Friday, May 20, 2011

OVDI 2011 FAQ 52 5% In Lieu of Penalty Experience (5/20/11)

FAQ 52 of the 2011 OVDI provides a 5% in lieu of penalty under the following conditions:

1. Taxpayers who meet all four of the following conditions: (a) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account); (b) have exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address; (c) have, except for a withdrawal closing the account and transferring the funds to an account in the United States not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation). For funds deposited before January 1, 1991, if no information is available to establish whether such funds were appropriately taxed, it will be presumed that they were.

2. Taxpayers who are foreign residents and who were unaware they were U.S. citizens.
I omit the examples, but readers can review them here:

The purpose of this blog entry is to invite readers' comments regarding this 5% penalty. It seems to be narrowly drawn and will likely be narrowly interpreted. I think readers might be interested if any anyone has experience regarding this reduced penalty that might not be evident from a straightforward reading of the text.


  1. Jack,

    I have RRSP that was setup/open in Canada long before becoming US person.

    Would that be considered "did not open or cause the account to be opened" ?

    My argument is "I did not open as a US person", I inherited it from a Canadian person IJ when I became US person IJ, so it should be on 5% penalty -- of course I have not touched RRSP ever since.

    Then the 2nd related question is --- I also have non RRSP -- which is small amount (under 12.5% penalty base).

    Can I break RRSP and Non-RRSP into two penalty level ?

    The total of RRSP and non-RRSP exceeds 75K -- that will be on 25% penalty, but if they are treated differently, it would be a big favour from IRS to me. One is on 5% the other is on 12.5%.

    Anyway, OVDI/QA and hotline don't give much help.. I think IRS should address this issue, as far as I know there are many Canadians with RRSP in this country and many of them do not know f8891

    OVDI Q/A does not address this issue, and hotline does not help much either

  2. If you call the hotline, in my experience they just read the answers from the FAQ and do not stray far. I think such issues have to be negotiated with the agent assigned.

    Have you been assigned an agent yet?

  3. I have a client - she signed a poa when her father gifted her some foreign property. Unbeknown to her, he opened a bank account that was used to facilitate payment of taxes in the home country and disbursement of funds to her. She never signed anything with the bank, never got bank statements and never had any contact.

    She filed under the 2009 OVDI. The net tax on the income in the account was $100 for all six years, in total. Because of an error her accountant made, she is in fact entitled to a refund of $700.

    The IRS says that she caused the account to be opened by giving POA - this occured about 25 years ago. They say a penalty is due of $40k based on a high balance.

    I pleaded with agent and supervisor who maintain this was decided by a tech advisor. The only appeal rights I know of are to put it in audit where I start with a minimum of $60k in penalties.

    I would say this is narrow - almost unconstitutionally narrow. Any thoughts on an appeal avenue would be appreciated.

  4. Anybody negotiated for reduced penalty?
    Anybody have experience qualifying for the reduced 5% penalty?
    We are in 2009 OVDP, started penalty negotiation phase and agent initial penalty assessment is 20%.
    Our case matches almost exactly FAQ 52, Item 1, Example 1 - which should get us reduced 5% offshore penalty. We did not even withdraw from accounts; we did not meet bankers after parent died.
    Can anybody tell me about their experience negotiated for reduced penalty or qualifying for the reduced 5% penalty?
    We are still in 2009 OVDP, we are not resolved and closed yet, so last paragraph of FAQ 52, Item 1 does no apply; but I would assume you can be in 2009 OVDP and still apply for 2011 OVDI penalty scheme?
    Any experience dealing with FAQ 52? Anything to watch out for? Would appreciate any feedback or advice.

  5. I understand that OVDI's rules are not subjected to negotiation/argument. It is really up to IRS to decide and interpret.

    For us it is either accept it or opt out the program (then face uncertain penalty).

  6. To the previous poster -

    I presume this is the 20% FBAR penalty being imposed?

    If the accountant made a mistake, then did the service not let you submit corrected returns during negotiation???

    I would like to know of what Jack and others think of appeals in cases like this. The downside is it costs the taxpayer money, time and a lot more hassle, which is what the service is counting on??

  7. Yes - the $40k penalty is the FBAR penalty. They did allow the corrected returns so we get a refund of about $600 $700 less the $100 tax due) and then pay a penalty of $40k. The client has a hard time understanding this.

