Wednesday, April 4, 2012

"Opting Out" #3 (4/4/12)

At the request of readers who having difficulty accessing the comments and replies because of the large number of them, I start up another in the series on "Opting Out."

The two earlier posts with comments and replies in this series are
  1. "Opting Out" of OVDI and OVDP; What is Really Happening? (12/12/11), here.
  2. "Opting Out" #2 (3/2/12), here.
If readers use this new blog to comment or reply to comments on either of the first two blogs, it will be helpful if you cut and paste the material that you refer to so that the reader can understand the current comments and replies.

I also include below the following from #2:

Addendum 4/19/12; as amended on 4/21/12:  I previously had a link to a blog that offered information about the IRS's application of the non-willful penalty on audit.  I have subsequently determined that the information was not materially different from the IRM provision and felt that it would be better to link to the IRM provision rather than to the secondary source.  The IRM provision is Exhibit 4.26.16-2  (07-01-2008) Normal FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004, here.  (See the table named Normal FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004 - Per Person Per Year.  Readers should remember that, upon a showing of reasonable cause, the FBAR penalty may be avoided altogether.  See my prior blog titled IRS Guidance on U.S. Persons with Foreign Assets and, Coincidentally, Quiet Disclosures on FBAR Delinquencies (12/9/11), here.  I should also note that, based on anecdotal information I have received from some practitioners, this Guidance is not rigid.  Persons with compelling stories to tell can get substantially less than the Guidance suggests or even no penalty.

IMPORTANT ADDENDA

1.  A reader has posted opt-out documents here;  I think the author -- with the pseudonym of Moby -- has done a particularly good job with his opt out request.  Accordingly, I have bookmarked it for easier navigation and post it here.  I encourage readers who are considering opting out or are in the process of making submissions in support of lesser penalties in audits (whether on opt out or otherwise) to look at this document.  (Note that the bookmarks are in the pdf file which can be viewed by downloading the pdf document.)

2. Many of the comments posted on this blog and its related earlier blogs (see above) are worthy of being posted (perhaps with some moderation) to the blog titled Open Forum Comments to Congress and IRS Regarding Tax Administration for Offshore Accounts (4/9/12), here.  I would like to consolidate appropriate readers comments there if possible, so encourage the commenters to consider doing that.

466 comments:

  1. Hi Jack and all. Good idea to start a third Opt Out blog. I left US 40 years ago and have lived very happily in Canada. Found out about OVDI 2011, never heard about 2009, last May and after three months of gruelling loss of LCUs decided I had to enter OVDI because now I finally knew about FBAR and also filing 1040s. As I never filed a 1040 since 1971 I never saw the question about Foreign Accounts and so I never checked the wrong box. I came into the program with very small taxes owing only due to AMT back in 2003-05 and then I applied for the 5% penalty which in my case with several businesses still amounts to $200k in penalties for not filling out a form I never heard of. My lawyers filed a PLR asking that my $1.0 mio RRSP be carved out.
    Now, I feel foolish that I even deigned to join this entrapment program and am considering opt out. So, we all need to hear from others who have gotten an agent and what the stand is on Expats living happily abroad for many years and will IRS continue to punish and persecute innocent people. Thanks Jack and great letter Moby. Amazingly well documented argument.
    Canada7

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    1. @Canada7 Welcome. I am also an expat applying for the 5% penalty and intend to share as much as possible as my case progresses. I have been resident overseas for almost 25 years and had zero contact to other American expats during that period. I often think I would have done things differently had I had other expats to share experiences with. While not all of these are expats, the experiences shared on this blog by Just Me, Moby, Anon123, Sally and ij (where is ij by the way?) have influenced me greatly along with the comments of Jack.

      While my facts are different than yours, what we have in common is that by being conscientious Americans and wanting to do the right thing, we have probably made the worst decision of our lives. Therefore, anything I can share so that others do not suffer as much I have, nor make the same mistakes is what I plan to do.

      Taking from Moby, I have fired my lawyers. This is one of the most positive developments in my case so far, at least in terms of a sense of relief. My case is relatively simple and if I had not seen others via this blog who were handling their own cases and been able to compare my facts with theirs, I probably would not have taken this action. I was bleeding money and had lost trust in my lawyers. Like a lamb to the slaughter, until now, I followed their counsel blindly.

      I will likely opt out. The final straw came for me when I asked my lawyers for an assessment of my reasonable cause arguments. They told me that I had favorable facts, but the cost of presenting them and defending them would be greater than my penalty and therefore I should just accept the penalty! At that point my lawyer costs had already exceeded my potential 5% penalty by 100% so I was furious. I approached another lawyer for a second opinion and was told I have very favorable facts, but this lawyer told me right away that he had nothing to offer me as his costs would be greater than my potential penalty.

      So I have decided to enter a brave new world and will now face the wrath of the IRS and my as yet unassigned agent while representing myself. I figure I have a good base that I understand well as my lawyers were competent and my documents are well organized and present my case in a straightforward way. In that sense, it was good to have the lawyers, but I no longer felt like they were helping me.

      My (ex) lawyer and the second opinion lawyer told me that none of their 5% cases have come back yet. That was the status about one week ago.

      Moby’s documents are very helpful. Just Me has posted his TAS letter on the Isaac Brock Society website. That document is very helpful for seeing how the IRM is applied in arguments.

      Please write more as you are able to.

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    2. Why are we seeing more than a couple of posts where people were given what now seems to be not the best advice by lawyers?

      Is this because of the way IRS handled the program, were lawyer considering the worst case scenario or something else?

      Jack, you have probably read more posts on this blog than anyone else. Most of the posts are from minnows such as myself. I spoke to 7 lawyers; one said just file amended returns and OVDI or OVDI + opt out will be waste of money, a couple others said do OVDI and just pay the penalty while majority suggested OVDI + opt out.

      Any opinions on why minnows are confused (myself included) with this situation even after talking to multiple lawyers? For minnows with no bad facts, I was expecting a cookie cutter solution to this problem.


      Thanks in advance.

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    3. You raise good questions. I think the phenomenon that occurred was that when OVDP 2009 first came out, there was a lot of uncertainty. As you know, the potential civil and criminal penalties the IRS claims it can assert are truly onerous -- and probably even unconstitutional if the IRS tried to assert them all. No one expected that the IRS would assert all the penalties, but no one knew how onerous the IRS would be.

      And very few, if any attorneys, had any real experience with the IRS's enforcement of the FBAR penalties -- civil or criminal -- simply because there was little actual observable enforcement. The enforcement only becomes observable when a court case is filed, and prior to this initiative there were very few. So little was known about what the IRS would actually do in the myriad of fact patterns that emerged -- from the whale to the minnow.

      The only certainty was to join the program and accept the program penalty structure (including in OVDP 2009 FAQ 35 relief, which itself was uncertain). And, of course, different attorneys have varying degrees of expertise and tolerance for risk in advising clients as to risk and the client's tolerance for risk.

      This created an environment where the advice rendered by attorneys was necessarily different advice even as to the same set of facts -- because the attorneys' background dn experiences upon which the advice was different. Two or even three different answers did not mean that any of them was wrong. And the facts varied from taxpayer to taxpayer, so one taxpayer cannot really judge his result by other taxpayers' results.

      Over time, attorneys have become more comfortable that, on opt out audit, materially better results could be achieved because the emerging anecdotal evidence as to what was being done appeared good -- at least for taxpayers who were not really bad guys (often referred to as minnows which can include substantial good guys).

      But advice differs. Within a range all answers are good.

      Jack Townsend

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    4. Thank you Jack for taking the time to respond to my post. Your blog has been a lot of a relief for a lot of us who are going through stressful times that seem surreal on occassion. We really appreciate the time and effort that you are devoting to answer some of our questions. Also thanks for hosting the blog and providing this forum to share views and information.

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    5. Hi, Canada7 back on Easter Sunday evening.About lawyers, I actually hired 3 different firms and did it seemed that the first two were churning legal fees and knew less than I had learned on the web. The third, answered the questions correctly so I went with them as I have the resources to do so. Finally, i told the good lawyers that my Canadian accountants advised me to just ignore the whole thing and it would all blow over with the next administration and my "good lawyers" told me "we cannot advise you not to join OVDI but in good conscience neiher can we advise you to NOT ignore your Canadian accountants. So, good lawyers third time lucky.
      One thing I did learn was that to come in, I would face incredible estate taxes and that I could leave a legacy to my wife and children with an estate tax of millions so I decided that i just could not do that and within 2012, I have some time to rearrange my legal situation to minimize that exposure.
      If you do not have a US SIN, then they do not know about you and you should not do this. But I had a SIN and milatary history so while dormant, I was in the systme. Still do not know if I made the right decision but hey, money is money and life is life and so I opted for the latter. hope this helps someone else.

      I recommend a class action suit agaist Schulman as this shit will not stand the test of the legal system as it is so poorly thought through. Good luck all cyber friends,
      Canada7

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  2. It sure is an entrapment for retires like you.I doubt the RRSP would be allowed to be carved out but i wish you the best. Looks like people like Moby have got good results
    and maybe you also would. get ready for the ride. be prepared for a good 3 long year ride. However i simply dont understand why someone who left 40 years back would have any trace of whether he/she is a US citizen.

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    1. stupidly, I still carry a US passport, have a Social Security number and was in the US Navy for 4 years. I just did not want to shorten by life by burning LCUs. Not sure if i did the right thing but I wish to fight this absolutely stupid and venal program.
      Canada7

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  3. I am preparing my opt out letter. [ Another minnow case, mistakenly sucked into this maelstorm]. However, I mistakenly sent in the in lieu penalty estimate earlier with my OVDI package in the mistaken belief that it was required. I asked my agent if this money could be returned to me now that I was formally about to exit the program. He said that he did not think so since he thought I would still be under exam on opt out (although I doubt they're going to audit my W-2 and < 5K interest and dividend income). This doesn't seem fair to me. The payment was sent for a specific purpose -- the program in lieu of penalty, and now that I am not in the program, the money should be refunded pending the results of the full audit and a closing agreement (if any). This is NOT about the tax and interests that (all 3K of it), they can keep. I haven't made a formal request for a refund yet, this is just what my examiner told me, although he didn't seem too sure himself.

    Jack, isn't the IRS required by law (minus a collection or some other statutory action) to apply any payments I make towards whatever I designate ? So if I say a a payment is for purpose X, they are supposed to follow that request ? Or does that hold only for tax payments, not for something ad hoc like this ? Can I simply tell them to redesignate the payment as being for 2012 estimated taxes ?

    [I don't attribute malice to the examiner's response, just the lack of a bureaucratic process. In retrospect, it was definitely a mistake to send this payment over prematurely, but what's done is done.]

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    1. This is not a perfect solution for you, but I recommend that you do two things in tandem: (1) write a letter to the agent asking that the funds be returned to you and (2) send a claim for refund asking that the funds be returned to you. The reason both may be required is based upon what the IRS has done with them. If the IRS has put the funds in some type of suspense account and there is no pending assessment for them, then the IRS is supposed to return the funds to you upon request. If the IRS has actually assessed the amount as a miscellaneous penalty, then the IRS should refund it to you since there has been no determination that you owe the amount assessed.

      As a predicate to doing that, you might ask for a transcript to determine exactly what has been done with the money. Any good CPA or return preparer should be able to do that for you if they have power of attorney (From 2848) to deal with the IRS.

      BTW, technically, the IRS could sit on the claim for refund awaiting the outcome of the audit, but if 6 months passes as is likely the case, you could file a suit for refund. That would likely get some action (perhaps only faster processing of the audit).

      Now, if the IRS has not yet assessed the in lieu of penalty, in theory at least the IRS should return it upon a simple demand letter. Should the IRS not do that, as I understand it, you could file suit in the Court of Federal Claims.

      Best,

      Jack Townsend

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    2. Jack

      Thank you very much and I will indeed send a request for a refund along with my opt out letter. I don't think there's any malice here, just the same bureaucracy that led the IRS to refund tax money to some other program participants (as indicated in another thread) midway. Hopefully a formal request will push the bureaucratic buttons.

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    3. Anon - I am trying to compile a timeline of OVDI processing - if its not too much trouble could you share when you sent your OVDI package and when the agent first made contact with you? It will be helpful for other minnows like me stuck in this quick sand!

