Friday, December 9, 2011

IRS Guidance on U.S. Persons with Foreign Assets and, Coincidentally, Quiet Disclosures on FBAR Delinquencies (12/9/11)

Yesterday, I posted on the News and Rumors page a new IRS web page (or newly revised web page) that provides a fair, succinct summary of obligations for foreign assets, including foreign financial accounts.  The web page is titled U.S. Citizens or Dual Citizens Residing Outside the U.S. (dated 12/7/11), here.  I think, at least on a go-forward basis, this page should be reviewed by all U.S. citizens and non-citizen U.S. persons with offshore assets.

In brief, the page covers (i) the income tax return filing obligations (including the new foreign asset Form 8938 for income tax returns beginning in 2012)  and (ii) the FBAR filing obligations.  The page also summarizes relief from penalties that might apply for income tax underreporting and underpayment and for failure to file FBARs.  It is a good summary.  It is particularly good at providing a fair sense of when the taxpayer may have reasonable cause for income tax and FBAR deficiencies.  This is not definitive advice as to when the reasonable cause exception may apply in a specific case, but for the relatively uninitiated, it is a good starting point.

The FBAR discussion is, in my judgment, incomplete.  It says that a U.S. citizen "may be required to report your interest in certain foreign financial accounts" on the FBAR.  U.S. citizens (and indeed non-U.S. citizens required to file an FBAR) should remember that it is not just a beneficial or title ownership interest that must be disclosed but also signatory and other authority over the account beneficially owned by another person.

Although the page is specifically addressed to U.S. citizens (dual or otherwise) living outside the U.S., the matters covered also apply to U.S. citizens living in the U.S. and non-citizen U.S. persons (e.g., U.S. resident aliens) who own foreign assets (including foreign financial accounts) or, as to the FBAR, have signatory or other authority over foreign financial accounts.

Now, to a point that might particularly interest readers of this blog,  The Fact Sheet does offer some fairly cryptic guidance as to what to do about the past.

As to problems on prior year income tax returns, the page only says "Generally, you only need to file returns going back six years."  Two issues:  First, the word "need" might suggest some type of obligation on the taxpayer's part.  There is no obligation to file an amended return.  There are prudential reasons to do so.  An amended return will usually be a "qualified amended return" ("QAR") which knocks out all penalties except in the case of fraud.  Second, the statement does not address the noisy versus quiet disclosure issue that has raged among taxpayers and practitioners.  A noisy disclosure is indicated where the taxpayer has risk of criminal prosecution, otherwise a quiet disclosure seems to be the order of the day.  The Fact Sheet does not suggest that any reasonable cause statement be attached and, indeed, in those situations where there could be reasonable cause, the amended return will avoid penalty anyway as a QAR.

As to FBARs for prior years that were not filed, the page says:
If you learn you were required to file FBARs for earlier years, you should file the delinquent FBARs and attach a statement explaining why they are filed late.  You do not need to file FBARs that were due more than six years ago, since the statute of limitations for assessing FBAR penalties is six years from the due date of the FBAR.  As discussed below, no penalty will be asserted if IRS determines that the late filings were due to reasonable cause.  Keep copies, for your record, of what you send.
In other words, for FBARs, the IRS is sanctioning quiet disclosures for FBARs at least for those who can articulate a reasonable cause defense.  This taxpayer does not have to go shove his face in front of CI, but if there is real criminal and criminal prosecution exposure, this taxpayer might want to be very noisy.  If one is going to go the quiet route of sending in delinquent FBARs, I suggest that they not become too exuberant in articulating the basis for reasonable cause.  Criminal penalties could apply if inaccurate facts are stated, and, perhaps even if there are no inaccurate facts but the facts were put together in a way intended to mislead.

Also, the quoted statement seems to address a situation where the taxpayer was not aware of the obligation in the earlier years but now finds that he or she was obligated to file.  If he or she really did not know of the obligation, then that person has no criminal exposure because the crime requires "willfulness," which is a specific intent crime.  (OK, I know that a jury can convict on belief of willfulness even where, in fact, the defendant had no willfulness; that is a collateral cost of a system permitting convictions where less than certainty of the elements exists; I often tell my clients that, for willfulness crimes, you can be convicted even though you know you did not have the required willfulness but, for whatever reason, the jury thinks you did.)

Finally, what should the person intentionally failed to file FBARs in earlier years do?  Obviously, that person would be at some risk (hard to quantify) in attempting a reasonable cause statement that would be at best misleading.  The person could just send in delinquent FBARsFBAR after the filing deadline has passed.  The crime was committed when the FBAR was not filed timely.  Filing a delinquent FBAR will not wipe out the crime.  Filing the delinquent FBAR might qualify as some type of voluntary disclosure or create risk to the Government in attempting to prosecute, but that is only a strategic reason to file delinquent FBARs.  I guess the way I could say that is that, if a client who had failed to file prior year FBARs, could I advise him that he commits a new criminal act by failing to file the delinquent FBARs?  I don't think I could.  The crime has already been committed and all filing delinquent FBARs can do is to mitigate the damage.  Finally, these taxpayers could do a noisy disclosure and at least avoid criminal prosecution.

57 comments:

  1. Insightful stuff Jack, but I don't think the FS goes so far as to recommend "quiet" disclosure.

    Admittedly, neither "quiet" nor "noisy" disclosure is a term of art. In my mind a “quiet” disclosure is along the lines of what was said in FAQ 15 of the OVDI:

    “The IRS is aware that some taxpayers have attempted so-called “quiet” disclosures by filing amended returns and paying any related tax and interest without otherwise notifying the IRS.”

    The FS encourages taxpayers to file their delinquent returns and make their reasonable cause argument. In doing so I think the taxpayer falls outside of the “quiet disclosure” definition in the FAQ.