  8. I know one case due to accountant error but that is outside OVDI and it is related to RRSP on f8891 election to defer tax

    IRS granted the request (as they viewed it in good faith)

    I am not sure they will treat mine the same in OVDI, at least I have other issue with Non-RRSP and that will be considered as "bad faith" even it was due to my ignorance (not intentional!!).

    Anyway, I will take whatever IRS decide. Think it positively, our country (my newly adpoted country) is in debt crisis, and just consider the money will help our country. No bad feelings --if it ends me in debt -:)

  9. Yes, our lawyer says that the 20% is FBAR penalty; I believe the assessment was verbal. I doubt IRS would go back and penalize dead parent, therefore 20% FBAR penalty must be for after account was inherited.

  10. I had an inherited account and did the 2009 program. Did not qualify for the 5% penalty but thought we had a strong FAQ 35 argument. IRS listened and even scheduled a hearing with a technical advisor and IRS attorney but in the end the 20% was imposed. The 12.5% penalty speaks for itself. To get any other kind of penalty reduction will likely be the very rare exception. For the 2011 initiative the IRS included a penalty calculation worksheet for the in lieu of penalty. The worksheet calculates the penalty at 25%. I think this sends a signal!

  11. I assume you are referring to the 2009 FAQ 35 - Will examiners have any discretion to settle cases?
    I am in 2009 OVDP, but referring to FAQ 52 Item 1:,,id=235699,00.html
    I would assume one can be in 2009 OVDP and still apply for 2011 OVDI penalty scheme?

  12. To the last post,

    the worksheet is editable, so you can change it from 25% to 5%, it is just a template.

    you may also awere it use adding together all accounts' max regardless there is a money transaction between accounts. this can also be edited to adding another row to remove the duplicates.

    As long as you have docs to support your own calculation, you can edit the worksheet.

    IRS puts this default 25% may just assume more of taxpayers will be using 25%, and it does not hurt IRS if people want to pay more than they should -:)

  13. I think one of the key concepts of the recent 2009 and 2011 initiatives is that you pretty much trade the certainty of settlement with no criminal charges and limited look back for paying the big penalty. This I think is why IRS has taken a hard line against reductions in the in lieu of penalty be it 20% for 2009 or 25% for 2011. If one had the resources, the intestinal fortitude and the right facts he might disclose outside of OVDI and do ok. The IRS programs are rough justice intended to quickly bring taxpayers back into the fold while trying to treat all of them equally. Unfortunately bad(willful) actors catch a break while innocents(non willful) get the shaft. Everyone is dumped into the same bucket except for accounts under 75k and the walk on water 5% penalty folks.Based on my experience, arguing for anything else just results in delays, additional legal fees and interest.

  14. Question on 2011 OVDI FAQ 52 1 d)
    " can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation)."

    If there was an estate tax filing and estate tax due and it was not filed and or paid would the 5% penalty be disqualified?
    Also, very likely if the estate tax filing was due between 2003 - 2010 IRS would want this done as part of the disclosure? This could cause an estate tax due as well as the big penalty??? Would the high balance of account be adjusted for the estate tax???

  15. IRS uses the phrase "burden of proof" on taxpayers to establish certain claims.

    That would be hard for some cases, like myself. RRSP again, banks only keep records up to 7 years (TD Bank in Canada), and I don't keep the paper records longer than 5 years. So, there is no way I can prove that these RRSP early deposit was in compliance US tax law (in fact they were not subject US tax as I had no tie with US at all as Canadian citizen/resident)

    Only way to prove this is to check with Canadian Revenue Agency, aka CRA and they have records that taxpayers use RRSP to shelter income tax in Canada (or defer tax). The records have the years of contribution and the amount were used. I do have my CRA assesment with RRSP information. I hope that is good enough "burden".

    Anyone with common sense would believe that deposit in RRSP should been only subject to Canadian income tax (it will be 25% Candian withhold tax when taking out from RRSP, nobody would be so stupid to put money there).

    However, I can not count on IRS to use this common sense, and I am not even sure they will consider my CRA assesment as "proof".

    Agree, OVDI is far from fair system but it is just the price we have to pay for being "simple ignorance" before our Gov to make it an "intentional ignorance" case.

  16. Anonymous, I see your point. But reading further it seems real intent is to know if account was funded with money earned outside the U.S., or with after tax funds from U.S.; are the funds legal (taxed) or illegal (not taxed).
    Do you meets all four conditions listed in FAQ 52, Item 1?

