Moby was the first publicly reported Opt Out of the 2009 OVDP. He has been very generous in sharing his experience, and has been an inspiration to others who have had to battle the fear of what draconian penalties the IRS ‘might’ apply outside of the OVDP. We all believe the IRS FAQ examples are hyperbolic maximums by intention to strike fear into non complying hearts, but until tested, you really don’t know. Moby basically turned down the “in lieu of” OVDP penalty, called their bluff, and won! If you are not familiar with his story, I would strongly encourage you to read it as originally reported on January 25th here and updated on March 10th here . Since the last post, he has been at work on a FOIA request related to IRS FBAR compliance improvement efforts, and asked me to share his findings. What follows is his report.
I wanted to publish this information to shed further light on FBAR-related activities by the IRS in recent years, and to get more eyeballs on some information that should have been public before now.
I don’t think there is anything truly astounding, but I think there are some significant tidbits that tells an interesting story.
I hope it is of use to people in making OVDP opt-out arguments, for fighting the good fight with media, and making the case for action with elected representatives.
I’ve written up my thoughts on the reports; but I’m short on time so didn’t read them entirely/thoroughly, and there maybe further stuff of interest in there. I welcome other peoples’ thoughts on these reports.
Section 361b of the Patriot Act requires the Treasury Secretary to report annually to Congress on efforts to improve FBAR compliance.
As far as I know, only reports covering years 2001, 2002 and 2004 have been publicly accessible on-line (here). The remaining reports (2002-2010) are now available due to a FOIA request. They are posted (HERE).
The FOIA request
The FOIA request text was for the following:
1) All annual reports required to be submitted (prior today’s date) by the Secretary of the Treasury to Congress in accordance with Section 361b of the USA Patriot Act of 2001.
2) Where there is an instance of the aforementioned annual report not having been submitted to Congress for any year please provide for that year;
a) documentation of the authorization of the Secretary’s non compliance with the S361b requirement; and
b) documentation describing the rationale and decision for the Secretary’s non compliance with the S361b requirement”
1) Parts of the reports were redacted by the IRS. Details of redaction are listed in documents numbered 10 and 11.
2) For search-ability, structured text was extracted from the all the static PDFs and dumped into a single file (document 09). The document is ugly and not perfectly translated (OCR has limits) but is a good way to find interesting words (or their absence). Repetitive appendices were not included for this.
Observations on the report content
Here are some tidbits from what I read:
1. IRS responsibility for informing taxpayers of the FBAR :
The reports mention “the Internal Revenue Service agreed to take responsibility for assessing whether better education and guidance regarding the requirements to file an FBAR was needed and, if so, to implement recommended improvements”. Essentially the IRS has taken on the duty to be reach out to people with FBAR obligations. They seemingly did nothing of the sort to fulfil this duty.
2. Identifying groups that should be filing FBARs:
The reports mention that this is something they were doing; i.e. “Develop additional methods to identify persons who may have an obligation to file FBARs”. Easy you might think; immigrants and expats would represent 90+% of the FBAR-obligation-population. See next point.
3. Immigrants and expats:
The reports don’t mention “Immigrant” or “Expat” anywhere at all. The word “Abroad” (as in Americans abroad”) does not appear until 2009. As the primary FBAR-obligation-population you would expect them to be getting some airtime in the report. There don’t appear to be any references to these groups using different words either.
4. Publication 54 – Tax Guide for U.S. Citizens and Resident Aliens Abroad:
This is very telling. Up until the end of of 2008, this 44-page guide (2008 version here) never mentions FBARs. The first time the IRS inserted a reference to FBARs was in the 2009 version after all previous versions had never mentioned it. They mention this change in the 2009 s361b report. I think that their sudden change to Publication 54 in 2009 is a filthy little action on their part. It reeks of them trying to quietly amend their previous de facto policy on not expecting expats to file FBARs.
5. 2007 report was not timely:
The 2007 report was bundled into the 2008 and report and released a year late. It is deeply ironic that the annual report on the subject of “the compliance of people with obligations to file an annual report” was submitted 1 year late. We all know what happens to people who file their FBARs late!
