Thursday, April 14, 2011

HSBC India Developments (4/14/11)

As expected, in tax filing season, DOJ Tax takes actions to encourage taxpayers to do the right thing.  There are two HSBC India developments. We previously covered the John Doe summons to HSBC India here. The new developments are:

1. One depositor in HSBC India, Vaibhav Dahake, who was indicted previously (see discussion of indictment here). Dahake pled guilty to one count of conspiracy on April 11, 2011 pursuant to a plea agreement he had entered November 18, 2010. (I speculate that the timing of the actual plea in court was related to the HSBC John Doe summons proceeding, or, perhaps, had something to do with the HSBC related enablers.)  The plea agreement is here, and a Reuters article is here. The plea agreement is fairly standard, with the stipulated sentencing factors being: (i) a tax loss between $30,000 and $80,000 producing a BOL of 14, (ii) sophisticated means 2 level upward adjustment, (iii) acceptance of responsibility 3 level (2+1) downward adjustment and (iv) deriving an offense level of 13. One unusual provision is the following related to immigration:
Immigration Consequences. The defendant understands that, if he is not a citizen of the United States, his guilty plea to the charged offense may result in his being subject to immigration proceedings and removed from the United States by making him deportable, excludable, or inadmissible, or ending his naturalization. The defendant understands that the immigration consequences of this plea will be imposed in a separate proceeding before the immigration authorities. The defendant wants and agrees to plead guilty to the charged offense regardless of any immigration consequences of this plea, even if this plea will cause his removal from the United States. The defendant understands that he is bound by his guilty plea regardless of any immigration consequences of the plea. Accordingly, the defendant waives any and all challenges to his guilty plea and to his sentence based on any immigration consequences, and agrees not to seek to withdraw his guilty plea, or to file a direct appeal or any kind of collateral attack challenging his guilty plea, convictiõn, or sentence, based on any immigration consequences of his guilty plea.
2. The second development is a plea agreement for Josephine Bhasin entered on April 13, 2011. The DOJ Tax press release is here. I don't have the plea agreement yet and will revise this blog when I get it. However, for now the key points of the press release are: (i) the plea is to one count of tax perjury for 2008; and (ii) "In 2008, Bhasin’s bank accounts at HSBC India were valued at approximately $8.3 million." However, the most surprising information (for which I offer no editorial comment) is the following from the press release:

At the plea hearing, Bhasin admitted that after being contacted by attorneys for the Justice Department’s Tax Division on July 15, 2010, she filed a false Report of Foreign Bank and Financial Accounts (FBAR) for 2009 and a false amended tax return for 2009 that reported ownership of a foreign bank account in India holding only $49,000. In addition, Bhasin also admitted that in September 2010 she filed similar false FBARs for 2007 and 2008.
I also remind readers that I am periodically updating the spreadsheet, but there are always was to improve the spreadsheet, particularly with information filling in the holes in the spreadsheet. Please let me know of any information you may have that is not reflected in the spreadsheet. Thanks in advance.


  1. Sounds like she had either no or very poor legal advice. Unbelievable!

  2. I agree. She must have been deranged to file a false FBAR/tax after being contacted by the DoJ. And to claim she only had 50K of accounts, when she had 8.3 Million ! Unbelievably stupid. She is very, very lucky to get off with only one count. I wonder if there was a prosecutorial mistake here, and thats why they are letting her off easy ?

  3. “Mr. Dahake is an Indian native who became an American citizen in 2006 and now lives in Somerset, N.J.” If the court can prove that he was lying during his naturalization in 2006 when he was asked "have you ever committed crime that has not been charged ?" -- certainly he answered "no" -- his IRS problems are from 2001 to 2010. That means he commited the crime before his application of naturalization. The burden of the prosecution on this matter is to prove Mr. Dahake knew it was a criminal offense for what he did with off shore accounts, and thus he lied during his application to become a US citizen. This will cause the loss of his citizenship, and then will be deported.

    It is not such an easy process for Americans who want to give up US citizenship, Mr. Dahake may just want to use this process to get rid of his US citizenship.

  4. Note that the plea says this

    "The defendant understands that the immigration consequences of this plea will be imposed in a separate proceeding before the immigration authorities"

    It says "will", not "may". On the other hand, his spouse and (I assume) children are very likely American citizens. Even illegals are not deported if they can show that their deportation will cause harm to an American citizen family. I doubt that Mr. Dahake will be deported. I doubt he wants to give up citizenship too, otherwise he would just have gone to India last year and risked the possibility of extradition.

    Jack, the tax loss stipulated is 30-80K. Assume midpoint 55K. Over 6 years, thats around 9K per year. Assume a 35% tax bracket (and regular tax rates on this income), that would be around 26.2K per year. Assuming all interest income at 3.5%, that would be an account of around 750K.

    Its possible though that some of the income was business proceeds (the original reports mentioned that business receipts were deposted into his accounts), so in that case the account size is likely to be smaller.

  5. to the last post, very well said...

    Then back to Jack's "unusual provision relating to immigration".

    If Mr. Dahake just ran away with his US citizenship, he would have become American fugitive, he would always have the risk being caught, even India Gov may turn him in to US. That is not a clean cut.

    If he does want to stay in US (to support his family), then he would have been better off to make a deal with this immigration deal to the prosecutor (it is also a Federal case with different proceeding). Or simply he knows there would be no deal at all if he had asked for.

    One thing is clear, some US citizens (particularly those with roots to their own home, native countries) are thinking of giving up US citizenship after going through this, and they might have a 2nd thought for being Americans.

  6. In reference to immigration issue, the plea agreement looks like a boiler plate template and the prosecutor was lazy not remove it even though news release clearly state Mr. Dahake is US Citizen.
    India does not allow dual citizenship and he is probably no longer an Indian citizen therefore where will they deport him ???

  7. To the last post,

    In the process of naturalization to become a US citizen, everyone has renounced his/her previous citizenships regardless his/her home country allows dual citizzenship or not.

    For the person affected, we can see the flaw of the process of naturalization or deportation of a naturalized citizen.

    For US, it can deport anyone regardless he/she has a citizenship or not.

  8. Can someone please post Ms Bhasin's plea agreement? Interested in finding the tax loss and sentencing level.

  9. The DOJ release mentions 160K interest income one year. Multiply by 6, assume 35% tax rate, and no offsetting foreign tax credit, that is 300K or so. Ms. Bhasin is probably looking at some time in Club Fed.

  10. Not to mention a possible enhancement for obstruction.

  11. i agree with anonymous april 14. the woman has incompetent lawyers can you find out who they are. they should be debarred.

  12. Jack, why is the fbar penalty excessive in some jurisdictions (50%) east coast and 11% (Chatfield) and 25% (Igor) in California.

    Why no one is complaining on these excessive costs?

  13. Jack, when will HSBC answer to the JOhn Doe summons?

    How will they handle 9000 accounts?

  14. lawyers are greedy . enormous charges with no results. the few good ones can produce results.
    but the inconpetite ones bring the client to indictment/information charges. there is lawyer sucker every minute. they should be debarred.

    poor woman was not given proper legal advice, thus she goes to jail for 3 years and loss of all retiremnt inhertance for fbar penalties. can these fbar penalties be negotiated for inheritance and retirement use 66 yrs old woman,

  15. 50% fbar penalty is painful, even with ovdi 25% penalty is a lot money to lose. if the monehy were invested in mutual fund (likely PFIC), that would add another 7% on investment regardless there is a gain or not.

    For people who either earned the money before they bacame US residents or inherited, IRS really should treat it differently.

    Gov should make its people to pay fair tax NOT "fear tax".

  16. I am not aware if any tax professional / attorney who understands about the sensitivity of this issue will give bad advise. All clients are different and their risk taking is different. Going with competent and experienced professionals who dealt with this situation is the best shot.

    Going for OVDI may be like buying an expensive bed so you can sleep better. If you are non-compliant or know some one - taking no action is not an option now.

    When you become a resident of a country - it becomes your home for tax purposes and you must report your world wide income to the country where you established your residency (by election / stay / filing resident tax return form 1040). I believe almost all countries follow the same theory for taxing resident.