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  4. I hear lot from people that based on this uncertainty, they won't risk showing the accounts this year as that would mean you yourself are giving all your facts to irs to audit you. Hence all these folks are still remaining silent. Is that a good idea?
    I'm losing sleep that no one i know is showing and only I've decided to show? I've about 10K interest income this year, so about 2500 tax I will be paying to US and quite a few small accounts aggregating to about 85K but all is US taxed money. I don't mind to pay this if I'm supposed to, but scared that what if they audit? past advices have been mixed, quiet disclosure, just go forward, do ovdi etc. I would have taken opt out but I've many any small accounts which is leading to advices against opt out...so basically I've been adviced all possible options by different ppl.

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    1. To Anonymous Apr 5, 2012 12:18 PM

      I strongly encourage you to meet your obligations from this day forward (this means filing a correct 1040 with all income and with Form 8938 and an FBAR). (If you have already filed an incorrect 1040, file an amended 1040 by 4/15/12 and it will be treated as an original superseder.)

      Then deal with the past as you feel moved -- properly advised -- to do. This can be joining the OVDI, quiet disclosure or just go-forward (the minimal response).

      But putting the problem off and failing to do your duty from this day forward is, in my mind, not a smart way to deal with the issue.

      In my view, your worst case for the past is just an audit (whether by joining OVDI and opting out, by quiet disclosure or by going forward) and the audit result should be less than joining OVDI (at least based on my projection from the minimal facts you offer). No use to subject yourself to greater risk by future noncompliance.

      Best,

      Jack Townsend

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    2. Thanks much. I've made my mind to disclose this year to the best of my knowledge. Only fear i was getting from friends who are not showing still is that last year interest income was $100 and this year it will shoot to $10K. Wouldn't that raise a flag right away? Or this amount doesn't make any difference. Last year there was no schedule B attached by my CPA at all.

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    3. AS I say in another comment, whether or not the correct and complete filing for 2011 will raise a red flag is not the issue. You now know your legal obligations and should meet them, even if there is a 100% chance that filing a correct and complete return will trigger an audit.

      Now, on the bare facts you mentioned, I doubt that an increase of interest income from $100 to $10K will per se trigger an audit. The IRS usually picks up returns with computer algorithm, and a computer algorithm could easily pick up that increase. I am not privy to the IRS's scoring techniques for audits, but I would be surprised if that increase alone would trigger an audit. Of course, there will be other data that could trip off an algorithm if it is so designed -- e.g., an interest increase of the size you mention plus the first time answer of the foreign bank account question to indicate that you do have foreign bank account(s). Assuming the IRS has been entering the foreign bank account question data into the data for at least some of the past year, an algorithm could be designed to pick it up, particularly if coupled with material increases in interest income.

      Finally, to return to some basics, if you are at criminal risk, you should join the program as well as meet all future obligations. If you are not at material criminal risk, then you are at audit risk and likely for the lesser penalties (accuracy related income tax and nonwillful FBAR). Depending upon your profile, those risks might be manageable even if you are audited, but you should seek advice on that.

      And, I close with even more basic propositions -- file 2011 and later returns and 2011 FBARs and later FBARs correctly.

      Jack Townsend

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    4. Anonymous, you say

      "I hear lot from people that based on this uncertainty, they won't risk showing the accounts this year as that would mean you yourself are giving all your facts to irs to audit you. Hence all these folks are still remaining silent"

      Lets remove the euphemisms. When you say "not showing", "remaining silent", what you are essentially saying is that these people are intentionally breaking 2 separate laws: tax laws, and FBAR laws, both of which (especially the FBAR laws) have serious and draconian penalties attached. Now ask yourself if you want to join that august company.

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  5. hi, I will soon be filing my 2011 taxes. I have failed to report my dividend/interest income for years 2008/2009/2010. It was approx $1000/year. I am pretty sure OVDI is not for me and if I do enter it I will be opting out. So I am considering QD. So couple of questions related to strategy for that.

    1. Should I file past amdended forms along with my current form or is it okay to fix my past year a month or two later?
    2. When I do file my past forms, do i need to file deliquent FBARs or just correcting paying unpaid tax and interest on it is sufficient?

    Thanks everyone for sharing your thoughts and experiences and thanks Jack for your guidance and supporting this blog.

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    1. The initial decision as to the strategy really requires custom advice based on far more facts and circumstance than you offer here.

      However, assuming that QD is the right strategy for you,

      1. The precise timing of the filing (certainly within the span of one or two months) is not important. I think you should focus on efficiency in getting them done rather than some type of chess game as to when to send them in.

      2. If you are going to do a QD, filing some number of delinquent FBARs would seem to be required. The number of years for delinquent FBARs may not be the same number of years for amended returns. Keep in mind that the statute of limitations for civil penalties for FBARs is six years, so your filings may need to be up to six year. The statute of limitations for income tax is 3 years, so that, unless a longer statute applies (25 % omission or fraud), your amended returns should be for only 3 years.

      Best to you,

      Jack Townsend

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    2. Thanks Jack! No, I am not trying to play chess game. I want to fix it as soon as I can. I was asking only because if filing 2011 return will trigger an automatic audit since previous FBARs/taxes have not been filed/paid.

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    3. You have a legitimate concern about whether the filing of the 2011 1040 and 2011 FBAR will trigger an automatic audit for prior years. My first response as a lawyer is that that has nothing to do with your meeting your legal obligations for 2011. I strongly encourage you to meet those obligations. Now, on the separate question as to whether it will generate an audit, I am not sure anybody will really know the answer to that question. Since this program started some people have just started meeting their obligations on a go-forward basis. I have not seen a rush of audits arising from those filings.

      Nevertheless, as I am sure you know, the IRS's FBAR database could be easily designed to pick up a first time filer in 2011. I have to assume that the IRS can do that. The next question is whether the IRS will then use that knowledge to generate audits. I don't know the answer to that question, but my sense is that the IRS may have some threshold aggregate number before it would launch an audit. But that is the IRS's call not mine.

      And, as I said, whether or not you get audited for the past is not the main factor you should be considering. You now know of your obligations and have not excuse for not meeting those obligations.

      Jack Townsend

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  6. Jack, thank you for this blog. It is a real sanity saver. And thank you to Just Me, and Moby, and others for sharing your stories. Looking at these two cases it seems to me that Moby got the reasonable cause penalty relief, but Just Me got non-wilfull, and I don't see the difference between these two cases except that one opted out and the other did'nt. Neither of them knew about the reporting requirements and yet we have two different outcomes. Moby opted out and got reasonable cause, whereas Just Me was assigned a non-wilfull penalty within OVDI.

    I am US LTR with complex financial affairs in native country, (mostly inherited from non-US relatives, plus some personal savings and investments in home country). I paid taxes in native country, but not enough to cover US taxes as it turned out. Plus turns out I own several PFICs which did not generate any real income but after calculating the MTM tax it almost tripled what I owe.

    Currently in OVDI with potentially very large penalty if 25% (Largest inherited account does not qualify for 5% FAQ on inherited because of $1000 rule). I don't feel comfortable going it alone because of the complexity. Have FBAR lawyer who stuck me in OVDI. Never heard of FBAR before and did all taxes in Turbotax which defaulted the lovely box B for me. Have now taken advice from two more attorneys and the answer ranges from OPT out now, to "wait and see" what can be negotiated in OVDI. Problem is I have a lot of accounts.

    My questions:

    1. Do you think that non-income generating PFICs would be included in penalty base if the MTM pretend income is the only income they generate? How would they be treated on opt out?

    2. Do you think that IRS will bifurcate penalty rate in OVDI. Some inherited accounts qualify for inherited 5% and some don't. The FAQ's don't really address a scenario where someone has a mixture of inherited and personal savings from previous employment in native country (because it's not designed for immigrants).

    3. Is it possible to exit the OVDI before the penalty has been assessed. Comments on this blog lead me to believe that this will not even be allowed. Does anyone have any experience of this?

    4. Can anyone explain the difference between non-willful and reasonable cause? If IRS decides non-willful on opt-out they could do way more damage with per account per year penalty than the 25% in OVDI. Example, someone with ten small accounts for 8 years might be looking at 800k penalty even for non-willful. Then I would have to go to court to fight it right? (expensive right?) What do they have to prove for non-willful?

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    1. @Nemo...

      I can answer one part of the question related to the difference between Moby and my penalties

      My settlement was based upon a non willful reasonable cause argument that the TAS made on my behalf. It was more of a negotiated amount, then it was driven my any penalty mitigation guideline chart. It was their considered opinion, that given the mindset of the IRS at that time, it was the best outcome they could obtain. Kinda like they needed to give the IRS something for their effort.

      The $25K was a counter offer to the IRS who had lowered the original OVDP penalty from $172 to $115 in response to the TAS order. There was some hard line thinking by the technical advisor which was driving that I think, although I could make no sense of how they arrived at that amount. Anyway, the TAS countered with $25K, and when the IRS accepted it, I decided to cut my losses and fold too. The anchoring effect of $172K made $25K look like a hellva a deal. It probably wasn’t.

      Moby, on the other hand totally opted out, and made the case that his non willful reasonable cause penalty should be nothing except the 20% accurracy penalty, and the management committee accepted it.

      He got a better deal than I did, but our facts were different. If I am honest with myself his was a more sympathetic case than mine, being a recent immigrant. I was a US citizen, and I think they take a dimmer view of us not knowing all the complex rules and regs. I argued with them as much as I could, but in the end probably wasn't as effective as I should have been. When it comes to FBAR penalties, you are guilty until you prove your innocence, and there was some hard line black and white thinking going on with my examiner and her technical adviser.

      Now, I did not have to accept the $25K. I still had the option of "Opting Out" and going that route and appealing further if I did not like the result. At that point of time, there were no known Opt Outs, the procedure was very new, and totally opaque, so that factored in my decision to accept the TAS negotiated deal.

      I may have left money on the table, and certainly don't feel my sins deserved a penalty even of that magnitude, but you win some, you lose some, and I had already lost enough LCUs, so I settled.

      Regarding your question 4. There are really 2 categories of failure Willful and Non Willful. Remarkably, Congress in their wisdom, they have allowed the IRS to collect penalties even if you are NON WILLFUL. It was a stunning concept to me. Now, if you are Non Willful, there are mitigating factors as to how non willful you were, and "reasonable cause" is just one of them. It is the least penalized. At least that is my understanding of how it works, and if I am wrong, I am sure Jack will correct me.

      BTW, I had about 25 different accounts and the FBAR penalty applied was a unified penalty of one account per year. That was what the TAS negotiated. Although technically when they did the paper work, for reasons I do not understand, they chose 3 accounts and divided the penalty up between the 3 to come up with the $5K account per year. Go figure. It was some jury-rigged deal (as they say) to make the paper work look better internally, I guess. It made no logical sense. The Examiner could not explain it. The result was the same, and so at that point, I just let it be.

      And, if the IRS were to assert $800K FBAR penalty in an Opt Out, my understanding is, they would have to go to court to collect it.

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    2. Anonymous

      "Example, someone with ten small accounts for 8 years might be looking at 800k penalty even for non-willful."

      Actually, it should only be 6 (or 5 years) on opt out. But about your more general question, this has been discussed before on various threads and Jack has commented once or twice.
      1) Basically, the IRS recognizes that the idea of 10K/year/account is ridiculous. They are not likely to try to assess a penalty even close to that except for really egregious cases.
      2) Even in criminal cases, the IRS has not gone beyond 50% of maximum balance for ONE year. Except for really bad cases, its hard to see them going beyond that.
      3) The IRS, especially its appeals division, pays close attention to so called 'hazards of litigation'. A penalty > 100% of account size is likely to get thrown out by a judge as an Eighth Amendment violation. Even penalties > 50% are likely to draw some judicial attention even in bad cases.

      The last 2 are my personal opinion
      4) I think the statute is unclear whether the IRS can really assert a per account/per year penalty. If this went to court, a judge could well say --- if someone doesn't know about the FBAR, the violation is non willful, so does it matter if there is 1 account or 100 on the form ?
      5) My impression is that Congress intended the non willful penalty to be used when the IRS believes that the violation was likely willful or grossly negligent, but believes it would be hard to prove willfulness. Thats why they want to preserve it for bad cases, and thats why they wouldn't assert 100K penalties or even close to 100Kfor 25 small accounts with 1 k in each.

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    3. Anonymous Apr 6, 2012 05:58 AM

      Your comments are excellent. Thanks.

      Jack Townsend

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    4. Anonymous April 6, 2012 5:58 AM

      Thank you so much for your comments.

