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
“When I left the US (albeit as a citizen) many decades ago I filed my final return from Canada, and never heard a peep.”
They sent me a refund. In those days they still did that without being asked. But in those days there wasn’t any FATCA, not even any FBAR, and certainly no balance-swallowing penalties.
I guess it depends on how seriously they take the Schedule B business. If you sign one but fail to mention a foreign account, particularly an account with a small balance and minimal interest income, are they really going to try to hunt you down? I doubt it, but to your point, why expose yourself if you can just disappear, refund be damned.
“ If you sign one but fail to mention a foreign account, particularly an account with a small balance and minimal interest income, are they really going to try to hunt you down?”
Not for the tax on the interest, but they surely might for the chance of collecting wilful or non-wilful FBAR penalties. Per year.
It’s doubtful ( or seems so to me) that the IRS would risk pursuing a non-resident USC for FBAR penalties for failing to report residence-country accounts, when they’ve got no evidence of tax evasion or tax crime. But in the case described here, the IRS already has the evidence of perjury on file. Even if they were reluctant to try for extradition, they might assess and then use the threat of an extradition request to scare the individual into paying up. Not a happy outcome.
“why expose yourself if you can just disappear, refund be damned.”
Yep.
“When I left the US (albeit as a citizen) many decades ago I filed my final return from Canada, and never heard a peep. If they’d mailed me forms a year I might even have stayed compliant! Lucky thing they didn’t.”
If you filed a final return, maybe the IRS assumed you became a Non Resident Alien not a US citizen.
But thanks to Canada Post, you don’t know if the IRS tried to mail you something or not. Small business-sized letters (A4 or US letter sized pages folded in thirds) get delivered about 99% of the time, but larger envelopes (A4 or US letter sized pages laid out flat, along with things like Playboy and Scientific American and letters to or from the Canadian government laid out flat in those larger envelopes) frequently disappeared in the mail.
Wht happens if in the future Eric moves to a country that does report all accounts under FATCA, like Japan? Then, all of a sudden, after a blank of years, he is on the IRS radar again.
non resident return form requires more information about foreign address, passport number. That will only cause irs’s doubt about the existing of foreign account. but not filing anything may trigger irs attention as well since my employer will send W2 to irs, but Ibelieve I should get refund.
Don’t forget State income tax returns. Your Employer will be sending to the state or states you worked in too. Hope you were not in Pennsylvania.
@ND
I just filed a regular return back in the day, though with my Canadian address. Perhaps they thought I was NRA after that, though I was (and am) a US citizen. I never filed another return after that. For all I know they’ve been sending hate-mail and trying to find me for 20+ years, but if so, they’re not very good at searching.
@JapanT
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!”)
@eric
Who knows? I suppose it depends on how much money was in your NZ account during the time you were resident in the US. If very little, maybe you can back-file FBARs and amend with Schedule B and what have you, then file the non-resident final return. Or just file a regular return to collect your refund, though you should probably use your NZ address. Or do nothing and kiss the refund goodbye. No matter what you choose, you and your money are perfectly safe – no collection or extradition or drones – it’s just a question of how much correspondence you wish to have with the good ol’ IRS.
@plex “It’s doubtful ( or seems so to me) that the IRS would risk pursuing a non-resident USC for FBAR penalties for failing to report residence-country accounts, when they’ve got no evidence of tax evasion or tax crime. But in the case described here, the IRS already has the evidence of perjury on file. Even if they were reluctant to try for extradition, they might assess and then use the threat of an extradition request to scare the individual into paying up. Not a happy outcome.”
If this happens, what can I do? refuse to pay, or move to a country US can not find.
“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-speak”
Nationality doesn’t matter. Anyone who has spent the minumum number of days in the US and has accounts in Japan will have their accounts and all the rest reported to the US, regardless of nationality, including Japanese citizens. According to the Japanese Bankers’ Association” via my banks.
“US Person” includes one who has worked in the US, or passes the physical presence test regardless of employment staus.
@Nononymous, my question is if I do not file a regular return, irs has my W2 sent by my employer. will that cause issue? I do not care refund at all. As for the money in my home country account, it is quite a bit even during my stay in US, that is why I am so scared.
@eric
Perjury in this case would be if you had included Schedule B on your past US returns (if you had more than $1500 in interest/dividend income or something like that) and also had NOT reported your foreign accounts. If however you never did a Schedule B then you’re in better shape because you never signed a declaration, just “forgot” about the requirement. See:
https://www.nolo.com/legal-encyclopedia/when-am-i-required-file-schedule-b-irs-tax-return.html
The key thing is, you’re in New Zealand, your money is in New Zealand, and the US cannot touch you in New Zealand. So if you decide to ignore all this, you’re fine. The IRS will not come looking for you. Even if your employer submits a W2 and you don’t file a return, the IRS will likely either not notice or think “Dumb-ass forgot to claim his return, we win.” If there was a fair amount of money in the non-reported accounts, I would definitely not think about back-filing FBARs and all that. Just go dark.
@JapanT
I will have to take your word for it. Japan sounds like a country best avoided, in that case.
“Who knows? I suppose it depends on how much money was in your NZ account during the time you were resident in the US. If very little, maybe you can back-file FBARs and amend with Schedule B and what have you, then file the non-resident final return.”
Don’t file amended returns for previous years unless forced. Amended returns ask for trouble.