    Circular 230 Disclaimer:
    To ensure compliance with the requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any links or attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

  17. There is a reduced penalty for inherited money. Its 5% assuming certain conditions are met (in both the 2009 program and the 2011 program).

    I do agree that the IRS needs to also offer lower rates for accounts created/money earned by people before they became US residents assuming they meet other threshold conditions.

    About Ms. Bhasin: I doubt very much that any lawyer (certainly any American lawyer) would have advised her to act as she did. Anyone with a modicum of common sense would realize that once the DoJ/IRS contacts you (and there were also other reports at that time of the DoJ investigating people of Indian origin who had accounts in HSBC India), it would be sheer foolishness to file a false FBAR. Unless she is a totally naive, new immigrant to the US (and I don't think that is so), her actions were extremely foolish and self destructive. I have no sympathy for her.

    If she had come in under the OVDI (and if the account was indeed inherited), she might have got off with a 5% penalty. Even after the DOJ contacted her, if the account was indeed inherited, she could have avoided a criminal prosecution and possibly even got a lower civil penalty (below 50%).

    There is obviously not going to be any negotiation of the FBAR penalties now. The best she can hope for is home confinement. Also even after penalties, back taxes and lawyer's fees, she will likely still have 25% of the account, which is still a few million dollars, so that hardly qualifies as poor.

  18. A non-citizen resident has the exact same filing obligation as citizen resident but he gets much less credit from IRS for example, he can not take child credit even if he has to pay child support in his own home country, he can not claim child education credit even if he has to pay for his child education in his own home country.

    Some immigrants (like myself) keep some money (that they earned before they came to USA) in their houme countries are not trying to hiding for tax evation, rather it is their responsiblity to pay (like myself) child support/education to the kids they left behind (due to divorce or whatever reason).

  19. and, these offshore accounts money have been taxed locally already, there is not real gain to have the money offshore at all.

    I am in OVDI now to clean up this mess, I have no problem to pay the penalty just the same as others.

    I only hope IRS will not impose penalty on my RRSP (retirement plan like IRA in USA) simply I did not file some forms that most people are not aware of.

  20. About an RRSP

    If you have been filing form 8891 for the RRSP, you might be able to claim that the undistributed "income" on that account was reported. In that case, it should not be included in the penalty.

    Otherwise, you could file RRSP with your amended tax forms and make an election to defer income and claim there was no income so this should not be included in the FBAR penalty. I doubt that work though -- the counterargument is that there was income, it was just not distributed yet. Worth a shot.

    Do you have a revenue agent assigned to handle your case ? You could try asking him/her.

  21. Jonf, Thanks!

    I was not aware of f8891 until very recently, I was not even aware of 2009 OVDI, it was just a Chinese web news that made me aware that I had been so wrong for so many years.

    I sent out my package to IRS and they took the pay check already (based on my calculation without RRSP included).

    I did ask OVDI hotline and the agent said "as long as no money been taken out from the RRSP, it can be excluded from the base" but she also said "the technical person would also look at the other factors to decide".

    I did file all the years covered by OVDI 2011 with f8891 and hope they would let me to back file to make the election.

    I just wonder if my RRSP also qualifies for 5% penalty as:
    I did not cause it open since becoming US person, no money in and no money out.
    Also all contributions were made while I was 100% Canadian resident (0% US person) so the money was not subject to US tax.

    It is on IRS hands now. I am a sitting duck! I never tried to hide money from IRS to evade tax at all. All other money had been subjected Canada withhold 15% unitl recently then I had paid all to IRS. For all these years, I thought only one tax should be paid...

    Anyway, if IRS won't forgive me for missing f8891 and want to take advantage of me being stupid, and it is in their power.

    I (am 55) have three little kids (4 to 8) to raise. This 50K RRSP means a lot to me when I am too old to work but not yet ready to get social security. A family of 5 will depend on IRA and RRSP when the gov is not ready to help.

    IRS can not hurt me that much (I am old), but it will hurt my kids, and in turn, they will be less likely able to pay tax to (without good education, good upbrining)

    Again, I am willing to pay whatever the error I made in the past just like others (rich or poor). I just want to our gov give people a chance to correct mistake if there is no harm to gov interest --like RRSP back filing for election.

  22. Also I know outside OVDI, IRS does allow people to back file f8891.

  23. Regarding RRSP and f8891

    "An extension of time to late-file the election may be granted under procedures described in Treasury regulation sections 301.9100-1, 301.9100-2 and 301.9100-3. If form 1040 was timely filed, an automatic extension of six months from the return’s due date to make the election may be granted (section 301.9100-2). In other cases, a request for relief under section 301.9100-3 is generally granted if the taxpayer acted reasonably and in good faith and the grant of relief will not prejudice the government’s interests. The request for relief is made as a request for a private letter ruling."

    Did I act reasonably and in good faith ? I hope they will think that way. I joined VODI as soon as I found out all my problems that including RRSP while many of others have the very same problems are just watching to see if what I will get. I trust our gov in good faith, would they trust me in good faith ?

  24. Anon with the RRSP/Canadian account issues:

    I am in OVDI too. Dual citizen, small accounts around 75K from before I became US citizen. I am impressed that you amended 8 returns already and sent them in. Did you use accountant or tax sofware ?

    The problem is that OVDI is really useful for big fish who wilfully tried to evade taxes, but not so good for people like us who were unaware of requirements. 25% is a good deal for them, harsh for us. Government does not have special rules for people who became US persons and have old accounts (they should have 5% rate , same as for inherited accounts).

    Good luck with your RRSP request to IRS. Please do post here if they tell you what they decided. I have similar tax deferred account in my birth country, so the same applies to me as well. Only problem is that my country does not have special tax deal with US for deferring retirement accounts the way Canada does.

  25. Like someone mentioned above, I have parents who live in other country to take care of. They don't have much medical insurance. So I opened an account to have emergency money for them when they need it. Also when I visit them, I can have money available locally. Nowaday the interest is so low that probably only $10 or so for a year that I didn't care to report. Now I'm stuck in this OVDI thing and have to pay unreasonable penalties which is way out of proportion. The tax law is victimizing innocent people while pursuing tax evaders.

  26. To the last two posts,

    To tell you the truth, all my friends (Canadians or Americans who used to live in Canada) with RRSP have no idea of f8891 -- of course, if one knew, all would have known now. So I am the first one to tell everyone to follow the law (FBAR, F8891), and I am the only one in OVDI to test the water.

    I spent 2 weeks working on f1040X (8 years), and spent $200 to collect all the bank statements. I did my best to submit, no accoutants, no lawyers (it won't save much but will pay a lot to do the paper work), i am not sure if i did it right, but IRS will correct them anyway.

    I will keep post my story to share with others.. for those who are still hiding in fears, if IRS treats me in good faith (again, I have no problem with penalty 25% or 12.5% -- this is the rule anyway), but if they want to punish me for missing f8891 and take advantage of me being stupid, then that is not in good faith.

  27. Also there is no software for 1040X, so you have to do it manunally. It should be easy as you just add the missing report income (from banks etc), these will add to your adjust gross income. For my case, I am in 15%, so I use 15%of the missing report income as tax due.

    As for for IRS interets and penalty 20%, I have a simple software (using microsoft xsl) to calculate all these years tax due plus intertes (based on IRS notice 746), and I can share with anyone with that software, all you need is to put your due tax for each of OVDI year and it will give you the total due to IRS..

  28. Thanks for information about 1040X for amending. I have Turbo Tax that does do amended returns if you did original returns with it, but do not have old software for 2003-2007.

    Along with 1040X, you also need to submit amended 1040, and modified Schedule B (with modified dividend income or interest income) ?

    I even have small holding in one foreign mutual fund worth around $1500, but to do paperwork for PFIC is nightmarish. I would rather just submit 1040x for older years and let IRS enter it all in -- they're getting money for doing it

    Hope the IRS exempts your RRSP.

  29. Consult CPAs, they may not charge a lot. Just Google for OVDI CPAs and you will find CPA with expertise on amending returns and handling OVDI cases. I found one in IL with reasonable charges.

    I did one mistake - using Tax software for so many years and now I learned my lesson by paying heavy charges that taxes s/b handle through professional only. I wish I contacted CPA earlier who knew this and educated me of this requirements. So a suggestion - find CPA with OVDI expertise.
    FYI, non disclosure or mistake in OVDI package runs chances of not being accepted in the program and misstatement can leads to criminal prosecution. Not worth taking chance for OVDI.