      Two further questions arise about the SOLs:

      1. I thought that if I had signed the SOL extensions for years 2003 to 2010 as part of the OVDI program, then that would override the standard SOL of 6 years for FBAR and 3 years for 1040? So on Opt out all years of the OVDI would be audited for FBAR and income, is that incorrect? That would make a huge difference for me because a lot of the tax I owe is due to MTM fake income generated in the run up to the stock market crash in 2008.

      2. In OVDI you get to make Mark to Market election for PFIC's. On an Opt out there is no Pfic election so you do you have to use default method? The default method says when you sell the Pfic you calculate your capital gain and then go back and distribute evenly over the time you held it, then calculate tax, penalty, and interest on that. The accrued interest gets nasty when have held a pfic for say 20 years. Would the SOL stop that?

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    5. To Just Me Apr 5, 2012 04:28 PM

      Thank you for your comments. I appreciate you sharing your case and opinions for the benefit of the rest of us that are going through this painful process. I think I would have made the same decision at that time. Thanks to this blog I have more confidence to do an Opt out. I have professional advice that I have a good case - not from my current FBAR attorney. I feel like a fool for getting into this situation, but cannot change the past so have to move forward and stop wasting LCU's worrying about it. Time to go file for my 2011 extension and figure out Son of FBAR. My full time job right now is tax. (:.

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    6. Nemo @Apr 6, 2012 09:39 AM

      I think a number of your questions are better directed at a professional. I would suggest talking to one of the professionals you seem to trust. I would even have recommended talking to Jack himself and paying him some very well deserved $$, although I he may not be in your geographical area. With that caveat:

      The IRS says that on opt-out one goes back to normal SOLs. That would mean only 5 or 6 years for FBAR, 3 or 6 years for taxes (unless fraud can be established, but if that were so in your case, you would not opt out).
      With that said, I think it may not have much impact in practical terms for most people, because:
      1) The opt out penalty for FBARs is likely to be a fraction of potential penalty, so it matters very little if its 5, 6 or 8 years that are open.
      2) For tax purposes, I do not think the IRS will seriously consider (for most people) offers on opt out that do not include all tax due on the OVDI years, even the closed ones, and would just ratchet up the FBAR penalty to make up the difference. I think Jack may disagree me with on this (based on his previous comments), although I wouldn't presume to speak for him. However my opinion of the revenue agent mentality is that they will (with some justification) believe this money is due to the government and will retrieve it using the FBAR penalty as a proxy if one were to insist on tax SOLs. At least for US residents anyway.

      I have to resort to speculation on your 2nd question about PFICs. It may be that if the IRS audits your returns on opt out, they may want you to go back to the default method. Or they may allow you MTM, but at your normal rate, rather than the lower OVDI rate. Or they might just decide not to bother with it and leave your tax returns unchanged. Remember too that if a lot of your gains are phantom gains, then if they want you to amend your returns, your MTM losses would not get zeroed out at the end of the OVDI period, so you could benefit from that.

      Delete
  7. For those wondering where ij is, he asked me to post this for him... Just Me

    Dear Just Me and Anon123,

    I am in Shanghai China right now. Access to Jack's blog is blocked,so is IBS. I can still see Phil Hodgen's blog though

    I am not able to see you folks either. I will be back to US next week and then I have a lot to catch up. I will give update as soon as I see any mails from IRS/OVDI

    I have to mention that it is because the host is being blocked --nothing to do with Jack or IBS. My company's web is also blocked --it is hardly political though -:)

    Anon123, Thank you for thinking of me, I will be back soon

    ReplyDelete
    Replies
    1. I am relieved that you are well ij. We have become a brotherhood in this misadventure. I just found it strange that you were so quiet these last few weeks but am happy you are well. Thanks for the update Just Me. I hope you come back to some great news ij.

      Anon123

      Delete
  8. In an opt out, would the Taxpayer Advocate service (TAS) provide legal tax advise and help or does the taxpayer need to hire an outside professional?

    If the TAS does provide help, how do we get their attention?

    ReplyDelete
    Replies
    1. The TAS will help out in an impasse with the IRS, and you can just contact them following the procedures on their web site. I personally doubt they would assist in the Opt Out, unless there was some unusual situation. You can always just call and ask.

      http://www.irs.gov/advocate/article/0,,id=212313,00.html

      In an Opt Out, you may need outside professional advice to help you weigh your options, or you could just read all the comments about how others have fared on these 3 Opt Out threads and write your own Opt Out like Moby did.

      https://docs.google.com/file/d/0B0SLTNWD-Z3YNFdlWmdGM0hSbVNocEpKQTBTY2lZUQ/edit?pli=1

      Delete
  9. Had a foreign account since 2000 & sent 10k in 2001, 20k in 2002. these funds withdrawn & utilized by parents (foreign citizens) in home country. from 2003 to 2011, sent very small amts to this account, so this account earned little interest, but total interest 300$ for 8yrs. another foreign account in my wife's name since 2007 had little interest but had 2k in it, but total interest income $200 for 2007-2011.

    in 2011, came to know abt ovdp2011, as i violated fbar in 2001, 2002 but reason for considering the ovdp 2011 is -- in 2001, (foreign citizen) dad bought a home in my name using his retirement money in my home country, never known until recently that it was in my name, not rental income property though.

    cpa said i have to go for ovdp 2011 as i have to pay penalty as home is in my name eventhough not rental property. but in 2001, this home was bought by less than 20k so told cpa that it was <100k so no obligation to file 3520. now this home market value is doubled or tripled, so finally entered ovdp 2011 and also amended the tax for interest income for 2003-2011 yrs.

    Question:

    1. do you think i owe penalty on this home eventhough bought by dad (foreign citizen) in foreign country using his fund. because one of irs faq says only assets bought using non-complicance funds should pay penalty.

    2. cpa said that i sent money in 2001 to a foreign account at the same year this home was bought, so i cant prove that dad bought with his money (no docs avail). but even if i go by this argument, i read IRS looks only for last 6 yrs fbar violation nt before that, can they try me for 2001/2002 yrs as it is not wilful violation.

    3. do you think this case suitable for opt out before final fine assesed? Thanks.

    ReplyDelete
    Replies
    1. IMO, your CPA has given you wrong advice.
      If the house is not rented and bought before 2003 you should not have entered OVDI.

      Delete
    2. Based purely on what you describe, your CPA was almost criminally negligent in advising you.

      1) The SOL has LONG passed on FBAR for 2001 and 2002. Hence, you would not have been subject to ANY FBAR penalty at all
      2) The ONLY items you would have had to pay were the taxes and interest for the open years (likely 2008, 2009 and 2010). Maybe a 20% accuracy penalty on that, but we're talking about loose change here.
      3) Even if the house had been yielding income, the worst that could have happened was that you would have had to pay taxes on the rental income.

      Assuming the fact are as you describe and there were no other issues that could cause a problem, I would be infuriated if I were in your shoes. The CPA is guilty of professional incompetence at the very least.

      Now, whether you should opt out. I would say definitely, yes. Get a NEW competent professional to analyze your situation.

      There is one small issue. If the father bought something in your name, that would be a gift at that time (2001) and might have required filing a form 3520 at that time. I am not sure what the filing threshold was for those years (the current threshold is 100,000$). I not even sure that there was a form 3520 for that year. Even then, there are very good reasonable cause arguments that could be made and the penalty (if any) would be based on the value at that time.

      Even then, it would most certainly benefit you greatly to opt out. If you haven't submitted your offshore disclosure letter, I would just submit a letter saying that you had no FBAR filing requirement for 2003-2010, mistakenly joined the program and now wish to withdraw. You can toss in a line about how you intend to make up tax deficiencies for open years, indicating that the total interest is $200 for years 2007-2011.

      Delete
    3. Are you referring to a CPA based in Chicago by any chance? No need to mention any names please.
      I got some advice from a Chicago CPA and it was not very accurate.

      Delete
    4. without naming names, what was the situation and what was the advice. Most of these CPA's who entered the trade in the past couple of years just buffalo everyone in this mess.
      they do not stand to lose anything.

      Delete
    5. no not chicago cpa.

      also cpa was talking abt whether checked yes/no for 2003-2010 schedule b but i was not sure abt this. also faq 34 in ovdp2011 says if the proceeding still remains after dec 2002 you have to include it in base of penalty and also faq 35 ownership of assets in any form due to tax noncompliace should be included for tax penalty, based on these reasons (schedule b, faq34 & 35) i thought cpa suggested i have to go for ovdp 2011 eventhough i didnt file fbar in 2001,2002.

      anyhow i will check with one another cpa.

      Delete
    6. The whole FBAR/OVDI issue is something very few lawyers and CPAs have much knowledge or experience with. I found that out when calling CPAs to amend my returns (which I had prepared myself.) Most were honest enough to admit they had little knowledge of this, but one CPA pretended to had more knowledge than he had.

      I just wanted to check around with various CPAs before deciding to go with he one my lawyer referred me to.

      Delete
  10. Its not just Anonymous@ Apr 5, 2012 10:40 PM who should be outraged at his CPA's advice. I'm outraged just to read it. Even if the house had been bought after 2003, even if it had yielded rental income, if there was no FBAR violation (and assuming there were no other serious issues), there was no eason to join OVDI.

    The only thing that is required is a few amended returns. In fact, if the income is small enough (as it seems to be in this case), processing the returns might have cost the IRS more than they earned. What a fiasco for this poor guy.

    ReplyDelete
  11. As many of you, I am a minnow. I lost a lot of sleep since I learned that I was not tax law compliant. Basically I checked NO on Schedule B Part III questions for last 5 years, and did not file D F90-22.1 as well. My accounts were not that big, aggregated value less than $100,000 (All from my after tax savings before moving to US). The money were all in CDs, so the interests were $3500 per year, at 25% tax rate, I under-reported $875 per year. After reading so much on Internet, at first I was leaning toward to QD. But I am scared that government may treat me as "willful". As per "Section 16. Report of Foreign Bank and Financial Accounts (FBAR)"
    http://www.irs.gov/irm/part4/irm_04-026-016.html.

    FBAR Willfulness Penalty - Evidence:
    * A person admits knowledge of, and fails to answer, a question concerning signature authority over foreign bank accounts on Schedule B of his income tax return. When asked, the person does not provide a reasonable explanation for failing to answer the Schedule B question and for failing to file the FBAR. A determination that the violation was willful likely would be appropriate in this case.
    * Documents that may be helpful in establishing willfulness include:
    -Copies of documents from the administrative case file (including the Revenue Agent Report) for the income tax examination that show income related to funds in a foreign bank account was not reported.
    -A copy of the signed income tax return with Schedule B attached (showing whether or not the box pertaining to foreign accounts is checked or unchecked).

    Do I read wrong? I filed my tax by myself, can not argue that my CPA checked the Schedule Box for me. So I don't know if government can pin me down on this. PLEASE HELP!

    A scared one

    ReplyDelete
    Replies
    1. You don't offer enough facts to give you anything definitive. Definitive advise would require nuanced consideration of all of the potentially relevant facts.

      Having said that, speculating from the known to the unknown, I believe that your fears may be inflated. You could, of course, join the program and settle the matter for an insider the program price of the income tax, 20% penalty and interest and the 27.5% in lieu of penalty. All of that may aggregate to less than $40,000. That would at least give you assurance that your past is done.

      However, should you join the program, it is likely that you could achieve a substantial benefit by opting out. Alternatively you might do a quiet disclosure or just a go-forward and take the audit risk. The audit risk, basically the same as the opt out (assuming as there appears no criminal risk), would probably (speculating) not result in a willfulness penalty and probably (speculating) would result in a more manageable and fair payment of tax and penalty.

      I am just stating that your fears may be inflated. You really should seek individual advice considering all factors in making the decision as to how to proceed.

      Jack Townsend

      Delete
    2. Hi Jack

      I am the person who had earlier mentioned in a posting that I spoke to 7 lawyers regarding my case. I have good facts in that I did not send any money from U.S. to the foreign accounts and all the money in foreign accounts was "inherited" in the sense my parents had added my name to accounts that were funded by their earnings and before I came to the United States. Majority of lawyers suggested OVDI + opt out even though my unreported income is no more than 30K over 2003 to 2010 and taxes even less so with foreign tax credit. I think I don't have material criminal risk given my above facts. I don't understand why lawyers are not recommending go forward compliance or QD with audit risk. Is there a real possibility that the penalty can be higher with audit than with OVDI and opt out?

