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
“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?”
If the person, besides being a citizen of country A, is not a US citizen, and did not have a green card while residing in the US too long, and either did not have a green card at all or did go through proper procedures to revoke a green card which had been held for a sufficiently short time, moves to country B from the US, they are not a US person, though they might still have had too long of a physical presence and therefore be required to submit a Form 1040NR though maybe or maybe not with an attached Form 1040 as a schedule.
Furthermore, if a person, not being a citizen of any country A and not a US citizen (i.e. stateless) and meets the other conditions described above, then the result is the same.
For example if the defenceless little victims who you infected move to say Singapore or New Zealand, then even though they’re citizens of country A (Japan) and move to country B, they still have the infection. They only get to hide the infection if they move to Guam, Saipan, Swain’s Island, American Samoa, Puerto Rico, etc. In fact if I understand correctly, if you were older and if you’d done all of this in Okimawa, they could have hid the infection while Okinawa was a US colony but the damage would have popped up when Okinawa stopped being a US colony.
@ND
The first part of that message confirms what we’ve been saying. A non-US citizen leaves the US and goes to any other country and unless they have a green card issue, they cease to be a US person the moment they leave the US (though of course they might still have tax paperwork to deal with a year later).
The second part of the message I don’t understand at all but I suspect it’s not meant for me, so I won’t try.
I’m not so sure that the IRS’s definition of US person is as you understand it. I’ll repost a comment I made bove no illustrate why.
“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.”
Another point is that the info the JBA is exactly what I expected based upon my studying of these issues. Whether the JBA’s reaction is based upon the word of the law, the spirit of the law or fear of the law, it is as I have been saying it would be even before I got proof of it.
Whether or not one is a US person as defined by law (a definition I think to be harderto nail down than just quoting the published IRS definition of the term) or not, if one or one’s assets are being treated as such, then they are.
I matters little if one is or is not a US person. What matters is if one is treated as such. Plaxy has provided reasons for FIs to treat non US person as US pesons and we see this happening in the real world.
Another point, I have not said that one necessarily will be a US person for life. But one will be for a period of time after leaving the US regardless where they reside. However, I do believe that once that indentifier attaches itself to someone that it will always be there, in the file, and the potential for it to cause mischief ever present.
I’d also like to restate the effective definition of US person I gave earlier. A US person is one who must abide by US law or regulation and that the US and the US alone has the power to determine who must abide by its laws.
Again, what difference does it make if one is not a US person if they must file tax and or information returns to the US? Although, I use “US person” to refer to such people, based upon what I have read earlier at IBS and other sources.
“A non-US citizen leaves the US and goes to any other country and unless they have a green card issue, they cease to be a US person the moment they leave the US ”
Or to put it another way: the Americans have no interest in labelling departing non-US-citizens as potential US taxpayers, if there’s no PR hook on which to hang them.
“Or to put it another way: the Americans have no interest in labelling departing non-US-citizens as potential US taxpayers,”
https://www.irs.gov/individuals/international-taxpayers/departing-alien-clearance-sailing-permit
@ND
Interesting. Unlike on my last passport renewal application, I do not see a statement of penalties for not providing the required information. What, if any, are the penalties for not obtaining this permit?
The “sailing permit” – good lord. I wonder what percentage of departing non-USCs who would be required to file the thing actually file the thing? (This must be what my parents were talking about when they describe going to an IRS office and paid a sum of money before leaving the US for Canada, back half a century ago. Both were on green cards at the time.) But it any case it demonstrates that you can make a proper exit and no longer be a US person. And presumably all those who are not required to obtain the “sailing permit” (student visas and everything else on the list) cease to be US persons the moment they depart.
But to close off this strange thread, I don’t think it’s useful to expand the definition of US person to include anyone who’s lived in the US and who might be wrongly treated as reportable by overzealous FIs. It just adds to the paranoia. It’s also important to note that having US indicia on file – such as an old US address with a Canadian bank dating back to when one was a grad student – does not mean that you are a US person. Those indicia are a flag for the bank to investigate whether you might be a US person, nothing more. (Bank finds old US address. Banks asks customer if they are US person and have SSN. Customer says no I’m Canadian but I went to school in the US for a few years. Bank says thank you, case closed, you are not a US person. At least that’s how it should work.)
“I don’t think it’s useful to expand the definition of US person to include anyone who’s lived in the US and who might be wrongly treated as reportable by overzealous FIs.”
Indeed. It’s useful to stop worrying about the definition of “US Person.” “Person suspected of USness” is more to the point.
All these so-called, “sovereign” nations were the usa’s lap dog. They bent over, spread their cheeks, and signed FATCA. ‘Kinda sorta’ shows you blantantly who their allegiance is to: bankers and the teet of the us financial system.
