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
Today, FBAR is not strictly enforced.
@eric
You stated earlier: “However it will make irs easier to locate you if they want to fine you.”
You are missing the overall point. They cannot fine me. They can send me a bill, but they can never collect.
Nononymous – “I was essentially parroting that nolo.com piece – ”
Yes – the “you” in my response was intended as generic “you”. Sorry if it sounded as if I was referring to you (i.e. Nononymous) as having filed a perjurious 1040. I should have spoken more clearly,
@Plaxy
From the documents one of my banks gave me, from the JBA.
“Under FATCA Due Diligence, banks are required to confirm whether you are a U.S. person (e.g., U.S. citizens) when opening an account for the first time, when you are moving to the U.S., when banks have a record of U.S. address in your customer profile, etc.., ….”.
“If, as a result of the foregoing, you are determined to be a U.S. person, we will report information including your bank accounts to the U.S. tax authority with your consent.”
“If you are treated as a U.S. person, we are required to periodically report your information, such as name, address, account number, tax identification number, account balance, interest income, etc., the the U.S. tax authorities.”
“I heareby express my consent to the bank that the bank report information about myself ( name, address, TIN, transaction records ( account balance, change in amounts, etc.)to the Internal Revenue Service of the U.S…”
“If you are unable to cooperate with the bank for purposes of the FATCA Due Diligence, you will not be able to open a new account at that bank,…”
NOTE: According to the Japanese language version, consent is not needed for existing accounts. All the infirmation the banks has is shared.
This is not a “Japan thing”. Several years ago now, a friend who is a British national had to provide proof he was not a U.S. person to his bankers and brockers in the U.K. are have all the same sent from said U.K. FIs to the U.S..
You may read FATCA to mean “was” a U.S. person, but FIs in at least two countries, Japan and the U.K. are not.
@plaxy
No offence taken. One day I might file a perjurous 1040 just for the sheer naughty fun of it.
Not unlike entering the US on a Canadian passport with a valid US passport stuffed down my shorts. If not a delicious perverse thrill, then at least a mild frisson of excitement.
Can’t take this stuff too seriously.
@Japan T
I realize that the devilish JBA has access to the government database containing records of your stool weight and composition dating back to 1973 so clearly they can track your every movement, but still, how precisely does that definition translate into US person = anyone of any nationality who ever spent more than X days in the US at some point in the past?
Japan Tu – yes I don’t doubt that FIs may report the accounts of non-USC Japanese residents who have been resident in the US since FATCA came into force. It’s not because they’re a US Person.
When they were resident in the US they were a US Person.
When they return to live in Japan, they’re no longer a US Person; but obviously their accounts may still be treated by the FI as reportable to the US.
Japan Tu:
“You may read FATCA to mean “was” a U.S. person, ”
Accounts of a non-US-resident non-USC who has been resident in the US since FATCA/IGA came into force in their country obviously may be treated as reportable by FFIs. It’s not because they are a US Person, it’s because they have been resident in the US since the FATCA IGA came into force in their residence country.
“Several years ago now, a friend who is a British national had to provide proof he was not a U.S. person to his bankers and brockers in the U.K. or have all the same sent from said U.K. FIs to the U.S..”
Is this news to you?
“I realize that the devilish JBA has access to the government database containing records of your stool weight and composition dating back to 1973 so clearly they can track your every movement, but still, how precisely does that definition translate into US person = anyone of any nationality who ever spent more than X days in the US at some point in the past?”
Actually, if I was enrolled in the national health care scheme as I am supposed t be, they would in fact know the weight and composition of my stool, BMI, CBC and have photos of every inner surface of my body.
The definition of “US person” has been discussed at IBS a couple of years ago. One of the reasons given by FIs to jettison US person account holders was precisely because there was no clear definition of the term. At least one poster here said that was nonsense, and then proceeded to give the multiple definition for the term. Would be funny in other contexts.
The US and the US alone reserves the right to define who is and is not a US person, one of the earlier arguments against signing the IGAs, as it ceded this sovereign right to the US. In short, while the boundaries are not clear, “US person” includes USCs, former USCs, their non USC spouses, children, business partners and anyone with assets shared with one.
At least one major Japanese company has changed its policy for posting its employees to the states based upon the physical presence test for asset reporting once the employee returns home to Japan.
As FATCA applies to all who have certain connections to the US regardless of nationality AND the JBA and at least one major employer in Japan act as if it applies to same, I can not understand this belief that it only applies to USCs.
