Monday, August 1, 2011

Of Fear and Hostages: A Mid-Sight Editorial on The OVDI Program and Extortion (8/1/11)

I write tonight an editorial comment on the OVDI program (and the OVDP program as well). Hindsight, they say, is always better than foresight. When the IRS designed these programs, the IRS did not have the benefit of hindsight. Nor, of course, do I have the benefit of hindsight. I must address the program mid-sight, which is where we are.

My mid-sight view of the OVDI (and its predecessor OVDP) is that it has some very rough edges -- some basic unfairness issues that the IRS should move affirmatively to address and resolve. I doubt that the IRS will listen to me, but I offer my views anyway and hope that the IRS or Congress will listen -- not because this is my issue but because the concerns I address are the concerns of many people who are hurting because of the way the IRS is administering the program and because of fears as to the way the IRS will administer the program.

Let me start with a stark example.

Taxpayer A, an individual, diverted untaxed money offshore during the 1990s, let's say $100,000,000, on which he evaded $30,000,000 in U.S. tax (not considering the interest and penalties since). The money sat in a Swiss bank and earned reasonable return (at least reasonable compared to what the Swiss pirates would permit him to earn after they took their share of U.S. tax thievery).  In order to assure secrecy, Taxpayer A hid the Swiss bank account in layers of tax haven entities, having no purpose other than to hide the U.S. tax cheating and steal from the American people. The account and the entities continued into 2011 when Taxpayer A decided that, for a relatively small amount demanded by OVDI 2011 -- small relative to the aggregate amount of his cheating -- he could effectively launder everything with the blessings of the IRS under the OVDI. Taxpayer A had a number of enablers throughout the existence of the account and the entities. So Taxpayer A joins the OVDI, and he pays only (i) tax, accuracy related penalty, and interest on the tax and penalty for 2003 - 2009 and (ii) 25% of the highest amount in the account for the highest year from 2003 - 2009. To be sure, because the account was large and his cheating was large, the dollar cost is large, but it is small in comparison to his overall stealing from the U.S. taxpayers. He is more than willing to pay that to launder the money, get it back into the U.S. and laugh at the U.S. taxpayers as the suckers he has played them for.  He is home free.

Now, let us consider Taxpayer B, also an individual, who prior to 2006 was a citizen and resident of Country X. Taxpayer B has no obligations whatever to the U.S. prior to 2006. Taxpayer B earns money from his sweat labors in Country X and pays all applicable Country X taxes. He builds a nest egg of $200,000, all of which is deposited equally in 4 Country X accounts at different banks in the area in which he livevs and is fully tax-paid in Country X. In 2006, the taxpayer gets a green card and moves to the U.S., the land of opportunity as we and the world imagine the U.S. to be (at least we like to imagine the world imagines that). He loves his new country and wants to become a citizen. He goes to a tax preparer who may or may not have asked him about foreign accounts (probably didn't but that is shrouded in cultural differences); in Country X , foreign income is not subject to Country X tax and this is the mindset in which Taxpayer B views the world. During the years 2006 forward, Taxpayer B's nest egg earns a measly 1% net ($2,000 per year) upon which Taxpayer B pays Country X tax so that Taxpayer B's net U.S. tax is $50 per year. But, Taxpayer B does not report that the income, claim the Country X tax credit or pay the resulting $50 per year tax liability. Taxpayer B, whose culpability toward the U.S. tax system is far, far less than Taxpayer A's, has the same relative toll charge as Taxpayer A and, indeed, on a relative scale Taxpayer B's toll charge is far larger, because Taxpayer B was U.S. tax noncompliant for only a few years and in a relatively far smaller amount.

Why would anyone design a program that has that effect? I don’t understand it.  And, I think it is inconsistent with the very laws and intent of the laws the IRS is charged with administering.

First, let's see what those laws, as designed by Congress, would do with A who clearly intended to and did cheat the American people out of vast sums of revenue. As to the income tax, the law would create an unlimited statute of limitations for all years and would impose a 75% civil fraud penalty, with interest on both the tax and the civil fraud penalty. Further, as to the FBAR failure, at least for the open years (6 years), the law would impose a 50% penalty per year for the open years. Even if imposing the penalty for all years may create constitutional problems, imposing it for one or two years (100%) might not because of the egregious circumstances. See e.g., Bajakajian. So the IRS is giving up all that for the meager (a relative term) payments required of Taxpayer A under OVDI.

Now, look at what the IRS is extracting from Taxpayer B -- who on any relative scale is a taxpaying saint compared to B. The same "punishment." In these two situations, once the benchmark is set by Taxpayer A, Taxpayer's punishment does not fit the crime, if indeed there were any crime by Taxpayer B to start with.