  17. Readers of this trail of comments may be interested in Chuck Rettig's and Kathy Keneally's article on the 2011 OVDI initiative listed under the Offshore links to the right. The article is excellent and a good resource for some of the issues that are raised in the comments.

  18. Jack
    In Mr. Rettig's article he addresses the filing of amended estate tax or original if never filed if the VDP participant was involved in the non filing and the transfer occured during OVDI years. I have scoured the 2001 OVDI FAQs looking for information on estates but could not find anything. I know in 2009 they had an FAQ that addressed this. Do you know where it was addressed in the 2011 IRS information.

  19. Jack,
    I found it. Its under submission requirements item # 13 here:,,id=235690,00.html

    My assertion is that a false or unfiled estate tax may disqualify the 5% penalty.

  20. You have to be able to prove that all taxes were paid back to 1991 on everything except account earnings to get the 5% penalty. Therefore, if an estate tax was due after 1991 and no estate return filed or estate tax not paid, IRS will likely disqualify the 5% penalty. Earnings prior to 1991 are presumed to have been taxed. Furthermore, if the estate transfer occured during the OVDI years and was not accurately filed or even filed at all IRS wants it corrected with amended or filed estate tax return.
    I would take this stance were I a revenue agent trying to quash a 5% penalty application.
    But then I am just a lay person with what is likely flawed logic. So many facets of the OVDI guidance are very subjective. I imagine that when this happens IRS wins because it boils down to pay what we tell you or opt out and face King Cong.

  21. i just wonder why the penalty jumps from 12.5% (under 75K) to 25% (over 75K). If A has 74999 and B has 75001. B would have to twice as much penalty as A simply because B has $2 more in his account.

    Why IRS can not use a better (and fair) penalty as

    12.5% for the first 75K (or under) and 25% for any amount over 75K.

    I don't believe what Obama said "we are behind in math education".

  22. I think they just randomly pulled the numbers out of thin air. Honestly I believe that the 5% penalty is a bait and switch tactic. Some may join OVDI convinced they will get it only to be denied due to the nuances and subjectivity involved in interpreting the IRS guidance. Once these folks join they are ripe to be intimidated into the 25% penalty. My philosophy in 2009 was to argue for any reasonable penalty relief that was logical based on the 2009 guidance and the cumulative(over 30 years) experience of my attorney in handling voluntary disclosures and international tax matters. In my heart I expected the full 20% penalty but the huge difference in dollar amount was difficult to ignore. At least in 2011 IRS made it clear that reasonable cause and non willfulness are out once you join. In 2009 they were optical illusions that according to some practioners were applied inconsistantly. IRS is manipulating two very powerful human emotions. Greed and fear! If there was a way to throw food, shelter and sex into the equation we would really fall apart. It would be most interesting(if possible) to do a FOIA to determine the number of applicants that got the 5% deal. My guess is that it is extremely low.
    In the end, those of us going through this or who have gone through this process should be thankful for the opportunity to clean it up. I am but I just want to whine a little about it!

  23. Time will tell, after OVDP 2009 and OVDI 2011, people will tell their stories. We will know how our Gov treat people coming forward to correct their mistakes (again, IRS did not catch them, they came forward to make it right).

    I will share my story fully and honestly. Gov might be successful in caching a few wimps, but will for sure lose public trust.

  24. The conditions for the 5% penalty for inherited accounts seem to be fairly clear. I don't see it as a bait and switch tactic at all. The only edge cases might be what constitutes 'minor, infrequent contact'. Or what happens if you have 2 accounts, one inherited and one not.

    I certainly do see it as bait for people who really want to clean up an inherited mess for a relatively low cost. The other 5% penalty case is meant to induce people who might someday want to make use of their US citizenship.

  25. A good example is SelfHelp.
    Based on posts made by SelfHelp above, he/she is convinced that he/she qualifies for the 5% penalty. He/She also posted that his/her attorney already heard verbally from a revenue agent that it would be a 20% penalty(2009 program). What is the likelihood of the revenue agent changing this to 5%? What recourse is there in this senario? Accept the 20% or face the uncertainty of opting out and full audit. My advise to those entering the program would be to budget for the high penalty and if you have a strong case submit for the low penalty. This way if the low penalty is reversed you have less of an emotional setback and you are prepared to print real small to make that big figure fit on your check. In my case my law firm presented me with a spread sheet showing all kinds of possible senarios some of even which showed potential outcomes of being found untimely. Talk about disheartening but I apreciated the truth and all the detail. Maybe SelfHelp will post the final outcome and the reason it was so. I did not qualify for the 5% because I made withdrawls that disqualified it. I certainly hope SelfHelp gets the 5% penalty.

