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
“Do nothing as far as US taxes are concerned. ”
I must say, that wouldn’t be the option I would choose, given that there’s going to be a return due for 2018, and likely a refund or tax to pay.
Further clarification: do nothing with respect to the unreported account.
thank you all for your information. First of all, I will never come back to US any more. I do not have asset in the US. I am thinking to do tax return next year as resident, not reporting or amend anything else. Then send bank the form back claiming non US resident. I have been checking online, I did not find any case about a work visa holder got fined by US, but just concerned about I worked in US for 7 years, a bit long time. also I am not sure what happened for people renounced US citizen, did US chase them for penalty? My concern is the bank if they can report my information to irs, they may be able to close or freeze my account if US fine the bank. Why the bank is forced to report potential US customers’ information to irs is because otherwise they got fined by 30% of their profit from US.
But a decision would have to be made as to whether to report the account, and pay any tax due on interest earned by the account, on the 2018 return.
If it’s reported, and any due tax paid, and the FBARs filed, all’s done, with no loose ends, and eric can easily sort out the status of his account with the bank.
“My concern is the bank if they can report my information to irs, they may be able to close or freeze my account if US fine the bank. Why the bank is forced to report potential US customers’ information to irs is because otherwise they got fined by 30% of their profit from US.”
Indeed. Nail on head.
Though the bank’s probably not at risk of a fine or losing their FATCA-compliant status, if they’ve been reporting your account to the NZ tax agency.
The whole point of FATCA is to identify US-resident US taxpayers who have not reported foreign accounts.
When you were working in the US and filing US returns, you should have reported the account and paid tax on the interest.
If you amend the returns and pay the tax and file the FBARs now, it’ll just be a mistake that’s now been corrected. If you don’t, it’s tax evasion.
This is why the world’s got lumbered with FATCA. US-resident US taxpayers not reporting income, in order to avoid paying tax.
To amend the returns only put me at higher risk I believe.
Amending returns is a mistake. It raises flags
@eric
The IRS has no ability to force banks to freeze accounts in NZ, or to collect penalties from NZ. Once you and your money have the left the US, the US government cannot touch you. There is no mechanism by which they can cause you any grief. (New Zealand has a Model 1 IGA so the banks do not directly report to the IRS, rather to the NZ tax agency, and they cannot be penalized by the US for non-compliance.) So do not worry.
Contact your bank and try to find out if you were reported under FATCA.
If the answer is no, then ignore the unreported account, obviously.
If the answer is yes (or maybe) then you have a decision to make. Presumably you would have some amount of unreported interest income to declare. You could:
(a) file an FBAR and report the account on your 2018 return and leave it at that (i.e. “partial” compliance)
(b) amend past returns and file old FBARs to become completely caught up (i.e. full compliance)
(c) file your 2018 return (are you expecting a refund?) with no mention of the unreported account, and no FBAR (i.e. non-compliance)
I have no strong opinion on which course is the best. Might depend on how much you owe in tax on the interest income. Whether the US is capable of taking the FATCA data and finding you and sending you a bill is an open question – it doesn’t happen now and it likely won’t happen until long after you’ve filed your final return, when they would have no ability to collect. But if cleaning up loose ends is easy and doesn’t cost you much, there’s an argument in favour of doing so.
@eric
“To amend the returns only put me at higher risk I believe.”
Higher risk of what, exactly? Unless you are expecting a large refund, your money is beyond the reach of the IRS.
“I am thinking to do tax return next year as resident”
You can’t. On the last day of next year you will be a non-US resident, so your US return will be a signed Form 1040NR. You will attach an unsigned Form 1040 as a schedule to report your worldwide income during the portion of next year that you will be a US resident.
“I did not find any case about a work visa holder got fined by US,”
I don’t know what type of visa Mr. Topsnik had.
“also I am not sure what happened for people renounced US citizen, did US chase them for penalty?”
If the IRS already asserted a penalty then they will continue chasing the person. I don’t know what would happen if a non-resident non-US person doesn’t file, then will the IRS assert a penalty or not. In general the IRS has, up to this point, ignored non-residents who don’t file, but you might be different because you used to file.
“Why the bank is forced to report potential US customers’ information to irs is because otherwise they got fined by 30% of their profit from US.”
30% of gross revenue. Maybe thousands of times their profit, or more than infinity times if they had a loss.
“30% of gross revenue. Maybe thousands of times their profit, or more than infinity times if they had a loss.