It is true that the IRS offers -- at least facially -- a safety valve for relative innocent taxpayers to avoid the type of punishment visited on Taxpayer A. They can opt out of the program. The problem is that the IRS has done nothing to alleviate the legitimate concerns of these taxpayers who are more or less like Taxpayer B that they will be treated harshly in the uncertain penalty regime offered by audit on opting out. They are scared as to the IRS's fairness in administering audits on opt out. Like President Obama's yielding to the tea party extremists, they view themselves as having little choice but to yield to the IRS's extortionate program rather than risk the IRS's wrath on audit. I would like to think that their fears are not warranted; I would like to think that the IRS will administer the opt out audits fairly and treat taxpayers like Taxpayer B on a fair relative scale to the largesse that has been granted to Taxpayer A. But I can't assure taxpayers like Taxpayer B that the IRS will be fair. I have to tell them that I hope the IRS will be fair and as a citizen I want the IRS to be fair. But I can't guarantee them that they will be fair.

It is true that the opt out procedures are still in their early stages of being applied. So I don't even have anecdotal evidence that the IRS will be unfair. But, I think that the IRS could be a lot fairer if it started disseminating, perhaps through FAQs or examples, assurances to these people who deserve fairness that the IRS will be fair.

I am concerned that the IRS does not have any idea as to the damage it is doing among this group of people whose footfault was small on any relative scale and in many cases non-existent in terms of culpability (they really did not know they had income tax and FBAR reporting obligations). I urge the IRS and, if not the IRS, the Congress to have enough empathy to address the question of fairness in the program.

Correction as of 8/2/11 7:40am.:  Because of one comment below I changed Taxpayer B's original country from India to Country X.  Scenarios that are not materially different in terms of establishing Taxpayer A as the greater culprit vis-a-vis the U.S. tax system can be constructed with India and, I am sure, are encountered by practitioners regularly.  But, since I needed a crisp example, I just changed to generic a generic country, Country X.  Thanks for the comments.


  1. Thank you for this commentary, Jack. It gets even worse for long-term expats who have all or most of their assets abroad. They may have paid hight taxes abroad, but, because of oversight, their entire financial well-being is at stake even though their US tax burden after tax credits will be zero or ridiculously small amounts. Precisely the country that has been the driving force behind globalization has a set of laws that effectively criminalize (or cast a shadow of criminality over) the people who are the footsoldiers of our efforts to stay competitive in the world. It is schizophrenic.

  2. Good post, although I believe that the IRS does know the damage it is doing, and they either don't care, view less culpable immigrants as "collateral damage" in their quest to maximize revenue, or have their hands tied by the unreasonable tax laws that underpin this and similar programs.

    After a lengthy period of permanent residency in the US, I turned in my green card and moved to another country a few years ago. I could have taken out US citizenship, but did not. The trigger to move was the "exit tax". It signaled a future that would bring significant new difficulties and unfairness both for immigrants into the US and for US citizens living outside the US. It appears that future has now arrived. In spades.

    I am now sure I dodged a bullet by declining to take out US citizenship when I had the opportunity. As a non-US citizen with no connection to the US, I am insulated from this mess. I once fought tooth and nail with the INS to obtain a green card. Now I give thanks every day that I no longer have it and that I left the US when I did. What a turn-around from a few years ago.

  3. Jack,

    If they do not join OVDI and later are found by IRS with their noncomliance, taxpayer A will face criminal prosecution but taxpayer B will be less likely prosecuted and far much less likely be convicted.

    So there is not much benefit for taxpayer B to join OVDI if he is willing to take the risk for uncertain civil penalty.

  4. One correction here.

    Foreign income is most definitely taxable for Indian citizens and residents. And there is wealth tax as well on worldwide assets. For Indian residents who are 'of Indian origin' even if they are citizens of other countries, worldwide income is taxed and there is a wealth tax as well. [India doesn't tax its citizens when they are abroad, in that respect it differs from the US]. Until relatively recently, India had fairly strict exchange controls, so few Indian citizens were likely to have foreign accounts, and those that did would likely not have revealed them to India's IT department (tax evasion is unfortunately very common in India, and corruption in India's Revenue Service is rampant too).

  5. The FBAR law catches both dolphins and tuna. But in my opinion it is more likely to catch dolphins, since the tuna it was intended to catch, the big fish who have broken laws like money laundering, terrorism and criminal tax evasion, are not likely ever to comply with the FBAR requirements. When dealing with a bad law, then, law enforcement must show restraint and wisdom. But to be sure, law enforcement can always apply laws in a stupid and abusive manner.