    So, I think the FS is (at least tacitly) recommending something between a FAQ 15 “quiet disclosure” and a Voluntary Disclosure that involves CI.

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  2. Jack

    'Factors that might weigh in favor of a determination that an FBAR violation was due to reasonable cause include

    ..
    there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and that there was no tax deficiency (or there was a tax deficiency but the amount was de minimis) related to the unreported foreign account. There may be factors in addition to those listed that weigh in favor of a determination that a violation was due to reasonable cause. No single factor is determinative.'

    Would not ticking the Schedule B question asking about foreign accounts be considered an

    'indication of efforts taken to intentionally conceal the reporting of income or assets,'

    or would it require something far more like the use of entities etc. ?

    Also, what amount could be considered de minimis ? would < 1% of taxpayers liability for a year be considered de minimis ?

    Also, one more comment about delinquent FBARs -- even for people who face no realistic risk of criminal prosecution, the IRS seems to be saying in this note that if delinquent FBARs are not filed, then 'reasonable cause' will not be expected if the person is audited (i.e. for compliance going forward) -- and the person will face at least non willful penalties.

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  3. To Anonymous 12/19/11 1:55 PM:

    Not ticking the Schedule B question or, even worse, answering No might be viewed by the IRS as cutting against reasonable cause. But I think the IRS will consider other reasonable cause factors before making a final determination. It is all about the power of persuasion.

    But, I do not think the IRS will view lack of entities as reasonable cause. Again, all of the relevant facts must be marshaled and presented. (Maybe adding some tasty irrelevant facts as well to spice things up.)

    De minimis is like pornography. You will know it when you see it, but attempts to define it will not be fruitful. It depends upon a lot of facts and circumstances. Now, if the IRS chose to offer some safe harbor such as the <1%, then that would work, but I don't think you will see such fine-tuning in the concept of de minimis.

    As to your final comment, reasonable cause is reasonable cause whether you present reasonable cause on a delinquent FBAR or to the agent upon an audit about whether you should have filed an FBAR. I don't think the IRS is suggesting that a more lenient reasonable standard that is applied if the taxpayer files delinquent FBARs rather than waiting to raise reasonable when and if the IRS comes to audit. In this environment, it may be better to wait for the audit which may never come. Still, if the taxpayer does not like audits or wants to minimize the risk of audits, he or she might file the delinquent FBAR with the reasonable cause statement. That filing may trigger an audit and then, if the IRS disagrees on reasonable cause, it could be messy. Why not just wait to see if the IRS cares enough or knows enough to come calling?

    In all events, a key step is to get right and do right from this day forward.

    Jack Townsend

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  4. To Roy Berg @ December 9 1:55 pm.

    Roy, perhaps it is semantics. To me, noisy disclosure is putting the taxpayer in front of an IRS CI agent - mano a mano. Just sending stuff into the service center, even with crafted mitigation disclosures, to me, is not a noisy disclosure.

    Now it is true that the IRS had mitigated its distaste for quiet disclosures where the taxpayer states prominently in the communication of the amended return that the amended return is intended to be a qualifying voluntary disclosure. But I think a timely and complete amended return, with or without some explanation, is a voluntary disclosure sufficient to mitigate the risk of criminal prosecution. (This might not be true in atypical circumstances such as taxpayers who are drug dealers or terrorists.)

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  5. Jack,

    I read this new IRS guideline and your comments with great interest. Of course, the immediate thought that came to mind was this is about 5 years too late!!

    I know it is easy to arm chair quarterback, as they say, but if your objective is compliance, and if you are trying to reach as many people as possible, then something like this should have been created day one that the IRS was delegated FBAR compliance as part of its tax enforcement mandate.

    I immediately sent the link to a close Chinese friend who has just got her US citizenship. I suggested that she pass around copies at her swearing in ceremony.

    Setting aside the argument as to whether or not the FBAR and Citizenship taxation statutes should exist in the first place, here are some recommendations I have Commissioner Shulman.

    1. Send this new IRS guidance out with the next mass mailing you do. Include it in the 1040 tax packages each year, starting with the 2012 tax preparation season Now, with such an overt effort, notice is really served that the IRS is taking this “offshore stuff” seriously. Do not just leave it to the average immigrant or Expat or homeland citizen who owns something “offshore” to search the IRS web site and consider that sufficient notification. Maybe that is fine for most minor tax changes, but when you are involved in major new tax enforcement effort as you have been doing the last 3 years, be proactive for once in your communication. Don’t be a minimalist here, and don’t just rely on fear from DOJ enforcement actions and associated press attention.

    2. Work with the Immigration and Visa issuance offices, to be sure this guidance is sent to all new Visa holders at the time a visa is granted. Don’t just assume that all immigrants will immediately turn to expensive attorneys to tell them of their new tax obligations. Better yet, before a person receives a Visa, include it in the visa application package. That might save a few folks the complicated and expensive process of applying in the first place. They may reconsider when they recognize the full scope of their new reporting requirements.


    3. Issue a press release about this new guidance to all news organizations. They seem pretty good at acting as scribes for the IRS without question, so this would be reported routinely, and that would get more eyeballs.

    4. Make this guidance a blinking alert on the front page of the IRS.gov web site. Since you are collecting a lot of over-the-top penalties for failure, this needs a flashing red alert that gets people’s attention. Don’t make the taxpayer have to search for it. Add it on your top banner home page where you show those happy taxpayers asking basic questions. Maybe you could add one, like… “Do I have to report my foreign earnings, bank accounts and assets?”


    5. Put a big notice about foreign account reporting on the front page of the 1040 as was suggested to you by a Congressional Committee years ago. Require Turbo tax to prominently display this information. Don’t leave it as a ‘gotcha’ little check box on Schedule B, or question 35 in a software application which some immigrants and Expats might never complete or see. There is a reason that newspapers work hard on headlines above the fold and on home pages. It gets attention that the stories on page 23, section D do not. Can’t you learn something from that?