  26. @jonf
    Assume an estate tax filing and estate tax was due and neither filed or paid. This is a very likely senario with an inherited offshore account. Does this disqualfy the 5% penalty which was intended to help those that inherited and did not open the account? If an estate return was filed likely the account would not be undisclosed. Does the IRS information clearly address this or do you have to read between the lines and guess? Based on the current guidelines you get your answer after your revenue agent contacts you.
    Also can you define minimal contact with the account in a way that is not subjective?
    I doubt the hotline will answer these questions.
    Remember that you have to meet all the criteria to get the 5%.

  27. Earlier in this thread there is a post from what appears to be a tax practioner representing a participant in the 2009 program. He posted that his client signed a Power of Attorney 25 years ago and that was seen as the equivalent of opening an account thus disqualifying the 5% and warranting the 20%.
    Talk about reading tea leaves!

  28. I still assert there is no 'bait and switch' for the 5% penalty. Obviously, some items are subjective (such as the 'minimal contact case'). But its not like people are being inveigled into the program and then suddenly told the conditions are hard to meet. [ I do agree that the estate return filing (or form 3520 filing) should have been clarified]

    [ I don't quite understand the facts of the situation described by the practitioner earlier with respect to the PoA account well enough to comment on that ]

    But some ambiguity holds for many other items and issues in the OVDI as well. I don't think one can reasonably accept the FAQ or the hotline to cover all cases.

    For most inherited accounts, the heirs are likely guilty of willful violations. The reason the IRS is willing to advance a lower penalty is presumably because it would be harder to find some of these accounts and because it would be harder to make a case against some of these people. But from basic principles of equity, why should someone who inherited an account and concealed it receive a better break than a recent immigrant who opened an account when not a US person ?

    might legitimately ask though w

  29. Now that I think a little about the estate tax filing requirement, it seems to me that it should not be a disqualifying event for the 5% if someone did not file it (or form 3520 for foreign estates). After all, said people already did not file FBARs or tick Schedule B's or include interest on that account.

    About 'Minimal infrequent contact' is clearly subjective, and its hard to be otherwise, but it seems like a legitimate condition to me.
    The FAQ has clearly spelled out a case (request to 'hold mail') too.

  30. Great Answers. I guess time will tell. I stiil think the logical process if you are in this situation is to budget for the ugly senario but to prepare and submit for the best that your circumstances can fit into.
    Like you I agree that in the end it is a great thing to become compliant without total financial ruin and jail time...hopefully!

  31. Jonf,

    Assume IRS won't let me to make an election within OVDI (back file of 8891), I hope they will consider on 5% penalty (which I think it does match FAQ52).

    If they won't consider for 5% penalty. Then 25% penalty on RRSP will be a grave injustice on me for this simple reason.

    As US person, RRSP is not 100% of my money at all, anytime I take it out from the plan, there is 25% Canadian Tax on the amount. So it is like I am paying penalty for Canadian Gov for their stupid treaty with US (f8891 -- how many people know form ? and why they don't make it as a default for defer tax ?).

  32. Jack, This is related to the previous discussion on 5% penalty as bait OVDI. When I called hotline asking my RRSP, the agent was very friendly, she told me "as long as you have never cashed out money from RRSP, you should exclude it from FBAR penalty" Then she said "After I discussed the issue with tech advisor, I can tell you it is a case by case decision". This might be an indication they want to switch position? My case is crystal clear -- it is RRSP (never cashed). If it comes with a penalty of 25%, I would have to agree this "bait conspiracy". Gov may get money (in my view, rip off from RRPS is just like what Nazi did to the jews!), and Gov will certainly lose my trust.

  33. jonf (d) can establish that all applicable U.S. taxes have been paid on funds deposited to the account.
    You think US estate taxes are not included in this condition? It is irrelevant if have filed incomplete or no US estate taxes for the inherited account?