    Your illustration shows that some, out of fear of being caught, will take advantage of the voluntary disclosure programs--but the programs affect them in the same way as it does the innocent dolphin who never had criminal intent. Thus, the law is bad, and the IRS application of it is worse. Therefore, it is incumbent upon lawmakers to realise this travesty of justice and to repeal the law. Many thousands of Americans abroad will renounced their US citizenship, because they have been caught in a net intended for terrorists, criminal tax evaders and money launderers. Their rights are being completely ignored--esp. the presumption of innocence. It is too late for me. Because of threats and intimidation from the IRS, I said enough is enough and have relinquished my citizenship. Perhaps it is not too late for others, but I have little hope that lawmakers will do anything about this stupid law. They are too busy spending money like drunken sailors.

    But as it is, I think the main reason that we haven't seem many thousands more renunciations because of FBAR is the long lines at the various consulates around the world which allow only a trickle of renunciations.

  6. To tj August 2, 2011 5:28 AM

    You say "So there is not much benefit for taxpayer B to join OVDI if he is willing to take the risk for uncertain civil penalty."

    That is, of course, the point I make in my earlier blog, To OVDI or not to OVDI - Part 2 (7/31/11)

  7. "But as it is, I think the main reason that we haven't seem many thousands more renunciations because of FBAR is the long lines at the various consulates around the world which allow only a trickle of renunciations. "

    You are likely correct, the vast majority of those lines being for visas (immigrant ot otherwise) :-).

  8. Jack,

    Most people I know (similar to taxpayer B) are not willing to join OVDI, they just close their accounts and hope it will go away as time goes by.

    I decided to join for the peace of mind. But I will regret if IRS goes too far to impose penalty on RRSP which should be treated differently.

    Rough justice is easy and fast to process but it will certainly create pain to taxpayers -- and in return, it will also hurt US national interest/security if this rough justice causes more people to hate this gov.

  9. "You are likely correct, the vast majority of those lines being for visas (immigrant ot otherwise) :-)." I'm not sure what you mean. I have heard that it takes over a year to get an appointment to renounce at certain US consulates (e.g., Berlin). I think that there are more people who wish to renounce than the State Department can handle.

  10. Yes there are long lines to enter the US, and long lines to leave the US. But the ones entering are poor and the ones leaving are rich. Economic arguments aside, the ones entering do not have a relationship with the IRS, the ones leaving have a long and involved relationship with the IRS and other tax authorities, simply because they are rich.

    I am not sure though that was the mandate of the IRS: immigration/emigration policy.

    And a second point, the penalty for renouncing US citizenship: forbidden from entering the US for 10 years, not even on a tourist visa like everyone else. Spite from the US Congress against ex-citizens. It would be funny if it weren't so crude.

  11. Do you think the person with unreported offshore account can escape from IRS radar after he renounces his US citizenship?

  12. The penalty for renouncing US citizenship is the exit tax if one is a "covered expatriate". Assuming that one is in compliance with US laws, one can travel to the US as a tourist immediately after expatriation. Of course, if one declares that one is giving up one's citizenship for tax reasons, all bets are off.

  13. "Assuming that one is in compliance with US laws, one can travel to the US as a tourist immediately after expatriation."

    But in some cases only by relying on selective non-enforcement of a statute. The current exit tax regime contains a non-rebuttable presumption of renunciation for tax purposes for so-called "covered expats". And from

    "A law known as the Reed Amendment makes certain expatriates inadmissible to the US if the Attorney General (Immigration Enforcement) determines that the expatriation was principally tax motivated. “Inadmissibility” is an immigration law concept that basically bars anyone who falls within that category from any US immigration benefit – notably entry at a US airport. To date, no one has been barred from entry and this law enacted in 1996 has never been enforced but remains on the books."

    Yet one more bad tax law to add to the growing pile there, then.

  14. "Do you think the person with unreported offshore account can escape from IRS radar after he renounces his US citizenship?"

    In practical terms, probably yes. Assuming no structures or other egregious tax evasion, a person whose taxes are clean but with only an FBAR issue is likely home free. Depending on their situation the statue of limitations may eventually wipe the slate clean.

    Even with a level of actual tax evasion, provided this person was not dumb enough to leave any assets in the US when they left there's little the IRS can do unless the person voluntarily re-enters the US. One would have to be a big fish indeed to warrant extradition. I suppose "extraordinary rendition" is a possibility, but that seems inconceivable. (On the other hand, a few years ago it was equally inconceivable that the US govt would engage in kidnapping and torture, but we now know that it both happens and that politicians have sold it to a gullible populace as somehow acceptable.)

  15. I would not think that non-US citizens are required to pay US taxes unless they reside in the US or invest in US securities, bonds, and are subject to withholding.

    I have a comment on Jack's hypothetical situation described in the editorial essay. It has to do with the amount of money involved, and the implicit power of that money.

    $100 million versus $200,000 (in offshore funds).

    Someone with even one or two million can live just about anywhere in the world and practice his profession/business just about anywhere.