    So, those are my few suggestions and actions you could take if you really wanted to increase compliance and tax reporting in a meaningful manner. Try it out. It might be more cost affective and less complicated then the onerous and lengthy OVDP / OVDI processes. You are facing budget cuts, so as you send out layoff notices to examiners, look for ways to improve your compliance via communication. Riding on the backs of DOJ enforcement actions to inform citizens after the fact is really not the best way to improve your collection percentages, in my humble opinion.

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  6. Hi Jack,

    Any comment on the final paragraph of IRS webpage saying that the Form 8938 filing requirement will be "beginning in 2012" - does this mean for 2011 returns filed in 2012, or for 2012 returns filed in 2013?

    Also, any chance of a taxpayer who went through the VDI process can get an abatement of the 25%/20%/12.5% penalty now making a reasonable cause argument? Even if the closing agreement has been executed?

    Thanks,
    Hopeful

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  7. To Anonymous / Hopeful @ 12/10/11 6:18 AM

    I think (but am not certain) that it means 2011 returns filed in 2012.

    I'll check later and post if someone else has not answered the question. But have to go now to give an examination in Tax Procedure at UH Law School.

    Jack Townsend

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  8. To Anonymous / Hopeful @ 12/10/11 6:18 AM

    To answer the second question, if a closing agreement is executed, I would say that there is no chance to reduce the penalty. The one caveat I would have is that, on rare occasions, the IRS has found some mitigation of the penalty that would apply to a set of taxpayers and have invited those with closing agreements to take advantage. I think that this would involve some feature that applies to a set of taxpayers and not a fact specific, taxpayer specific claim of reasonable cause. Keep in mind that, inside the program, there is no reasonable cause out -- taxpayers must either take the settlement or opt out in which case they will be audited and can make their reasonable cause defenses.

    Jack Townsend

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  9. To Hopeful Anonymous @ 12/10/11 6:18 AM

    For what it is worth, I do think Jack's analysis is correct. I would only add one "Hail Mary" type of suggestion.

    I don't know what guidance you had when you participated in the OVDP, but if you felt some coercion to sign the 906 because of how the Examiner was representing your options at the time, you might contact the TAS and see if there is anything they could or would do. The probabilities say, the answer will be just as Jack described. "No chance". But what is the harm in asking? It is a very very long shot from outside the court, but what have you got to lose? My wife says she would try it! And she has been smarter than me all along. LOL

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  10. So here is a Whale they were looking for... :) He would have done well to read the guidelines had they been published...

    http://www.bloomberg.com/news/2011-12-09/gulf-keystone-ceo-kozel-faces-6-million-tax-fine-over-offshore-assets.html

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  11. All,
    I reviewed form 8938 today. One question - do we have to report a house or a condo in part II, which covers other financial assets? I read through the instructions but can't figure out whether real estate is required to be reported.

    Any thoughts will be really appreciated. Want to do the reporting right this time and not get involved in another disclosure down the road because I had skimmed over the form quickly.

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  12. Laura Sanders of WSJ has an article " What's next for offshore accounts?" an interesting read - here is the link
    http://online.wsj.com/article/SB10001424052970204319004577086441475822300.html

    Below is an extract on unintended consequences of one size fits all approach by IRS - so, the word is getting out. The Canadian situation is the tipping point I hope, and is highlighting the hardships common folks are facing, including the Premier of New Burnswick, who is in non-compliance as well!
    Here it goes:
    In its limited amnesties, the IRS hasn't distinguished between an 84-year-old grandmother who is a Holocaust survivor or a U.S. taxpayer of Indian descent whose father put an account in his name without telling him—which is common—and the crooked businessman who skims cash in the U.S. and hides it abroad," says Kevin Packman, a attorney at Holland & Knight who has had handled more than 200 confessions.

    In Canada, many generally law-abiding citizens with dual U.S. citizenship are in technical violation of the rules, from small farmers to David Alward, the premier of the province of New Brunswick, who was born in Beverly, Mass.

    "I'm not different from thousands of dual citizens in New Brunswick, which has strong ties to the U.S.," he says. "The threat of losing significant assets has been a real concern." To avoid criminal prosecution, some confessors have had to agree to a 25% penalty on the highest value of a wide range of foreign assets since 2003, not just bank accounts—even if those values have since fallen.

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  13. AB...

    So far, I have just skimmed the form too. Figured I would have to go through it in detail when I filed, but my understanding is, yes, you would have to report a house or condo.

    If you are interested, you can read ACA comments on the form here...

    http://www.aca.ch/fatcacomm2.pdf

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  14. AB...

    I too read that story. Interesting.... Laura is someone I have had some email correspondence with, and knew a story was coming out, just wasn't sure of the perspective it would take. She has emailed me as late as Friday, looking for the name the New Brunswick Premier and the link to the story about him, which has been removed, btw.

    To your earlier question, I did notice that on her chart of what you have to disclose on the 8938 form it shows that real estate is still 'unclear and IRS guidance pending.'

    One other comment, which I emailed back to her...

    "Too me, what was instructive, was that in the discussion at the end of your story about the advantages of moving assets off shore, none of those attorneys advising the clients were ever quoted about the disadvantages related to IRS disclosure and the cost of compliance. In the drawbacks of the investment, this was not even mentioned. Maybe because, their clients all have their taxes prepared by well paid advisers, and it is such an insignificant marginal cost that it doesn't merit discussion. You think?

    Also, there was one small item that I think you might have neglected to discuss, and maybe that is because it is too speculative at this stage. Many of those feeder funds and/or hedge funds and financial institutions may 'not' want to be FATCA compliant and may 'not' want US clients any more. At least that is what I am seeing and reading in a lot of articles from overseas perspectives. Maybe there hasn't been enough actual activity yet to preclude it, but if it happens the tone of those advisers will definitely change.

