock Society website–and sort out what are the real threats, and set aside the Hollywood doom-and-gloom disaster scenarios playing out in your head, that the local police will drag you away in the middle of the night and handcuff you on the next flight to the USA, where you’ll be tossed into a dank basement prison cell.
And, finally, you need to participate in the efforts you’ll learn about here, to lobby US lawmakers, to fund lawsuits in Canada and elsewhere, and to spread the word to others with US taint who may not yet be aware of the horrible situation they are in.
eric is right to be scared of the US, but I agree he won’t be extradited for something like this.
I think eric will be most comfortable by proceeding to submit a dual status return for 2018 (deadline 2019-06-15 approximately unless he applies for an extension), so the IRS will know that he left the US properly. The return is 1040NR for the status on the last day of 2018, and an unsigned 1040 is attached as a schedule for the portion of 2018 that he resided in the US.
On the 1040, don’t forget to include in taxable interest income, the amount of interest received during the portion of 2018 that he resided in the US, even though the payer is outside of the US.
If eric can safely submit FBARs online for the portion of 2018 that he resided in the US, he will probably be most comfortable by doing so. If eric resides in Russia and has an account in Cyprus, it might not be safe for him to submit an FBAR to the US. The amount of interest should be included in the US return even though he can claim the 5th amendment as to the source of the income — the IRS still respects two important US Supreme Court rulings, and so does US Tax Court, though other US courts don’t.
“Eric wouldn’t be a US taxpayer abroad,”
Indeed. From what has been posted, the poster is not a US taxpayer and is not a US citizen and is not a US Person and doesn’t have a CBT problem and doesn’t have a FATCA problem.
Wrong forum, perhaps.
He was a US Person because of US Residence until one day before he left the US. He doesn’t have a CBT problem and no longer has a FATCA problem. The IRS still expects to see a final return so maybe the expat_tax thread would suit part of the answer to his question, and the US might expect to see FBARs so this thread suits his question.
“He was a US Person”
Yes, while living in the US a non-US citizen would be a US Person. Then they leave and they’re not.
““He was a US Person”
Yes, while living in the US a non-US citizen would be a US Person. Then they leave and they’re not.”
The Japanese Bankers’ Association is at least one entity that disagrees with you.
I would disagree with ND’s advice to Eric on one count. For the final return, filed next year, do not report interest from or acknowledge existence of, any accounts in NZ. They won’t be reported under the FATCA, and the whole reason for the these fainting spells about extradition is that they were not reported on FBARs during the time he was living in the US. So why reveal their existence now?
A non-US citizen, not born in the US, not resident in the US, not owing US tax, not possessing any US income or assets, would have no reason to file a US tax return.
@plaxy
We speak of a partial-year return, filed in 2019, for income earned in the US before leaving in 2018. Depending on withholding, it might result in getting money back. Plus it closes the file and tells the IRS that he has left the country. (Whereas not filing that return when the US employer reported income might have the IRS asking questions.)
I would do nothing about FBAR and not mention non-US accounts on this return, however.
Nononymous – “not filing that return when the US employer reported income might have the IRS asking questions”
Write to the IRS for no good reason, lest they write to you? 🙂
I generally agree with you on don’t speak until spoken to point as far as the IRS is concerned, but if you’ve been working in the US for years and leave in April or May, I think it would be prudent to file the final return for that partial year. Especially if you get a refund.
“if you’ve been working in the US for years and leave in April or May, I think it would be prudent to file the final return for that partial year.”
I think it would be imprudent in the extreme for a former US resident with a foreign account not reported to FINCEN or the IRS while resident in the US, to file a US tax return from a foreign country in the hope of getting a refund.
Six of one, half dozen of the other. If there’s zero chance of FATCA reporting (because he said not US citizen to the NZ bank) then I’m not sure why it’s so dangerous to file a return from abroad without reporting the account. On the other hand, having the US employer reporting income to the IRS for half a year, then not filing a tax return, may also provoke correspondence from the IRS. Pick your poison, I guess.
Also it’s not clear that the NZ account had much money in it while Eric was in the US. Upon leaving he transferred his savings. So possibly it doesn’t have a significant balance until he’s already a non-resident. In which case there was nothing to report…
“I’m not sure why it’s so dangerous to file a return from abroad without reporting the account.”
Don’t you think the IRS might wonder whether the foreign filer had any foreign accounts during the years he was in the US?
“possibly it doesn’t have a significant balance until he’s already a non-resident. In which case there was nothing to report…”
The existence of the account? Schedule B?
“Don’t you think the IRS might wonder whether the foreign filer had any foreign accounts during the years he was in the US?”
That’s what I was thinking.
Coin toss, then. I dunno. Depends partly on whether the NZ accounts were under the 8938 and FBAR reporting thresholds during the time Eric was resident in the US, though there is still a potential Schedule B issue. But walking away and not filing a final return when you had earned income in the US does also seem like a potential red flag if you ever wanted to return. If they don’t know you’ve left and don’t have the NZ address then no, they won’t be able to find you after you’re gone.
We are just debating the cleanest exit here. In no case will Eric be faced with collectible penalties, extradition or drone strikes. (So stop worrying.)
“If there’s zero chance of FATCA reporting (because he said not US citizen to the NZ bank)“
He said (correctly) tax-resident only in NZ. There would be no reason for the FI to report the account. But most US tax treaties provide for requested exchange of information. If the NZer writes to the IRS helpfully supplying their address, it would probably be easy enough for the IRS to obtain the information they ask for.
You are giving the IRS a lot of credit for having the energy and initiative to go after a relatively small amount of money that they are not able to collect.
“In no case will Eric be faced with collectible penalties, extradition or drone strikes. ”
Drone strikes, no. But perjury is a felony and an extraditable offence. Less likely to be noticed if the person doesn’t write to the IRS seeking a refund.
“You are giving the IRS a lot of credit for having the energy and initiative to go after a relatively small amount of money that they are not able to collect.”
I’m saying there’s a better chance the unreported accounts will go unnoticed if a person in the circumstances described lets sleeping dogs lie.
Are we overthinking this? Surely very large numbers of people leave the US after working for X years on a visa, not having reported foreign accounts (because it wasn’t widely known that one had to) and then filing final returns from abroad.
When I left the US (albeit as a citizen) many decades ago I filed my final return from Canada, and never heard a peep. If they’d mailed me forms a year I might even have stayed compliant! Lucky thing they didn’t.
“Surely very large numbers of people leave the US after working for X years on a visa, not having reported foreign accounts (because it wasn’t widely known that one had to) and then filing final returns from abroad.”
No idea.
It’s up to the individual to weigh up their options. Personally I would forget about this non-problem and get on with life. I definitely wouldn’t opt to file a 1040NR, without first taking the precaution of backfiling the FBARs.