      Before I was given the recommendation by the lawyers, none of them asked me about Schedule B or any detailed questions that would give them an idea whether I have reasonable cause non-willful, non-willful or willful etc.

      I assume the lawyers (atleast the 4 that told me OVDI with opt out as my best option) are thinking that penalties will be lower than in a audit lottery? Would that be a reasonable assumption?

      Delete
    3. I respond only the your question as to whether the audit penalty will be higher if you are picked up for audit rather than have an audit after either OVDI with opt out or quiet disclosure. I don't know the perfect answer to that question. The IRS could have told us but it did not. Since it did not, it should apply the same audit results however the audit arises -- whether OVDI with opt out, quiet disclosure with audit, or go-forward with audit. In other words, the IRS should not punish you whichever mode of audit applies unless it has told you that it will apply better audit results for any particular avenue for the audit.

      What the IRS did say was that, upon opt out audit, you would get the same results as you would get in an audit -- no better and no worse. So, if you choose quiet disclosure or go-forward, and then happen to be audited, you should get the audit result -- no better and no worse.

      Now, and I speak to the IRS on this (I hope someone at the IRS with an ability to influence things is reading), if the IRS really intends to change the audit results to make OVDI with audit more favorable, then it should announce that policy clearly along with some guidelines about how much worse off the taxpayer will be if he or she does not join OVDI and opt out.

      Until the IRS does that, you are entitled to the audit result however you get audited -- whether on the OVDI opt out, the quiet disclosure or the go forward. And the IRS will be egregiously in bad faith if it does anything other than that.

      Jack Townsend

      Delete
    4. Jack, thank you for your detailed response. As a minnow who has done the pre clearance OVDI step less than a week back, I am now thinking that I should have instead just amended my returns and waited for an audit and IF it occurred hired a lawyer at that point instead of paying expensive lawyer fees for ovdi and opt out now. For a person with no material risk of criminal charges, I then see no real advantage of going into ovdi with the intention to opt out. I will question my lawyer about this and why he felt I should go through the program with intention of opting out. I did not express to him at any point that i want to get this thing over with in 12 months or anything. I was willing to wait for an audit if the results were not going to be any differen.

      Thanks again for your valuable time. You are doing a great service to people such as me.

      Delete
    5. To the Anonymous who talked to 7 lawyers: I hate to play amateur psychologist, but you should ask yourself why you consulted with 7 lawyers ? And now you are seeking an eighth lawyer's opinion anonymously? Are you looking for an answer that matches exactly what you want to hear ?

      Delete
    6. Yes it may seem odd to someone that I spoke to 7 lawyers; let me try to explain what happened. The first lawyer I spoke to said OVDI is not for me. He said filing amended returns and statemented FBAR is the way to go. He said I won't be audited. I was about to go with him when I came across this blog and read that IRS was specifically looking for quiet disclosures and threatened severe penalties (note I have unreported income and taxes due even though values are not huge). That led me to talk to another lawyer and this second lawyer said I need to go through OVDI and just pay the penalties! So I have one lawyer saying I will get off with zero penalties and then the second says just go ahead and pay 27.5% in-lieu penalty along :-) I realized that either lawyers are unsure about what the IRS will do, or are uninformed or my case is not straight forward (good facts but with 9 small accounts but adding to over 100K). That led me to call several other lawyers; finally took the decision to enter OVDI with opt out based on discussion with last 4 lawyers who recommended OVDI and opt out. I hope that answers your question. Now wondering whether remaining blissfully ignorant was the best situation for me (that perhaps defaulted to first lawyer's recommendation) :-)

      Delete
    7. I should have mentioned in my earlier posting: all the 7 lawyers I spoke to have previously done FBAR related work for clients. What should a client do when attorney advice varies from one to another? Is sitting tight (and just doing the go forward) the best thing to do when after 3 years of OVDI, we are still unsure what the IRS will do?

      Delete
    8. you are not alone. i have consulted close to 15 lawyers/CPA and i never get the same response.
      Ultimately, i figured i was looking for an answer that i would like to hear. Unfortunately there is no such answer because if i heard an answer that i liked, i immediately found a reason why that is not the correct path and what
      complications it can create.
      We are trying to find an unknown answer, that would make us comfortable from a non existing lawyer and hence we end up calling different lawyers expecting to get a comforting answer.

      Delete
  12. Please note that the IRM also says that simply ticking the wrong box or no box is not evidence of willfulness.

    Did you use tax software or fill tax return by hand ? A lot of tax software seems to default to 'No' on that question (or used to).

    ReplyDelete
    Replies
    1. First couple of years, I filed by hand, and later I used tax software. Did not remember its default setting. This year, I answered "yes", then the software reminds me of filing the FBAR TD F 90 form.

      Delete
  13. Thank Jack for the quick response. I think my case is quite straight forward as an immigrant. Had money in off-shore banks before immigrating to USA. Never did I move money out of USA, only gradually move the offshore money back to USA, (either write myself a check of less than $10,000 or brought cash back with me when I visited my home country- less than $10,000 as well). So as of now, I only have around $35,000 still in the off-shore banks. Had I known this stupid FBAR thing, I would have transferred all money to my parents, and asked them to wire to me when necessary.

    I appreciate your suggestions in terms of choices I have. I understand them well. But ultimately my fear stems from the language of "willful" as per government's definition which I quoted above. How do I explain to the government with regard to checking "No" in Schedule B box if I got audited? Could you please elaborate a bit more from a lawyers perspective? Thank you very much.
    A scared one

    ReplyDelete
    Replies
    1. The fact that you bought back cash less than $10k does not work well in your favor. did you do that so that you did not have to report?

      Delete
    2. I honestly did not know the filing of TD F 90-22.1 form, otherwise, why would l risk the penalty? Is that non-willfulness?
      I always thought the off-shore bank accounts are for the rich people trying to transfer and hide the money outside of USA. Me, on the contrary, try to bring my hard earned money to the USA. The reason that I bring less than $10K cash is because I don't need to declare it to the customs when I enter USA, less paper work, less headache. Now I learned an expensive lesson. For crying out loud, I even never have a traffic ticket in my life.

      Money maybe cannot buy happiness, but definitely can solve problems. I will enter the program and pay Uncle Sam $40,000 to get my life back. I think it is fair to pay under-reported tax plus interest plus penalty. But the 27.5% for FABR, a form I never heard of is just way to harsh.

      Delete
    3. Consider the opt out if you do join. But, you should consider whether you should join in the first place or, alternatively, do a quiet disclosure or go-forward. These alternatives will not give you certainty, but you should consider them.

      Jack Townsend

      Delete
    4. To Anonymous Apr 6, 2012 04:17 PM

      I do not intend this as a criticism, so please don't take it that way. But, your explanation for bringing in less than $10,000 could raise a possibility of "structuring." Basically, where the law has a threshold reporting requirement ($10,000 is the one on our minds, whether cash deposits or bringing money into the country), an admission that you "structured" more than one incident to avoid the reporting requirements is a major issue -- and could mean that you violated major felonies.

      From your perspective, you were simply complying with the law which says that, if you don't bring in more than $10,000, you don't have to report it. But if you take ten trips so that you can bring in, say $9,000, per trip, then there is a problem. The same is true. Banks report cash deposits of $10,000+, but if you arrange to make a series of cash deposits of, say, $9,000 to avoid the reporting requirement, then you have structured and committed a felony offense.

      So just be careful how you do this and, even if you did do this, what you say about it.

      Jack Townsend

      Delete
    5. Listen hard to what Jack is trying to tell you. If I could do it all over again, I would do a go forward strategy. Many are doing just that or QDs.

      If you are audited, remember you will have the law behind you which you will not have in OVDP unless you opt out. Within OVDP, you will not get peace of mind as there is still uncertainty with OVDP, e.g., will they calculate things the same way? Also the LCUs in terms of time and monetary costs in OVDP as a minnow will easily erode any semblance of appearing to be the right thing to do.

      Having been there and done that, I can only tell you my experience. The decision is yours.

      Delete
    6. Jack, I appreciated your honest advice. I will keep it in mind....All the money are hard-earned from work (salary), nothing illegal. As a thrift person, I wanted to save wire fee, that is why I wrote myself a check or bring cash back. In addition, I bet US dollar would depreciate because the fiscal deficit, another reason that I did not want to exchange all my foreign-dominated money at once.
      Anyway, too many laws/regulations (traps) for us new immigrants. When I finish the OVDI, I will close all the accounts, and transfer all the remaining money at once. No more FBAR crap.
      A scared one

      Delete
    7. "The reason that I bring less than $10K cash is because I don't need to declare it to the customs when I enter USA, less paper work, less headache. Now I learned an expensive lesson. For crying out loud, I even never have a traffic ticket in my life."

      Above are your statements. So you know you have to declare if you bring more than 10k. So to avoid reporting (less headache) you decide to bring in less so that you do not have to report.

      Forget for a second about it being hardearned money or you did not have a traffic ticket.
      your intention may be benign and simple but if
      it goes to a court or a jury their take on it may be different.

      So repeating what Jack says, intentions do not
      matter, in this climate just be careful how you do this and, even if you did do this, what you say about it.

      Many of the minnows (immigrants particularly) are finding benign actions such as accounts opened in India with parents (NRO) and banks sending the statements to local address (So that parents can go and monitor) take a different perspective in this climate.
      It is difficult to convince a jury where all are locals. First there is minimal need for someone local to have a joint account with his parent and even so in such a case the parent is not going to be in a different country with a different citizenship. Contrast this with a case of an Indian IT professional in the US. A good 50% of the cases atleast will have a parent in the account
      and most if not all the major banks send the account statements (atleast for the NRO accounts) to a local address.

      So intentions may be benign but they could be misconstrued/perceived differently.

      Delete
    8. To "A Scared One":

      Your decision is yours to make, since you will face the good and bad consequences, but I too suggest you think about what Jack said about whether you should opt out, or not join at all. Jack is doing the exact opposite of what some greedy lawyer might do. He is not asking you to join OVDI so he can earn fees.

      If I were in your shoes I would not decide anything until meeting with a lawyer with experience in this area (Jack has a list of lawyers on the website.) Might cost you around $1,500 for 2 hrs. (That's what my lawyer charges.)

      Keep in mind too that OVDI is not the place to save time and aggravation. You will likely incur tax preparer fees, and a LOT OF TIME going through bank statements and dealing with this.

      Delete
    9. Thank you for suggestions. My understanding is the audit risks for going-forward and QD or Opt-out are more or less the same. (assuming no criminal risk). So to me, if I do join the program, then it does not make sense to opt-out later. Why not just do QD or going-forward, and may be lucky enough (immaterial enough) not to be picked up for audit.

      Anyway, I will consult a lawyer listed on Jack's website (about one hour driving distance) before I take action. Question for you: 1) Did the consultation take place face to face or just a phone conversation. 2) Did the lawyer review all the facts before the consultation meeting? 3) Is necessary to ask for a 2nd or 3rd opinions? As you know this off-shore thing is kind of new to the lawyers as well, and the interpretations of the penalty ain't as clear as 1+1=2.

      Thanks you.
      A scared one

      Delete
    10. To "A Scared One,"
      I am the Anonymous of April 7 at 10:23
      Here are my answers:

      1) I met with the lawyer face to face, since this is an important matter and I live only about an hour away from one of the lawyers who has written a lot about FBAR.

      Had I lived several hours away I might have done this by phone, but such a matter requires a long discussion including of my specific facts.

      2) We reviewed the facts during the meeting, which took TWO hours. (And I paid for the time, of course.) I had done my homework before so I didn't need to ask dumb questions like "What's an FBAR." It was also a time of great uncertainty (OVDI#2 had just ended and he could only guess how the IRS would now be dealing with disclosures, so there were a lot of questions as to how to proceed in disclosing.)

      I really don't feel a short phone convo is enough to review the facts.

      3) I didn't ask for a second opinion, but wish I had due to the uncertainty. I went ahead with noisy disclosure, but am not sure that was the best way. Of course there is no way to know whether noisy disclosure, quiet disclosure or forward compliance is best, until maybe a year or two after you've made the decision. All a lawyer can offer is really an educated opinion, not certainty. It's a bit like taking a new job, getting married or having a child. There's no crystal ball into the future.

      Delete
    11. Thanks for your reply.
      You did a noisy disclosure after 2011 OVDI was closed at that time. So I assume you contacted IRS and wanted to join the OVDI? How is your situation now?