    Plug this headline into google news and see what you get... ‘Europe’s asset managers could consider barring US clients’

    I am sure you are aware of these issues, but just surprised that it wasn't mentioned by attorneys as a countervailing risk. Maybe everyone assumes FACTA is considered 'fait accompli' and the world will fall into line! Not if ACA has its way!

    Anyway, thanks for your article, as it got me thinking about how the very rich Whales might still see the benefits of offshore investments setting aside the complexity, risk, and cost of IRS disclosure requirements. They will still do it!! They are the risk takers, and that is why they are rich and I am not! LOL

    Meanwhile, minnow US expats may just renounce because of the hassle of these issues or risk some pretty draconian penalties for their failures.”

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  15. Jack

    Do you think the IRS will (legally) be able to assert a 10K per account per year penalty ? The statute is a little unclear since the penalty refers to "transactions" -- more relevant to other portions of the BSA. Its not clear whether it should be 10K per year, 10K per account per year or even 10K per institution per year. Otherwise one could end up with truly absurd situations where a few small accounts < 50K lead to a far higher penalty than 1 large account of around 1M. I cannot believe it was the intent of Congress to allow Treasury to levy penalties that are so extortionate and I doubt the IRS would be willing to litigate the issue. This is just my opinion. I am in that situation (a number of small old accounts) and considering opt out of OVDI.

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  16. To Anonymous 12/12/11 @ 6:09 AM:

    I don't know how the courts will ultimately interpret the nonwillful penalty. My understanding is that the IRS claims it can be up to $10K per account per year. Whether that is the best interpretation of the statute is an open questions, but under Chevron or Skidmore deference concepts, the courts may accept the interpretation unless affirmatively unreasonable.

    But the real question is not what the IRS can do but what it will do. I would be disappointed if the IRS were to apply that possible interpretation in a punitive way with small amounts spread over several accounts.

    There is one phenomenon I have observed that, for U.S. persons with traditions in certain countries, maintaining several accounts rather than just one or two, even when the aggregate amounts are small, is quite common. Those U.S. persons would suffer from a draconian application of the interpretation.

    I think we should shortly has some anecdotal evidence shared among practitioners and perhaps even taxpayers as to what the IRS is actually doing. I don't think it will be as bad as a lot of people imagine / fear.

    Jack Townsend

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  17. Jack,

    You are right. Foreign banks do open more accounts than US banks for weird reasons.

    For example they have to open a dedicated account for incoming/outgoing SWIFT. Then they have to open another checking like account from where you can withdraw/move money. In order to have the money into a CD, another account has to be opened.

    Therefore I have 7-8 accounts in order to service 2 CDs, one in USD and one is local currency.

    What possible defense I can build for myself here?

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  18. Anon December 12, 2011 9:31 AM

    I too had multiple accounts, at times up to a dozen open, but with the way the bank and other financial institutions opened and closed term deposits as they rolled over I must have > 25 over 6 years. I hadn't really thought about it, until I started adding them up to figure the transfers between them to eliminate duplicate funds from the aggregate high balance in the OVDP.

    As an Opt Out exercise, my examiner tried to get me to figure my penalties on a per account basis and to figure that my transfer of funds would be double counted outside the OVDP. When I followed her instructions the penalties went from over- the-top to absolutely totally ridiculous. In fairness, the examiner had no idea what to expect in an Opt Out penalty calculation, so maybe she was just covering her bases and doing her due diligence. I try not to cynically think that she was deliberately trying to instill fear to keep me inside the program.

    In the end, my TAS negotiated penalty was based upon “one” unified non willful FBAR penalty, and not by account. So maybe that is an indication of what the IRS might do. I have to believe that is the model they would use in the OVDI Opt Out, but until there is more anecdotal evidence, it is hard to say whether mine was an outlier or not. However, we can hope that this is an indication to support what Jack says, “I don't think it will be as bad as a lot of people imagine / fear.”

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  19. To Just Me @ 12/12/11 9:31 AM

    Thanks for posting this. Although, as I gather it, you did not opt out, it seems that TAS might have negotiated the terms that might have been available on opt out. You might consider posting this information to the opt out blog I created today if you think it would help. For example, it would seem that a single unified nonwillful penalty is the right answer. Then, even if it is the maximum of $10,000, it will be far less than the inside the program penalty in many cases.

    Jack Townsend

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  20. Thanks Jack...

    Your point is acurrate. I will move that comment, and another one I just made on another thread which concluded like this...

    "In this respect, it was kind of a back door Opt Out where discretion was applied as I hope will happen in OVDI Opt Outs."

    I had not seen that you had created this new thread, so will do as you advise.

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  21. It was with bitter amusement that I read the excellent suggestions made by Just Me to enhance FBAR awareness and thus increase compliance.

    If the data on the FBAR were indeed "highly useful" to law enforcement or regulators as they have purportedly been lo these 4 decades since a long ago Secretary of the Treasury (Connally? Schultz?)so determined (without any known factual basis for that determination) then one might well have expected someone in law enforcement or with regulatory responsibility to have adopted such suggestions long ago.

    That they have not - and will not - is easily explained:

    The data on a FBAR is utterly useless to any sensible law enforcement official and/or any known regulatory agency.

    In contrast, the ABSENCE of a FBAR or better yet: a demonstrably willful failure to file it - is of enormous potential value to the US Treasury because it allows the opportunity to extort wealth from and/or otherwise coerce its citizens.