    I do not see someone paying the IRS $30 million (of it) for the privilege of continuing to live in the US. Unless one was elderly, with nothing to live for, or too old to move, make a life change, etc.

    Furthermore, someone with that much money ($100 million) would likely hire the best offshore lawyers to keep it hidden, meaning it would not be discovered, and if it is discovered, it would be quickly re-hidden, and he would have to option to disappear quickly, to one of his international vacation homes.

    Someone with just $200,000 dollars does not have as many resources, to move, to hide the money, or as much to lose if penalized, and would likely comply with the IRS if caught.

    And for the IRS it is not good publicity to be prosecuting "small fish".

    From what I see of the conviction list, the range seems to be between $800,000 to $2 million (in offshore funds). I did not see any "small fish", or "whales". And I suspect this is the reason. Small amounts are not worth their while (plus the bad publicity), big whales can't be caught, (too smart or too fast)...

    Furthermore, I was alarmed to see many elderly people on the conviction list (even octogenarians), and children and women (heirs) (who happen to have inherited the accounts). It confirms to me that only mid-range wealthy people are being prosecuted and only those who do not have much fight in them.

  16. Jack can probably confirm this, but statutes of limitations are suspended when someone leaves the US. So statutes of limitations do NOT expire on leaving the US.

    There were a few big fish in the net -- the hotel owners who were criminally prosecuted were moderately large. The biggest fish was the Russian Olenicoff, but he was not prosecuted (unclear why, but apparently the informant held his name back).

    It may be that UBS did not have many really wealthy customers ($100 m + ). Those may have gone to smaller banks with no US presence.

  17. On the statute of limitations issue, here is a cut and paste from my Federal Tax Crimes book (note FBAR violations would be subject to the rule in Title 18):

    • Tolling By Absence from Country or Fugitive Status.
    • Tax Crimes & Conspiracies. For the tax crimes created in the Internal Revenue Code and for conspiracies related to tax – both offense conspiracies and Klein defraud conspiracies – where the statute of limitations is determined in § 6531, the statute is tolled while the defendant is outside the United States or a fugitive from justice within the meaning of 18 U.S.C. § 3290. Tolling is in the disjunctive.
    • Absence. The defendant’s mere absence from the United States tolls the statute. For example, a defendant’s eleven-day health and pleasure trip to Switzerland tolled the statute of limitations under 26 U.S.C. § 6531.
    • Fugitive. Section 3290 defines fugitive as “any person fleeing from justice.” The “majority rule” is that “intent to avoid arrest or prosecution must be proved” for § 3290's fugitive definition to apply; the minority rule is that mere absence from the jurisdiction, regardless of intent, is sufficient. As noted, of course, the disjunctive provision in § 6531 tolls the statute upon mere absence from the country regardless of fugitive status under § 3290.
    • For Other Crimes. For other tax related Title 18 crimes where the statute of limitations is determined in Title 18 (e.g., false statements to an agent) rather than § 6531, the statute of limitations is tolled only if the defendant is a fugitive as defined in § 3290. As noted, intent for the absence is critical under the majority rule.

  18. "Jack can probably confirm this, but statutes of limitations are suspended when someone leaves the US..."

    Suppose the following. J is a citizen of European country C. He works on a temporary assignment for some months in the US before returning permanently to C, and meets the substantial presence test for one year only. His US taxes for that year are handled by an accountant in C who is not familiar with the FBAR rules, but otherwise his taxes for that year are correct and he's fully compliant.

    J's entire net worth - retirement accounts, children's college saving schemes, house down payment - is all in country C. As a consequence of failing to fill out one piece of paperwork to the US, half of J's entire net worth is at risk. Forever. It could at any point be claimed by what is to J a foreign nation. If the US assesses the FBAR penalty, J loses half his house down payment and may have to settle for renting forever. To access his retirement accounts early J must pay 50% in tax to country C, and the remaining 50% to the US as the FBAR penalty, meaning his entire retirement saving over a complete lifetime is wiped out. J's children's college savings plans are severely curtailed, and his children can no longer attend college.

    Life-destroying penalties then, for multiple people, for a paperwork footfault. And nobody in congress or in the mainstream media seems to think there's anything at all wrong with this picture? Imagine the uproar if another country demanded the same of US citizens.

    What a weird, insular, xenophobic and authoritarian country the US has become. I can't see how this can end well. The rosiest scenario I can envisage is that the US will find itself no longer able to attract top talent from around the globe. It may also lose the top talent it has already attracted.

  19. To Anonymous August 5, 2011 2:36 PM

    It seems that you are in great pain, but I think that, at least in part, it is because you are misinformed as to the genesis and scope of the problem. I suggest that you consult a qualified attorney. If you will email me and state your location, I will find a qualified attorney nearby (at least assuming you are in the U.S.).



