Friday, June 3, 2011

IRS Updates and Expands 2011 OVDI FAQs - Extension of 8/31/11 Deadline, Opting Out & 5% Penalty (6/3/11)

The IRS 2011 OVDI FAQs have been expanded and updated as follows:

25.1 (New). Provides for good faith extensions to the 8/31/11 deadline.

51 (Updated) Discusses the Opt Out procedure. Reminds taxpayers that Opting Out will entail a full scope examination in which taxpayers must cooperate to get the benefit of being in the VD program and that, if additional issues not disclosed are found, CI might institute a criminal examination.

51.1 (New) Gives examples of when it might be favorable to opt out.

51.2 (New) Gives examples of when it might be favorable not to opt out.

51.3 (New) Another reminder that the audit from an an opt out may identify other noncompliance which, if not disclosed by the taxpayer in his or her OVDI submissions, could result in criminal investigation and possible prosecution.

52. (Updated) Adds a new category.  (See prior discussion of FAQ 52 here.)


  1. This brings a lot of clarity to the opt-out procedure (they included a memo) as well and provides substantial relief to expats.

    I found the provision that someone would need to have paid foreign taxes properly to qualify amusing. In a way it makes sense, since such people are not likely to be habitual tax cheats, and are also likely to owe less to no tax because of tax treaties. Still, it must be rare for the IRS to consider whether someone paid foreign tax properly when deciding whether to grant relief in an amnesty.

    Now, we need some similar relief for immigrants as well.

  2. it seems IRS is more fair-minded now. so i should be more hopeful with my RRSP. if they forgive me --- i can even donate half IRS and half to CRA --- i don't want a penney even it was my canadian pre-tax income.

    penalty on RRSP will cause me not only financial pain also resentment to the gov i will have to deal with rest of my life.

    it is not just moeny -- it is the way being treated..

  3. jonf,

    I don't think IRS will give immigrants similar relief as to expats although I wish they would.

    There is a good reason to grant expats relief,

    1. it is hard for IRS to enforce the law to expats --- they may just choose not to come back or even give up citizenship.

    2. this is a step close to other countries tax law --- that is tax based on residency not on citiznship.

  4. It doesn't appear to me that very many Expats, especially retirees are being given much of a brake under new 2011 FAQs. Under 52.3... That $10,000 threshold for income produced in the US is pretty darn low. SS and with drawls from IRAs in the US would quickly exceed that, unless those funds are not considered income. They are taxed as income, so assume they are.

    As far as the Opt Outs procedures go, It looks like they are putting more work onto the audit agents (which couldn't make them happy) and then moving the decision on how to handle the Opt Outs to a Management Committee.

    Not sure how to interpret the comment, that the "decision of the committee is final." Maybe it is just final as to the determination of who will handle the examination, and not final as to outcome. Wonder if there is still opportunity to appeal?

    Also it looks that the look back will be all OVDP or OVDI years, and not just 3 years using the statue of limitation years...if I am reading that right. So rules being adjusted as they go, I see.

  5. Interesting on Q&A 51.1
    Does this now mean that an expat (or inpat) retiree with an offshore account from 100% foreign-taxed income prior to moving to the US, should opt out of OVDP and hope to just pay the $10,000 per year FBAR penalty plus of course any back-taxes, penalties and interest??
    Could this really be such a concession to common sense? Couldn't they have thought about this before????

  6. Not sure if the “new” opt out guidance gives me much comfort. If I read it correctly, a taxpayer gets NO upfront read if their FBAR violations will be deemed willful or non-willful in the event they opt out. If the IRS decides to enforce the willful penalties, a taxpayer will be much worse off.

    It would be nice to get some assurances from the IRS, now that they have been through six years of a taxpayer's returns and all the facts, what position they will take before deciding whether to opt out.

    (As a suggestion to the IRS, it would be a lot easier if the agents were allowed to decide penalties under FAQ35 and clear up the easier cases in the OVDI program instead of going through the opting out process.)

    Also, I’m a bit concern that the agents will take the June 1st guidance and just use them to force OVDI participants to sign the settlement agreements. One IRS agent has already stated that one client should opt out (as he thinks it might benefit the client) but also indicated that if he doesn’t opt out he could be forcefully removed. The IRS agent can give no assurances what the outcomes will be by opting out, but in the same converation the agent requested that the client exectue the settlement agreement. Sounds like these new rules are giving the agents more ability to strong arm taxpayers.

  7. Strong arm? Indeed! Let me pass along some “take aways” from recent conversation with an IRS agent ref new Opt Out. Disclaimer: I am not a Practitioner with any special knowledge. Use caution, and/or get professional help. Opinions expressed could be wrong.

    1st note: The words “agent discretion” are noticeably absent from examination process description. There is vague language that one Committee option is to “assign the case for other treatment.” Agent doesn’t know what this means. Also missing was the standard comment about ability to appeal. Agent unsure if further appeal would be possible.