      I just learned from this website that Shulman will leave the office this time next year. And as we all know that the new OVDI is open indefinitely. I think this will be the policy from IRS in the foreseeable future. How to implement it by the next commissioner/IRS is another question. We never know.

      Since I am not a risk taker, I am leaning towards to join the program, and trying to opt out later. The reason is that if the new commissioner/IRS will treat people fairly, then dealing with opt-out will be less painful. If it is the same old same old policy, then I guess QD or going forward will be hit hard as well. Anyway, the worst case scenario for me is to pay the penalty (which is not unknown amount of money). And yet I can sleep tight all night.
      ASO

      Delete
  14. Jack,

    I think the person above would be guilty of structuring if there was more than trying to avoid with customs paperwork and extra hassles. If he was trying to smug in illegal funds below 10K then yes he committed a crime. However if the person just wants to fly below the radar with his own funds, why would he be guilty of anything. Nowhere on the customs forms does it say that if you bring less than 10K for second or third time then you have to come forward with any type of declarations.

    ReplyDelete
    Replies
    1. I guess all I can say is that the law prohibits structuring. Now, the question is whether DOJ would pursue an indictment when the funds are not illegal. That really is a different question and left solely to the discretion of DOJ. However, if the Government is serious about the reporting requirements, then it cannot suggest that structuring is OK if illegal funds are not involved. Congress did not say that and the Government can't say that. So, I would not recommend that anyone that they structure any time and in any context.

      The custom form may not say that multiple under $10,000 transportation is a problem. People with common sense will know that a reporting requirement that easily evaded is probably not the law.

      Keep in mind that an isolated event of assuring that less than $10,000 is brought in will probably not be structuring. It is the related pattern of such events that creates the problem, and the problem is present whether illegal monies are involved or not.

      For example, some of the prosecutions in the current round involved the structuring of clearly legal proceeds to avoid the reporting requirement. I think Dr. Silva's case involved that.

      Best,

      Jack Townsend

      Delete
    2. I will not speculate on where the fuzzy line is that once crossed, results in structuring. I think that someone who vacations once a year in a far away country and brings in $9,500 after spending two weeks there is bringing the money incidental to his trip, and his main purpose for the trip would not be structuring.

      Someone flying out every weekend and bringing in the same amount for five weeks in a row, I think, would be structuring.

      There have been convictions (in Jack's spreadsheet) of people who requested a series of checks just under $10K from their foreign bank, and that was considered structuring.

      Dr. Silva is an extreme example of what not to do; if memory serves me correctly he had inherited 250K from his mother (which would apparently have resulted in the max 5% penalty on inherited funds) instead he mailed a series of large envelopes each with just under $10K cash.

      Delete
    3. yeah. he could have paid $12500 and got the issue closed. instead he ended up losing 279K, his medical license and has
      a felony record.

      Delete
  15. Jack, any thoughts on self-prepared vs. CPA-prepared amended returns? Would like to save money but at the same time fear losing credibility if mistakes are found on audit, especially since I plan to opt out. Am represented by counsel, and he strongly suggests hiring CPA.

    ReplyDelete
    Replies
    1. While I have no empirical foundation for this, my gut reaction is that having a good -- emphasis good -- return preparer (does not have to be a CPA) prepare the returns is better. A good return preparer will make sure that the amended returns are well and professionally prepared and presented. I believe that an agent reviewing the returns will get some better feeling for a professionally prepared package with a return preparer who has done due diligence than with a taxpayer only prepared return. That may not be reality, though, and the benefits of a professional return in terms of presentation would likely be marginal at best. But every little bit helps.

      Also, the use of a return preparer can avoid the types of mistakes that might cause the agent to do a more detailed audit than he or she would have done otherwise.

      So, even at some cost, I would have the return preparer do it.

      Jack Townsend

      Delete
  16. I started working on my taxes for 2011 today and for the first time noted the part at the bottom of schedule B mentioning foreign accounts reporting. This was the first I had heard of any of this and now I'm freaking out over the possible consequences of my noncompliance.

    My story: I had a foreign bank account that I opened as a teenager before coming to the US. The account went unused for many years but I got some gift money (~$3k) when I graduated from college (by which time I had become a "US person") which I decided to keep in my home country to have easier access to cash on trips back. I ended up having to close the old account and open a new one, where I deposited the gift money. I later transferred ~30k (post-tax) from the US to the foreign account (at which point I became subject to FBAR). I only use the account when I am abroad and did not monitor it closely unlike my US accounts, and I assumed that my bank was withdrawing local taxes on it so never included it in my tax filings.
    So now, it is apparent that I am FBAR delinquent for 2007-2010, as well as tax delinquent for the earned interest (~$3K total) for 2006-2010. Current value of foreign acct is ~20k now. I would qualify for the 12.5% OVDP penalty (~$3.5k), which would still be a serious hit, but wondering whether it would be worth just paying it to get the monkey off my back... Worried that the fact that I was also tax delinquent would reflect poorly in an audit if I went QD or opt-out...

    ReplyDelete
    Replies
    1. I am neither a lawyer nor accountant so I will not advise you what to do, just some thoughts.

      There would usually be no FBAR penalty if all income has been reported, so generally even those with relatively good facts have some unreported interest income.

      And I just wish the IRS would take people such as you into account and design a program with little or no penalty of someone like you, instead of uncertainty or a $3.5 K cost to avoid uncertainty.

      Jack has written about whether it might be viable for those with small accounts and small amounts of interest (such as you) to either disclose quietly or just comply from now on without correcting the past. I would strongly suggest you read those comments and base your decision on that.

      Unfortunately lawyers who know about FBAR (not just the law but who have handled such cases so they know what really happens) are few ... and expensive. And even they can only give you an educated guess, they can't predict what will happen.

      I think it boils down to what the penalties would likely be if you do a QD or forward compliance, and what your chances are of being audited ... versus the certainty of having to pay $3.5K.

      Delete
  17. Is there a penalty "if no tax is due?"

    This is what I read about for FBAR penalties:

    "The penalty is 5 percent of the amount of tax required to be shown on the return. If the failure continues for more than one month, an additional 5 percent penalty may be imposed for each month or fraction thereof during which the failure continues. The total failure to file penalty cannot exceed 25 percent. Note that there is no penalty if no tax is due."

    In the case if a certain year, if the taxpayer has a net operating loss, and no tax is due, does not meet this case?

    ReplyDelete
    Replies
    1. You are mixing up Failure to File penalties for your 1040 income tax declaration with FBAR penalties. What you refer to are penalties for failing to file your income tax declaration which is an Internal Revenue Code penalty under 26 USC §6651. FBAR penalties are Bank Secrecy Act Title 31 penalties, specifically under 31 USC § 5321. They are not a percentage of tax. You can also read the Internal Revenue Manual 4.26.16.4 to find out what they are.

      The FBAR penalty ceilings are listed in the IRM. Sadly, practitioners will tell you to reckon with a non-willful penalty of USD 10,000 per account. That is because they do not know how the IRS will apply FBAR penalties and if the IRS will willingly apply less than the maximum. This is what scares a lot of people into OVDI/OVDP. If you read 4.26.16.4 carefully, you will realize these are ceilings and there are other possibilities. Note the negligence penalties appear to only be applied to financial institutions.

      To learn more about the monster penalties for not filing an FBAR that were imposed starting in 2004 under 31 USC § 5321, take a look at the following article on the American Citizens Abroad website.
      http://www.aca.ch/joomla/images/pdfs/browntax.pdf

      Note: I can't believe I know this detail. This is what 1.5 years of being in OVD programs will do to you. I wonder if I will ever be able to return to learning and thinking about "normal" things that are non tax related. Well, no worries yet, as I am in OVDI and considering the speed the IRS is working at, it likely won't be for another two years...

      Delete
  18. On the issue of whether the IRS can really assess a non willful penalty of 10K per account per year. I read the statute in question and frankly it seems to clearly say that the non-willful penalty is on a per report basis. I am not a lawyer, but I do not think the IRS can go beyond the 10K per year per account limit whether 1 account is involved or 100,000. I also doubt they will be willing to litigate the issue.

    I also question the rationality of the idea that for someone who simply hasn't sent a form in non-wilfully, it makes a difference how many accounts are required to be reported. I realize that courts generally defer to governmental agency positions, but in this case it doesn't seem to me that the agency has the statute on its side either. Now for the willful penalty, it could make a difference (and the statute does seem to support the idea that per account penalties could be assessed). However, given how massive the willful penalties are, it may not matter at all anyway since the potential penalties are so high.

    Jack, do you know if the service has actually tried to go beyond the 10K/year limit for non-willful violations in audits or on opt out ? I have not heard of such a case.

    ReplyDelete
    Replies
    1. I think that the per account or per form issue is kind of moot, simply because the line between willful and negligent isn't clear. So whether or not a per-account penalty is allowed, what matters is that there's this sword of Damocles hanging over you that says that a willful penalty might be charged. So in essence people are paying a reduced willful penalty, and it's just being labeled as per-account in cases in which this reduced penalty is over $50K.

      Delete
    2. I am not sure that I followed the reply, but to the question of whether the IRS is actually applying the nonwillful penalty per account per year for multiple years (up to 6), I have not heard that. I think that it would have to be a quite unusual case for the IRS to want to do that, and maybe that is why I have not heard of it being done. (Also, the reason I have not heard is that very few of these cases have been processed, but the ones that I have heard about came in with much lower nonwillful penalties than the draconian $10,000 per account per year. However, I can imagine that, if the taxpayer had a two account with $100,000,0000 each and was still not willful, the IRS might feel that $10,000 per account per year ($120,000 max) would be appropriate and proportional.

      Best,

      Jack

      Delete
    3. Jack

      I asked the original question as to whether the government had ever really tried to assess a nonwillful per account penalty > 10K/year. In some of the comments here, people have mentioned that they were penalized on a per account per year basis, but the total amount was still considerably less than 10K/year. The actual penalty may just be 2500 K total/year, but the government seemed to spread it over all accounts rather artificially (i.e. $500 per account for 5 accounts)

      So I agree with you completely, I do not think the government will try and go beyond the 10K/year number except for really egregious cases. And I think they are still assessing penalties at the per account/per year basis (rather artificially) for minnows to leave the door open for themselves if they want to charge a whale > 10K/year. Most whales will consider they got off lightly even if that happens -- after all such people are more likely to have a few very large accounts, rather than a set of small accounts.

      Another question is whether the IRS (or individual agents) may try and assess willfulness even in cases where they don't have enough proof (e.g. simply the Schedule B question) to really sustain that. I believe you have said that is unlikely too, and Appeals is likely to prevent over-reach.

      Delete
  19. Hi Just Me / Jack - I had a question regarding exchange rate to be be used to report passive interest income. I have a bunch of CDs which accrue interest throughout the year (let's say quarterly but at various dates because different banks follow different quarters). I dont have any capital gains or dividend. I went through the IRS website and it says that if you receive income throughout the year you can use average exchange rate for converting the income to US$. Does interest income from CDs qualify for that conversion i.e. can I convert using average exchange rate during the year. Please note this is not for FBAR or 8938 reporting (I am aware that for those reports we need to use official treasury rate). This exchange rate is for reporting income on tax return. Any help will be greatly appreciated. Thanks in advance. This is a great blog.

    ReplyDelete
    Replies
    1. Just use the official treasury rate, so the foreign interest income on 8928 will match the foreign income on 1040. Doing so, MAYBE you pay a little more tax, but it will cause less headache in case you got audited.

      Delete
    2. to Anonymous Apr 9, 2012 04:23 PM

      Regarding FX rates: Well, now that I have done this for about 8 tax returns, I will tell you what I do and why.

      When I first started doing this on my 2003 return, I set up my spread sheet to show FX rates on the multiple interest payments two ways. One, using the average yearly rate, and two, using the FX rate on the date that the income was posted to my account.

      According to the CPA, I employed for my first amended return, either way is ok, as long as you are consistent in what you do each year, and year to year. He wasn't so good at understanding and doing the foreign tax credit form 1116, but in this regard I do think he was right.

      As it has turned out, the FX rate on the date of transaction, ended up, in most cases, showing slightly higher interest income. I thought it would be best to default to that method, so the IRS had no possible case to be made that I was somehow slighting them during the OVDP audit!! I guess being gun-shy, I just defaulted to what is generally in their favor. Frankly it was pretty immaterial when I compared the two calculations on a yearly basis. (BTW, as it turned out, my Examiner didn't seem to care. In any FX calculation done, she ended up defaulting to the rate I chose even when it was in my advantage, so go figure.)