  30. I don't think OVDI is for big fish only. IRS wants more money - particularly if money is sitting offshore, it will try to bring that in US tax system. From IRS perspective, for a person with as low as $50K balance, it could generate IRS revenue as much as $200K+, if somehow they do not accept you in the OVDI program.

    I strongly recommend not to do it yourself. small mistake can cost you heaven. I agree, single mistake can expose you to criminal prosecution and misstatement in OVDI can hold against you. It might be too late to correct at that time. - So there is no alternative to experienced OVDI CPA -

    MY CPA is charging $300 a year - I think worth for peace of mind.

  31. Fear mongering! Criminal prosecution on taxpayers for mistakes on returns/ovdi packages ? Are we under Nazi rule ? How about Tim Geithner, did he make mistake ?

    Reporting $500K on FBAR while holding 8M may not be considered a mistake. This is a misleading.

    As long as you have full access bank statements (records) readay, as long as you don't submit fake statements when IRS requests, I don't see doing OVDI package yourself will run into criminal prosecution or rejection into the program.

  32. I did my OVDI myself, and only known mistake before submtting is that I did not use any foreign credit on tax withold (which is more than US tax), that would result no less pay to IRS.

    I can not guarantee there is no other mistake but I did all best on my best understanding on all my documents and IRS rule. If it comes a criminal prosecution on my mistake, I can guarantee that I will not hire an lawyer to handle, and I will take it on DOJ myself. If I end up being convicted, it can only prove one thing "this country is not worth to live!" and I will deport myself and take my three US born kids with me. I will ask them to renounce citizenship when they turn to the legal age of doing so!"

    Is US a country "Justice for all?"

  33. Can someone please post the Bhasin plea agreement?

  34. The notion of ALL OVDI participants coming forward is due to pressure of being caught is totally wrong. Many of them were not aware of their filing obligation until they knew recently -- of cource much to the crdit of OVDI itself.

    Regardless, all participants should be under the same penalty regardless the nature of their accounts -- the rule is clearly set by OVDI.

    At the same time, IRS should not treat OVDI participants like "criminal" -- don't forget the fact "they come forward as soon as they see their mistakes."

    This is a country of rule of law, profiting $200K on $50K balance can not happen inside OVDI, it can be only applied to those who are being caught in hiding (trying to save 12.5*50K FBAR penalty).

  35. Sweet .. It seems that IRS is running on dime and nickles and can not tax any more to unemployed American people. So it is going after foreigners (resident now) to bite a big piece from their life time saving invested in offshore location - just because you are now so called "RESIDENT" for tax purpose!

    It needs to be fixed - BEFORE they wipe out our entire savings.

  36. One of my friend had an account with State Bank of India - recently pre-clearance was rejected - not sure why? May be because IRS had his account information already or he did something wrong in the application.

    Not sure what are the other options? Did anyone else had an issue with this bank?

  37. To the last post,

    This is not a good sign. Your friend needs to talk a tax lawyer. I am sure Jack and other lawyers can help..

  38. Its fear mongering and nonsense to suggest that a simple mistake in your OVDI disclosure will lead to your being subjected to criminal tax prosecution. If you just happen to 'forget' about an 8.2 Million dollar account, then the IRS may not believe its a simple mistake.

    But if you have disclosed fully, and there are some simple small mistakes in your tax computation, then that is another matter entirely. Old account statements may be incomplete or hard to decipher, foreign tax credit/foreign earned income credit calculation is hard, PFICs are extremely complex .. and so on. I'm not talking about saying that you earned 4K in interest income when you earned 170K. I'm talking about issues such as basis of old stock, whether a particular dividend is qualified or not. If there is a specific issue on which guidance is really needed (the RRSP issue mentioned before), then you can ask the IRS hotline or attach a statement to your returns explaining how you calculated something.

    But the government is not going to you in jail if you think that a particular stock gave $100 of dividend when it actually gave $200. For a simple return with dividend and interest income, no CPA is needed.

  39. Pre Clearance form is pretty simple. Just put in SS#, name, maybe a covering line and fax it in. Don't see how anyone could make any mistake in submitting that.

    Main other reason would be timeliness. Government might be investigating bank already, but maybe they also have other reasons. Maybe they wanted to audit someone as part of a regular audit and that might make someone ineligible even if audit was unrelated to bank account. Or maybe person was audited earlier and said he had no foreign accounts ?

    Government also has other ways of tracking money flows and the like. Either way, not good for your friend. He does need to get lawyer. I said in previous post that CPA not needed, lawyer not needed. But if pre-clearance rejected, a good lawyer like Jack definitely should be consulted.

  40. the last two posts, very well said!

    CPA and Lawyer are needed for those who want to save their own time or who are involved more complicated issues.

    I saw a web ads "don't contact CI yourself for pre-clearance, don't make a phone call or write them yourself! it is not like ordering a pizza, it is a criminal investigation branch of IRS"

    I did all by myself, and as a matter of fact, I made a direct transfer of over 10K from Canada to US in April 2010 when I was not aware of anything like OVDI(2009 or 2011) at all. After learning recently about OVDI, and then I looked more details -- and now I know, anytime over 10K transaction from offshore will be reported to Gov by the bank. Anyway, I contacted myself to CI and got pre-approval for OVDI.

    As Jack's data indicated, so far almost all of the prosecutions are related to using entity... I think that is something people should know, as long as you are not intentionly to cover up your offshore money, and the chance being criminal prosecution is still low (by no means you are free at all), all I want to say is that for people who join OVDI and do their best to resolve the problems, there is no reason for our gov to prosecute anyone who makes mistake.... even it is the case, then I don't think the court will convict... it is always the burden of the proof -- with criminal intent, then it really does not make sense for people to join OVDI in the first place.

  41. Got pre-clearance approval on 30th Apr and sent in the voluntary disclosure letter this week. Can some one who has gone through this, please share how many days IRS takes for it to accepted so I can send in full disclosure package to IRS.

  42. in my case, it is just a little bit over one week. all my accounts are in Canada no entity with one in China (small amount). all together peak around 68K in 8 years. However, I did not include my 50K RRSP.

    You should prepare your pacakge anyway, the sooner the better, it should be very quick to get accepted.

    Good luck!

  43. there is three steps,

    1. Fax to get pre-clearance (this should take less then 24 hours). since I do not have fax, so I just skip this step.

    2. Send a voluntray disclosure letter (it takes
    less then 10 days for me to get back a pre-approval).

    3. Send the full package with 1040X and original 1040 etc (other consent forms and pay check), this should be done by Aug. 31

    I have done all, but I have not heard anything back from IRS but they took my money -:). I can only assume the package is accepted and it is under examination.

    Before signing 906 -- this is an open case, but it could a few more corrections, as long as they take the money, the clock on interests payment should stop.

  44. Re: previous question about a pre-clearance with the 'State Bank of India' being denied. From the bank's web site, I gather that this is the largest bank in India, is majority government owned and is almost an official bank for the government of India. It does have a few branches in the US, but its not clear that the branches open 'NRI' style accounts.

    Its very hard to see a bank like this indulging in the sort of illegal behavior that HSBC, UBS and Credit Suisse did since its not likely to have the UBS/Credit Suisse culture. Its also hard to see the bank being a direct IRS target (the fact that its majority owned by a foreign government undoubtedly gives it some diplomatic protection). On the other hand, if this is the largest Indian bank, its very likely that just statistically it has a lot of undeclared accounts. And it might easily accede to a quiet treaty request for US account holders -- India after all, has no tradition of bank secrecy.

    Either way, I would concur with earlier statements that this person should see a lawyer. Its clearly an unpleasant situation to be in.

  45. I just wonder there is a way around this situation. He is under investigation, but if he comes forward to make it clean and make it right, and in some cases, he may not be aware of this filing obligation (often for immgrants), would it be for the public interets to have the issue resolved without going through criminal prosecution ?

    The Gov certainly has power, but its policy should be more "friendly" towards those who join the VOD regardless the timeline.

    Making people to trust our gov is far much better than making people fearful, and in some worest cases, making people hateful...