    If you and your agent are not in agreement on “statement of facts” related to “willful” vs “non willful” failures in FBAR filings, a decision to go this route will be very risky.

    Agent is applying a very broad definition for willful, (recent court rulings aside) IE., checked box on Schd B is enough to consider you willful. End of story. This in spite of IRM cautions in paragraphs 1-7.

    IRS agent doesn’t know who will make up the centralized review committee or the “mindset” of that committee.

    All 6 yrs are open for exam. Agent unsure if the yrs already outside the Statute of Limitations will actually be available for tax collection if failures are not fraud, and < 25% gross income level.

    Examinations will be looking for evidence of fraud so as to apply these penalties also. (see IRM

    For FBAR penalty mitigation consideration, all 4 thresholds of must apply.

    If you think mitigation applies, study carefully the table in Exhibit 4.26.16-2 (7-01-2008)

    What is an Account? The IRS will use every technical means available to assert individual accts so that more penalties can be assessed. My impression is that is about collecting revenues more than it is about encouraging future compliance.

    CD acct example: US vs resident country A: In US you might have a CD linked to your savings acct, but no new acct number is created. In country A, your CD might build on the base acct number and add two digits called a suffix. The IRS considers that suffix a new acct, so a penalty applies (yea!).

    Aggregate calculations: There are no provisions in IRM or 3 that allow elimination of double counting of funds in the aggregate maximums. Agent first said, “of course we won’t double count”, but then called back with information from her Technical Advisor which said, “Yes we will!” The IRM talks of max acct amounts, and they literally mean that.

    For clarity, if you have $1000 in Acct A “Checking”, and transfer $500 to Acct B “Savings” so both accts have $500 each, the total aggregate max is $1500 not the $1000 as allowed in the OVDP or OVDI. That can quickly put you over IRS mitigation levels I,II, III, IV max limits of <$50K, <$250K, <$1 Mil and > $1Mil.

    As I explained to my distraught Green card wife, the decision for or against Opting Out, is to understand that the IRS is encouraging the “cat surgery decision” process.

    Our adopted feral cat dislocated a hind leg. My wife went to the small animal surgeon fearing the worst based upon recent experience of a friend where it cost $2,000 for a cat leg reconstruction. The surgeon said, “Are you prepared to spend $737 for this feral cat?” She was so relieved, she took the “bargain” with out thinking, “should I have just put the cat down instead?”

    The IRS with the OVDP / OVDI is offering the “the cat surgery bargain”, compared to the ridiculous max aggregation of penalties under the IRM. It is meant to seem cheaper. They apparently have no intention of following discretion guidelines of IRM paragraphs 4 - 7.

    Penalties can go from “Over the Top” in the OVDI to the “sublimely absurd” level times 20 in an Opt Out. This encourages you to make the “cat surgery” decision. Just pay up and meekly take your injured cat and hemorrhaging wallet home. You shouldn’t have “willfully” left the door open and let that cat in the house in the first place.

  8. So much uncertainty unless you take the medecine dished out by OVDI that fits your facts(assuming you can accurately figure that out). Boy am I glad I disclosed in 2009. Saved 5% on the in lieu of penalty and was able to submit 2003 - 2007(5 years) of amended returns instead of 8 as mandated for 2011 OVDI. I agree that IRS will seek to punish those that opt out. Think about it. If they did not and everyone opted out they would have a huge mess on their hands. In 2009, FAQ 35 turned out to be a defacto opt out mechanism with built in safe guards and thats why it was taken out to the parking lot and shot dead. This program is more a financial collection tool than it is an enforcement tool.

  9. We are still are not complete on the 2009 OVDP. They denied us use of FAQ 35, but now pushing us to accept the settlement, as the Out Opt really has no hope of discretion and a lot of unknowns. It is criminal what they are doing, but no one cares. When the Justice department delegated authority to the IRS for 31 CFR 103.56(g) all hope of mediated justice ended. They have all the power and control all the rules. It is just a bend over and take world, even if the penalty is totally out of proportion to the "so called" crime. I have lost all faith in the IRS and it's leadership.
    Congress is dysfunctional, so there is no hope that they will ever improve the situation for the small fry.

  10. Anonymous @June 13, 2011 4:23 PM

    I have heard (2nd hand) something similar about FBAR penalties and mitigation (although this was not specifically in the context of opt-out).
    --- All accounts will be considered independent violations
    --- Duplicates/Transfers will not be removed.

    So its pretty tough.

    There is recourse to appeals, but FBAR appeals go through a special 'appeals' coordinator. It wasn't entirely clear what would happen if the penalty after mitigation guidelines were applied exceeded the maximum non willful violation penalty for the applicable years assuming a max of 10K per year.

    [ OTOH, it doesn't seem unreasonable to consider CDs as separate accounts from savings accounts. All the US CDs I have have separate account numbers, and they are different enough from savings accounts in terms of interest rates, maturity etc. to be considered separate accounts. But there could certainly be other complicated accounts where there are some genuine questions.]