      I have continued that practice, and will do so again in my 2011 filing which I have not yet done due to an extension. Timing your US return, with your foreign resident country return always gets complicated if they are on a different fiscal year. I take all the time necessary as my NZ refund may require an extra tax or I may get a credit which will require you to also amend a previous year’s US return if the timing is wrong. GRRRRRR! It does get complicated, but never mind, I am just a compliant little tax payer now! :)

      Delete
    3. Thanks Anon and Just Me. Very much appreciate the inputs from both of you.

      Anon - the issue with using the year end exchange rate for India is that there is 7% variance between year end and average exchange rates because the rupee was volatile last year. As Just Me indicated, i would rather use conservative rate i.e. average rate vs. year end as it benefits IRS.

      Its good to know that we can use average or rate on date of posting whichever we choose to use consistently. This ie because I literally have 30 different postings as different banks post interest on different dates.

      Just Me - also being an Indian citizen and tax payer I am in the same boat as a Kiwi i.e. my Indian fiscal year and taxes are April 1 to March 31 - pretty complicated.

      Delete
    4. On form 8938, there is a row in the 2nd page for total interest reported on tax return so there is a link between tax returns and 8938.

      Since 8938 states to use the official treasury rate for the principal amounts, should we not be consistent in using the same rates across the board for interest calculation as well?

      Delete
    5. Does Form 8938 require translation of income at the treasury exchange rate? I thought only the maximum value was required to be translated at the year end treasury exchange rate. Anon - please let me know where Form 8938 states that income should be translated at official treasury rate as that will be helpful in determing the right exchange rate to use.

      Delete
  20. Hi, there are few articles on irs.gov on exchange rates. They reference both official sites and external sites here
    http://www.irs.gov/faqs/faq/0,,id=199668,00.html

    They have a table of exchange rates here. This article is under small business/self employed but I imagine it should be true for individuals also. They mention the following

    "The Internal Revenue Service has no official exchange rate. Generally, it accepts any posted exchange rate that is used consistently.

    When valuing currency of a foreign country that uses multiple exchange rates, use the rate that applies to your specific facts and circumstances. For example, if you have a single transaction such as the sale of a business that occurred on a single day, use the exchange rate for that day. However, if you receive income evenly throughout the tax year, you may translate the foreign currency to U.S. dollars using the yearly average currency exchange rate for the tax year."

    http://www.irs.gov/businesses/small/international/article/0,,id=206089,00.html

    ReplyDelete
  21. Anon123,

    I am back today. Here is my update. I got a voice message from my agent who asked me to call back and I did.

    My agent is about sending me a close form (906) along with all the correction made on my package. I was told that the tax part, we had very little difference (around 3K for the 8 years -- no foreign tax credit was taken into consideration). However, because there is a big difference on in lieu penalty -- my calculation is based on all Tax related assets -- since RRSP is protected by US/Canada treaty -- I did not include RRSP into the base. IRS' position on RRSP is that late tax deferral election can be granted but it should still be included base penalty which I believe inconsistent with OVDI FAQ that penalty only applied to tax non-compliance. IRS's explanation on this RRSP inclusion is that in lieu penalty is not about tax but about the reporting on FBAR -- so they want have RRSP included.

    My agent's calculation is based on IRS manager/technical adviser although he seems sympathetic on RRSP.

    I have no other option but opt-out. This inclusion of RRSP would make penalty almost 10 times of my tax due.

    I will keep updated as the process continues.

    Jack, I have been advertising your blogs to some of my Chinese friends who have interests in coming to US as investment immigrants. I recommend them to read yours and Phil Hodgen blog -- and possible p2p consultation before making such a big decision. However, blogspot.com is blocked in China. They may have to jump wall to access your valuable information.

    ReplyDelete
    Replies
    1. IJ - this does not make sense to me. FAQ 45 that states as follows:
      "Because the annual FBAR requirement is to file a single report reporting all foreign accounts meeting the reporting requirement, it is not possible to bifurcate the corrected filing. The taxpayer should make a voluntary disclosure for the omitted income and include the delinquent FBARs with respect to both accounts. The account with no income tax issue is unrelated to the taxpayer’s tax noncompliance, so no penalty will be imposed with respect to that account."

      I believe that your RRSP falls in the same category i.e. it is tax compliant but FBAR non-compliant.

      Delete
  22. ij

    Sorry to hear that, but on the good side, you may do even better on opt out than you might have in the program even with your RRSP excluded. The IRS's position is inconsistent, since they say that an account will be penalized only if it has income, and its not just about reporting. This is one situation where it may be worth your while to get a professional to draft your RC letter.

    ReplyDelete
    Replies
    1. "AnonymousApr 11, 2012 06:57 AM",

      Thanks..

      I won't opt-out even if I could do better with RRSP excluded inside OVDI.

      It is just too much LCU, and it has added 5 years on my aging for the last year only (no kidding), a lot friends were surprised to see me this time looking so much different than a year ago.

      Also, I do want to take some responsibility on non-RRSP as I am a long term US resident and new citizen of this country. 12.5% on 68K of non-RRSP is something I can take without much pain.

      I do tell my agent of my position on this matter -- so I hope I can convince IRS (in a small way) that it is better to deal with a minnow than piranha (when a minnow turns mad !)

      Delete
    2. Welcome back ij. Hope you at least had a nice trip to our hometown.

      I have been lurking around waiting for any news from you. Today I was literally holding my breath when I read your post. As you may recall, I have more or less the same issues as you had. I have not filed this year's 1040 yet although the file was ready to go a while ago. I am sorry to hear that the RRSP has to be included as the penalty base. It seems no income argument did not work, but have you tried 5% argument? Maybe it is the time to ask TAS for help.
      Civic

      Delete
    3. Civic,

      Inclusion RRSP into penalty base is not really a new development, it has been rumored for awhile and some folks inside OVDI have been informed this ruling.

      We should protest by opt-out (in your case, simply not get into OVDI).

      If you have purely RRSP issue, then you can just do back file of 8801/f1040x for last three years (if your undistributed RRSP income is less than 25% of your total income) and back file FBAR for 6 years.

      If you have RRSP AND non-RRSP issue, then it is a complicated problem. I would just go forward filing -- so you won't have problem being willful.

      Delete
    4. ij,
      Sorry to hear that but this was to some extent expected. They will pull in everything and that is why i do not see much participation from north of the border.
      Are you planning to opt out? how much would be the legal fees etc on opt out for you?

      Atleast you are closer to the finish line.

      Delete
    5. "AnonymousApr 11, 2012 11:22 AM",

      I have expressed my intent of opting out. But the final ruling has not come yet -- so there is still room for change. If it is final that RRSP must be included, then I will 100% opt out.

      I won't seek legal service. The amount of my case is so small (compared to legal fee), and I am comfortable with my own case.

      Delete
    6. il,
      In case you decide to opt-out, please check out the following document--IRS opt-out guidance.

      http://www.irs.gov/pub/newsroom/2011_ovdi_opt_out_and_removal_guide_and_memo_june_1_2011.pdf

      Good luck,
      Civic

      Delete
    7. "I won't seek legal service."

      "A lawyer who represents himself has a fool for a client, adage says "
      i hope the IRS settles. if not, i wish you luck ij
      It is sad that normal people have to spend a good chunk of their time,life and wealth defending themselves while the big guns from GS,Fannie Mae and the likes of Countrywide walk
      free.
      Somehow i feel reason will prevail, the Service will settle with a lesser amount or just a warning letter. Lots are eagerly watching.
      If that happens with many cases, i am sure the
      service will see a flood of entries in 2012 and they would possibly get more in compliance and
      collect a whole lot more than squeezing you.

      Delete
    8. The RRSP balance is pre-tax money. When you finally withdraw it, you have to pay tax on it. US resident Canadians will be subject to 25% withhold tax. So IRS has no ground to include 100% RRSP amount in the penalty base.

      I wonder how IRS calculate penalty on real estate.
      If you bought a home for $100,000 with $50,000 down, now it is worth $110,000 by appraisal, What will be the penalty base? Will it be (market value - mortgage)ie.110-50=$60,000 or $110,000? What if the house is only valued at $90,000. Will the penalty base be (90-50)=$40,000 or $90,000?

      Just-me maybe can shed some light on this. Thanks!

      Delete
    9. I kind of agree. There are a lot of people waiting on the sidelines to see how the minnows are being treated. If they are treated well, there will be two major advantages. All the expats and immigrants will praise the govt and their adopted home. They will be lifelong advocates of this great country. There will be a wave of disclosures in 2012 which will enable the Service collect far more in revenue that they can get by squeezing the existing minnows.
      It would be a win/win for all involved.

      Delete
    10. All of the persons replying on this comments should consider posting some variation on this theme at

      Open Forum Comments to Congress and IRS Regarding Tax Administration for Offshore Accounts (4/9/12)
      http://www.federaltaxcrimes.blogspot.com/2012/04/open-forum-comments-to-congress-and-irs.html

      Thanks,

      Jack Townsend

      Delete
    11. "If they are treated well, there will be two major advantages. All the expats and immigrants will praise the govt and their adopted home. They will be lifelong advocates of this great country."

      I don't think so. This analogous to gratitude for someone who threatens to break all your fingers but later settles for breaking only a few of them.

      The damage is done, and it's not reversible. Expats and immigrants are not stupid. An IRS that switches to behaving reasonably only if dragged away kicking and screaming from its initial unreasonable and punitive position is not going to suddenly voluntarily behave reasonably in future. Trust is like a vase. Once broken it's never the same again.

      Delete
    12. I agree. The damage is irreversible. I was very naive upto this point that government institutions will consider genuine grievances of common people. We are not against paying back taxes and ready to pay even 100 percent accuracy penalty. I have lost hope in this system. I see no hope in begging for mercy on another forum when TAS has already clearly reported the hell that benign actors are being put through.

      Delete
    13. "I agree. The damage is irreversible. ....
      ... the hell that benign actors are being put through."

      So what do you suggest those in ovdi do?

      Delete
    14. Anonymous Apr 12, 08:03 AM

      I am opting out of ovdi. 2012 ovdi guidelines (that the IRS back in Jan said would be out within a month and so already delayed by couple of months) may make things clearer.

      Delete
    15. 'So what do you suggest those in ovdi do?'

      Evaluate your situation objectively. Maybe get a professional to help you:

      0) Do you think the penalty is disproportionately high ?
      1) Do you think you are at serious risk for the willful FBAR penalty ? Even then, assume its not likely to go beyond 50% except for really bad cases
      2) Have you made a full, complete disclosure, missing no material fact ? [ I don't mean that you have identified every withdrawal and deposit from your account, I just mean that you have concealed nothing ]
      3) Do you have some serious reason to be concerned about a full audit ? I don't think the IRS will do full audits for minnows, but you should be prepared for that. Again, I don't mean concern about missing an old expense voucher or charitable deduction list.
      4) Do you have the intestinal fortitude to take a few months more of uncertainty and a possible protracted negotiation ?
      5) If you need a professional for hand holding, do you think the professional fees would exceed any possible reduction in penalty ? Bear in mind that the IRS may well reduce the FBAR penalty, but its extremely unlikely that you will be able to avoid the tax and interest due, even for closed years.

      If the answer to all these is yes, opt out.

      Delete
    16. IJ, Have you considered contacting the TAS?

      Also, keep in mind that if the possible penalty is too small for you to pay a lawyer to fight it, then from the IRS point of view it is also too unproductive for them to spend too many hours fighting you, and that might make them more inclined to reduce the penalty from what they sought initially. Keep in mind that Just Me initially faced a proposed 178K penalty, the IRS then proposed 115, he offered 40, the IRS rejected that and then TAS came in with 25K which the IRS accepted.

      Delete
    17. "AnonymousApr 13, 2012 12:28 PM"

      Thanks, I thought about TAS before, but now I think I will just do the argument myself.

      In case of opt-out, I will mainly deal with my examiner who seems a very nice guy, and he will be more flexible outside OVDI.

      Just got a pile of paper from my examiner -- he spent a lot time (since late last year) working on my PFIC. Our calculations differ by around $150 -- the total is only a bit over $2K. I do feel guilty for entering OVDI for that small amount money and waste IRS a lot time to do the job for me.