  46. I have a question for tax law professionals. If one didn't report interest on a US account, will s/he be prosecuted? Assume a small amount of interest.

    Apparently LATE filing of FBAR itself won't subject to criminal prosecution, not even civil penalties. What really pushes the button is failing to pay interest. In that case, why failing to pay interest on a foreign account is treated much harsher than the same wrongdoing on a domestic account?

  47. To the last anonymous comment.

    Your question is a good one but it seeks legal advice that this blog is really not designed to give. The purpose of the blog is to promote discussion among tax and legal professionals. That discussion is often cryptic and in words of art that nonprofessionals may not understand or be able to apply to their unique facts. I would remind you and all who read this comment, that nothing here is intended to be nor should be read as being legal advice to readers. This is really a discussion blog.

    Beyond that, at least to me, your question is quite confusing.

    Thank you for reading the blog, though.

    Jack Townsend

  48. My understanding is there is not much the GOV can do with under report US interests -- very much the same of other US income. As for offshore, there is FBAR -- and I think GOV is taking advantage of FBAR to make this case.

    Under report of US bank interests are easy to find out by IRS --because US banks file to IRS with 1099 while offshore banks do not..

    So it seems to IRS offshore under reporting is more willful tax evasion than inshore under reporting..

  49. Ref:

    As for for IRS interets and penalty 20%, I have a simple software (using microsoft xsl) to calculate all these years tax due plus intertes (based on IRS notice 746), and I can share with anyone with that software, all you need is to put your due tax for each of OVDI year and it will give you the total due to IRS.. >>>>

    Can you please share software (using microsoft xsl) to calculate all the interests for the past years. I have sent in the disclosure letter on this Monday (after getting pre-clearence) and hope to receive it by next week. I have to start preparing for the full disclosure now. The software to calculate the interests will be really useful. I have another Question. Should we need to include failure to pay penalty (i think max 25%) on the tax due in addition to 20% accuracy-related penalties ?

    Thanks in advance

  50. Jack,

    Can you post somewhere for people to download my software on interets payment to IRS ? I can send you the xsl file ? If not, I will try to post somewhere..

  51. i thought 25% is FBAR penalty, 20% is accuracy penalty. Is this 25% related other penalty such as non filing for that year at all ?

  52. tj,

    Thanks for your offer. I will consider posting it only if you identify yourself and give me some background as to why one might want to rely upon the software. If it is a simple Excel spreadsheet, I probably could follow the formulas enough to determine whether it was in the right ball park, but would still want to post something about the author of the software so that readers and potential users of it would gain some extra confidence in the software.

    Thanks again,


  53. tj,

    There are two penalties inside the program. First, there is the 20% accuracy related penalty on the income tax. Second, there is an in lieu penalty of 20% on the highest amount in the foreign accounts and other assets require to be included in the penalty base. This penalty is called the in lieu of penalty because it is in lieu of all other penalties, including the FBAR penalty. (See FAQ 5 of the 2011 FAQs.) Many, including me, have called it an in lieu of FBAR penalty, but that was incorrect. Of course, for U.S. taxpayers whose only assets offshore was a foreign financial account and there were no foreign entities involved, the only penalty that could apply would be the FBAR penalty and, in that preactical situation, it is in lieu of the FBAR penalty.

    Now, as to "non filing" you mention, instead of the 20% accuracy related penalty, a nonfiler must pay the failure to file and failure to pay penalties, if applicable. (See FAQ 7.)

    Jack Townsend

  54. Jack,

    I just sent you email with interest "software", In the email, I gave you my full name, please do take a look this software -- i think it gives a good estimate at least, and IRS will do theirs -- so send a check based on this calculation won't hurt..

  55. The server was down and some posts have been removed. There was one question like the following

    "why offshore under reporting was treated with huge penalty and what would hapeen to under reporting on US bank interest earning"

    IRS will treat under reporting from US bank just like any other under reporting because there is no FBAR. For offshore bank earning, this FBAR can enforce heavy penalty to the same amount under reporting.

    2. US banks issues 1099 to the taxpayers and they also report to IRS, so there is no secercy about US banks deposit. Also any transeaction from (to)US banks will be report to the Gov if it casues alarm to the banks.

    3. Offshore banks are not under US Gov radar, and so that is why FBAR is in place. Tax evading from offshore banks seems a lot more intentional because Gov has no 2nd source of reporting.

    So that is why offshore bank under reporting deserves much heavy penalty.

  56. I participated in the 2009 Program. Hired attorney 12/08 (before program was even announced), Made submission in 5/09, got clearance letter 7/09, case closed with final 906 around 10/10. The process was slow and nerve racking because it seemed to drag on and on. I am so glad its done. Total costs with attorneys fees and payments to IRS about 600k.I think there was a big back log of cases in 2009. Hopefully things will be quicker in 2011. We argued against the 20% penalty but IRS said no way Jose. Good luck to all of you doing 2011 OVDI. I think its the right way to go. When FATCA does its magic in 2013, non disclosers will be in a pinch. It will be hard to plead ignorance.

    1. Was going through all these posts to get an idea of what costs people were experiencing under OVDI. Just wanted to confirm that your total costs were 600k and its not a typo since they seem really high. Or were the fees high because of real estate etc being included under the penalty? Roughly how much of this was attorney's fees and how much was penalties?

    2. It was actually a little under 600k. My high balance was over 2 million. Situation was immigrant with inherited account. No real estate or other assets. The 20% in lieu of penalty was about 420k. The balance was backtaxes, 20% accuracy penalty, interest and attorneys fees. It was not a typo and total costs were close to 600k. The attorneys fees, at least my portion (siblings involved) was about 90k. My case was 2009 OVDP not 2011 OVDI. We were able to take 2008 off the table with a timely FBAR filing and an extended return that was filed and included the offshore income. We argued for reasonable cause based on reliance but it was rejected and we were told to pay the 20% or opt out. I paid and closed. There was zero guidance on opt out at this point except the FAQ's which made opt out sound quite risky.


    3. Anon123...

      Thanks for sharing your details. That is sooo sad and wrong. That must have really hurt to have to part with that kind of money. I have heard you say you are thinking about writing and asking for a refund. I would do it just to cause them administrative grief! Also, have you considered a post closing appeal to the TAS for reconsideration?

      For your entertainment, you might enjoy this little back and forth I have had with a "30 Yr IRS Vet". I appreciate his willingness to have dialogue and input, but I think he has been getting more than he bargained for! He is a good sport however, and is providing a service with his comments. I try not to shoot the messenger :)

      Read the comments on this thread. The comments are a little off the subject of the Post heading, but never mind....


    4. I have read them Just Me. I get a chuckle whem I read the responses to him. I guess IRS runs in his blood too deep.
      A little more about my reliance argument:
      I went to a local tax attorney shortly after my dad died to get advice on the account. He took a 10k retainer and basically did nothing. He actually mislead me and oversaw the filing of returns that were not right. I had no clue what to do to get it right after that experience until UBS made headlines. I joined OVDP years later through a different law firm. I told them about the attorney that bilked me. They contacted him and requested an affidavit about what happened. They supplied the affidavit but only after I signed a release agreeing not to file a malpractice suit against him. He actually hired another attorney to deal with my OVDP attorney. We eventually got the affidavit after I signed a release. IRS still rejected it and offered no relief on the 20% in lieu of penalty. Had I joined later in time, maybe after they gave a little more vague guidance on opt out, I may have opted out. Honestly after the 2 year drubbing, my health was taking a hit and I just could not go on. The more I think about the programs the more disgusted I get.


    5. Anon123

      Did you actually request reasonable cause (or any other argument) under FAQ 35 for 2009, and if so, was it rejected ? Or were you too late to request under FAQ 35 and just made an ad hoc appeal ?

      Finally, if the answer doesn't compromise your privacy: was your account with UBS ? I'm just wondering if the government is likely to be tougher with those who had accounts with a targeted bank.

    6. Anon123...

      I am especially disgusted now with Shulman's deliberate lack of response to the TAD, but I have come to expect it. I never thought I would come to dislike one man or one government agency as much as I have Shulman and the IRS. I know it is easy to beat up on the IRS generally speaking, but they way they have gone about their revenue collection (shake down) efforts, is beyond contempt. They represent the worst of anything you could imagine in a Orwellian world, governed by 72,500 pages of laws!