  20. Jack: Many of us are in great pain. But my view is similar to Anonymous August 5, only from the standpoint of an American citizen abroad who has recently been forced to renounce citizenship because of this insanity. Thanks for your blog, and thank you for your recent comment above on the statute of limitations. If I understand correctly, if a person is not under indictment, they are not a fugitive, and the FBAR requirements will expire normally at the end of 6 years, even if he/she is living outside the USA.

  21. Jack,
    If OVDI was not really intended for the "small fish" (taxpayer B), could it be that quiet disclosure is still an option for such people? Is there any anecdotal evidence on what type of quiet disclosures are being picked up for audits? It would seem logical that IRS audits the whales, not the minnows.

  22. To Anonymous August 5, 2011 9:49 PM

    I am aware of no anecdotal evidence that any quiet disclosures are not picked up for audit. If I were designing the tax enforcement system (I am not), I would have some materiality standard for forcing quiet disclosures into either audits or the OVDI (at least for processing). Except in narrow categories (hard to qualify) there are no materiality standards in the voluntary disclosure program.

    Given the now-recognized gross distortions and injustices that have become apparent in the present program as currently implemented, I would like to think that the IRS could do a better design today to put the onus on the whales and not the minnows. But the IRS did not have hindsight or foreknowledge of the real damage the program has wrought on good people.

    My only hope is that the IRS will exercise some grace on those "minnows" who were too fearful to enter the program (rightly so for many of them). The problem with that hope is that the program does not offer grace to the people who come forward and join the program. How can the IRS in good faith to them be more lenient on those who did not join the program?

    But, not only did I not design the program or the audits, I do not administer them either. Time will tell whether this country sells its soul to chace a relative pittance at the cost of injustice. That is a poor bargain.

    Jack Townsend

  23. "But the IRS did not have hindsight or foreknowledge of the real damage the program has wrought on good people."

    While I thank you for being a sympathetic voice, I feel this lets the IRS off far too lightly. I do not work for the IRS or treasury, yet I predicted it. No, the IRS knew exactly the effect its program would have on everyone, but went ahead anyway.

    I don't know why they did, but they are smart people and cannot possibly have been ignorant of the effects their program would have. Remember that the IRS does have hindsight, from experience of the first program. Apparently they learned only that if something is counterproductive then the only remedy is more of the same.

  24. Jack wrote concerning quiet disclosure vs. voluntary disclosure programs: "My only hope is that the IRS will exercise some grace on those "minnows" who were too fearful to enter the program (rightly so for many of them). The problem with that hope is that the program does not offer grace to the people who come forward and join the program. How can the IRS in good faith to them be more lenient on those who did not join the program?"

    Jack, very well said. That really hits at the core of the problem. If all foreign account holders who didn't file FBARs are treated as having committed a crime, then some of us who knew nothing about FBAR have no intention of cooperating and thus waiving our 5th amendment rights in the case of the OVDI or our 4th amendment rights in the case of quiet FBAR filings.

    The United States has already sold its soul--it lives parasitically off the rest of the world by taking advantage of its power to print the world's reserve currency (so Putin said this last week). For some of us who live abroad, there is no tax gap. We don't owe anything because we pay it where we live at a higher rate. Millions of us live in higher tax jurisdictions. So the IRS doesn't need our bank information--it is a fishing expedition--but as the first cases of OVDI have shown, it has become clear that it is not a catch and release campaign, but a catch, kill and eat campaign. So now, in default tax compliance because of where I live, my wealth and my spouse's wealth (who is not even an American--and who earned most of it as the higher wage earner) is part of a big money grab by the IRS.

    Since the IRS has acted in bad faith, the only way to make this right is if there is a general amnesty to all foreign account holders who have either (1) lived abroad and opened the accounts for the purpose of conducting their lives overseas; (2) or have emigrated to the US or have come to the US on work visas and have accounts in the home country--but were ignorant of the FBAR requirements. And I mean general amnesty in the form of a presidential pardon, like Carter did for the Viet Nam draft dodgers.

  25. "How can the IRS in good faith to them be more lenient on those who did not join the program?"

    I have what I think is a fairly sympathetic case (immigrant, NO funds -- ZERO transferred from the US, all money in original country, small account), but I joined OVDI and may opt out. I'm on the cusp of 75K (just 78K), so the jump at that point is very irritating.

    this may be a dog in the manger attitude, but I would strongly resent letting people similarly situated who did not join OVDI off with quiet disclosure. No, I'm not suggesting they should be subjected to full FBAR penalties, but they should face a choice of OVDI like penalty or opt out/full audit. If the IRS were to reduce OVDI penalty (especially the 75K cut-off) for evveryone, including OVDP 2009 people, quiets, I would be fine. But I'm NOT fine with letting quiets off with a higher penalty than people who came in. And I don't think (excepting recent arrivals) that many people were that innocent of filing requirements after 2009 anyway. I do know of people who ignored requirements (not big time evaders, small accounts) on the grounds that the IRS was after Swizterland, they would never target my original home country.