They mention outreach to the public a lot. I saw very little mentioned in the way of outreach to individuals, and nothing about immigrants or expats. It seemed to focus on tax practitioners. I mention this because (as highlighted in my opt out letter, here, section 4.3); Deloitte (the biggest accounting firm in the world) was not passing the information on. Obviously the outreach was ineffective and/or insufficient.
Summary of my thoughts
I think this further demonstrates the behaviour of the IRS as being the primary cause for FBAR non-compliance amongst immigrants and expats.
The IRS had the responsibility, duty and obligation to reach out to expats and immigrants; to make the FBAR discoverable and known to people who inevitably trigger filing requirements.
The IRS seems to have deliberately ignored immigrants and expats in its education and outreach efforts, when in fact these groups should have been the primary audience.
It appears like the IRS didn’t expect or want expats/immigrants to file FBARs, in effect making this a de facto policy.
Then in 2009, the IRS has changed its mind with the OVDP holy war on expats/immigrants, and in doing so changed its (de facto) policy on who should be filing FBARs. That amounted to a retroactive application of draconian penalties.
I think it shows that the IRS has its hands in too many pots. The Congress needs to narrow its tax focus to those who legally come under the authority of the U.S. Treasury. In other words only those who actually have accounts with the Treasury as holders of the Treasury’s paper. The last time I looked at the paper money in my wallet I did not see a promise printed on it by the Federal Reserve that they stand behind my Canadian dollar by promising to redeem it for a U.S. dollar. They don’t seem to understand how fiat currencies gain legitimacy which is be being the sole legal tender and the only means by which tax obligations can be settled.
It isn’t easy to be god, even for the U.S. Being everywhere present, omnipresent, is a tough job for the most powerful nation in the world, when in the end it is populated by mere mortals.
I would have paid in lieu penalty already if Moby had not shared his opting-out story. Thanks for keeping helping us..
Taking the Moby material as narrative, what jumps out at me as crux is the 2009 alteration to Form 54. Dirty sneaky and typical poltroon IRS. Then couple that with their going deep cover 2007-2008. As independent confirmation of this sick story, just look at the evolution of the FBAR form over the past decade, and the offspawning of Form 8938. Pretty well a perfect mesh. The scariest part of this horror movie is that it isn’t over — unless you’ve exited the movie house — and whatever the next episode is, it will be worse, and the goal is to do you in with greatest possible pain.
and the 2010 FBAR penalty structure is legislated retroactive 6-8 years prior to pub 54 (not to mention the absurb injustice of retroactive penalties)
*I found fascinating the information concerning the absence of a reminder or notice of FBAR (and other information return) filing requirement in the 2008 version of Pub 54.
What is most interesting is to examine the past versions of Pub 54 available at the IRS website:
There, you will find that PRIOR to tax year 2004 i.e. in all versions of Pub 54 for 1994-2003 there WAS a reminder concerning the filing requirements for various information returns (FuBAR, 3520, 5471, etc.)
What happened in calendar 2004 to change the IRS’s mind about including this warning to the group of people who had the greatest need of it?
Well, for starters beginning in 2003 the IRS by internal memorandum assumed FBAR enforcement duty from FINCEN. They also got tagged with the responsibility to design a new and improved FBAR form which – in a mere 4 years of herculean effort – they succeeded in publishing in October 2008.
The 2004 calendar year also saw the massive hike in FBAR penalties in the JOBS Act of that year.
And it was in 2004-2005 that the TIGTA report came out suggesting that there were “compliance opportunities” in FBAR enforcement going to waste.
The information on a filed FuBAR was and is utterly useless to any organization in the US government. But, with the massive penalty hike of 2004, its non filing suddenly offered “compliance opportunities” i.e. the use of extortion to coerce settlements or as it is expressed in Washington: “leverage”.
A cynic might suspect that these clowns stuck the FBAR warning back into Pub 54 when it became obvious from what Bradley Berkowitz was telling them in 2008 that the first OVDP was going to have to depend for its effectiveness on occupying the high moral ground vis-a-vis tax cheats.
Really disgusting – and very sad.
So you are saying that without FBAR there would have been no way for the IRS to go after Olencoff and co under just Title 26.(I have suspected this for quite a while. This is why Canada with no FBAR equivilent other than T1135 has basically shut down its own offshore investigations realizing there was no money to be had.)