      I understand about your health. Eventually they do grind you down, but I was wondering if given your situation, if one of your relatives impacted by this couldn't at least contact the TAS to see if their isn't some opportunity for a post 906 appeal. The US does not deserve your money, and I hate to see such an injustice done. At least you would not be spending more money on attorney fees, and if they said no, they can't help, you would be no worse off than you currently are.

      Anyway, just a thought, and understand if you just want to move on.... but... I do note you are still reading this me. It is hard to let go, isn't it? :)

      btw...I hear you have joined with the IRS in a new marketing campaign to encourage skilled immigrants to apply for Greencards and come to America... I joke!

    7. Just Me,

      Nobody is coming to US, even "Bill Gates" is leaving. He is working for Apple now in Japan

      Anon123, have a good laugh and take care..

    8. I see Jack has some comments here on his news link that I often forget to check...

      I think the main thing is there is a legal dispute related to the requirement of formal reporting for TADs versus the Report to Congress.

      Read more there.

      I still think he is being a Wiesel here, by not doing the right thing, but this is Politics now. We shall see what his response is to Congress. I think he still has to formally respond to that. So, this might not be over yet. They still have an opportunity to do the right thing, but balanced against the political needs of a coming campaign, I am not sure anything positive will come out of this. So it goes..

    9. Anonymous February 21, 2012 06:42 AM

      We made argument to the revenue agent during the process and when he got to the point of putting the final numbers together. He told us it was beyond his authority to vary from the standard 20% penalty. This was well before FAQ 35 was withdrawn publicly. In fairness he did refer the matter to a technical advisor. The technical advisor rejected the argument saying I should have continued to pursue a remedy to the situation after I was duped by the tax attorney years ago.In my mind I had gone to what I considered a member of the court to find a remedy to a sticky situation. Instead I got duped and wasted over a year and 10k in money. I was too scared to do anything else until the UBS debacle broke and then I read an article by a prominent tax attorney that showed the way to deal with the situation. I hired that attorney in December 2008 before OVDP was even announced. Thought we were doing a traditional disclosure(noisy) but the program was announced in mid stream and I got sucked in cause IRS mandated any disclosures in process would be run through OVDP. I was so beat down after the first attorney duped me that I could not function well. I resigned from a company that I had worked for for seventeen years. Great job down the tube. The one good thing for me about OVDP is that its now over! It definately took a toll on me as my threshold for stress is clearly not high. To those of you fighting this madness still, I wish you peace, good health and a quick resolution.


    10. Just Me,
      It is hard to let go. The way things are being handled is unbelievable. The entire process is a grind for both the participants and the IRS. I can understand a hard line against those who deliberately established offshore assets in order to evade tax. What is happening to expats, immigrants and run of the mill folks is an outrage. Is this really the face of America? If it is, I wish I could just leave but sadly they make that a horse and pony show where one is required to mire in the dung to get out. Its truly a sad day in this country. Home of the free? Right!


    11. ij,
      I hope you are making progress through the IRS OVDI trenches. I also hope they do not penalize your retirement savings. That would indeed be a travesty of justice. Hang in their friend and may your closing come soon and be fair.


  57. to the last post, thanks for sharing your story..

    just wonder if it took months (5/09 to 7/09) to get clearance. it seems long and i guess the amonut money may be the factor. mine was less than 10 days

    As for FATCA, most immigrants have their accounts (in their home country) setup before they came to US (that means no US ID would be used), that would be difficult for banks to tip off IRS (they could still use their parents address).

    Of course, it is a right thing to do to make it clean regardless, and it makes you sleep well.

  58. I would argue that except for new immigrants to the US or people who are below US 1040 filing limit (such as US students abroad) or other special cases such as dual US citizens living abroad in remote locales, or people with special types of accounts or signing authority that are were clearly identifiable as such, it would be harder and harder to plead ignorance even now.

    My personal opinion is that barring the cases I cite above, a lot of people with foreign accounts did indeed act willfully, certainly so from 2009 onwards. I don't mean that these were people skimming off money or hiding it via entities and bearer shares abroad. I mean they were normal expats abroad or long time immigrants who figured (if they thought about it) that the IRS would never bother with small interest income from foreign accounts abroad and that if worst came to worst, they would treat it was they do domestic unreported income (send a letter charging taxes and interest).

    Its clear though that the government is serious now.

  59. Thanks for all the help. Here is my status so far.

    1. Sent for pre-clearance approval april last week. Got clearance confirmation via fax in a day.
    2. Sent VD letter to IRS, got pre-approval from IRS via certified letter in 5 days.

    I spoke couple of times with IRS on some queries. They were very helpful. I had one doubt, where I was non-resident for tax purposes (was in USA for less than 31 days for the taxable year) on the 1st year I was in US, they told me to include from next year onwards (year when I became resident) as there is no FBAR for non resident tax filers.

    Now working on to submit full disclosure with all amendments. I have couple of doubts:

    1. I have done filing for all the years. Do I need to pay failure to pay/file penalty?
    2. Whether the interests needs to be applied on tax due + 20% accuracy penalty combined for each year?

    Thanks a lot

  60. Here is a thought. At some point IRS will have to really ramp up the costs of being non compliant. They have warned the world of offshoredness multiple times and had 3 initiatives now on offshore accounts if you include the 2003 program. Will 2011 OVDI really be the last best chance to come in with less than 50% Fbar penalties and reduced chances of criminal sanctions? I have a feeling 2011 may be that last opportunity. After that point I think folks will have to do traditional disclosures (quiet or noisy) and face potentially higher civil and maybe criminal penalties. It does not seem logical that IRS would settle cases for less after the 2011 OVDI expires. I also think they will take a very hard line against mitigating circumstances post 2011 OVDI. The way I see it is that there are limited options none of which are warm and fuzzy:
    Continue to hide and hope for the best
    Come in through the OVDI
    Come in outside of the OVDI
    Can anyone think of any other options. Each one seems to have a different set of risks and rewards(thats if you can call any aspect of them a reward).On the other hand, there is still a 25 point spread between the 25% Fbar penalty and the 50% Fbar penalty. Who knows?

  61. A statute of limitations question for Jack:

    I settled my case through the 2009 program through the execution of the IRS 906 Closing Agreement. I noted in the agreement that the IRS reserves the right to re examine non offshore issues for the applicable years. I assume this is written in all of the initiative closing agreements. Is this an open ended deal for the IRS or is there a time limitiation on this clause?

  62. 1. I have done filing for all the years. Do I need to pay failure to pay/file penalty?


    2. Whether the interests needs to be applied on tax due + 20% accuracy penalty combined for each year?

    Yes, just add all the tax due plus interests --- and then times 120%.

  63. I wonder if next OVDI
    1. will have more detail dealing with Retirement Plan.
    2. As for penalty, it may increase for those who have max over 100K, but less increase penaly for less than 100K but more than 75K, and reduce more from less than 75K... with more structure on amount of money.
    3. FBAR reporting limit on 10K is way too low -- that was the amount in 1970s. Canada's FBAR is limit is 100K (effective in 1998). US FBAR reporting should also change to a value reflecting more on today's USD value.

  64. Someone raised this thought: Come in through the OVDI, and come in outside the OVDI (assuming through a quiet disclosure.

    1. If you come in through the OVDI, you pay 25%, plus back taxes 2003 onwards.
    2. If you come in through quiet disclosure, you pay 50% of max balance plus back taxes only for the past 3 years.

    The question is if the 25% difference is worth paying when compared to the pain of calculating all those prior years and doing the calculations. Option 2 may have the slight upside that by the time they get to you a year or two may have passed and they may choose to give you the "non-willful" penalties which are 10k/year and that may be lower than the OVDI.

    ANy problem with the logic above? Assuming no other criminal behavior except not knowing about the FBAR requirement or the need to report foreign income (on which foreign taxes are being withheld).

    What is the worst that can happen if you don't come in through the OVDI and just do a quiet disclosure and wait for the IRS to come to you?