  34. If there was no taxes due (because it was below the limit for estate tax in that year), or because it was a foreign estate, and the only violation was a reporting account, then it might not matter. Otherwise -- well, then it gets into a gray area. That holds for many offshore cases, not just the 5% case.

    Owners of inherited accounts very likely willfully evaded taxes. Many people may not know about the obscure FBAR form, but just about everyone (especially with an estate large enough to trigger estate taxes) should know about estate taxes and returns. One could make a good argument that other cases (recent immigrants, Americans working abroad with no tax due because of foreign tax credits) deserve a break on the penalty as much, or even more.

  35. Vibrant thread! Sorry I am late to the discussion. A few thoughts:

    1. Jack asked about experience regarding the reduced penalty. My experience is that the IRS will find any reason not to apply it. As just one example (out of many), an elderly US taxpayer inherited funds from a Non Resident Alien (NRA). US taxpayer took no distributions from the account. US taxpayer had minimal contacts, if any, with the foreign account.
    Inherited account, minimal contacts, no withdrawals . . . sounds like a good 5% case, right? And inheritance from an NRA isn't even taxable!

    Not so fast! First, the IRS noted that there was nothing in writing from the bank that the account had to be kept at the bank in order to facilitate the inheritance. In other words, according to the IRS, taxpayer therefore must have decided to keep the inherited account offshore. Put aside that OVDI FAQ 52(1)(a) does not mention a writing. The IRS is basically concluding that this elderly woman, rather than following the (verbal) instructions of the foreign bankers on how to get the inherited funds, determined to keep the funds offshore in order to commit tax fraud.

    The IRS also viewed the lack of written authorization for the bank to trade securities, as evidence that the taxpayer must have traded in the account herself, which would be violative of the "minimal contacts" requirements of the 5% penalty. I can only speculate that a written securities authorization signed by taxpayer would have led to an IRS conclusion that, like a "hold mail" authorization, would be violative of the 5% also. Taxpayer can't win, either way.

    My experience is that the IRS has been more receptive to an FAQ 35 argument than a 5% penalty request. I've had more success in getting the IRS to impose non-willful penalties of up to $10,000 per year, pursuant to 2009 OVDP FAQ 35, than going from 20% to 5% of the aggregate account balance under 2011 OVDI FAQ 52. Of course, that FAQ 35 non-willful penalty is now, under the 2011 OVDI, off the table. See my comment on this further below.

  36. 2. Anonymous on May 20 at 10:32 asked about appeals. Anonymous correctly notes that an appeal would cost the taxpayer money, time and a lot more hassle.

    I had an OVDP case where the IRS was clearly over-reaching because of the amount involved. In that case, the 20% penalty alone was over $1 million, and the IRS did not want to let that amount go. But the facts were excellent for a reduced non-willful penalty of up to $10,000 per year; FAQ 35 was still in effect at the time.

    One strategy would have been to reject the $1M+ penalty, submit to a full audit, and then recourse via appeals and even litigation. On that last point, we felt that there was little chance that a court would find willful tax avoidance. We felt that there was a good chance that a court would find against the IRS based on the facts. But an appeal and litigation would have cost taxpayer more time, money and aggravation, and although the chances were good, there is no guarantee in litigation. Moreover, a full audit might have turned up other headaches. Taxpayer paid the $1M+ penalty rather than challenge the IRS, even though the facts were on taxpayer's side.

  37. 3. SelfHelp on May 20 at 11:22 wrote "I doubt IRS would go back and penalize dead parent."

    I do not know the facts of that case, but I have represented various estates as applicants in the OVDP and OVDI. In other words, if a deceased taxpayer had a non-compliant foreign account during his/her life, the non-compliance does not disappear at the death of the taxpayer. The IRS will, in fact, impose penalties not against the "dead parent", but against the estate of the deceased. Thus, estates of deceased taxpayers enter the OVDP/OVDI.

  38. 4. As to the "bait and switch" comments, I was very surprised that the IRS rescinded FAQ 35 after the announcement of the 2011 OVDI, even to taxpayers who disclosed under the 2009 OVDP. Taxpayers who disclosed under the 2009 OVDP, did so on the basis of the applicability of FAQ 35 (as well as any and all other guidance issued by the IRS with respect to the 2009 OVDP). One must question whether subsequently, and retroactively, denying such taxpayers the opportunity to benefit from FAQ 35 is in fact a "bait and switch". One must also question whether such a policy violates legal precedent which prohibits the IRS from issuing rules and setting policies on a retroactive basis.