    Here is another suggestion to add to the list that the Treasury can be expected to avoid like the plague:

    Ask the Defense Financial Accounting Service (DFAS), the United States Social Security Administration and the Office of Personnel Management (OPM) for the foreign bank account data of all retirees, survivors and other beneficiaries of their respective organizations who have signed up for direct deposit of their monthly benefits to foreign bank accounts.

    Then compose a notice to be enclosed by each of these organizations to the respective beneficiary warning of their obligation to file FBARs. For maximum effect the warning would, of course, include Treasury's best argumentum in terrorem.

    Now what do you suppose the reaction to something like that might be?

    Might there be political repercussions?

    Equal or greater than the recent mini-tempest out of Canada?

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  22. To Anonymous @December 13, 2011 3:26 AM

    Darn, I missed that one... :)

    Didn't think of if, as I am not collecting SS yet.

    The point is a good one. If the goal is compliance, and if you want as many people as possible to know of their responsibility or duty, then there are many avenues besides just prosecution to get the message out. In this regard, the IRS has miserably failed. Probably this is out of bureaucratic ineptitude more than cynical design to generate revenues off the backs of minnows. I try to give them the benefit of the doubt, but if an obscure post on a gov web site 3 years after they start their crackdown is their best effort now, you just shake your head in disbelief that they will ever do something right.

    In fairness, the Statutes are not of their making, but the communication of the requirements is their responsibility. If they took all the money they have wasted in processing Minnows, and put it into a real communication effort, I have to believe that their compliance rates would go up significantly. That does not preclude the DOJ continuing their successful efforts at finding the UBS type whales. But what do I know, I was just a dupe that decided to do the right thing, so my judgment is suspect!

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  23. "The data on a FBAR is utterly useless to any sensible law enforcement official and/or any known regulatory agency. In contrast, the ABSENCE of a FBAR or better yet: a demonstrably willful failure to file it - is of enormous potential value to the US Treasury because it allows the opportunity to extort wealth from and/or otherwise coerce its citizens."

    This comment neatly sums up FBAR in a nutshell. The only FBAR form of value is the one that is not filed.

    I'd go further, and suggest that filed FBARS are actually worse than useless because there is a cost to processing them. The cost drain of this pointless busywork is likely to worsen considerably in future as the IRS begins to pull in hundreds of thousands of new ordinary 1040 returns from overseas, all of which have a big fat zero dollars owing on the bottom of them because of the FEIE and/or tax treaties.

    There are plans to mandate electronic only FBARs from next year. I predict something similar soon for *all* US tax returns filed by overseas filers, and perhaps domestic also, as the IRS struggles to contain ballooning processing costs, with little to no additional revenue, caused by their recent jihads.

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  24. To Jack and all the wonderful persons on this blog,

    I read this link (http://www.irs.gov/newsroom/article/0,,id=250788,00.html) and was left wondering about how many people will now get trapped inside the penalty regime and what kind of reasonable cause defense will they use to get the penalty mitigated.

    On December 9, 2011 2:42 PM, Jack said that "Not ticking the Schedule B question or, even worse, answering No might be viewed by the IRS as cutting against reasonable cause." But as far as I can think, the only persons who will be caught in the penalty net are those that either did not tick the box or ticked No.

    If you ticked Yes and did not file the FBAR or forgot to include the foreign income on the tax return you would have gotten audited right then and there and the matter would be closed by now for you. But if you still have foreign account issues pending due to which you are in the penalty net arguing reasonable cause, then you must have either ticked No or did not tick it at all. Am i missing something here?

    If I am not missing anything, then in my view, the discussion of reasonable cause already takes into account the fact that you have schedule B checkbox issues and yet IRS is willing to listen to you in order to see if the penalty can be reduced. Is this not being unfair to all those who paid the 20% or 25% penalty inside OVDP/OVDI after getting scared by all the fear mongering about being criminally prosecuted if the service found out about your issues before you disclosed them?

    Are those who paid the penalty just plain stupid idiots compared to the courageous ones who did not do anything and now will get a chance to present their reasonable cause defense and have their penalty either lowered or eliminated for commiting the exact same crime (not showing foreign income and ticking No/Not ticking the check box on schedule B) as those who did not participate in either of the OVDIs? I really feel betrayed. The IRS commisioner was calling OVDI 2011 as the last best chance to come clean. In hindsight it seems that it was the last best chance to show the world how stupid and gullible you are.

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  25. Anon @December 26, 2011 6:37 PM

    'Are those who paid the penalty just plain stupid idiots compared to the courageous ones who did not do anything and now will get a chance to present their reasonable cause defense and have their penalty either lowered or eliminated for commiting the exact same crime (not showing foreign income and ticking No/Not ticking the check box on schedule B) as those who did not participate in either of the OVDIs? '

    Anyone in the program has the same opportunity to demonstrate reasonable cause, however in the 2011 program, you cannot do it without exiting the program.

    'I really feel betrayed. The IRS commisioner was calling OVDI 2011 as the last best chance to come clean. In hindsight it seems that it was the last best chance to show the world how stupid and gullible you are.'

    It seems like you are suffering from buyer remorse. Would you feel less betrayed if the IRS were extremely harsh on anyone they caught outside the program from now on ?

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  26. many are suffering from buyers remorse.

    there are a total of 39 million legal immigrants and about 6 million expats which is a total of 45 million expats and immigrants. Even if on a conservative basis 15% of these have a foreign bank account with more than 10k this translates to about 7 million. Based on recent data there are about 600000 FBARs filed. 30000 has come forward and when you see there are more than 6.5 million who have not
    filed, those who participated and were not intentionally violating will bound to have buyers remorse.

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  27. 'Based on recent data there are about 600000 FBARs filed. 30000 has come forward and when you see there are more than 6.5 million who have not
    filed, those who participated and were not intentionally violating will bound to have buyers remorse. '

    It would have been better to have thought of those statistics before joining. At this point, remorse is futile. Depending on your circumstances, you could consider opt-out.

