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
“What too.” Sailing permit.
What about the sailing permit?
if my country’s tax authority knows about my local bank account and knew I was working in the US. Do you think they will report my account to irs? if irs knows they can fine me, will they refused to collect it just because I am not in the US now.
You have asked variations of this question before. The answer is no and no . You’re not even a US citizen. Get on with your life. (unless you’re trolling us)
trolling
So US only target its citizen and green card holder, not a work visa holder who used to be “US person”. As long as he is not in the US.
You are correct. You are in no danger.
my concern is the sailing permit, I did not know it. so I did not get sailing permit before I left US. If I file a dual return next year, it may only brings trouble. because I have to mention my passport, foreign address, etc. If I just file a regular return. Will I still be under irs rada in the furture? of course I will have no US income later on. I do not plan to file return later on.
eric,
Since you keep asking similar questions here again and again, it seems it might be time for you to shell out for some professional advice from a US tax compliance and US ‘foreign’ account reporting industrial complex professional who has set up shop in your country. Or, try your patience with the help line at the IRS. Good luck.
There doesn’t seem to be any penalty for failing to get a sailing permit. If the US intended to enforce the requirement, they wouldn’t have let you board the plane to leave the US.
If you submit a dual status return, it probably avoids some future trouble, because it it tells the IRS that you left the US. Trying to decide if you should submit FBARs for 2018, it probably doesn’t hurt if you do (we haven’t heard of the IRS trying to force retroactive FBARs except from people renouncing US citizenship) and it might not hurt if you don’t (we haven’t heard of the IRS trying to obtain penalties from people who don’t live in the US).
If you submit a regular return, it probably causes some trouble, because it makes the IRS think that you intend to retain your temporary US residence even though your mailing address is different, and it will make the IRS expect future returns.
If you wonder why answers aren’t 100% definite, it’s because laws are written to avoid being definite so that the government can act however they want. You’ve seen our best guesses.
Don’t bother with the IRS help line. They can tell you whatever lies they want, and you’re the one who gets in trouble if you believe them. Even when the IRS used to have offices in US embassies and consulates, they gave wrong answers too.
@Norman, dual return has to be lodged via letter, it requires passport number, foreign address. it requires you to tell irs you have closer relation to another country. that will make irs easy to locate you, also doubt you have a foreign account. For regular return, after i file it, next year there is no income from US employer W2. so irs may not care if I do not file. The key thing is irs does not know I am a foreigner for now just from my SSN.
ND said: “Don’t bother with the IRS help line. They can tell you whatever lies they want, and you’re the one who gets in trouble if you believe them. Even when the IRS used to have offices in US embassies and consulates, they gave wrong answers too.”
Exactly. I don’t remember why I phoned the IRS help line in Los Angeles 30 years ago, just before I moved abroad. But I do very clearly recall asking whether I still have to file US tax forms if I move overseas, and the woman at the other end saying, unambiguously: “If you’re moving overseas full time, then no need to file.”
It wasn’t until a year or more later when I met a local US consulate officer at a party, who informed me of the need to file. When I quoted what the IRS woman had told me, he said that not only was she misinformed, but that I could not use that as an excuse for non-filing, since the IRS is not liable for any incorrect advice given.
Barbara –
“I don’t remember why I phoned the IRS help line in Los Angeles 30 years ago, just before I moved abroad. But I do very clearly recall asking whether I still have to file US tax forms if I move overseas, and the woman at the other end saying, unambiguously: “If you’re moving overseas full time, then no need to file.” ”
Interesting. That would be the mid-80s, is that correct?
The mid-80s was when it all changed. That’s when that little tiny small-print statement about having to keep filing was slipped into the US passport.
Not noticed by me. After FATCA hit and I started trying to find out how I could have been required to file US taxes for half a century without ever being told, I saw the passport notice mentioned in a forum, and went back and compared my expired passports. And there it was. Silently criminalising me and apparently hoping I’d never notice. Which indeed I didn’t.