      I thought it was the right thing to make it clean -- but indeed, it seems wrong that process has cost so much on the government.

      Delete
    18. If and when you talk to your examiner next time, can you get a feel for what most of the examiners are feeling about the minnows/expats/immigrants in the program. Are they given any leverage?

      So is the total tax loss from you only a little over 2k?

      Delete
    19. "AnonymousApr 14, 2012 07:37 AM"

      I believe most examiners are just like us, and they have common sense. They are sympathetic. But they have to follow the rules set by OVDI policy and guided by their managers/technical advisers. Unless there is change of heart from the top, there is very little they can do --even for simple matter such as RRSP.

      My total tax due from PFIC is $2K, with other CD/saving account, the total is around 3K.

      I read through the the detail work of my examiner last night (over 100 pages!). He calculated each fund (over 30 total !) while I calculated all together as a whole. The difference between our two methods is $150, I overly taxed myself -:). He would love to take what I did -- but I guess he, as an examiner, had to do the accuracy -- even on penny difference. Had I hired CPA or tax lawyer to handle my package, that would cost me at least another 20K, remember -- my examiner started to work on my case since late last year !!!

      So there is a good moral ground for minnows like us NOT to enter OVDI -- it saves a lot resource from IRS -- and LCU from ourselves as well.

      If there is anything I feel guilty -- that should be the fact I flippantly entered OVDI.

      Delete
    20. What an incredible waste of an IRS examiner resource. I feel for the agent who is just doing their job, by following the rules and guidelines/restrictions they are given. 100 pages, by god! As I told my examiner, I could not do your job. I would rebel against the stupidity of the process. But then again, when I was younger, I wasn't very good at taking instructions from a shop steward on my one Union job to slow down so we could justify a new hire! I thought that was stupid too.

      If this was a normal business and a Manager saw his employee engaged in such low return highly inefficient activity, they would cut losses and move on to something else more productive. If they didn't, they would go out of business eventually. But the bureaucracy never dies and doesn't think this way, so more time and energy is wasted with no thought of "lean processing".

      Frankly, if you wanted to bring the IRS to it's knees, 30,000 Minnows need to join the OVDI tomorrow. Their processing would grind to a halt, and they would still wouldn't recognize what is wrong. Shulman would probably be up on the hill the next day begging Congress for more money for more agents to deal with his success, and yet not change a thing in their process! Go figure.

      Delete
    21. Kind of sounds like how our government is run day to day. Waste and inefficiency. Thank the lord they can print money I guess. Eventually it will collapse itself under the weight of the mass waste it self propagates. Just like these ignorant programs that now take two to three years to complete. Come on all you potential 2012 cases. Don't you feel up to a five year tussle with the IRS? By golly they will audit the entire world. How stupid.

      Anon123

      Delete
  23. My dear friend ij,
    Firstly welcome back and I am happy you had a safe trip. I am saddened to hear the news on your RRSP. I urge you to do what is right for you. I totally understand the toll that this multi year process of madness and insanity takes on decent people. I hope whatever you do brings you a fair and just result. Is it not bewildering to be treated like a common criminal when you have innocent circumstances and then have a huge portion of you savings stolen from you buy a despicable and desperate government? I guess thats the price of doing what they tell you to do. Disgusting!

    Anon123

    ReplyDelete
  24. "Also, I do want to take some responsibility on non-RRSP as I am a long term US resident and new citizen of this country. 12.5% on 68K of non-RRSP is something I can take without much pain. "


    It is one thing to give money to the US Treasury as a thank you for making your life better by allowing you to come as an immigrant to the US.
    Donate here:
    http://www.fms.treas.gov/faq/moretopics_gifts.html

    It is another thing to give the money as part of a penalty for having had a prior life in Canada (or India, etc.). That is not acceptable under any circumstances, and for any amount.

    Every immigrant should understand this. Because of the guilt associated with the "penalty" the implications are far worse for the donor, because "penalties" are only applied if one has done something wrong.

    Donating money to the US Treasury (or a related charity) does not have a bad or wrong or guilty or "willful" association that a "penalty" does.

    This is something that immigrants unfamiliar with the US criminal or justice system have a hard time understanding.

    ReplyDelete
    Replies
    1. You might consider posting some variation on this theme at

      Open Forum Comments to Congress and IRS Regarding Tax Administration for Offshore Accounts (4/9/12)
      http://www.federaltaxcrimes.blogspot.com/2012/04/open-forum-comments-to-congress-and-irs.html

      Thanks,

      Jack Townsend

      Delete
  25. Dear M,

    Maybe I should rephrase it as a "cat surgery" as Just Me has done so.

    Relatively speaking, I should be more responsible than expats and short time immigrants ---under the same non-compliance situation.

    ReplyDelete
  26. Folks,

    Just a new update, I was just told by my agent who had briefed his manager on my position regarding RRSP.

    He said "they will review RRSP as whole" and it may take a bit longer time. My agent is really a nice person. He went through all my docs and could easily see I was simply a sloppy and stupid taxpayer.

    ReplyDelete
    Replies
    1. It can't be the case that they are still reviewing the general RRSP issue, since it must have come up before for other people. Maybe they (despite the 'no discretion' line) do have some discretion when someone is just on the point of opting out, and are considering making an exception in your RRSP case.

      As far as opting out anyway, even if RRSP is not penalized, you may want to do that too. If its just that you don't want to spend the LCUs, that is perfectly justified.

      On the other hand, I don't think you should feel the penalty (even without RRSP) is reasonable. I do not think the IRS is unfair or evil, I think they are actually pursuing a genuine problem (tax evading whales). But that does not mean a penalty far greater than might apply to domestic assets is reasonable and I think the IRS would likely reduce it a lot even on opt out.

      Delete
    2. "Anonymous Apr 12, 2012 04:56 AM"

      Thanks... I think IRS will review RRSP for all and I think they will have to come up a ruling since it affects so many people.

      Of course, I don't think 12.5% on high balance is reasonable -- but I have got myself used to such a harsh penalty based on others' experience (expats and immigrants like Just Me and Anon123), I would take a "cat surgery" exit and move on.

      Delete
    3. ij, I am in the same situation as you, except no RRSP account. I was just stupid and grossly negligent for a long time.
      I am hesitating between OVDP and quiet disclosure. If you were to do it again, would you do OVDP again, or would you choose quiet disclosure?

      Delete
    4. "Anonymous Apr 12, 2012 11:04 AM"

      OVDP it is costly but it should give you a good sleep.

      QD it is cheap and if you don't have much bad facts (simple offshore CD etc and not much tax "evaded"), you can still have good sleep.

      Forward, pretty much same as QD, it is even cheaper.

      Nothing, if you can get rid of all offshore and wait FBAR SOL dies.


      If I were you, I would do forward. As Jack said "we have no obligation to undo our past wrong (if not intentional/criminal).

      Delete
    5. One difference is that I didn't get the US citizenship yet.

      Delete
    6. Hello IJ,

      Are you in OVDP 2009 or OVDI 2011? Sorry if I missed your post on this information earlier.

      Thank you.

      Delete
    7. "AnonymousApr 14, 2012 12:39 PM"

      i am in 2011 ovdi. i heard ovdp 2009 after i became aware of ovdi 2011 -:)

      Delete
  27. Jack,

    As for dealing with the past, you answered in an earlier post:

    "However, should you join the program, it is likely that you could achieve a substantial benefit by opting out. Alternatively you might do a quiet disclosure or just a go-forward and take the audit risk. The audit risk, basically the same as the opt out (assuming as there appears no criminal risk), would probably (speculating) not result in a willfulness penalty"

    You seem to say that in that case, the end result of opting out or being audited for doing a quiet disclosure is likely to be the same. Why would this person join the program in the first place? Amending 8 years would be more expensive than amending 3 in the case of quiet disclosure.

    As for the choice between Quiet Disclosure or just being compliant going forward, is the IRS more likely to be more lenient for penalties in an audit triggered by a quiet disclosure, or by an audit triggered by a first time FBAR filer who decided not to address the past? It seems amending is the right thing to do, but might increase the chance of audit.

    If someone goes for the Quiet disclosure, how do we reconcile the 6 year statute limitation of FBARs vs 3 year on taxes? It seems we should file 6 years of taxes to match the limitation of the FBAR to declare the undeclared interest income for these 6 years, and also fix the "Foreign bank account" checkbox.
    Or is it OK just to file just for the statute years?

    Thanks in advance for your answer.

    ReplyDelete
  28. Are there HSBC customers out here, small guys with balance < 100K. What are you guys doing - ovdi opt out or quiet or go forward? Question is has HSBC given away the names?

    ReplyDelete
    Replies
    1. in case of HSBC you are playing with fire. They could even randomly select and disclose. ovdi opt out is probably the best way forward.

      Delete
    2. Apparently, HSBC India reported names of account holders with balances greater than 100K. From what I understand, a person can go through OVDI independent of that development unless IRS has initiated inquiry/investigation specifically against that person.

      Delete
  29. The summons said that all customer accounts should be disclosed, even those below 100K. The IRS may not have actually acquired those documents, they may not do anything with them, but I don't think you can necessarily assume that, nor can you assume that HSBC will necessarily inform customers whose account is being disclosed.

    ReplyDelete
  30. Hello all, I've a vague and unclear question lingering my mind. Lets say one is doing disclosure going forward and don't do anything for the past (since available options to correct past are horror). Now if there is audit, would we be considered wilful for past just because we did not correct the past? If yes, then i guess we have to do quiet or opt out. If no, then i guess its all the same whether we correct the past or not. Looking at < 10K tax for 2003-2010, all principal is US taxed, only interest went unreported due to lack of clear knowledge and idiot CPA.

    ReplyDelete
    Replies
    1. First, the statute focuses the inquiry on each 6/30 when, at the moment of midnight, the return that is due is not filed. If there is willfulness at that magical moment, then there is willfulness; if there is not willfulness at that magical moment, there is not willfulness. So what happens after that magical moment -- whether you join OVDI, make a QD or just go forward without filing any past FBARs -- should not bear upon willfulness or nonwillfulness.

      An analysis like this applies in the analogous income tax area. The penalized culpable event if the filing of a false return or the failure to file a return when due (April 15). What happens after that is not does not affect the proper determination of the mental state -- willfulness -- on the key moment the taxpayer failed to meet his or her duty.

      It is true that, generally, filing an amended income tax return or delinquent income tax return will avoid a criminal prosecution, but that is based on prosecutorial discretion rather than some command that filing the amended return or delinquent return compels no criminal prosecution. That subsequent event is just not relevant to the required mental state at the time the key act occurred. The same would logically be true for the FBAR willfulness analysis for purposes of the civil penalty. Until and unless Congress or the IRS says that filing a delinquent FBAR mitigates the original penalized conduct, then there is no basis to assume that the willfulness determination will be different for (i) an OVDI participant opting out and taking an audit, (ii) a QD taxpayer who is audited, or (iii) a go-foward taxpayer who is audited. All should be subject to the same penalty regime, applied in the same way (subject to audit tolerances that does not require every taxpayer similarly situated to be treated exactly the same way).

      Jack Townsend

      Delete
    2. Thanks a lot Jack.

      Delete
  31. I see Jack has started a great forum and there is this new blog to express concerns to govt. But
    I don't think anything is going to happen. This is going for quite sometime now and if anyone cared, they would have done something about it. Congress knows about this. President knows about this. IRS knows about this. They are just turning deaf ears to immigrants and expats. They simply don't care. Nation's productivity has surely decreased as this tension and turmoil is taking away so much time. First time it is appearing that we are 2nd class citizens. I wish someone stands up to challenge this amnesty and one size fits all, may be if you raise money using some online means, lot of folks will contribute. Even media is silent. Have we really committed such a big felony that no one other than Jack is helping us.

    ReplyDelete
  32. Looking on the IRS's web site, I saw a memo from 2006 from the Chief Counsel's office. Its slightly, old from 2012 and deals with the old compliance initiative (LCCI), but here is what it says about FBAR penalties (and I think these are the pre 2004 penalties, which were high, but not draconian).

    'The penalty statute, however,
    provides for discretion in asserting the penalty. The purpose for the penalty, and the reason for
    the flexibility Congress provided in asserting the penalty, is to encourage compliance. There is
    no requirement to assert a separate FBAR penalty for every possible technical violation
    encountered and doing so could lead, in some cases, to an absurd result. To put this in
    perspective, consider that the section 6663 civil fraud penalty is limited to 75% of the
    underpayment of tax attributable to fraud ..'