Previous comments from me
The mystery surrounding Canadian owners of offshore accounts in a secretive bank in Liechtenstein has deepened with the discovery by the Canada Revenue Agency that nearly half the names it was given are not the real owners of the accounts, iPolitics has learned.
CRA’s probe has determined that 51 of the 106 names it received of account holders in the LGT Bank in the tax haven of Liechtenstein “were not the true beneficial owners for the account.”
“With regards to the 51 cases that were not the true beneficial owners for the accounts, the CRA has determined, through audit actions, that they do not have any tax obligation in relation to the information obtained,” explained Philippe Brideau, spokesman for the Canada Revenue Agency. “However, the CRA has taken actions to determine the true beneficiaries and has taken audit actions to ensure compliance with the Income Tax Act.”
Brideau said further details are protected under confidentiality provisions of the Income Tax Act.
Now LGT had a reputation for being pretty dirty so the fact that CRA under traditional income tax law came up with nothing basically is pretty telling. Additionally the 106 names were “stolen” by the German government(Hope they didn’t pay too much for that info). Other than the 51 nominees 15 holders were in full compliance and twenty were in partial(i.e. did not disclose on T1135 but no “tax loss” to government) compliance.
As well as doing a sneaky little retroactive addition to the publication they then stopped mailing out an overseas tax package to tax payers abroad forcing an extra burden on overseas filers to somehow find the information and forms they needed either by the internet (not an option for some people) or by telephone (often an exercise in futility). Could they get anymore devious than to cover up their complex requirements for compliance than by making it so difficult to find out what it is they want? By the way, how does one ask for information about something if one doesn’t know there is something they need information about? (I’m thinking about how I didn’t know such a thing as an I-407 existed so it was natural that I would not look for it.)
The enhanced FBAR penalties that were mysteriously and grotesquely enhanced in the 2004 JOBS Act were the key to future Offshore enforcement programs. (No one to this day knows who, exactly, was responsible for the markup of the bill that suddenly and drastically increased the enhanced FBAR penalties as originally proposed or what the rationale was. There was a proposed increase in the original legislative draft but when the bill came back from Committee someone had administered legislative steroids to the increase.)
The IRS’s original 2002-2003 OVD program had been a flop for essentially 2 reasons:
1) lack of any credible threat of independent detection by an internationally deaf and blind IRS (international enforcement plan: “get lucky”) and
2) no credible penalty threat under Title 26 or Title 31 remotely comparable to the “tax savings” of continued criminal behavior.
The JOBS Act solved problem 2 – at least theoretically.
That still did not solve Problem 1. And then Bradley Birkenfeld walked in the door; the IRS enforcement tactic of sitting back, scratching their asses and waiting to get lucky finally paid off; and the rest was history . . . .
*I am always getting David Berkowitz (AKA “Son of Sam”) confused with Bradley Birkenfeld (AKA “Son of UBS”).
My apologies to both gentlemen.
*My understanding in several Canadian offshore cases account holders had in general big capital losses over 2000-2010 and in particular during the 2008 financial crisis that whiped out all the unreported capital gains from the 1990s tech boom. So at the end of the day there turned out to be very little tax loss to the government. Additionally in general going back and auditing 1990s era returns is very tedious and time consuming.
*This is what the Minister of Revenue in Canada said back in 2009(much different attitude from the US)
“You still have time to call us and do a voluntary disclosure. If you do before we have your name, no penalties — only interest and income tax that you have to pay.”
*So here a few question for you Todundsteuer
1. Do you think former IRS Commissioner Mark W. Everson filed FBAR’s during the years he worked as an executive Pechiney in France and Turkey.
2. Do you think Mark Everson has any other skeletons in his closet.
Unadmissable hearsay below:
Everson within six months of leaving the IRS to run the Red Cross got fired for “knocking up” a subordinate employee. Now while that is totally irrelevant many a Federal Prosecutor would try to get a jury to find out about something like that in order to make a Federal defendant look bad.
*Does anyone have access to historical background data from back in 1970 which provides information on exatctly who was targeted by the FBAR legislation when it was enacted? It is quite revealing that the existence of this legislation was, in effect, concealed by the IRS from overseas US person tax filers by there having been not reference to this legislation in PUB 54 until 2009 As I recall it was only fairly recently that Congress assigned the responsibility for the enforcement of FBAR to the IRS.
