From the RenounceUScitizenship blog.

This is a companion to the earlier post I wrote suggesting why Swiss banks should NOT join the OVDP program for Swiss banks. In this post I argue that individuals shouldn’t join OVDP for people. At the moment that means that nobody should join OVDP.

France: October 10, 1789 – Ancestor of #OVDP and #FBAR https://t.co/8P6iwn4ed1 – #Americansabroad don't let Swiss Banks take you there!

— U.S. Citizen Abroad (@USCitizenAbroad) December 14, 2013

I have written a number of posts about the OVDP program for Swiss banks. The banks should stay away from it. But what does it mean for Americans in Switzerland? The answer is that they are being asked to prove that they are U.S. tax compliant. Remember that proof has nothing to do with proof.

U.S. tax lawyer Robert Wood (referring to Americans abroad in general) asks:

What To Say When (Not If) Your #Offshore Bank Asks, 'Are You Compliant With IRS?' http://t.co/d2xfqm0BkZ via @forbes – Great comments!

— U.S. Citizen Abroad (@USCitizenAbroad) December 14, 2013

The Swiss banks are taking the lead in asking the question. One American in Switzerland  reports receiving the following message from Post Finance:

Postfinance blocked our accounts this week until we provide proof of “Voluntary Disclosure” to the IRS, whatever that means. I assume they just want proof we filed the FBAR, which we did. However, I don’t remember any confirmations. If I do some googling, I find the “Voluntary Disclosure program (OVDI)” which seems to be for people have been not compliant for a long time, and are trying to avoid stiff(er) penalties. Not our case.

Not sure if PostFinance is saying we have to enter this program or simply provide proof of FBAR filing because my wife spoke with them on the phone. I will have to follow up Monday.

Note that the reference is to “voluntary disclosure” and NOT the “Offshore Voluntary Disclosure Program” (OVDP). OVDP is a “sub class” of Voluntary Disclosure.

What’s in it for the Swiss banks for Americans abroad to be tax compliant?

Swiss banks who join OVDP for banks will pay a penalty based on a percentage of the non-compliant U.S. account. The short answer is that it reduces their penalty base. Remember that the banks only pay a penalty on non-compliant accounts. Therefore, the banks receive a “penalty credit” for every dollar in penalty the customer pays. As one commenter puts it:

It’s my understanding that the bank will get a discount on the penalties levied against them by DOJ if the bank actively encouraged the customer to enter OVDP (I can only assume Streamlined also). Once in OVDP, the taxpayer will either opt-out and be exonerated – along with the bank for their particular case, or, the taxpayer will be found guilty of tax evasion. In the latter case, the bank could apply the appropriate portion of the frozen assets to whatever the balance remains of the penalty after it’s been discounted, or they and DOJ can share in the spoils.

Obvious conclusion: No American in Switzerland can trust their bank! It’s also very clear that Swiss banks have decided they do NOT stand in a fiduciary relationship to their clients. Query whether they are capable of being a trustee of one of those “foreign trusts – of Form 3520 fame”.

The two kinds of Americans in Switzerland with problems …

The first kind of American in Switzerland with a problem is the tax compliant American. How does he/she prove it? For example, how does one prove that an FBAR was filed, when Fincen doesn’t acknowledge receipt of an FBAR?

The second kind of American in Switzerland with a problem is the non-tax compliant American. How does he/she become tax compliant and prove it?

Seems like Americans in Switzerland have problems.

Those who are not tax compliant are now forced (if they want a bank account, but maybe they don’t) to consider how to become tax compliant.

As Phil Hodgen  observed:

This more or less forces you into the voluntary disclosure program. That might be the right move for you or it might not. But your options are narrowing.

I don’t quite see why this would force someone into OVDP (if that’s what he means). The law does not require one to enter OVDP. The law does require filing U.S. tax returns and FBARs. Other options exist (including Streamlined compliance and others).