  65. Anonymous,

    In the immediately preceding post, the issue you address is whether a taxpayer is better off to do a quiet disclosure. Your key assumption is that the taxpayer making the quiet disclosure can dodge the criminal prosecution bullet, The IRS has made noises that the historic failure to prosecute after a quiet disclosure does not apply to the OVDI programs instituted since 2009. If that is true and the taxpayer has bad facts, the IRS has put taxpayers on notice that they can be prosecuted. Whether the IRS will prosecute after a quiet disclosure is a different question.

    Assuming the IRS does not prosecute after a quiet disclosure and chooses to do something, it can go after the unreported / unpaid income tax for a number of years. The default number of years is 3, but the IRS has two key exceptions -- a six year statute in the case of a 25%+ omission of income and an unlimited statute of limitations in the case of fraud. The noisy disclosure via the OVDI assures that there are limits on the number of years the IRS will seek additional income tax, penalty and interest. Again, whether the IRS would in any case pursue the far out years is a different question, but I suspect that there will be cases where the IRS chooses to do that, perhaps if for no other reason than to make the point and thereby encourage noisy disclosures.

    Finally, there is also risk in the big potential penalty, the FBAR penalty. It can be 50% of the highest amount in each year (subject to constitutional excessive fines limitations). Whether the IRS would exercise restraing at 50% of the highest year over some span of years (e.g., since 2003) is not known. People assume that it will. (Readers should note that the FBAR penalty at 50% of the highest year actually can be less than the in lieu of penalty under the program because the in lieu penalty because the FBAR penalty includes only financial accounts in the base whereas the in lieu of penalty includes other assets that, if it doubles (or more) the base, can result in a higher penalty that is equal to (or exceeds) the FBAR penalty.

    Jack Townsend

  66. Anonymous, in your post of 5/16/11 5:45pm, you ask about the statute of limitations with regard to items other than the offshore matters settled in the closing agreement.

    It is true that the closing agreements always stipulate that the offshore matters only are being settled and the IRS reserves the right to look at other issues in future audits. So your question is a good one.

    At least conceptually, since the IRS is not settling other issues, the year itself is not closed and the IRS can come make further adjustments if the statute of limitations is still open. So this is a risk that is simply present but, on the other hand, if the taxpayer properly participates in the program it is unlikely that the IRS will exercise any rights it may have to conduct further audits and make additional assessments.

    The principal mitigating factor is that the taxpayer participating in the program must file amended returns. I as a practitioner make sure that the returns are clean -- if there are further material problems in the taxes for the years involved, they are scrubbed out in the amended returns which must, after all, be signed under penalty of perjury. Thus, if the taxpayer and his advisors do their jobs properly with respect to the requirement to do full cooperation and file correct amended returns, there will be not material issues that would cause the IRS to spend any further resources on the matter. And, of course, if the taxpayer and his advisors do not do their jobs and fail to correct other material items, then they can be drubbed out of the program anyway and perhaps even the closing agreement can be avoided.

    So bottom line, it would be the most unusual case whether the taxpayer continued to have any material risk after signing the closing agreement. But, again depending on the facts, it is certainly a possibility.

    Jack Townsend

  67. To add to Jack's excellent comments about the risks of not coming in under OVDI:

    -- The non willful penalty is 10K, but it can be applied individually for each violation, which means for each account (not reporting each account is a separate violation).
    -- The potential willful penalty is, of course, enormous.

    The willful penalty is so draconian that the government merely has to threaten to apply it to get its way. The full penalty is likely to be unconstitutional, but between 25% and 300%, there is a lot of room for the government to seek penalties. Even between 25% and the 100% limit in Bajakajian (Jack has blogged about that before), there is plenty of room. Under threat of the penalty, a taxpayer (or non taxpayer :-) may meekly agree to refile years outside the SOL (as people are doing in the current OVDI).

    In response to an anon comment before about the pain of doing old years, it might be a false economy to avoid doing that now, and then be forced to do it 2 years hence. Also, add in extra legal and accounting fees if you come in outside OVDI since there is clearly more risk.

    Jack, your comment about how 50% of highest balance year under traditional disclosure could be lower than OVDI penalty if the taxpayer has assets like income bearing real estate is valid, but the government could threaten full FBAR penalties as a way to get such a taxpayer to agree to add asset value to account value for penalty purposes. Assuming, that does not exceed statutory maximums.

  68. Jack, I presume part of the idea of a really quiet disclosure is that the government does not even know if the amended return was because of a genuine mistake/change or an attempt to avoid 'bad facts' ? If the income difference involved is small, the government will likely not bother to audit. But if they do audit later, its harder to bring a criminal case or even a civil penalty case because the return may be a 'qualified amended return' ?

    But a foreign account disclosure cannot really be that quiet since FBARs have to be included too. There are probably not that many delinquent FBARs, and all go to one place. A pile of old FBARS revealing offshore account balances will certainly get some attention.

  69. Good point, Jonf. A good algorithm at the FBAR service center could pick the quiet disclosure. That might be harder to implement for the amended return filings, but still possible. And, in any event, the IRS claims it is looking for quiet amended return disclosures related to offshore accounts with the threat that it will take appropriate action.

    Even if the quiet disclosure avoids criminal prosecution (and there is perhaps no certainty of that), the civil penalty regime can be quite onerous.

    I understand that there were some quiet disclosures, even with significant amounts. So we may soon know whether the IRS will identify some that it may want to prosecute. In this regard, for those doing quiets, I think they need to generate amended returns that are 100% squeaky clean. If the IRS prosecutes quiet disclosures, I suspect that it will be those with really egregious facts and obviously less than complete amended returns is an egregious facts.

    Still the holy grail of the quiet disclosure is to be treated as a qualified amended return where the IRS for whatever reason takes no action. Then there are no penalties.


  70. To all experts on PFIC calculation, I need some help in understanding PFIC mutual fund calculation using MTM method:

    For example,

    year 2006, bought 200 MFs @ 200 USD total, net gain by year end, say 200 USD (approx value of 200 MFs at year end is 400 USD_), not sold 200 MFs

    year 2007, same 200 MFs netted me say another 200 USD gain (400 USD cost from last year end, 600 USD at 2007 year end), I also bought in the same 2007 year say another 200 MFs at 400 USD (net gain for this batch is 200 USD at year end)

    My understanding is:

    For year 2006:

    200 MFs, cost 200 USD, gain 200 USD
    20% of gain 200 = 40 dollars + 7% interest on 40 for year 2006 => 40+ 2.8 dollars = 42.8 USD
    Whether I need to add this to the total tax for the year 2006?

    For year 2007:

    200 MFs from 2006: 200 USD gain (profit: 40 USD)
    200 new MFs : 200 USD gain (40 USD + 2.8 int = 42.8)
    Total: 82.8 USD (whether this needs to go in to total tax)

    Does MTM calculation have any impact from state tax amendment as profits are added to total tax than as income? Also if we are using turbotax or taxact, does it calculate these automatically?

    Really appreciate your help on this,


  71. Wow! What a thread of comments. I am wondering why the HSBC summons issue has seemed to totally quiet down. During the UBS fiasco, it seemed there were headlines every few days as UBS, the Swiss Government, IRS and DOJ Tax sparred back and forth and every which way. Could it be that HSBC has quickly thrown in the white towel? Remember that IRS has requested the records of aproximately 9000 HSBC account holders. That is double the amount that was ultimately requested from UBS. It would be most interesting to be a fly on the wall while some of the conversations take place between HSBC and these targeted account holders. I really feel bad for them. My best advice would be based on one of Jack's earlier titles on this matter: "Get in line brother"!

  72. Anonymous,

    Regarding the PFIC calculaton, I have enlisted someone who may be able to provide quick and dirty responses that may not be complete but should be helpful. Because of the press of other matters, I don't think that response will be forthcoming until perhaps noon tomorrow at the earliest. If anyone else wants to respond earlier, please do.


    Jack Townsend

  73. I really like Jack's comment about the holy grail of quiet disclosures. As for me, I could not tolerate the risk and uncertainty of a quiet.I figure that you would be somewhat in limbo until the SOL on the amended returns had tolled. Also if there were multiple years, likely amended FBARs would need to be filed further increasing scrutiny and risk of detection. Couple these facts with publicly made statements by IRS about quiet disclosures and I am all out on this method. There may be circumstances where a quiet is suitable but my guess is the facts need to be right and the discloser and his council need to have nerves of steel. Especially the discloser. You have to wonder what attorneys that early on advised clients to go quiet are saying to clients after IRS came out publicly and stated this will not suffice and if you already did it then join the initiative thats currently going to avoid doom. I wonder if prescriptions for Valumm have spiked in recent years.

