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
“if one is treated as a US person even if one is not a US person, seems to be a distinction ofno difference.”
Or to put it another way: if your accounts are treated as reportable by one’s FI, it doesn’t matter what they call you. (Generic you)
Yep.
“What makes you think anyone believes that FATCA reporting applies only to USCs?”
Repeated statements of doubt that Japanese and others FIs would report non USCs accounts to the IRS.
Statements of doubt posted here on IBS? Can you point to an example?
Because it seems to me you frequently claim people keep telling you that Japanese FIs won’t do this and Japanese FIs won’t do that, yet I can’t recall ever seeing the kind of comments you seem to be complaining about. If you point out one or two of the comments that you object to, perhaps the confusion could be cleared up once and for all.
Here is one.
“Eric is not a US person. NZ citizen only, no green card. Surely even the devious malevolent minds of the Japanese Bankers’ Association wouldn’t subject a Kiwi to FATCA reporting. (“No one expects the Japanese Bankers’ Association!! Our weapons are fear, surprise, ruthless efficiency, and assuming that all English-speakers are Americans!”)”
JT – that’s a joke.
That latter part surely is, it was the sentence preceeding the ( ) that I was responding to.
It’s irony.
I refer you to Nononymous, who no doubt will spring to defend his comedic efforts.
🙂 <— smiley
Well then, seems we are not in disagreement on that point.
Eric, do you envision yourself ever moving or working outside NZ ever again?
Your answer may cause further considerations.
Well, here good news, I hope.
From Accounting Today.
IRS spent $380M on FATCA, but still can’t enforce it
By Michael Cohn
Published July 09 2018, 2:06pm EDT
Havn’t read it yet. Devil’s in the details I’m sure.
Well this certainly disappeared down the rabbit hole overnight. Shows what happens when there’s not enough World Cup left on TV.
To my earlier comment, it was not meant as a joke, rhetorical flourishes aside.
Here’s the situation: our hypothetical Deric (let’s change the name to avoid confusion) is a NZ citizen only, who lived X years in the US on a visa (no green card) but has returned to NZ. He has no US business interests, assets, etc. He then moves to Japan.
Under the IRS definition, Deric is not a US person. On this we must agree. If there is some other US government definition of US person, we don’t know about it.
Now, in Japan, one of two things will happen when Deric tries to open a bank account:
1. He will be asked about US personhood, and he will answer no – correctly according to the IRS definition – and that will be the end of it.
2. The fiendish JBA will give him a questionnaire equivalent to a top secret clearance, and will examine his NZ passport for stamps and visas, and will come to the conclusion that because he once lived in the US, he must be a US person, and he will be treated accordingly.
Only one of those two things is true. I claim no expertise on matters of Japanese banking practice, so I can’t say which one is correct. Common sense tells me that the second answer is ridiculous, but the world is a complex and sometimes confusing place.
Or he might be asked which jurisdictions he has paid tax on, in the last x years.
However, the NZer in the scenario described by eric was merely asked where he was tax-resident. Which was lucky. A more cautious FI might well have wondered about all those US-source transfers.
Yes, he was asked by his NZ bank about tax residency, and answered correctly that he was NZ only.
If they’d wondered about the transfers and asked, he might have needed to argue with him that his US tax residency ended the moment he got on the plane, despite potentially having a final return to file a year later.
We can but speculate.
The salient point, it seems to me, is that a non-USC in the situation described (recently returned from several years working and paying tax in the US) is not a US Person as defined by the IRS, but that doesn’t necessarily mean his account won’t get reported.
On this we agree. Either the individual in question makes a mistake in telling an FI that they are still US tax resident because they have only recently left, or the fiendish JBA reports them for having once visited Yellowstone, or there is some other mishap due to an abundance of caution on the bank’s part.
The us empire needs tax bases/subjects, “leased” individuals–their terms. Do NOT be angry at the usa empire, be furious with your “sovereign” “countries” for bending over, spreading their cheeks, and being the usa-er’s female dog. Reality. They OWN you. Reality.
“2. The fiendish JBA will give him a questionnaire equivalent to a top secret clearance, and will examine his NZ passport for stamps and visas, and will come to the conclusion that because he once lived in the US, he must be a US person, and he will be treated accordingly.
Only one of those two things is true. I claim no expertise on matters of Japanese banking practice, so I can’t say which one is correct. Common sense tells me that the second answer is ridiculous, but the world is a complex and sometimes confusing place.”
I had to allow the bank to photocopy my passport to open the account.
But how is he not a US person. If he resided in the US for a minimum of certain amount of time he is a US person regardless where he moves to after leaving the US. Where does it say one must return to their country of nationality to be a US person?
“But how is he not a US person. If he resided in the US for a minimum of certain amount of time he is a US person regardless where he moves to after leaving the US.”
Only if the residence was on a green card.
More precisely, if the US residence was on a green card that was not properly disposed of with an I-407.
The notion that anyone who spent X amount of time in the US on a visa then leaves is a US person for the rest of their life is not consistent with the IRS definition of US person. Also not consistent with common sense. For all I know, however, it’s the definition used by the fiendish JBA.
@JapanT
“I had to allow the bank to photocopy my passport to open the account.”
The front page only, or every page, with all the stamps?
So, if citizen of country A moves directly (or within a short period of tme) to country B from the US, they are not a US person?
I have no idea how many pages of my passport they copied as customers are generally not allowed behind the counter of a bank. After the bank clerk thumbed though the entire passport and took notes, my passport disappeared into the bank and returned about ten minutes later. They also required my “My Number” card and one other photo ID, I usually opt to provide them with my DL, which they also copied.
They dffinately have the opportunity to either copy the whole thing or look at the whole thing or both. I did witness the clerk thumbing through my passport and taking notes and I doubt it was for the bank to have a better idea if the message for my birthday card.
@ND
How are you using “green card” in your statement above?
In that scenario, the person is not a US person by my definition, the IRS definition, and any other non-JBA definition.
Really? I have never run across anything stating that to be a US person, one must return to their country of nationality. If this is the case, problem solved! Anyone who works in the US just has to work in another country before returning home to avoid all of this. If this is the case, I am sure there will be changes to close this loophole.
What? A citizen of Country A leaves the US for any Country A, B or C – regardless of where they have citizenship – and once gone they cease to be a US person (the exception being if they have a green card and fail to file I-407 on departure). There is no rule that says if you spend X amount of time in the US and then leave you are somehow a US person for life.
There might be some weird fiendish JBA rule, but there’s no IRS rule. That’s the whole point of people getting rid of, or not acquiring, green cards. So that they cease to be US persons once they leave the US. Wherever they go.