Where was the enforcement responsibility before that?
@Just Me and Moby
Many thanks for this initiative. Very interesting and valuable information. Honestly I never would have believed that his level of corruption was possible. The IRS needs to refund all FBAR penalties. Nobody but nobody should enter OVDP.
I feel particularly sorry for the IRS employees who are good people who must now live with the realization of what the organization has become.
As Phil Hodgen says:
Renounce while the getting out is semi-good.
@ Tim and Todundsteuer (aka death and taxes)
I sure many appreciate both your research skills and your grasp of the implications of the subjects discussed at IBS
I’m glad you mentioned the fact that the IRS stopped mailing out several important publications to non residents of the U. S. I know a number of older seniors who were quite upset that they didn’t receive the forms and who didn’t have either the access or the knowledge to download and print the publications from the IRS site. And, yes, trying to call the IRS during tax season is an exercise in futility.
FinCen under Treasury was responsible for FBAR enforecment before they delegated the responsibility to the IRS.
As I have often said, the CRA has a real amnesty program. Just come clean before we find your name, and pay only taxes and interest.. That is what the web site still says...
@Steven Mopsick… Wonder where you are, and if you have read this, and what is your analysis? Take your time to digest it, but would love to have you provide your perspective.
@Todundsteuer Thanks for your comments and insights.
This is supporting that the whole Patriot Act BS is the basis of FBARs and FATCA. Everything points to 9/11 reaction is all just an excuse to chase after (non-existent) money launderers and tax cheats and to destroy presumed innocence. Together with your local Rep/Senator and Romney silence even on Romney’s trip abroad, this is going to prove that the major candidates are supportive of increasing the punishment regime.
Presidential candidates such as Ron Paul, Ralph Nader, and Pat Paulsen are looking more and more attractive each and every day.
Great spotting. I didn’t spot the earlier Publication 54’s like you did. So, to recap, here is the timeline:
– Up until 2003: Pub 54 issued every year for expats, with information about FBAR included
– 8 April 2003: Treasury delegates FBAR enforcement and compliance activities to IRS via Memorandum of Agreement
– 24 April 2003: IRS issues 361b report covering 2002 and states: “IRS took responsibility for assessing whether better education and guidance regarding FBAR compliance is needed, and for implementing such improvements, as appropriate.”
– 2004: IRS updates Pub 54, and **removes** information about FBARs
– 2004-2008: Pub 54 makes no mention of FBARs
– 2009 onwards: Pub 54 updated to include FBARs again
Wow. Just, wow. This behaviour by the IRS is unbelievable. Expats never had a hope of ever knowing about FBARs with this kind of outreach/education from the IRS.
Moby, thank you. Absolutely fascinating. $41 M in FBAR penalities in 2010 (versus $2.8 M in 2007). “Only” 540,000 filings in 2010 (versus 6 Millions Americans abroad).
I believe, about 67% of the 540,000 FBARs may be filed by persons living in the USA (either citizens or any other kind of residents). So not even 5% of the expats know about the FBAR until 2010.
So maybe the same is true for the penalities, i.e. the $41 million in 2010 would essentially concern USP residing in the USA (and not USP residing abroad)?
@oohlala: The list of FBAR convictions shows that all are rich US residents or bankers who helped them: http://www.irs.gov/newsroom/article/0,,id=110092,00.html
OVDI trapped innocent dual-citizens who live abroad and owe no taxes. Unfortunately IRS chose to extract fines from minnows entered OVDI trap in years 2009, 2010 and 2011.
Many thanks to you @Moby – invaluable research. Unbelievable.
@Bharat, re; “about 67% of the 540,000 FBARs may be filed by persons living in the USA (either citizens or any other kind of residents).” Can you tell us what the source of that figure (67% = US residents) is?
You might add to your timeline that it was 2010 when they stopped mailing overseas tax packages so it became catch-as-catch-can for all of us to get information and forms after that. At least I think that’s right because I always save the previous year’s package until the next one arrives and 2009 is the only one I have now. When my husband inquired on his recent trip to the USA he got the impression that they don’t even make the overseas tax package anymore. Also the FBAR form changed in 2008 which made us reluctantly separate our accounts after being advised to do so by a free, five minute telephone conversation with a lawyer in Vancouver.