  74. I'm sure that most common home tax softwares doesn't handle PFICs, and I'm POSITIVE they don't handle the new method.

    But Tax SW does allow overriding entries. I would just compute tax, override computed tax column in sw, and put additional tax there. Then put in a small schedule describing how this was done for every year as an addition to tax. That is my reading of IRS FAQs anyway.

  75. In the case of UBS, they could claim that the bank would break Swiss law if they handed over their names. For HSBC, the Indian government will say nothing, even assuming they have to clear the request [ If HSBC USA has all this information, they may not even be involved]. As I understand it, under Indian law, resident Indians are not supposed to open or maintain these so-called NRI accounts, so all these holders are US residents (and likely citizens).HSBC has no grounds for refusing, they saw what happened to UBS. The only question is whether HSBC will be able to protect its Hong Kong, Swiss and Singapore customers.

    There are some reports that CS is asking its American customers to close their accounts or disclose.

  76. To Jack, Thanks a lot for PFIC help. We will wait for it.

    As I understand, when will is M2M method useful for PFIC calc? what about default method for calculation? In my case, I have not sold any PFIC units after aquiring it and also there is no dividends declared. So, really speaking I have not made any profits out of it as there is no sell or dividend distribution. Should I need to declare this in Voluntary disclosure as there is no income yet?


  77. To Make it clear, I have not sold any acquired PFIC yet and there are no dividends given. So, I have not made any money yet on the account. The PFIC units are around 2000 USD cost and on paper (as I have not sold yet) made around 2000 USD to date for 3 years together. I have declared this as part of VD (but not sure if this need to be included or not as there is profits yet on the account).

  78. Not that I understand the PFIC morass very well, but I think that under US law, there is imputed income even if a PFIC is not sold or there are no dividends. So it would be part of penalty base. But this is the sort of question that is best put to the voluntary disclosure hotline.

  79. I can still see situations where silent disclosure is possible. Cases where there is almost no chance of criminal prosecution, or other extenuating circumstances: recent immigrant to the US, small accounts (say < 50k), 2 or so years of violations rather than 6.

    If I were the IRS Commissioner, I would assign some CI agents to pick out cases of silent disclosure. Its not that hard to find these, as I mentioned there. Then pick (as Jack said) some particularly egregious cases to serve as an example and recommend a prosecution. For others, when there are large amounts or other situations indicating wilfulness (use of entities), do a civil audit and assess a 50% penalty. Otherwise, audit most/all and assert negligence penalty for other cases, letting off only a few rare cases like the ones I mentioned above.

  80. Jonf,

    I wish you were IRS commissioner, I should say I hope you are.

    I would assume you would let people with RRSP go as well.

  81. This responds to Anonymous' comment on 5/17/11 - URL is here:


    This is the response I received from a CPA friend who makes PFIC calculations in the OVDI program. I don't make them and thus cannot speak to the issue. Hope this helps:


    In the example, the calculation is almost correct.

    2006 - $40 PFIC tax is to be added to 2006 total tax. No additional 7% interest. This is only for the year 2003.
    2007 - $80 PFIC tax is to be added to 2007 total tax.

    I would think that yes, state tax returns could potentially be affected. Under this scenario, there is no additional federal income added to the return, only additional tax. So it’s possible that state tax returns would not change if federal to state income apportionment does not change. But I would have to see the numbers in practice to know definitively.

    I don’t know for sure if Turbo Tax or Tax Act will do this calculation for you. I know even given our rather sophisticated tax software, we have to do this calculation manually and do text box inserts on the actual return (per the OVDI alternate resolution instructions) to show the additional tax.

  82. Jack,

    Is this 7% interest applied to total PFIC investement value on Jan. 1, 2003 (say if total value at 100K, that would be paying Fed 7K) ?

    As for 20% tax for MTM gain, it could be converted to "equivalent income" by 20/15(20% over 15%) times MTM gain.

    This is like to make an "equivalent capital gain" from MTM gain (will result the same tax to Fed)

    So AGI on 1040 will be changed due to this calculation for state tax..

  83. Thanks Jack for the PFIC info. This is really useful for people like us who have small accounts and can not afford tax attorneys.

  84. Response to tj on 5/18/11 2:45

    Here is the response for whatever it is worth (and I really must shut down further responeses on this issue):

    7% interest for 2003 is applied to PFIC TAX = So if PFIC gain is $10 - Tax would be $2, interest on top of that would be 7% of the tax.

    I’m afraid I don’t really follow the conversion he/she refers to. Perhaps they are speaking to the statutory calculation. Under the alternate method, I don’t recall a “conversion” feature. And nothing affects Federal AGI under the alternate method. In theory, yes, the income is there and picked up via a separate calculation, but for purposes of the amended returns, you would not change AGI, you would only add on tax.

  85. Nowhere in the FAQ does it state that the MTM calculations should not be listed on the return?

    Can you please comment on that Jack?

  86. I just called the hotline and apparently the service is swamped with applications for the present 2011 disclosure. Has anyone had their 2011 disclosure civil phase started yet. If so when was the full disclosure sent in?

    With regards Jacks previous comment regarding the amended returns being squeaky clean, if there are minor math errors, would the tax payer be given an opportunity to correct them if all the tax has been paid?

  87. Currently helping a client with the PFIC calculation. We do not have the basis for one stock predating the disclosure period. Would the service accept an estimated basis. Anybody have any experience in this regard during the present or the 2009 disclosure?

  88. Anonymous,

    On your question at 5/19/11 9:04am

    Do the PFIC calculations and preparing the return are not really my area of expertise and I feel like I have leaned on my return preparer friend to much. Sorry. You might try the hotline or engage a preparer who can answer the question.

    Best to you.

    Jack Townsend

  89. I'm still in a dilemma on whether I should take part in OVDI or do a quiet disclosure for not reporting foreign interest (around $2500 total) & not submitting FBARs for years 2008 & 2009. It was a honest mistake & I reported my interest for year 2010. I still need to submit my FBAR for 2010 before June end. If I take part in OVDI, I'm assuming that I do not have to submit anything for 2010 as I have already filed taxes for the same.

    I had a discussion with a tax attorney and he does not recommend OVDI because my owed back taxes are very little. He recommends quiet disclosure as he does not think that the IRS would come after me, considering I owe $2500 in back taxes. I never had more than $10,000 in the offshore accounts for years 2003-2007.

    Wonder, what people think about OVDI v/s Quiet Disclosure.

    Thanks in advance for any suggestions.

  90. For the immediately preceding post, take a look at today's post here

    You need good advice in considering whether to make a quiet disclosure.

    Good luck.

    Jack Townsend

  91. Jack, thanks for the link. I think the "good advice" part is a tough one. I have spoken to many CPAs, sent mails to attorneys & not many people know about FBAR. For ordinary citizens like me, that is scary. It sounds simple that if you have a foreign account & if you earn interest, you report it. But there is always that misconception that you need to be a US citizen. US immigrants, who already have accounts in their native countries, do not expect to report that information when filing US taxes.

    If say there was no OVDI scheme & if I would have found out that I should have reported interest for previous years, what are my options? - A quiet disclosure, right? In that case, with no OVDI scheme, will the IRS treat me the same way? Shouldn't they be happy that I'm reporting taxes that I forgot? Mistakes happen. When I asked my tax preparation agency HRBLOCK about OVDI & FBAR, they had no clue what I was talking about. I'm sure there are many individuals who have not submitted FBAR because their accountants did not know about it. So when they learn about it, they are willing to do a quiet disclosure and IRS does not like it. What kind of system is that? In short, I'm forced to take part in OVDI and pay huge penalties for a honest un-willful mistake.

  92. To anonymous poster-

    Same boat here, recent immigrant. Most CPA's dont have a clue what FBARS are and definitely not PFIC calculations.

    The question I have for Jack and others is - if I file on my own, and disclose all income, if there are minor math errors, would that lead to prosecution for inaccurate returns or will the service be willing to allow me to resubmit with the numbers that they come up with?