I can’t say whether to back-file FBARs for previous years. People who renounce US citizenship and participate in some procedure to avoid becoming covered expatriates do have to back-file FBARs; but for other people, back-filing might just be asking for trouble, I don’t know. Remember that non-compliance breaks US law but compliance brings punishment.
It might be safe to file an FBAR just for year 2018. It might not be safe though, for example, if the person is a resident of Russia with a bank account in Cyprus.
“Or just file a regular return to collect your refund, though you should probably use your NZ address.”
No, do a final return (a dual status return). A regular return would subject the person to US tax for income earned or received even after leaving the US, and would make the IRS expect further ongoing returns.
The final return will have a signed 1040NR (the return), an unsigned 1040 attached as a schedule, and W-2 and maybe other forms as schedule-schedules attached to the 1040.
@ND
There seems to be some debate as to whether the 1040NR route would then trigger curiosity as to the presence of foreign accounts.
Filing the return along with an FBAR and Schedule B for 2018 only might be a risky strategy.
I’m increasingly leaning towards advocating the do nothing approach.
For my last year I just submitted a regular return, declaring the US income only (not worldwide income – I wasn’t telling them about my Canadian money) and using a Canadian address. I never heard a word in reply, and I kept that address for several years, it wasn’t just a temporary postbox used for passport renewal).
@Nononymous if you use your canadian address, it is good to receive potential letters from irs. However it will make irs easier to locate you if they want to fine you.
I’m not sure why the 1040NR would necessarily trigger curiosity on the part of some IRS minion as to the existence of foreign accounts. Just because Eric or whoever posts a 1040NR from New Zealand, does it necessarily indicate that he lived and banked in New Zealand prior to his life in the USA? Even if he has to declare his New Zealand citizenship on the forms, who’s to say he didn’t leave NZ at 16 to study in the US and stayed on to work there, without maintaining a substantial bank account in NZ while in the US? There seem to be so many uncertainties about the situation that an IRS minion would be unlikely to spend the agency’s dwindling resources to pursue a very iffy penalty case.
He’d be well within reason to claim non-willfulness regarding the FBAR, hence possibly subject to a $10,000 fine, and a single military drone costs way more than that.
Kidding aside, first thing I’d do in Eric’s case is close my local NZ bank account and open a new one straight away, even at the same bank. Then in the extreme unlikelihood that he has to produce bank records to show the IRS, the account only goes back to July 2018. Before that time: “What New Zealand bank account? I was living in the Land of the Free!”
“If this happens, what can I do?”
What could a non-USC individual do if threatened by the IRS with extradition following a perjurious filing of a 1040NR in the expectation of receiving a refund of US tax?
It would depend on the individual’s appetite for risk, I suppose. The individual could pay the assessed charges to make it impossible for the IRS to threaten extradition; or they could ignore the threats and wait to see if an extradition request materialised.
Nononymous:
“If however you never did a Schedule B then you’re in better shape because you never signed a declaration, just “forgot” about the requirement.”
Oh yes you did, You signed a 1040 swearing under penalty of perjury that it was accurate. Which it was not, since the instructions told you to file a Schedule B if you had a foreign account.
You might indeed be able to file amended 1040s though, as suggested in the nolo article cited. I hadn’t thought of that – good find.
“The individual could pay the assessed charges to make it impossible for the IRS to threaten extradition”
Paying assessed charges might be sensible if the assessed taxes are actually tax that is actually owing (i.e. if US tax was underpaid during the portion of the year that he was living in the US — though if course in such a case it would be better to just send payment along with the dual status return).
However, if the US government trumps up some reason to threaten extradition, the trumped up reason would not go away when assessed charges are paid. However, I don’t think any sensible country would agree to extradite for a known false reason.
I still don’t fully understand why CRA helped the IRS when the only assessed charges against Dewees were penalties for missing forms, when no actual tax was owing. But I bet Canada wouldn’t have consented to extradite for missing forms.
ND:
“I still don’t fully understand why CRA helped the IRS when the only assessed charges against Dewees were penalties for missing forms, when no actual tax was owing”
Is there any wording in the treaty mutual assistance in collection article that says the requested country can decline to collect penalties?
The IRS can’t request collection assistance for FBARs because FBARs don’t come under tax. Corporation tax does.
ND:
“However, if the US government trumps up some reason to threaten extradition, the trumped up reason would not go away when assessed charges are paid.”
No but the threat probably would. 🙂
“US Person” includes one who has worked in the US, or passes the physical presence test regardless of employment staus.”
Not according to the IRS, who should know since they’re the ones who invented this categorization.
Not because they are a US Person – because they were a US Person what they were resident in the US.
@plaxy
I was essentially parroting that nolo.com piece – it claims that if you never filed a Schedule B for US interest income then it’s easier to claim an oops – take a mulligan as it were – on the non-reported foreign accounts. No idea whether that’s a valid argument, just something I found on the Interwebs.
@eric
At the time (mid-1990s) the IRS never sent anything further to my Canadian address. Since then I’ve come to value anonymity, so when I renewed a US passport a few years ago, I used a temporary address during a half-year stay in Europe. If the US government is sending me angry letters, I am perfectly happy to know nothing about it.
@plaxy
Never underestimate the Japanese Bankers’ Association. Among their weapons are ruthlessness and thoroughness.
Nononymous, mid 1990, that is wholly different story. back then fbar was not strictly enforced.