In any case, entry into the OVDP should never be a reaction. Rather it must be a response. Here are some perspectives of the OVDP:

From a 5ThSwiss a retired lawyer/academic (Note that OVDP is the same as OVDP):

“Voluntary disclosure” is a bad choice of words because it confuses with OVDI, as happened to you. OVDI is a mitigated forfeiture scheme of the IRS of which there have been several versions. It was intended (under Congressional mandate) that it would target cases of major noncompliance. However because of poor understanding in Congress of the issues and hostility towards expats generally, even minor discrepancies are disproportionately punished.

And you cannot expect to approach an accountant or lawyer in the US or UK without being encouraged (as his/her “professional ethics” rules mandate) to go into this expensive and emotionally devastating procedure.

What the Government Accountability Office found in its research is that of the millions (nobody knows how many; American Citizens Abroad claim 6 million-plus and the State Dept accepts that figure, but it really is totally arbitrary and those promulgating such a number have a vested interest) of US citizens abroad only a few hundred thousand file tax returns (but of course that includes joint returns, persons married to aliens, and children).

The penalties for small underpayment of tax are minor. The penalties for non-declaration of foreign accounts where the total value exceeds $10,000, of foreign trusts (including “Stiftungen” and “Anstalten” (foundations) and civil-law fiduciary relationships) and foreign corporations are draconian.

The IRS look-back period is generally 6 (or for OVDI, 8) years. But technically major underpayment of tax, non-filing and “absconding” from the USA have no statute of limitations.

That said, what PostFinance and other Swiss banks want, in the shadow of FATCA (the US law, now more or less accepted by Switzerland by treaty) where foreign financial institutions were threatened with 30% withholding of US income and seizure of correspondent assets if they did not cooperate is this: US persons must file Form W-9 and a consent form to reveal past and present account information to the IRS.

The EU has a vaguely similar project with Switzerland and UK residents and some UK citizens resident in Switzerland have received notices from HMRC to declare their Swiss accounts. Google “SA106” and see http://www.scribd.com/doc/191496288

Like the IRS, HMRC is starting from the standpoint that everybody has criminal intent. In fact that’s not just nasty but wrong. Most US Persons will have satisfied their US foreign account declaration obligation by checking the box at the foot of Form 1040 Schedule B.

Many US taxpayers are choosing to file and declare only “going forward”. There is chatter on the Internet, in professional forums, in GAO reports and within the IRS about investigating prior tax returns of those filing FBARs and (now) Form 8938. The real issue is whether taxpayers (especially US residents) are hiding funds abroad they never declared to the IRS when they earned them or made capital gains.

Given that the legal costs of OVDI (assuming one doesn’t do it him/herself) run upwards of $25,000 and the various penalties based on foreign account balances and, bizarrely, sometimes on foreign assets and real estate too, can be in the hundreds of thousands of dollars and can involve assets of a non-American spouse and children, some (especially dual nationals) are choosing to do nothing. Those without assets, income or heirs in the USA, assuming they do not apply for a new passport and never go to the USA (the IRS has access to the EPIC database and can follow the travel of target noncompliant persons), are probably beyond reach. Swiss banks will generally not know that a Swiss citizen depositor is a US person unless told, since Swiss ID cards don’t bear “place of birth”.

I understand from online chatter that many US and UK (and other) account holders, Swiss dual citizens, green card holders and others, are changing banks. Often by carrying their account balances in cash. It’s not only demands of the sort you received but revelation about US Government access (via the NSA especially) to foreign databases that have people frightened and anxious about paper trails. But as I said, most people are in fact compliant; the problem is that even minor noncompliance can lead to disproportionate penalties and expensive legal fees.

Remember this: your conversation with an accountant is not privileged. Your exchanges with a lawyer, and through the lawyer via a “Kovel letter” to an accountant, are usually privileged unless used for further violation of law.

I hope that helps. Feel free to send a direct message if you have further questions. I an a retired academic in this area of tax law.