Plaxy,
How is that consistent with the IRS allowing non-compliant US taxpayers to file without penalty under the Streamlined program – those who may not have been aware of their US tax filing obligations? I was never asked if I’d received a US passport before being accepted into Streamlined. You think the IRS verified with State Department before I was accepted into Streamlined?
The right hand doesn’t know what the left hand is doing. Unless of course it’s looking for ammunition, then the mere issuance of a passport with tiny mouse print might make a difference.
“How is that consistent with the IRS allowing non-compliant US taxpayers to file without penalty under the Streamlined program – those who may not have been aware of their US tax filing obligations? ”
Sorry, I don’t follow. How is what consistent?
“You think the IRS verified with State Department before I was accepted into Streamlined?”
Verified what with the State Department?
What is it you’re asking me?
Looking at ACA’s “History of US taxes Abroad” (https://www.americansabroad.org/history-of-us-taxes-abroad-from-1787-to-2001/), the US seems to have been passing numerous laws about overseas taxation, and commissioning studies of the treatment of USCs outside the US, and generally creating or exacerbating the mess it’s in today, for a decade or more in the 70s-80s. Quite depressing to see that the arguments haven’t changed in the slightest. Presumably this unproductive turmoil generated the new notice in the passport along with the rest of the chaos.
Anyway, the point I was making – things changed in the mid-80s.
“things changed in the mid-80s”
Roger Conklin stopped representing US manufacturers abroad in the mid-70s, but several of his colleagues renounced US citizenship.
Someone please remind us about the New York Times article from 1914.
ND – NYT article from 1914 can be found here https://timesmachine.nytimes.com/timesmachine/1914/03/07/100301896.pdf
“Roger Conklin stopped representing US manufacturers abroad in the mid-70s, but several of his colleagues renounced US citizenship.”
And?
And things didn’t change in the mid-80’s, things already were that way.
It sounds like the things you’re thinking about aren’t the same as the things I was referring to. Things definitely changed in the 80s in that USCs began to be told of CBT obligations via their passports.
Very likely some groups of expats were better informed than I – especially if they were going abroad for work. I knew nothing about it, and neither the IRS nor the State Department drew it to my attention though both of them had ample opportunity. Barbara seems to have had a similar experience. Then, sometime in the mid-80s, the notice appeared in the passport – and went unseen by me, and, I imagine, others.
@plaxy,
Additionally…
Many of us never had US passports. If we had a passport, it was only that of the country in which we chose to become citizens of, a CHOICE (i.e. like claiming vs not claiming based on *accidental* place of birth or parentage facts). My then husband and I were *warned* in 1975 that if we became Canadian citizens, we would lose our US citizenship. We became Canadian citizens with acceptance of that proviso, which proved to be incorrect advice. I, for one, had learned NOTHING of US citizenship-based taxation in my US elementary and secondary and some university education. My family lived in Canada with the false perception we were only Canadian citizens.
My son (and I feel others like him) was born in Canada, raised in Canada, never lived in the US, never had any benefit from the US and was never registered as a US birth abroad by his parents, but cannot renounce a US-deemed USC because of lack of requisite mental capacity. For those like my son and for the *accidental Americans* born on US soil but who returned to their parents’ (and their own) countries in childhood and well before the age of majority, having never applied for or accepted a US passport, common sense should / would say that for them US citizenship should be a CHOICE, not automatically deemed, given exceptional US citizenship-based taxation and financial account reporting consequences (their only connection to that country).
Calgary411
Sadly, many, even here on Brock, seem to think that situations such as your son’s can not exist, or if it does, no worry as there is no way for the US to find them and thus hold them to US law.
Calgary –
They did a lot of lying (and still do of course). I was told my children couldn’t enter the US to visit family unless I registered them and bought US passports.
If I’d been told about CBT, I would have renounced before my children were born, and they’d never have caught USness from me. But they could renounce, if only I could convince them that they need to. I’m so sorry about your son being denied the right to renounce.