  26. You know, as a Minnow, ours was a Hobson Choice as to whether or not to join the OVDP, or to silently disclose and play the audit lottery which was really just a risk assessment decision. Some like me, are risk adverse, and some others are willing to take a bigger risk for a bigger gain that a silent disclosure might produce. Can't hold that against anyone any more than I can be upset if someone makes lots of money buying gold, while I kept my money in Treasuries.

    We choose to disclose, figuring that once we were aware of our failures, to do otherwise, was a real "willful" decision and as such would have subjected us to a worse fate if audited. It seemed the right thing to do, and we hoped that logic would prevail and some discretion would in the end be applied that would come up with more reasonable penalties for our relatively minor failures as compared to the Whales they were supposedly targeting.

    Alas, that was not to be. A combination of design flaws of the program in the first place and then the rigidity of the IRS bureaucratic ways set in, to assure continued stupidity and inability to adjust to the facts of a situation. Even though IRS audit agents can willingly admit, that we were not the target of the program, they can do nothing to mitigate the impacts of their stupid program other than tell us to "Opt Out" and take your chances. Given how broadly the IRS is now willing assert "willfulness" to crank up the penalty possibilities outside the OVDP, this whole thing has been come a horror show for us. But I was risk adverse, and this is what I got.

    If those that chose to go the silent "more risky" route, and if they escape the fate that befell us by joining the OVDP, I can't begrudge or resent them their success. We were just the unfortunate ones to think that some measure of sanity would prevail inside the system. How wrong we were. The inability of the IRS to draw distinctions to separate Whales and Minnows in their penalty process has been the major fault, and even their minor technical adjustments in the 2011 OVDI don't address the key failures.

    Ultimately, they are not interested in fairness, or measured justice or even future compliance. They don't care about all the negative and unforeseen consequences. All they are interested in is collecting additional revenues from those in society who don't have special interest lobbies to protect them. The Republicans won't allow any minor tax increases for their RICH constituency, so might as well take it from the middle class fools. That is easy pickings.

    If you think this is bad, wait until FATCA kicks in and no foreign bank in your country of residence wants you for a customer. More nightmares are coming from the Empire.

  27. My parents are US citizens/Australian permanent residents of 42 years and have not files a US tax return in all that time, are both in their late 80's and receiving small US social security pensions. They have savings over $10k as well as term deposits, and have never heard of FBAR. I'm not about to tell them as it might cause distress. Am I to assume people like them will be targeted and have their social security payments cut off?

  28. "Am I to assume people like them will be targeted and have their social security payments cut off? "

    No legal backing for this position, but -- I would say -- Not bloody likely, mate

  29. Considering myself to enter or not the OVDI program, and with a background close to the case B one in this blog, I feel that the OVID/FBAR penalty is completely unfair for alien or ex-aien people.
    I like your example, and I think that FBAR penalty is in that regard discriminatory against alien residents or "new" citizens.

    Case A, a US citizen having unreported offshore incomes, is indeed offered a great deal with 25% penalty on assets built with past hidden incomes (so much less than the 35% highest federal income bracket), and tax income (+ acceptable accuracy and interest) on the last 8 years.
    Case C (new) case), a mid-income US citizen, living in the US, and very unlikely to have offshore accounts - with past non reported incomes, his liability would be tax income + accuracy + interests, fair as well
    Case B, an alien resident, same income range as case B, but because of his alien origins, very likely to own offshore accounts.

    For B, if he is in the grey area where any FBAR or foreign income were not fully reported, he is subject to a tax income penalty, similar to what C is exposed, but also to a failure to file FBAR tax of 25% of his assets, acquired in many cases before he became a US resident or citizen.
    If he opts out, there is possibility to be subject to a even higher tax of $10K by account and per year.

    This is simply outrageous, and I wonder why not more people in case B are complaining, or leaving this country.
    I'd like to quote part of the Fifth: ...nor shall any person … be deprived of -- property, without due process of law.

  30. "This is simply outrageous, and I wonder why not more people in case B are complaining, or leaving this country."

    The first of these will appear futile, though you can see some of the overspill of frustration on sites like this one. These folk are disenfranchised by definition; they must pay US tax but cannot vote. They will (correctly) see complaining as not only tilting at windmills but at its worst potentially damaging -- if anonymous it has no teeth, and if not anonymous it opens the complainant up to potential massive problems with the IRS.

    Given this, the second will probably appeal greatly. The govt does not publish statistics on abandonment of US residence by aliens, but it's likely many are simply leaving rather than trying to deal with the mess the US govt has created for them. And many potential new immigrants into the US may now be going elsewhere instead.