  93. To the immediately preceding anonymous poster (5/19/11 at 2:13pm), if you are filing in a noisy disclosure under OVDI, my anecdotal experience is that the agent will not footfault you for such errors.

    Even in a quiet disclosure, except for the caveat that the IRS claims it will not honor qiest disclosures as valid voluntary disclosures, I would not think that minor footfaults will tip the scale one way or the other.

    Keep in mind that the foregoing comments are valid only if I were running the program. The IRS may see it differently. My anecdotal experience, however, is that I can predict how the IRS will see it in most cases. Anecdotal experience carries risk, though.

  94. Quick question on reporting Mutual Fund in OVDI: Do we have to report MF's net value even if I haven't sold them. E.g. if I purchased MF worth $200 in a calendar year but did not sell any & if they are worth $400 by year end, what value should I put in the FBAR? $200 or $400?

    Does this apply to real estate too? If I own property in a foreign country, do I have to report it in FBAR as an asset?

  95. For the years covered by the OVDI, is the statute of limitations for the service to examine the returns and assess tax automatically extended by the amending process?

    E.g for the year 2007 if amended returns are filed in 2011, does it automatically extend the statute of limitations to 2014?

  96. To the last post,

    If your fund pays div/int (even reinvested), you have to report and pay tax. In Fbar, it should be teh max value.

    Your property is not included in FBAR, but for this OVDI, you should include as base if you rent it out and gain income from the property but you failed to report such income.

  97. The filing of an amended return does not affect the statute of limitations. Several caveats here.

    First, the filing of a fraudulent amended return could itself be an independent criminal act with a new criminal statute of limitations.

    Second, if the original return were fraudulent, the civil statute of limitations is open forever, regardless of whether the taxpayer files an amended return -- whether fraudulent or nonfraudulent.

    Third, the filing of a fraudulent amended return after filing a nonfraudulent original return should not affect the civil or criminal statute of limitations as to the original return. (Note my first caveat that the fraudulent amended return can be an independent criminal act).

    Example 1: If the taxpayer filed a fraudulent original return in year 01, the civil statute is open forever even if the taxpayer thereafter files a nonfraudulent amended return. Badaracco so held.

    Example 2: The criminal statute of limitations in Example 1 runs from the date of filing the original return unless the taxpayer does some act after that date that refreshes the statute of limitations. A fraudulent amended return would likely be such a refresher act.

    Example 3. If the taxpayer filed a nonfraudulent original return and thereafter filed a fraudulent amended return, I think the civil and criminal statute would run from the date of the nonfraudulent original return (but criminal statute is irrelevant because original return is nonfraudulent), but a new criminal statute of limitations would run from the date of the amended returns.

    Hope this helps.

    Jack Townsend

  98. "Third, the filing of a fraudulent amended return after filing a nonfraudulent original return should not affect the civil or criminal statute of limitations as to the original return."

    Logically, how could this be true, the reason of filing amended return is because the original was incorrect (say under report). If taxpayer does not file amended knowing the original was incorrect (that would be considered fraudulent by IRS, right ? this is why we go to OVDI). Now, how could the amended be considered fraudulent while the orginal is not ?"

  99. tj, in response to your comment on 5/19/11, the taxapyer could file a nonfraudulent and even correct (different than nonfraudulent) return and then file a fraudulent amended return to claim a refund. Trust me there can be fraudulent amended returns whether or not the original being "supposedly" corrected is fraudulent or not (or was correct or not).

  100. Jack, thanks!

    My mind is full of ovdi -- meaning the original was incorrect -- that was leading to file amended return

    Now I see nonfraudulent in your early example means correct -- then someone made fraudulent amended return, and made wrong from right.

    The OVDI is to make it right (amended) from wrong (original)

  101. Related to real estate, if I own property that is under construction (being built), does that fall under a foreign asset? In the form

    there is a section (14,15,16,17) where it talks about real estate owned. It says FMV of the asset. Does that only apply to real estate for which a sale has been completed?

  102. If the property has generated income (probably not if it was being built), or was purchased from funds that resided in an undeclared bank account for even a day, then it will be part of the penalty base. Duplication will be removed, but if the property value increased, then its FMV will be included to the extent of the owner's interest. It does not matter if it was completed or not.

    If funds were transferred through check/wire transfer written directly to seller/builder, then no. I'm not sure if funds sent to builder and maintained in a non interest bearing account would be considered.

    That is my reading.

    The reason for this condition is clear: tax evaders thought they could 'dispose' of cash sent abroad by buying assets that have no FBAR reporting requirements such as real estate, jewels, artwork. UBS even suggested that to its clients.

    Unfortunately, its a little harsh for people who genuinely bought real estate. And many builders are required by local laws to pay interest on deposits, so that would make the deposit interest bearing.

  103. it is foreign asset. but it should not be included as FBAR penalty if the asset does not generate any income, and the asset were obtained from fund that has been taxed by US.

    i am not sure you should include this in the foreignaccountstatement if there is no tax violation. i would not have it included.

  104. To all commenters:

    Thank you for your comments. They are helpful to me in sharpening my focus and I hope they are helpful to others.

    Jack Townsend

  105. Jack & other experts,
    We should be thanking you for putting all the information at one place. This has been a very useful blog. Keep up the good work !

  106. @real estate: So going forward, when I get possession of the property being built, how am I supposed to report that to IRS. Will that be in FBAR after the property has been built? The FBAR does not have anything related to real estate.

    I understand that the IRS is on a lookout for people that are evading tax but I'm sure there are immigrants / dual citizens who own property in their native countries. Are they all supposed to declare their assets as part of OVDI then? They may have purchased the property using their "after-tax" US money by transferring it to their offshore accounts.

  107. My understanding:

    -- There is no FBAR reporting requirement for real estate. You do have to report gain when you sell after taking credit for whatever taxes are paid in home country.

    -- If someone has real estate and income abroad, but have not violated FBAR reporting (either because account < 10K, or because they reported it), they would be stupid to join OVDI. They should just amend returns and include additional income.

    -- Real estate that yielded no income and was not purchased with funds from an offshore non compliant account during the OVDI period will not be included in the penalty base. I'm not sure whether you need to report that to IRS in OVDI (as a compliant asset) just for reporting. This is something you can ask the hotline.

    There are some corner cases and subtleties that the IRS could probably rule on: for instance, deposits held at a builder, houses bought through a trust, co-operative housing societies etc.

  108. Hi Jack, can you please post the s.w to calculate back taxes + interests under OVDI?

  109. Anonymous,

    I don't know what you are referring to about the s.w. Can you be any more specific?

    Jack Townsend

  110. recently I heard from an atty that one of his client tried for quiet disclosure and now IRS sent them notice. When atty tried to push him through the program his pre-clearance was declined.
    Also HSBC sent out a letter to all account holders recommending OVDI if they failed to report income and FBAR. --- Question I have is it true that once non-compliant is always non-compliant even in later years that fund was used to buy a land (nonincome producing asset) - Can we keep land out of penalty computation for later years?

  111. More than likely, if untaxed funds were used to purchase the land it may be included in the penalty calculation because it is related to the non compliance. Non compliant offshore assets remain non compliant until they are disclosed and backtaxes, interest and penalties are paid. Like your example of the person who was declined for preclearance indicates, IRS says the only way to become compliant is to make a "noisy" disclosure to IRS through OVDI or traditional disclosure. The pattern HSBC is following is very simular to that of UBS only with no resistance to the IRS. Anyone with an undisclosed HSBC account should be concerned.


  112. All -
    In OVDI, the FAQ says we need to add 20% tax to the MTM gain. Where do I add this in 1040X? There is no row in 1040X to add this 20% tax on MTM gains. Appreciate your help

  113. AnonymousMar 2, 2012 09:03 AM

    It does not have to be in 1040X -- just pay the tax in the total tax.

    If you have state return to file, you may add MTM gain into other come (somewhere) as it does not appear in your Federal income.

  114. Add 20% Tax on MTM Gain to the Total Tax in 1040x and
    attach a schedule with your calculation for PFIC MTM tax.


  115. Joesphine Bhasin was sentenced in 3/8/13 for 2 yrs probation. This case is a mystery since there is barely any information about the case or plea deal. Does any one know what's the inside scoop?


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