In case you missed it, the advice is to stay out of OVDP!

Want some confirmation? Here is a recent comment to one of my other posts about the OVDP experience.

Nick: I left my country in Africa to escape a dictatorship. I find out by pure accident about FBAR reporting. I now have to pay over 90,000 dollars for a reporting violation I did not know about, hear or read about until 2011. I have tried reason with the IRS and sought help from the TAS all to no avail. All accounts were open years before coming to the states, no new assets were bought outside the country whilst living here. I was not allowed to shut up shop in my country of birth and bring my assets with me to start again. The IRS does not want to hear the truth. It merely by decree says you are guilty and you must pay or opt out to a more potentially devising situation with possible higher Penalties and jail time. This whole ex excise is a revenue generating scam and has nothing to do with compliance. I am going to try to go through my congress person next and if I have no success, going to go public using social media, etc. is anyone else interested in seeking true justice and wants to join me with going public?

The vast and mean very vast majority of Americans abroad should stay out of OVDP. If you want to learn more about OVDP, here are some suggestions:

OVDI Posts on the Renounce U.S. Citizenship blog

OVDP Posts on the Renouce U.S. Citizenship blog

OVDI Posts at the Isaac Brock Society

OVDP Posts at the Isaac Brock Society

For those who want to become OVDP Scholars:

OVDI Drudgery For Minnows – Destined to become a classic in American History will replace Thoreau’s Walden – The OVDP experience described here rivals the loneliness and solitude of Walden.

The Not That Lisa Chronicles – To be analyzed by future historians of the FBAR Fundraiser

In closing, while I was writing post, another commenter replied to NIck (above) as follows:

@Nick: Wishing you the very best. Regret I’m not in a position to help you directly, but I surely hope others may be. It’s an appalling situation, especially after what you’ve already been through. Will be praying you find people who listen sincerely and act for justice.

@all: In a (very) small act of reaching out to US homelanders, I had the opportunity to include the following in a Christmas letter to trusted friends living in the US, which I hope may be understandable to them. Perhaps some of it would be of use to others here for a similar purpose???

“When I first lost my mother, as you know, my aim was to find work at once. What I had no clue about then was how much US tax law had changed since 9/11. The treatment of expats under the present system of penalties is so harsh that the same person in my same situation would, if stateside, owe neither tax nor return, but if living abroad could face hundreds of thousands of dollars in penalties for paperwork errors or lateness!

“The situation is so unbelievable, that few people except tax experts have any clue as to what is going on, but since those are the very people who benefit from the situation, they are hardly likely to oppose it, unless they have a great deal of integrity. To give an example, one woman in Canada who actually owed no tax at all had to spend more than two years’ total salary on the paperwork to prove that she owed nothing – even though she hadn’t set foot in the US for decades and all her income was earned abroad!

“Things are set to get worse as FATCA takes hold, as it will bring into the net people who have lived abroad their whole lives, many of whom have no clue they are considered “US persons”, and yet can still find themselves required to pay 5 percent of their entire net worth in “reduced penalties” to the US. Others have faced penalties exceeding their entire net worth, penalties which cannot be released even by bankruptcy, even though the actual tax due was minimal and the penalties were only for failure to file forms.

“So it became for me a choice between spending my time working for – probably – minimum wage – and then paying upwards of $2,000 for tax preparation each year, or devoting hours each day to studying the situation and communicating with others affected and trying to get the situation improved. Fortunately, if extremely frugal, I can just get by, so this was the route I chose.

” It’s an enormous task, as I’m sure you can see. I could write a great deal more about it, as you can imagine, but that would hardly be fair to you, when I’m sure you must be very busy!”

Yes, has it occurred to you that in order to save the rest of your life you really should renounce U.S. citizenship?

Yes:

Renounce U.S. citizenship and be free. Life is just to short for this!

You are seeing the last of U.S. Citizenship Abroad! So sad! And FATCA has yet to really begin.