  31. FM,
    Very good summarization of the taxpayer B situation. Many of us are feeling that pain and complaining, but the important thing is how can our complaints reach the right ears for any change to be effected.. The two avenues I see are the TAS and the Indian American groups that have made pleas in this regard (Jack's blog post in July). Anyone in this situation should reach out to these groups. I did not see anything specific for taxpayer B situation in the NYSB letter. If anyone knows of any other groups voicing these concerns, please chime in. Only collectively do we stand a chance to have our voices and complaints heard and any possible changes to address this.

    Am still hopeful.....

  32. I am also hoping that complaining can bring some changes but it is quite difficult to get coordinated and not be targeted by IRS

    I have seen the blog about Indian groups pushing for relief and since they request that the 25% penalty be eliminated on "law abiding" citizens I would support this.
    Not sure if we can be considered "law abiding" when not reporting FBAR or foreign incomes, I would instead remove from the penalty caculation any asset owned prior to moving to the US or significantly reduce the 25% and apply this retroactively to the older OVDP program.

    I had also seen a petition on, but I can't see it today, their pleas were different, perhaps they deleted it.

    We can involve other influential groups or rights representatives, Tax advocate is one of them, but as well US congressmen and European Union representatives. I am starting doing it.

    I don't see why UE countries should cooperate under Tax treaty when there is no reciprocity and such an unfair treatment of their citizens

  33. Most of the recommendations by experts and others are around either joining or opting out after joining. Is there no merit for a middle ground like "quiet disclosure" for taxpayr "B"? If he wants to come clean, it is in everyone interest that he be allowed to amend and pay back taxes without joining the program. I understand quiet disclore is despised but it is probably the only recourse for this guy but I dont see anyone recommending that approach.

  34. Write letters to your congressman/senator that all citizens and green card holders should be granted a blanket amnesty (no civil or criminal penalties) if their balances are less than a million and they agree to bring back the funds into the US by say December 31, 2011 that should bring in much needed funds back here. Once the money is back in our economy do we need to go after these little fish or should the IRS agents be focusing on big time tax evaders? What is more important?

    IRS is on this fishing expedition but what about people who really wanted to hide money and did so using a million other banks anywhere in the world that IRS cannot serve John Doe summons to. So basically all those people, some with the intention of hiding their money, are still okay. It is the average IT Professional/professor/doctor of Indian origin who opened an account with HSBC India who is on the hook.
    There are people who believe that HSBC is not a foreign bank since it has offices in the US.
    A lot of accounts in the range of $100-200K were opened to help the immigrant's family back home. The disclosure rules were definitely not well publicized. In fact, if it is so important then why does the FBAR not need to be filed with the 1040. IRS has lulled people in to a safety zone in error...

    We have a big problem with undocumented workers, and the fact that they are a drag on our resources but the IRS in their wisdom is penalizing citizens, legal aliens and immigrants who is some cases have paid hundreds of thousands and even millions in taxes over their lifetime.

    Write to your congressman. Please.

  35. More need to contact the TAS and write Shulman directly. TAS is sympathetic, but in the end they report to Shulman, so have to keep that in mind. Shulman apparently has a tin ear, and the deafness that implies, but if he gets enough letters he has to take notice, or not! "Not" has been the reaction so far, but I keep being hopeful.

    And, sorry to say, forget about your Congressman. I have tried that route multiple times. All they do is refer you to the TAS, so might as well go their first. They are very professional and take their advocacy role seriously. They listen, and if your Facts are good enough, they might be able to assist. Don't hesitate.

  36. Should I do OVDI if all I had missed was $600 in interest gains from offshore.

  37. "quiet disclosure" for foreign accounts seems to be an oxymoron. When old FBARs arrive, IRS knows immediatedly that you are doing a disclosure. Nothing quiet about it.

    Its not like a normal case, where you can send in an amended return and hope IRS doesn't notice it.

  38. Thanks for your blog and discussion. It is depressing but helpful.

    I am a professional who has lived in Canada for 20 years, and became a Canadian citizen 16 years ago. I have not filed US tax returns for 15 years. My US passport expired last year, and I have not renewed it yet. I just learned about OVID tonight on the Canadian news, am very upset, and am trying to decide what to do.

    I am virtually positive I owe no US taxes, so there should be no penalties there. My current income is about C$110,000, and accounts subject to fine total about $250,000 plus pension (not sure if they would count that) If I go the OVID route, it looks like I would probably get the penalty of 5% of all my savings (which are all from after tax Canadian earnings). But I suppose there is no guarantee of a 5% penalty. After all, I filed US tax returns for a number of years after moving to Canada (but never owed any taxes), so couldn't they argue that my subsequent failure to file was willful?