  11. Thanks for the update on CDs in the States. I don't have any there, so I don't know. I could have been wrong on how they are handled. The IRS agent implied that they would not be considered separate in the US, but since they are two digit "suffix" different in Country A, they can gleefully assert that the penalty applies. It is a bizarro world they live in. They are looking for every technical detail to apply penalties, even if the outcome is ridiculous. Doesn't matter. I guess I now understand better that famous quote... "It all depends on what your definition of 'is' is."

    It has been a very hard learning lesson for me who wasn't the marketing target of the program in the first place. I sometimes really question whether I did the right thing joining the OVDP. Each person has to make that decision on their own, but after this experience, I can understand why others would not.

  12. Jack - here's a question that I think would be useful for readers.

    The updated FAQ 52.iii provides a lower 5% penalty for "taxpayers who are foreign residents" and are tax compliant in their home country. The examples all mention expatriate citizens.

    As you know, many minnows caught in this are immigrants - green card holders who live abroad and use green cards as a convenient way to visit family in the states. Typically, they're tax compliant in their home countries where they live and work, and are ill-informed about US tax requirements. I personally know more than a dozen folks like this, mostly elders. Do they count as "foreign residents"? Would they quality for the 5% under this FAQ?

    Hope you consider this a worthy question for your excellent blog - I haven't seen a discussion of 52.iii anywhere else on the web!

  13. Anonymous,

    Thanks for the inquiry. I do think that the answer to the question would be helpful to readers in that situation. Unfortunately, however, I have not faced the situation in my practice and have not put the thought and research into an answer that would permit me to give a definitive answer.

    I did take a quick look at the rules. As I piece them together, the green card holder is treated the same for tax and FBAR purposes as the U.S. citizen. See the FBAR instructions that state that a U.S. citizen and resident is a U.S. person required to file the FBAR. The test of resident is under Title 26 USC 7701(b)(1)(A)(i) which says that a resident alien is a resident of the US if "Such individual is a lawful permanent resident of the United States at any time during such calendar year." I presume that that refers to green card status. Thus, as I understand it, green card aliens must file income tax returns and FBARs even for periods while they are outside the U.S.

    If all that is true, it would seem to me that logically the green card person should be treated the same as U.S. citizens in terms of the relief provision.

    Note that FAQ 52 refers to "taxpayer" which does not distinguish between a citizen and others who are U.S. taxpayers. Some of the examples that do refer to "citizen" do so in a context that it could apply only to a citizen rather than a U.S. taxpayer who is not a citizen (e.g., a foreign resident who is a U.S. person by birth).

    So, it would seem to me that a good position could be taken that if all the other requirements of FAQ 52 are met, the green card holder should qualify. However, I hope someone else with more experience in this area will speak up. I would appreciate learning also.

    And, thanks for your comments on the blog. I hope it is helpful to others as well.

    Jack Townsend

  14. Thanks Jack. Your reply is pretty much the only analysis of 52.3 on the web. I'll add some conjecture that might be helpful for other users:

    Yes, green card holders have to file FBARs, as you mention they're viewed as US residents for tax purposes. Pretty much anyone under USC 7701(b)(1)(A) has to file. To be eligible for 52.3, the requirements from the IRS FAQ are:

    (a) "The tax payer must reside in a foreign country"
    If you're a green card holder, you're a US resident for tax purposes. So what does it mean to "reside in a foreign country"? There are so many different definitions for resident that the US tax code uses. What if you fail the substantial presence test? What if you were in the US for a month or two on vacation? etc. etc. Most green card holders in this situation live abroad, work there, file taxes there, and use the green card to visit the states. Where do they "reside"?

    (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
    Basically, "You must be in compliance with your local tax code"

    (c) taxpayer has $10,000 or less of U.S. source income each year.
    Basically, "You really live abroad, and most of your income is from there"

    So 52.3(a) seems like a good option for the many green-card holders who are in a typical situation of: "My family is in the States, they got me a green card so I can come visit them without hassling with visas. I have to file this 1040 thing to maintain my green card. I never owe anything because the credit for the taxes I pay on my local income more than covers US taxes, so I view them largely as paperwork to maintain my green card and try to keep them simple. Oh shit, suddenly the US government is planning to take all my life savings even though I never owed them any tax but didn't file some form".

    The other hope for these folks was the new streamlined program. Unfortunately, the killer there is that "PEOPLE WHO HAVE FILED TAX RETURNS" are NOT eligible for the new streamlined process. All green card holders are REQUIRED to file tax forms to maintain their green cards, so they do, and which makes them ineligible.

    This puts folks who have filed tax returns and tried to be compliant (but no FBARS) on a worse footing than those who didn't bother to so at all, which is simply incomprehensible. Otherwise the streamlined process would be a viable option for immigrants in this condition.

    As Jack says, anyone with more insight, please comment!


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