“Japan T,
“You may read FATCA to mean “was” a U.S. person, ”
Accounts of a non-US-resident non-USC who has been resident in the US since FATCA/IGA came into force in their country obviously may be treated as reportable by FFIs. It’s not because they are a US Person, it’s because they have been resident in the US since the FATCA IGA came into force in their residence country.”
That’s not what they say.
“. It’s not because they are a US Person, it’s because they have been resident in the US since the FATCA IGA came into force in their residence country.”
Not entirely correct. If they returned before FATCA went into force but were in the US for the previous three years, their accounts were reported.
If not a US person, what is the basis for Japanese FIs to spy on their own citizens and the citizens of other countries who spent x amount of time in the US?
Let’s make this easy.
US person=anyone that has any responsibility to the US as decided by the US.
“I realize that the devilish JBA has access to the government database containing records of your IRS administrative records weight and composition dating back to 1973 so clearly they can track your every movement,”
Actually Japanese houses still mostly used septic tanks in 1973 so movements wouldn’t need much tracking but IRS administrative records would get more stuffed up than they already were.
‘Actually, if I was enrolled in the national health care scheme as I am supposed t be, they would in fact know the weight and composition of my IRS administrative records, BMI, CBC and have photos of every inner surface of my body.’
I don’t think the JBA would obtain those records though. The local office of the National Tax Agency would get the shit (and local offices of the National Tax Agency often didn’t communicate with other offices of the same agency) but the other records would be created by the medical clinic where you had your physical exam performed and sent to your employer.
Japan Tu:
The IRS defines a US Person as:
https://www.irs.gov/individuals/international-taxpayers/classification-of-taxpayers-for-us-tax-purposes
Which clearly does not include a New Zealand resident who is not a USC.
Not being a US Person does not mean accounts won’t be treated as reportable. The FIs err on the side of caution to save their bacon.
“I don’t think the JBA would obtain those records though. The local office of the National Tax Agency would get the shit (and local offices of the National Tax Agency often didn’t communicate with other offices of the same agency) but the other records would be created by the medical clinic where you had your physical exam performed and sent to your employer.”
Yep and all connected with every other bit of data they have on me via the “My Number” system.
The purpose of the “My Number” system is to have all data accessible with the one number.
We were once able to renew our “gaijin cards” at our local city office. Because the local city offices did not always communicate with the the national gov. the Gaijin card has been away with and replaced with the residency card which can only be renewed at region immigration offices.
The lack of communication you cite as once a strong barrier against abusive national programs. With the newish residency system and the My Number system, those protections are fading fast.
“The lack of communication you cite as once a strong barrier ”
Should be “The lack of communication you cite was once a strong barrier “
That is one definition. It has been reported that the DoS has another and that the FATCA statute has another. There may be more but I recall at least these three.
Oh, but there is also “a US resident for tax purposes” that I know of and my personal favorite “ US citizen for tax purposes only”. Though I have long since forgotten the several locations I have seen these.
JapanT:
“If not a US person, what is the basis for Japanese FIs to spy on their own citizens and the citizens of other countries who spent x amount of time in the US?”
What worries FIs is the risk that they might fail to detect and report an account that turns out to be risky. There’s no reason for them to worry anout reporting accounts that are actually not risky. They have a built-in incentive to over-report and a built-in incentive not to under-report.
“That is one definition. It has been reported that the DoS has another and that the FATCA statute has another. There may be more but I recall at least these three.”
“Oh, but there is also “a US resident for tax purposes” that I know of and my personal favorite “ US citizen for tax purposes only”. ”
Yep. All this stuff is just words strung together to serve the interests of the USG and its various departments and agencies and other fiefdoms.
Oh, and these several articles over the past year I think (could be that they are of earlier vintage and I just ran across them over the past year) with headlines like ‘IRS clarifies definition of “Taxpayer”.’ followed later by ‘IRS reclarifies definition of “Taxpayer”’.
Before the definition given by the IRS has any meaning, we must see how they define “citizen” and “resident” to start with. As there is now a “tax citizen” which differs in meaning from the traditional idea of “citizen” and we know one can be a “tax resident” without residing in the US, the mystery of what the IRS’s definition of “US person” is not solved by the definition they provide.
“What worries FIs is the risk that they might fail to detect and report an account that turns out to be risky. There’s no reason for them to worry anout reporting accounts that are actually not risky. They have a built-in incentive to over-report and a built-in incentive not to under-report.”
That is certainly true.
But if one is treated as a US person even if one is not a US person, seems to be a distinction ofno difference.
“As FATCA applies to all who have certain connections to the US regardless of nationality AND the JBA and at least one major employer in Japan act as if it applies to same, I can not understand this belief that it only applies to USCs.”
What makes you think anyone believes that FATCA reporting applies only to USCs?