    Is renouncing my citizenship an option at this point? I don't want to do that, but am prepared to do so. What if I just ignore this? I have no plans to ever move back to the US, but who knows what the future holds. I have family in the US, and visit once or twice per year. Can I justify unjust OVID fines given minimal future benefits of US citizenship?

    I do have an IRA in the US from employment in the US between 1990 and 1992 (about $50,000). I also am designated executor for my elderly parents who live in the US, so at some point in the not too distant future I will need to deal with that. Future social security would be minimal.

  39. Tiny minnow

    You should be eligible for the 5% penalty, definitely in OVDI. You seem to meet all conditions required for meeting the 5% penalty. You may even be able to get Canadian pension account removed from 5% base.

  40. 'It is the average IT Professional/professor/doctor of Indian origin who opened an account with HSBC India who is on the hook.'

    The ones with accounts in HSBC India who've been prosecuted so far are the IT guy Daihake and the Indian doctor with $5-7M in HSBC India. And there was one Indian origin woman as well with 7M or something in HSBC India.

  41. But 5% is a shameful penalty. Im am not sheltering US taxes, and have paid all taxes owing. A potential penalty of 5% of my savings for not filing evidence to the IRS that I am law abiding is unjust. It is estimated that there may be a million like me in Canada, so it would seem improbable that we can all become part of a massive IRS inquisition.

    I find the discussion at the blog below an interesting contrast to this one, and it would be interesting to get perspectives from those participating in this blog. The general consensus is that those with nothing to hide should just file six years of returns and FBARs. This approach is supported by IRS correspondence on the first page.

  42. TinyMinnow,

    I looked at the page you cite and I see one quote there.

    "The IRS has limited resources to pursue this sort of thing and they're normally not going to go after someone for not filing if there are no back taxes to be gleaned from the exercise. This especially holds true if the taxpayer involved is an overseas resident."

    The first part is mistaken. Even if the IRS cannot get back taxes, they can get FBAR penalties and that might make it worth their while to go after someone who owes minimal taxes. The 2nd part is probably correct, in that the IRS wouldn't go after an overseas resident unless really large sums are involved.

    The rest of the board is largely guesswork. In the past, IRS would let people off (even with large accounts) if they just filed quietly. Who knows what they will do now ? No one knows. And what 'hiding' income means is probably unclear too. Even people who are not big time tax cheats, may have some tax due on outside income.

    It all probably depends on individual situation. If someone owes no tax at all owing to tax treaties (but aren't Canadian rates a little lower than American rates ?), they're probably OK. If someone's been living abroad for years or decades in Canada and hasn't filed taxes, they're probably better off than someone who filed and wrongly said on tax return that they did not have an account.

    For your personal case, if you think 5% is too much, and you don't really intend to live in the US again, no reason to join OVDI I think. Maybe you could file past returns and FBARs, but of course that brings you to IRS attention.

  43. Jack - I want to bring up another hypotetical e.g. whose case is probably like Taxpayer B but even more innocent. Let's say someone had offshore accounts that earned a paltry 100$ interest every year that was unreported but also had a home that he was living in prior to coming to US that he then rented that earned $5000 rental income per year that was unreported he/she will end up paying 25% of the home's value right ? In such a case would you suggest he join OVDI with a huge penalty or opt out or would you think he just file his FBARs for prior years with a note saying that his underreporting his minimal or should he just wait and get compliant next year or file amendments next year. The OVDI would be too harsh for such a case, dont you think ?

  44. anon -- August 17, 2011 3:24 PM

    I'm not entirely sure that not reporting $5000 in rental income makes someone "even more innocent" than taxpayer B.

  45. also had a home

    AFAIK, real estate does not go on the FBAR.

    Real estate might go on the new IRS form for foreign assets next year.

  46. Tinyminnow -

    Contact a tax attorney that knows about "probable cause" and will try to get you out of it without ANY PENALTY. I'm no attorney, but I can refer you to one if you like. The attorney + accountant fees are penalty enough!

  47. "Contact a tax attorney that knows about "probable cause" and will try to get you out of it without ANY PENALTY."

    I assume you mean 'reasonable cause'. The IRS seems to be pretty strict about 'reasonable cause', so I question whether its possible to get off without ANY PENALTY. Maybe if NO ($0) tax due.

  48. I filed my paperwork in early 2010 for tax year 2004 through 2009. Still not done as I don't agree with my IRS auditor on the calculations. We have now - yet again, passed the consent period and she sent me a set of consent forms to sign to extend the time period. What if I decide not to sign the consent forms? What's the impact on years 2006 and before (passed statute of limitation) and impact on years 2007 through 2009 (not passed the statute of limitation)?

    Can they force me out of the OVDI program? Can they create any new or additional fees or penalties for years 2007 to 2009? Can I get out of any additional tax and penalty liabilities for years 2004, 2005 & 2006?


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