These bankers/countries do NOT care abt duals, us “persons”–simply they want $–they’re hu$tlers and they screwed you royally and could not care less about privacy, your rights, and dual status.
You’re in toxic relationship with a partner that hates you. REPEAT: You are in a horrible “relationship” with an empire and its’ lap dog that HATES you.
Who the bleep would actually thk that if we do this, that, we must, we should, letter writing, sign this, sign that, etc etc….All futile. You’re owned by the usa empire and its’ lap dogs. It’s. Over. It’s a done deal–the most anyone can hope for is some minor PR BS tweaking.
Hence, one has 2 options:
1. Repatriate and say f you to the “sovereign” place that pretends to care abt you (LOL).
2. Renounce usa -hood and divorce the toxic partner.
“The “sailing permit” – good lord. I wonder what percentage of departing non-USCs who would be required to file the thing actually file the thing?”
Sounds similar to things said about FBAR.
Usefullness of determining the Definition of US Person. There is a reason why this term was coined and why the last president kept using it. “It is time for all US persons to pay their fair share.”
[sailing permiit] “Unlike on my last passport renewal application, I do not see a statement of penalties for not providing the required information. What, if any, are the penalties for not obtaining this permit?”
My best guess is that if an illegal immigrant doesn’t obtain a sailing permit then they can’t get deported by ICE.
(If your computer froze when you read that answer, that just proves how far-reaching ICE is. No wait, that doesn’t work. What happens when two contradictory sarcasms collide with each other?)
“Sounds similar to things said about FBAR.”
Exactly – what percentage of US persons file FBARs? It’s not high.
Damn lack of edit function…
– what percentage of US persons who should file FBARs actually do file them? It’s not high.
Exactl, and now after 40 years of no penalty for not filing, slowly but surely, people are getting hit with huge FBAR fines.
But if they aren’t US residents (or edge cases like Dewees) they aren’t *paying* the FBAR fines.
CRA didn’t even help collect FBAR fines from Dewees. They collected for some other form crime which is in Title 26 US Code (penalties for not knowing about some form even though no income tax is owing) instead of Title 31 (penalties for not filing FBAR).
Right, forgot about that. Even where US tax bills are collectible, FBAR penalties aren’t.
It still wasn’t a tax bill, it was a penalty bill when no taxes were owing, but the US codified it in the section for penalties related to income tax forms instead of penalties related to other forms. I still think CRA shouldn’t have collected.
No, non residents have not been forced to pay FBAR FINES. That is not the point. The point is, that fact that a law has not been enforced or known about should not be thought of as a protection from future enforcement.
The sailing permit is related tax and thus may have penalties that are collectable through tax treaties if obtained as required.
“The point is, that fact that a law has not been enforced or known about should not be thought of as a protection from future enforcement.”
Of course not. It’s the other way around. If FBAR had been enforceable, it would have been enforced and people would have known about it.
“The sailing permit is related tax and thus may have penalties that are collectable through tax treaties if obtained as required.”
If you’re worried that due to the US-Japanese tax treaty you might get hit by an unexpected US penalty for not filing a sailing permit (despite the fact that as a USC you’re not required to file a sailing permit), read the treaty to see if that’s what it says.
Small semantic point. The law has been enforced, but the punishment cannot be inflicted.
“Of course not. It’s the other way around. If FBAR had been enforceable, it would have been enforced and people would have known about it.”
Before FATCA, not enforcable at all. With FATCA, it is a lot more enforcable.
No, I am not at worried about the sailing permit. My comments are not about me only. I was responding to a comment made about how many knew about the requirement and fullfilled it. It too was nonenforceabl before FATCA but a lot more enforcable with FATCA.
“It still wasn’t a tax bill, it was a penalty bill when no taxes were owing, but the US codified it in the section for penalties related to income tax forms instead of penalties related to other forms.
Form 5471 is the form the US is currently trying to use to get compliant USC owners of foreign corporations to pay the transition tax on imaginary income. Dewees had a foreign corporation; whether he knew about Form 5471, I do not know.
It appears Dewees expected to be assessed for (uncollectable) FBAR penalties but was actually assessed for (collectable) penalties for not filing Form 5471. The treaty required Canada to assist with collection; Canada fulfilled its treaty obligations.
I still think CRA shouldn’t have collected.
Oops – blockquoted the wrong paragraph. Apologies.
“Before FATCA, not enforcable at all. With FATCA, it is a lot more enforcable.”
No.
“It too was nonenforceabl before FATCA but a lot more enforcable with FATCA.”
What too?