  39. Like I posted earlier. Its basically a bait and switch tactic to suck in more hopeful OVDI applicants. Once you are in the only way out is to close through OVDI or opt out. Either way IRS will extract its pounds of flesh. The question becomes which way will hurt the least. A quiet disclosure tries to circumvent these choices. Thats why IRS is totally down on them. If IRS posted more detailed information on disqualifying 5% applicants, it may serve to discourage people from joining. This is basic bait and switch strategy based on presenting an attractive outcome that likely will not be available in reality. Thats why I say budget for the worst, argue for the best based on fact but due something to become compliant because time is short. The IRS has figured it out and FATCA is looming.

  40. Mr. Rubinstein

    Thank you for your very interesting comments.

    Without knowing the details of the case, I admit that if I had been an IRS agent, I would have been skeptical of the 2nd case you cite -- that someone with an account size > 5 million would be unaware of not just FBAR reporting (which is believable) but also the requirement to report worlwide income and tick the box on schedule B indicating a foreign account

    Again, without being fully acquainted with the facts of the case, I will say that someone who was willing to pay up $1M rather than undergo a full audit and litigation expenses (which I doubt would be anywhere near 1M) --- well, I would wonder if there were other sleeping dogs that the taxpayer did not want to awaken ...

    It would be totally different if the IRS had threatened possible criminal prosecution -- clearly that would be a potent threat.

  41. Asher If you enter 2009 OVDP and have not closed yet then FAQ 35 is not available? When and how did IRS rescind FAQ 35?
    Does last paragraph of FAQ 52 mean that the 2011 OVDI FAQ 52 criteria are to be used to qualify for 5%? 2009 OVDI also had 5% conditions that were not as narrowly defined; still valid?

    Case background: Deceased taxpayer held non-compliant foreign account in his name from before 1991, upon death estate was held in US trust which was non-compliant for over 1 year while account ownership was transferred to US trust then estate entered 2009 OVDP and then repatriated to US.
    During the time estate held account – not withdrawals, not meeting bankers, no changes to account management (hold mail, investments)

    In your case of elderly woman; how long did she hold the non-compliant account? FAQ 52 Item 1 - does not say how many years account can be non-compliant and still qualify.

    What is your view on estate taxes? FAQ 5 implies that no estate returns were filed and no US estate taxes were paid.

  42. My understanding is that FAQ 35 was revoked if the person in OVDP 2009 had not mentioned this possibility to the agent before Feb 2011.

    I don't know if there was any existing case where FAQ 35 was withdrawn if it had been asserted earlier than Feb 2011.

  43. Correction - What is your view on estate taxes? FAQ 52 Item 1. Example 1 - taxpayer inherited two offshore accounts … never reported earnings on the accounts on his U.S. tax returns and he never filed an FBAR.

  44. Let me add my sobering experience with the infamous 2009 FAQ 35 if it is of any benefit to anyone considering the 5% rule.

    In Oct, 2009, I wrote Commission Shulman to express concern that the OVDI penalty was disproportionate for expats and immigrant "Minnows”. We were not the Big Whale tax cheats trying to hide unreported funds in overseas secret accounts. If you remember, with all the UBS fervor, this is how the program was marketed in all press accounts.

    I feared that Minnows, were by-product catch of a finely woven net designed for the UBS type Whales. We were entering a giant fish processing plant from which the Whales would emerge without any life altering financial consequences. The Minnows on the other hand, would be ground up and spit out as fertilizer. I hoped I was being hyperbolic at the time. Actually, I may have understated the reality.

    I received a reply on April 1, 2010 from a Kevin McCarthy, Acting Director, Fraud/BSA Small Business/Self-Employed Division. He politely talked about the needs for fairness and compliance, and described the salient objectives of the program. He separately and specifically restated FAQ35 that “under no circumstances must a taxpayer pay a penalty greater than what he or she would otherwise be liable for under existing statutes.” It was that language that gave a lot of us hope that some discretion would actually apply for Minnows.

    Due to IRS delays, it took a year and 1/2 to get my OVDI penalty outcome. I received my form 906 in early March 2011. It was the shock of my life when they included the value of my home, where I am living overseas, in my highest aggregate total.