    ReplyDelete
  28. Hi,

    I hope I can ask for advice here, because it's about the only website on this topic where people both know what they're talking about and aren't trying to lure you in to hire an attorney!

    I'm a US/EU dual citizen, in Europe for about 15 years. My income has been low almost all that time, since I was a student for much of it, and only fully employed for one year. I do have foreign savings, though (over $200k) - from buying and selling a house in 2004/5 (with the help of family loans), work, and money I already had before I moved from the US (helped out by frugal living!).

    I only found out I had to file US tax returns a couple of years ago. A family member who is an ex-CPA helped me prepare the back years I needed to do. She ticked the "no" box on Schedule B for every year, and did not enter anything for "other" foreign income (like savings interest). I didn't see the error, and obviously had no idea about the FBAR.

    I am pretty sure I won't owe any taxes on foreign income, or that they'll be low since my income was always low - sometimes living on savings for a couple of years at a time.

    My question: should I file amended returns for all those years, plus FBARs for all of them, along with a letter of explanation? Or should I just make sure I do the current year correctly and hope for the best?

    I am seriously afraid of what's going to happen, because these are my life savings. Any advice much appreciated!

    Thanks.




    I am

    ReplyDelete
  29. I am,
    Most of us with these issues faced fear and uncertaintly as to what course of action to take. You need to clearly understand your potential outcomes before deciding what to do. Becoming compliant on a forward basis sounds good but does not erase past noncompliance and may even trigger interest in past years by the IRS when you file your 2012 FBAR. The 2009 and 2011 initiatives are closed so that leaves traditional disclosure as the option at this point if you want to confess, pay up and move on with life. Doing nothing is also an option but it has risks as well. If I were you I would at least consult with an experienced practioner to gain a clear view of your options and potential consequences. You mentioned having 200k in savings abroad which in the eyes of IRS makes you a big fish as they hit those with over 75k with the big penalty in 2011 OVDI. At least with traditional disclosure there is room for reasonable cause arguments but a practioner should evaluate your details. At this point in time after two widely publisized initiatives these arguments may be harder to make. No one can give you decent advise without complete knowledge of all your details. That is why a consultation with an experienced practioner may be worth the cost and effort of getting it. Sadly there are many in your situation who are frozen into inactivity on the matter because of the heavy hand IRS has applied on these matters.
    Good luck to you.

    Anon123

    ReplyDelete
  30. @I am

    I must offer a counter opinion to Anon123.

    A dual citizen resident in another country like yourself is as safe as anyone can be. The suggestion to "seek professional advice" is common but keep in mind the following points.

    Many lawyers will mislead you and outright lie to you about your situation and your options. They may well know less about the situation and risks than you do, and not admit it. Their goal often is to convince you to do something like a noisy disclosure so they can charge you $$$ to do all the paperwork.

    I would question whether you should do any disclosure at all, most of all a noisy one. Unfortunately there are no clear answers, even to those of us with a couple of years exposure to this matter. This is a matter where the "right thing to do" is not necessarily "the right thing to do".

    Just my 2 cents.

    ReplyDelete
  31. To I am.

    I have to second Anon123's advice. I think if you have read enough on these various blog threads, you would have heard me say, "don't be penny wise, pound foolish when it comes to professional advice." You need someone who very familiar with the current IRS practices related to the OVDP/OVDI and regular VD and QD processes and have all your facts in front of them to help you asses your risk. That will help you reach a decision as to the best course of action for you, given your risk tolerances. You don't have to pay an expensive attorney to do the entire process for you, but you may need to invest some up front dollars $ for good guidance. It could be you have a "reasonable cause" case given your reliance on ex CPA professional advice, where a regular VD process would result in a better result than you now think/fear given IRM discretion that could be exercised.

    There is much more that could be said, but I think I will just direct you to advice I have given previously. Maybe just having you read a few other threads here, might be helpful for you.

    I would definitely be sure you have read these three (A, B, C) carefully...

    A. To OVDI or Not to OVDI - That is the Question (Of Quiet Disclosures and Doing Nothing) (5/23/11) This represents folks asking the questions and seeking answers similar to what you are asking now.

    http://bit.ly/ve0rM7

    B. To OVDI or not to OVDI - Part 2 (7/31/11) Here Jack goes through the analytical processes he uses to help determine a course of action for clients. I would have to think this might really help you.

    http://bit.ly/t9ncz9

    C. Finally, download the Special Report from this thread (11/9/11) and read it carefully. It deals with some of the Practitioner dilemmas as what to advise clients now that the OVDI is closed. You might find something useful there.

    http://bit.ly/uIC7gn

    Second suggestion: Download the IRM related to FBAR penalties. Print, read, and digest how you might be handled in a regular VD program and audit, where agent discretion should apply. It would be helpful if you know this information before you seek out an attorney. It will shorten the amount of time ($) they will have to spend explaining the audit and penalty processes to you. Here is the link:

    http://1.usa.gov/t9UfsD

    Hope that helps. A full reading of all the threads in this blog going back to May of 2011, might be in order, as it will prepare you adequately for discussions with an attorney. If you don't know of a good one, Jack has a list of attorneys posted here:

    http://bit.ly/u3zyjj

    Good luck Mate.

    ReplyDelete
  32. To "I am"

    One other comment. I just noted Jacks comments on his News links. You may, like me, have missed these.

    They are at...
    http://federaltaxcrimes.blogspot.com/p/news-on-offshore-evasion.html

    Read the 12/22/11 JAT Comments: on Moody's, especially the 3rd point. Jack has some interesting things to say about the "may not" implications of a QD that you might want to put into the mix. When JAT talks, I listen :)

    ReplyDelete
  33. 'A dual citizen resident in another country like yourself is as safe as anyone can be. '

    This assumes that the dual citizen does not have significant financial ties to or assets in the US, especially assets such as retirement accounts or real estate that would be hard to move abroad. Or expectations of inheritance, or payments from US companies or ...