Um, no. Complete misunderstanding. The penalty is this: “30% U.S. withholding tax will apply to payments of certain U.S. source income (e.g., dividends, interest, insurance premiums) made to non-U.S. financial institutions (FFIs)” when those FFIs have done something bad. FFIs in Model 1 countries, of which NZ is one, cannot be penalized this way.
OK, thank you again all.
2 things here, for the bank letter, I am thinking to reply to this letter with filled out self certified decalaration I am non US resident. I will call them afterwards to make sure they do not report me later on.
As for the tax return, someone mentioned I can not do resident return. Next year return(final return) is for this year 2018, so I am still resident. 183 days (all three years multiply weighting and sum up). Initially I want to do a dual resident return, however that dual return requires my passport number, my new address, I am concerned about my information. if I do a resident return with old US address without mention NZ bank account, I should be OK for this return. In the future, I won’t have any US salary, so even I do not submit return later on, irs will not notice. so basically I am just concerned about my current address, I do not want to disclose to irs. Not sure I am right or not. I read some articles online, if irs wants to collect fbar penalty, they have to first sue you to federal court, that requires fedex court package signed by you. So if they do not know where you are and checked immigration you are out of the country, they should toss the case. anyway I hope someone here can point me out how to do the final tax return, the key thing I am worried about is the address. all in all, at least my money should be safe as Nononymous pointed out. Thanks
@eric
I will defer to the experts on how should file your 2018 return.
After certifying non-residency, I would ask the bank whether you had been reported in the past, as that would potentially help determine how to proceed.
The thing is the letter bank sent to me is in early 2017, if I reply back now and ask them if they reported me or not. That may raise their concern why I reply after almost 2 years. they may be concerned I was overseas, I am /was US resident. they may ask for more evidence.
As for expert of tax return, it is so hard to find, most of the accountant only knows how to fill out forms. Any complex situation, they do not know how to do.
Don’t overthink this. Control the paranoia. Your bank is not going to cause trouble or retroactively report previous years’ data if they discover that you were a US resident in the recent past. (There might not even be a mechanism for them to do so.) They are not tax inspectors, or police. Banks in Model 1 countries (like NZ) are only required to make an effort to find US persons. They sent a letter to the address they had on file. You didn’t get receive the letter. Now that you are no longer a US resident, they have no reason to care. End of story.
By “leave it to the experts” I meant the experts here, on this forum. Since I refuse to file US tax returns, I know relatively little about the mechanics of doing so. Others know a great deal more.
OK, thanks. so model 1 is less strict than model 2 country? Model 2 directly reports to irs?
To all of you guys, who can tell me what is the best way to do my 2018 US tax return, technically I am still US resident if you just count 183 days(3 years weighting). I believe I can do dual resident return, however I do not want to disclose my NZ address. Any thought? thanks.
Model 1 IGA is less strict in the sense that banks report to their national tax authorities and are not at risk of IRS penalty. They have an obligation under their own country’s laws (through the legislation enabling the IGA) to make a reasonable effort to find US persons.
thanks.
@Norman Diamond, are you suggesting me to file a dual resident return? I honestly do not understand your comment listed below
“You can’t. On the last day of next year you will be a non-US resident, so your US return will be a signed Form 1040NR. You will attach an unsigned Form 1040 as a schedule to report your worldwide income during the portion of next year that you will be a US resident.”
Next year I will not be in US, so I do not need to file return the year after. My only concern is early next year how I do my 2018 return. 1040NR? Can you pls explain ” attach an unsigned form 1040 as a schedule” ? thank you in advance
“As for expert of tax return, it is so hard to find, most of the accountant only knows how to fill out forms. Any complex situation, they do not know how to do.”
Your situation’s not complex. Any tax accountant will know how to not report the account. You just need to find a tax accountant who’s willing to commit perjury on your behalf, and pay them enough to make it worth their while.
@plaxy, I do not know I need to file fbar until I already left the US. If it is that easy to fix the issue just to amend the tax and file previous fbar, I will have already done that. To amend the returns for so many years only may bring uncertainty.
If you depart from the US on 2019-01-01 then your 2018 return will be as a US resident, not dual status. I’m not sure if you’ll be dual status in 2019 and I’m not sure if you’ll have to file a final return for your dual status in 2019 when you have zero income. When you file your 2018 return in 2019 you’ll have to write an address and if that address is in the US they probably will expect a 2019 return from you.
Tax returns have schedules. Usually Form 1040 isn’t a schedule, but when Form 1040NR is a final return the attached Form 1040 is a schedule.
“You just need to find a tax accountant who’s willing to commit perjury on your behalf, and pay them enough to make it worth their while.”
Is it perjury if the tax accountant doesn’t know?