    The reason they gave, was that since it had some causal holiday rental income (even without substantive tax impacts), it still put me in the technical category that allowed them to asses the penalty. I guess any income even minor amounts give them the opportunity to reach deeper into your pockets. It doubled my OVDI penalty. Ouch!

    IRS Agent, to her credit, was sympathetic to my cries of pain. She openly admits this program was not designed for me, and tried twice with her technical advisor to get it removed, but to no avail. No discretion, you know!

    I subsequently asked for FAQ 35 consideration, but agent says she is unable to, as it was rescinded in Feb, but she can't produce anything in writing that says that. I see all the comments around the web that it is so, but I don't see it specifically spelled out, and on the IRS web site, FAQ 35 for 2009 OVDI is still there.

    Oh, and btw, now that the statute of limitations is running out for 2004 FBARs, she was instructed to provide friendly information that if I don’t sign an extension, the IRS could extract the 2004 FBAR penalties immediately. Is that a threat? Can they do that? I guess, they can do whatever they bloody well please!

    I think the IRS has lost the plot on its one size fits all OVDI fairness rules. What can one do? Pray for a miracle? Pay up and be happy as the last drop of fish oil is squeezed from your carcass?

    Or, … do I dive into the opaque Opt Out pool without knowing what crocodiles might lurk there? Agent now says they do not have instructions on how to process those exit requests. I cynically think they are probably busily changing the rules again, and removing the discretion that the IRM expects agents to apply.

    All in all, I think the OVDI for the target Whales, is a great deal. For the small Minnows who realized their failures, the OVDI was a “catch 22” operation, a weapon of mass financial destruction with no viable exit. It is just plainly punitive in application, confiscatory in practice, and not positively corrective in its compliance objective. I wonder, was that the intent of Congress when it originally passed the FBAR statutes?

    Well, someone has to pay for GE’s offshore earnings exceptions, I guess. And you ask me to pay up be thankful that I am not being prosecuted? Boy that is hard ask. :) Fertilizer, anyone?

  45. In FAQ 52 what period of time is examined for compliance? Is it limited to 2003 – 2008/2010?

  46. I noticed that IRS had announced three changes to 2011 OVDI. One of them is a reduced 5% penalty regime to certain citizens (Taxpayers who are foreign residents) if they meet three requirements (FAQ 52.3) My question is about the third requirement, in which the citizens “had $10,000 or less in US source income each year.” Does the $10,000 include US Social Security and company pensions?

  47. Hi All, Can anyone advise on how a loan account should be reported as a part of OVDI. The loan was taken from a bank in which we had some fixed deposit accounts. The loan amount was made to one of our uncle's company (as a gift) as he needed the money. We took the loan because we didn't want to break our fixed deposit accounts during the term. We paid interest on the loan account and it was paid-off with the FD accounts after 2 years.


  48. Under FAQ 52.3, it outlines that foreign residents who meet the three conditions qualify for the reduced 5% FBAR penalty. It states that income tax returns filed with the foreign tax authority have to be provided. Do residents of non-tax countries such as the Cayman Islands qualify for this exception?


  49. Jack - you included the first 2 ways to qualify for the 5%, but not the third:

    Taxpayers who are foreign residents and who meet all three of the following conditions for all of the years of their voluntary disclosure: (a) taxpayer resides in a foreign country; (b) taxpayer has made a good faith showing that he or she has timely complied with all tax reporting and payment requirements in the country of residency; and (c) taxpayer has $10,000 or less of U.S. source income each year. For these taxpayers only, the offshore penalty will not apply to non-financial assets, such as real property, business interests, or artworks, purchased with funds for which the taxpayer can establish that all applicable taxes have been paid, either in the U.S. or in the country of residence. This exception only applies if the income tax returns filed with the foreign tax authority included the offshore-related taxable income that was not reported on the U.S. tax return.