    ReplyDelete
  34. Sad to say if I am wants to be in compliance he has to somehow play the IRS Russian Roulette game. If on the other hand if he is willing to take risk knowing the potential down sides involved, than that is a different matter all together. Becoming compliant on a forward going basis or even doing a quiet may be viable if one understands the risks and potential costs if it blows up. Both of these actions are counter to IRS guidance. Doing nothing will not lead to compliance and will continue the dilemma of being a "tax evader". Given the post that I am made, future noncompliance will be willful as clearly I am is now aware of the issues. It boils down to making the decision to clean it up or not and how much risk/expense trade off I am wants to take. I imagine there are hundreds of thousands facing the same dilemma. I did the 2009 program and it hit me hard in many different ways. As bad as it was I would probably do it again because I do not want to live my life in the shadows of fear, darkness and uncertainty. If you get caught there could be even more devastating consequences. These laws suck but it is what it is and the government is using them to extract a lot of money even though in many cases the results are unfair. I did not advocate hiring a practioner to do a disclosure per se. I advocated a consultation to develop a spread sheet of possible corrective actions and their potential civil and criminal costs. I think we all have great respect for Just Me. I think his course of action was consultaion with practioners and then representing himself in the 2009 program. His result was pretty darn good but he also assumed a level of risk to get there. He clearly understood his facts and circumstances and stood by them in the face of the IRS pressure to achieve a great result.

    Anon123

    ReplyDelete
  35. Thanks very much for all those replies. I will read everything suggested and may be back for more questions/advice.... I have not even considered disclosure of any kind other than 'quiet' because anything else seems to be an admission of intent/guilt with little room for explanation, and certain high penalties. I will never accept that I am a 'criminal' because of some clerical errors made on my behalf.

    If I do get an attorney, do I need to go back to the US to deal with it all there? My ex-CPA relative (who helped get me into all this) advised me to call the IRS office in the country I reside and discuss it with them, but somehow that doesn't seem like a good idea....

    As for living out of the country, I was planning on moving back to the US next year after 16 years away - with my foreign fiance'. I guess that will make me less "safe". I don't have any property - only savings, and stocks (some in the US).

    This whole situation and law is so awful and sneaky. I have various US friends living in Europe who I have contacted since discovering this rule, and none of them have ever heard of it (most did not even know the had to file in the US, as I didn't).

    Anyway, thanks again - it's good to at least have some level-headed discussion about this.

    OP (I am)

    ReplyDelete
  36. Hi Jack,

    I am a US resident and I have maintained an offshore account for a few years now and it had more than 10K USD during most of the years 2008-2011 (12k, 16k, 6.0k, 12K). I also earned interest on the deposits in the account over the period 2008-2011 (~$170 in total).

    Unfortunately, neither did I report the little interest earned in my tax returns nor did I file the FBAR - purely out of my own ignorance for the laws. The account was purely intended just as one for transferring money to support my ailing parents and never was as an investment. I now realize there was interest accumulating across the years because of parking the funds for short durations. I also missed the deadline for the OVDI program - as this whole issue was brought to my attention by a friend just this week.

    As I read thru the various blogs and articles, I realize what a mess I have got myself into, all due to my non-willfull mistake.

    What makes sense for me to do now? Should I call the CI @ IRS and prepare for a voluntary disclosure or should I approach a tax attorney? Or should I prospectively file for FBAR for 2011, report the income and hope for the best? The concern here is what are my options if I get audited?

    Thanks a lot for the wonderful Blog that is so informative.

    ReplyDelete
  37. To Anonymous @ December 30, 2011 1:30 PM

    I am sorry, but I can't give you advice over this blog. You say you are a U.S. resident, so you can at least relatively easy seek counsel who can develop all of the facts relevant to any decision you should make. Please note that I have a list of attorneys who do this work in the right hand column near the top.

    Best,

    Jack Townsend

    ReplyDelete
  38. To I am and Anonymous @ December 30, 2011 1:30 PM...

    If you haven't picked this up, there is another group blog of Canadians who have recently started commenting on all the issues that you and your friends were unaware of. It might also provide you with links or additional information or advice which Jack can not provide here to help you with your decision process. The entire foreign account issues, FBARS, the OVDP, OVDI, VD programs and FATCA and DATCA (Domestic) regimes that are following it are not something you can just ignore any more. We/you may not like it, but being and staying compliant, is not getting easier, and if you have an intention to hide or willfully ignore, that is getting more difficult.

    Here is the link to the About page. You can read to see if there is anything of interest to you...

    http://isaacbrocksociety.com/2011/12/14/about-the-isaac-brock-society/

    ReplyDelete
  39. Jack,
    On your news and rumours page, there is an excerpt about audits on quiet disclosures. Is there any info on how these audits are being initiated? Is it being triggered by first time FBAR or amended returns? Are the audits being initiated along with processing of the returns? or afterwards? Appreciate if you have any other info in this regard.

    ReplyDelete
  40. I have no such meaningful information at this time other than the IRS's repeated claims that big brother is looking. I will try to post when I hear of anything meaningful (rather than just rumors that have no basis). Perhaps other readers have something meaningful and could post via comment or send me an email with the information to post as a new blog entry.

    Jack Townsend

    ReplyDelete
  41. Thanks for the info, Jack. However, to what extend does a dual nationals need to report his/her foreign assets? In my situation, I live and work in Taiwan using my Taiwanese identity. I pay tax to Taiwanese government and I have $0 income from the states. All my foreign assets (assets in Taiwan) are under my TW identity. Unfortunately, I do need to file U.S. tax return because I have U.S. citizenship and some property taxes. I asked many people including several accountants, but they all have different answers. So does anyone know if I need to report those foreign assets even if they are not under my U.S. identity? Because clearly the assets are not belong to my U.S. identity. I do want to be compliance but by reporting them, it's possible to open up more paper filing and double-tax potential, which is painful consider that I don't live in the States.

    Thanks

    ReplyDelete
  42. Rock&amp;HardPlaceMay 25, 2012 at 2:09 PM

    Do people who are on H1 and their green card is in processing, have to file these FBARs too?

    I know for tax purposes, based on substantial presence the H1 taxpayer is considered a resident alien, but for FBAR purposes, am not sure.

    ReplyDelete
  43. I'm a resident alien for tax purposes (just recently found this term). I've offshore accounts for about 100K, all of which is US taxed income. But the interest income which was taxed by the banks at offshore, was not reported here due to lack of knowledge. The amount of tax owed for past 2003-2010 is about 2000 - 3000 dollars. OVDI is a very expensive proposition as it would cost be about 40-50K with all legal fees etc. Will it be too much risk to go forward only with FBAR showing 100K+ ? I've multiplee accounts and many linked certificate of deposits tied to these accounts. I wish I knew about this obligation for even visa holders. Some are suggesting to do nothing and stay quiet as there is much risk involved. There is so much pressure and doubt, nothing seems right anymore.

    Jack, just me and other learned gurus, your advice would be very helpful.

    ReplyDelete
  44. Going forward means you know your responsibility and know your past fault but choose to look forward only -- is this what our dear President wants to be re-elected --- he does not want voters to look at his past 3 years record --but look forward for his next 4 years plan -- change we believe in -:)

    Now back to your issue,

    There are two ways of going forward.  1. Keep the money offshore and file FBAR and report income going-forward.   2. Get rid the money offshore and file whatever you have been doing in the past. 
     Would be 2nd option much better ?  

    ReplyDelete
  45. 2d option is not a legal option. The past is the past. But continuing the errors of the past is not the solution.

    Jack Townsend

    ReplyDelete
  46. You do have options other than joining OVDP 2012. However, whether those options are best for you requires detailed inquiry into your facts and risk tolerance. Certainly, the minimum is go-forward with all tax compliance done correctly (including the FBARs due 6/30/12).

    Jack Townsend

    ReplyDelete
  47. Jack, once the offshore is gone -- what is to continuing the error ?

    ReplyDelete
  48. Jack, 

       I would say this 
    minimum of go-forward is not a legal option either.  There is a SOL of 6 years of FBAR, and the Fed asks to amend the missing files with a letter of explanation.   This is just like play a "catch me if you can" game.

    ReplyDelete
  49.  ij, there is a filing requirement for 2012 even if the money is 'gone this year'. And there is still a filing requirement for 2011, too for another week. So the 2nd option is not legal.

    ReplyDelete
  50. Let's say he closes account in 2012.  He has the 2011 FBAR filing requirement due June 30, 2011 and the 2012 FBAR filing requirement for June 30, 2011.  And he has the income tax filing requirement for 2011 (but he may have already filed that) and then for 2012.  The income tax filing requirement is for both income and for Form 8938.  Continuing his past errors into these filing requirements is not an option.

    Then, of course, assuming all foreign accounts closed by 2012, there will be no FBAR filing requirements for periods after 12/31/12.Jack Townsend

    ReplyDelete
  51. I know that but the present will become the past as time goes by.  if a taxpayer can ignore the past responsibility (which is claimed to be legal), then it is just one year to put up with -- and likely IRS won't find out.  Then it becomes the past -- does it ?
    Then we can use the argument what means IS -:)

    ReplyDelete
  52. I dont know if anyone responded to you but you ABSOLUTELY need to file FBARs. Your visa has NOTHING to do with your tax status. Not only FBAR from this year onwards you have to file Form 8938.

    ReplyDelete
  53. I am also resident alien and was on visa when I filed for OVDI. I did it because I knew my tax preparer had screwed up and I did not have risk tolerance for audit risks. I know Jack mentions in his blog that the outcome upon audit will not be any different than upon an opt out but that is yet to be tested - I did not want to be a test case so I chose the path of least resistance. As Jack mentions different people have different levels of risk tolerance.

    ReplyDelete
  54. Thanks Jack. Most tax practitioners suggested either OVDI with 27.5 or just go forward. And your advice also is in same lines. I will go forward then. Does it make any difference to do online fbar vs paper filing. Is one less prone to getting caught than the other?

    ReplyDelete
  55. Hi Jack and Others who can help,
    can you help me to come to a conclusion

    Came to US in 2006 .
    Transferred money from US to India to use in sisters marriage in 2008 that made the account total more than  $10k(about $16k)
    Have Rental Income of 250$/PM 2008 onwards which i did not know has to be reported in US .I pay an EMI roughly the same amount as rent. I am paying the tax in home country.
    What is my best recourse , Should i go for OVDI or just submit the amneded taxes and FBAR from 2009 onwards.

    ReplyDelete
  56. These are not all the facts that someone would need to give you advice. But, if there were no facts that are inconsistent from the reasonable inferences from these facts, a go forward strategy would be the best for you and, in my judgment for the U.S. and its citizens.

    Go forward means compliance with the U.S. tax lows (including taxation of worldwide income) for 2011 forward.

    Jack Townsend

    ReplyDelete
  57. I infer that you were filling out the Form 8938 for 2011 to file an amended return for 2011. I see no particular reason you should not amend the FBAR, even though the amendments are not material (in my opinion).


    As to whether anyone compares the two forms, who knows. And, if they spotted the relatively minor discrepancy, would they be concerned. Again, who knows. I would not think they would be concerned, but I don't manage the IRS.


    Jack Townsend

    ReplyDelete

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