    In my case, I fit all of the guidelines of the third - overseas resident (never lived or worked in US, in fact), fully compliant (in a tax free jurisdiction, but fully within the laws), but I am hit with the third requisite - less than $10,000 US source income.
    How? I had the confidence as an overseas American to invest in strong US companies that paid dividends. This counts as US source income, and thus takes me back up from 5% to 25%!!!
    I am completely flabergasted by this!!! All it has taught me is to invest in other countries!! Surely this could have been fine-tuned. I am sure they are going after wealthy Americans living abroad off US income, but I am a hard working individual who makes good money off dividends. I would suggest a fairer way to have done this would have been to put the level of US source income as a percentage of actual income. Yes I made over $10,000 in dividends, but it is less than 25% of my income for the year, so why not recognize hard working Americans abroad who believe in America and invest in America???
    At the end of the day, I would have been happy to still pay a 5% penalty - I was not in full compliance with US FBAR laws. But 25% just because I invested in the US?
    FYI, in the last few weeks I have divested a lot of my US investments. Not only do I feel the Empire is crumbling and the above example is just one way they are trying to drive away investment - all be it inadvertently - but I feel the opportunities are far greater abroad in the coming years.
    Isn't it ironic that the US Government is forcing overseas citizens to invest in places like China - places that promise to crush the US financially in the next decade?
    This is just another example of a very poorly thought out and implemented law and the constitutionality of the FBAR penalty notwithstanding, has clearly NOT been studied from every angle.

  50. In response to July 28, 2011 1:01PM:

    I am in the Cayman Islands and have wondered the very same thing. I am going through the OVDI and, along with legal advice I have taken, interpret the section to include Cayman residents as the wording clearly states that the individual has complied with the tax reporting and payment requirements in the country - (Actual section: (b) taxpayer has made a good faith showing that he or she has timely complied with all tax reporting and payment requirements in the country of residency).
    Since Cayman has no direct taxation, there would be a hard case to prove the person was NOT compliant!!!

  51. I wasn't born in the US (born and raised in Australia - migrated to Canada 13 years ago), have never lived there other than 4 months when I went to a high school as an exchange student when I was 14, and I don't even have a Social Security number. I have a US passport because my parents arranged one for me when I went to school there (when you didn't need a SS#) and I've just kept it current. Now I'm told I have to participate in the OVDI. My question is, am I hopefully one of the 5%'ers? I don't have any US accounts, I live in Canada and file my taxes every year. Is the OVDI for me? I have a week to figure this mess out! This is a nightmare my poor father never thought he'd be inflicting me with by making me a US citizen through "Birth Abroad".

    Minnow caught in a Whale trap

  52. Minnow caught in a Whale trap,

    OVID is to get those who hide assests offshore (according to IRS), now some people may not intend to hide (just happen to keep some money offshore and "forget" to report. The common sense is that people do hide money --they often use entity, and it is a lot money. Who would be so stupid to hide 10% or 5% of his/her all assests offshore ? Also who is so stupid to keep money offshore while paying high tax there ? All these are comon sense, but the law does not really treat these case differently (unless IRS uses common sense as well), but anyway, OVID is indeed for all those who have money offhosre.

    Your case is different in a sense, you are also offshore person, and you certanly do not hide money offshore (rather, if you keep money in US --that would be considered offshore)..

    If you are not super-rich in Canada, even if you file US return you may not owe any tax after using Canada tax credit, then you may just consider file for last 6 years along with FBAR.

    here a link

    someone did file quietly 5 years catch up return/FBAR in 2009, and then did this time for 2010. He/she seems still oaky.. My guess is that IRS won't bother go after someone who has little fat they can rip off. It may even cause some bad PR for IRS if they do.

    i am not a pro, just common sense.

  53. Isn't canada's rate slightly lower than US generally ? If so, there would be some tax due on most accounts.

  54. Can anyone explain what is the difference between example 1 & 2 of FAQ 52>#3. Why the stock value is included in penalty base in example 1 and excluded in example 2?? If there were stock options from the employer, would example 1 apply or example 2??

  55. Does anyone know what led to introduction of FAQ 52? Was there a lot of follow up by the expat community? It is very reassurng to see this FAQ as it shows IRS is making important changes to the program where required. Now, if they would introduce similar relief for the immigrant community too. Something on lines of FAQ 52, #3 would be a huge help....

  56. I am curious what to do about an asset (no income) situation as follows:
    A family LLC opened and owns a gold pool account in Canada. Each year the account is duly listed as an asset in the balance sheet of the LLC filed on the 1065. There has been no income as the pool account transaction was limited to purchase.

    What is the risk of non-filing penalty if voluntarily file late returns now (Nov 2011). Is it routinely waived if there was no income generated and the asset was being reported.

  57. HSBC provided Indian client information to US?

  58. Apparently many people are already informed about these methods and obviously some of us account holders or owners had some questions and maybe there are more questions to be ask in the near future for further understanding.


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