    I wonder if those planning to opt out could make the same argument since for a number of people, the 75% of tax civil fraud penalty would still be substantially lower than the FBAR penalty. Of course, this assertion treads on slightly dangerous ground because it might lead the IRS to seriously consider the civil fraud penalty -- although the high standard of proof should deter them.

    ReplyDelete
  33. Jack,

    My OVDI package includes amendments from 2003-2009. 2010 return was filed correctly with income from offshore accounts and the 2010 FBAR was also personally handed to an IRS office on June 30th 2011(not mailed to Detroit). So i am hoping that IRS will not include 2010 in the penalty base. Do you agree?

    Thank you.

    ReplyDelete
    Replies
    1. Technically, the return is supposed to be in the Detroit Service Center on June 30. However, I doubt that the IRS would impose a penalty for what you did. However, you might want to check to see if the FBAR actually made it to Detroit. There is a way to do that; do a google search and you will likely pick it up.

      Also, did you get some type of receipt from the IRS office to which you delivered the FBAR? That would be helpful in showing your good faith.

      Jack Townsend

      Delete
    2. Jack,

      Yes I was given a stamped copy of the FBAR's front page as a receipt by the local IRS office. It shows the date.

      I was going to FedEx it earlier but my accountant told me initially that it only needs to be post-marked by June 30th. So i waited till the last day and then on the last day he said, it needs to reach by EOD today. So I panicked and went personally and hand delivered it to the local IRS office. I realize that is not exactly what IRS wants but at least I tried to meet the deadline.

      Are you saying that I can check on Google whether my FBAR acutally made it to Detroit on that same day or not?

      Thank you very much.

      Delete
    3. No, you don't check on Google. What I meant was that by googling the right question, you could find out how to request the filed FBARs. But here is the information:

      Q. How do I verify that my FBAR was filed?
      A. Ninety days after the date of filing, the filer can request verification that the FBAR was received. An FBAR filing verification request may be made by calling 866-270-0733 and selecting option 1. Up to five documents may be verified over the phone. There is no fee for this verification.
      Alternatively, an FBAR filing verification request may be made in writing and must include the filer’s name, taxpayer identification number and the filing period. There is a $5 fee for verifying five or fewer FBARs and a $1 fee for each additional FBAR. A copy of the filed FBAR can be obtained at a cost of $0.15 per page. Check or money order should be made payable to the United States Treasury.
      The request and payment should be mailed to:
      IRS Enterprise Computing Center/Detroit
      ATTN: Verification
      P.O. Box 32063
      Detroit, MI 48232
      http://www.irs.gov/businesses/small/article/0,,id=210244,00.html

      Delete
  34. If 2010 return is not part of the OVDI disclosure, would IRS audit 2010 as well as 2011 returns if the taxpayer opts out? OR only those years that are part of the OVDI get audited?

    Thank you all.

    ReplyDelete
    Replies
    1. I think the IRS has the option to audit those years. However, I doubt that the IRS will simply because, playing the odds, those who got into the program are not likely to make material errors on their returns for later years. The very stupid might, but most entering the program will likely have filed good returns. So, from the IRS perspective, why spend good audit resources on those returns.

      Of course, the agent may ask for copies of the returns, but a quick scan of those returns to see if there are obvious errors is different from a real audit.

      Jack Townsend

      Delete
    2. Jack,

      On a related note, would IRS audit 2003 and 2004 if the participant opts out? Or would these years get excluded under the 6 year SOL?

      I guess if they suspect fraud they would audit all years and might even look back beyond 2003 but what if there is no fraud?

      Thank you.

      Delete
    3. I should point out here that it is far from a given that the IRS will audit 2008, 2009 (likely the only open years) too. In fact, for the large majority of minnows with primarily wage and some 1099 income, I would not expect a full audit. After all, the IRS has to focus its resources and someone matching the profile of immigrant/expat with some small accounts, no entities, and say less than 100K with post tax income transfers (if any) from the US is unlikely to yield much extra income.

      Of course, if someone has a material problem with their past or amended 1040s, then they should not opt out. [ But I mean material problem, not a few expenses for which you can't find a receipt, or a botched basis for a small sale]. On the whole though, I think the possibility of a full audit is just intended to keep whales in line. Nothing a minnow should worry about. Consider too that even if the IRS (say) disallows a deduction and your bill goes by $2K or so, you should still be able to get a large break on FBAR penalty.

      Delete
    4. To Anonymous Apr 15, 2012 07:04 PM

      The IRS will have a three year statute generally to audit. It can audit six years if there is a 25% omission. It can audit all years if it can prove fraud (which would take an incredible amount of audit work in most cases and may be impossible in many, if not most, and for that reason will probably not even spend any resources to see if there is fraud). So practically, the three or six year statutes are the ones that will apply.

      To go further, I doubt that in most cases, even where the IRS may suspect fraud, it will not spend audit resources to chase down any fraud. Of course, if big potential recoveries are there, the IRS could. Or if the IRS had some other reason to spend extraordinary resources, it could. But in the minnow cases, I doubt that it will.

      Jack Townsend

      Delete
    5. Can people please share their knowledge on where does a minnow end and a whale begin in the eyes of the IRS?

      Thank you.

      Delete
    6. The IRS treats anything over 75k balance pretty much like a whale unless you have very specific mitigating criteria that you likely will have to opt out with in order to get discretion. In other words they say but they do not say that the majority should not join these extortion programs. Once you join you pretty much have to opt out to get discretion. If you are a minnow with the right facts and circumstances, joining is likely a financial and life altering mistake. Perverse consequences when you get harsher punishment for trying to do the right thing by listening to an organization that speaks out of both sides of its mouth. Also, anecdotal evidence seems to indicate that joining results in a two to three year process that has had detrimental health and social effects on some participants. Consult with an experienced practioner, do the Just Me Drudgery and see if there is not a better solution for you than joining the shakedown.

      Anon123

      Delete
  35. Some interesting results for people in the program

    <--- From http://isaacbrocksociety.com/2012/04/15/my-response-on-jack-townsends-open-forum-comments-to-congress-and-irs-regarding-tax-administration-for-offshore-accounts-4912-2/#comment-13153 ----->

    bubblebustin
    April 15, 2012 at 12:38 pm

    In my case alone, in rough numbers our capital gain tax liability under OVDI is $65G plus $35G in associated penalties and another $50G’s for in FBAR penalties arising out of the sale of our principal residence. The IRS cashed our cheque for the tax and its penalty, but did not request the FBAR penalty. TAS has given us hope that we can use First time penalty abatement to eliminate $35G penalty, so already there is a discrepancy on what the total haul will be for the IRS. My MP John Weston said that there is a possibility that Article XXV of the Can/US tax treaty may eliminate the cap gain tax, but my lawyer does not agree. Is there anyone out there who can shed more light on this article of the treaty? I’ve asked TAS if their legal can look at it, but they can’t even open a file for us until we get a response from OVDI. Time will tell about he FBAR penalty.

    ReplyDelete
  36. Hi All,

    I just found this website and found you guys. I am chinese who immigrates to Canada, became canadian citizen and then moved to U.S. since my husband (who is also chinese) works here.

    When I read the posts, tears come into my eyes. I joint 2011 OVDI and suffered every single day since I joint. Some time I was thinking not to continue but looking at my three year old girl, I knew there is no choice. Finally found you guys that could share the feeling and support each other.

    ReplyDelete
    Replies
    1. Please hang in there - I am a mother too, and looking at my child is also a reason I continue. We are alive. So we have a chance to go forward, and put this behind us. We have a duty to our children to continue, and to ourselves - however painful or frightening it is right now. There are many of us. Also see; http://isaacbrocksociety.com/2012/04/16/reuters-article-attosa-abrahim/#comment-13969 - many Canadians, but also from Europe, NZ, etc.

      Delete
    2. i also suffered a conscience honesty attack when trying to put my 5 months old to sleep and decided to join ovdi so i can offer him a better future, now i am in bigger suffering for 9 months now, so much gray hair for nothing...

      Delete
  37. I am wondering if there is chance for me to opt out for a better deal?

    My case is, I came across the boarder in the middle of the year. At that time, I was not prepare to be able to stay so I kept all my bank accounts and my canadian job as if I would return soon. I was lucky that my canadian employer offered me to transfer to it's U.S. branch with L1B visa. At the same time, my husband file my I485 application together with him.

    By the end of 2006, I learnt that I might get laid off and at the same time found myself pregnant. Then returning back to Canada seems not a option for the family.

    I was officially laid out by March 2007. At the same time, suffered a miscarriage.

    Being mentally depressed, I made a mistake. I just checked with Canada CRA about my status and advise by them that I should be non-resident of Canada. I report all my canadian source income (wage income, part of it paid after I get across the boarder since I am still on their payroll before transfer to U.S. as vacation. interests, dividents) to canada.

    When file the U.S. return, my husband (who never owns any offshore accounts since those accounts are only on me and always do the tax return himself) and I just simply thought we should file as married couple and should only report my U.S. wage

    income and interest from our bank accounts jointly own in U.S.

    My husband check no on 1040B as he used to do without second thinking that the term "you" here is not just him but also me.

    I just simply sign the form without even looking at it since being so sick at that time.
    We have no sense at all about the FBAR issue.

    Then year 2008, I pregnant again and about to delivery my baby at tax return season

    and just leave everything for my husband to take care of year 2007 tax return. He fill in those forms by hand as usual. Then 2009, busy with the one year old baby, same story.
    Finally, in year 2011, not being so busy, I read this OVDI thing from chinese website and started my nightmare.

    ReplyDelete
  38. My accounts status are:

    I have highest segregate of $200k of cash, mutual fund and stock by the end of year 2006, add on top of that $64K in RRSP, $40K set up through my canadian employer and $24K by my own. and there are several bank accounts under my name in china opened by my parents (with no knowledge by me at that time, just figure is out in year 2011 when
    told my mom about the OVDI thing) in total about $10k.

    I transfered about $40K 20 days after first time enter into to U.S. by write check of to myself and deposit into the my husband's account since I don't have SSN to open account for myself.

    Then transfered about $50K in march 2007 knowing that I would not go back to canada.

    Then in year 2008, transferred an other $30K which make the left over in canada about $70K in cash and the $64K RRSP.

    I went with a tax service company for the OVDI package.

    After their caculation, I owe $3500 in year 2006 (according to them, I have to pay my whole year income even for the first half year that not physically in U.S.since I fill jointly with my husband). Nothing for year 2007. $300 for 2008, $600 for year 2009 (the income is actually just $79 from canada, the other taxs are occurred for U.S. interest income that we did not received tax slip so that did not report).

    Add them up together with the tax penalty, I paid $6700.

    For the FBAR calculation, they said RRSP should be exclude so that my penalty is $52K.

    But with the latest news, I now learn it is actually $68K if stay in OVDI.

    ReplyDelete
  39. I am wondering for OVDI 2011 panticipant. Do I have the advantage to opt out for a better deal since

    1. 2009 has FAQ #35 but OVDI 2011 doesn't.

    2. The segregate of my balance (include RRSP) for year 2006 is more than $250K and I have about 19 accounts at that time (I was living in canada, each CD counts one).

    17 account in year 2007 (although no tax owe) and 13 accounts in year 2008 and 2009

    3. How could I bargain that my RRSP should not be included if stay inside OVDI

    since I made contribution to my RRSP in year 2006 and early 60 days of 2007 especially the RRSP/DPSP contribution made through payroll that not report to U.S. but only to canada. (I do have enough cash to make the same amount contribution using my money earn before 2006 though)?

    Any information are highly appreciate it. If it turns out no chance for me, I will take this lesson and take the beat up. It is about $100k hard work clean money, half of my life saving for a home of my dream which I never own.

    ReplyDelete
    Replies
    1. You have a good chance to have RRSP removed in penalty base inside OVDI, and this is what I am fighting for.

      OVDI high level officials are reviewing this issue because there are so many Canadians living in US with RRSP -- and they have to come up with a consistent/sensible policy.

      As for opt-out -- this is a tough choice for anyone inside OVDI. It is easy for me to make my own choice, and my choice is simple -- if OVDI punishes RRSP -- I am out otherwise I stay and take the hit. My decision is based on two facts.

      1. high moral ground to fight for RRSP
      2. the worst opt-out outcome would not be much worse than OVDI with RRSP included.

      I am doing it all myself -- with help from IRS doing nice auditing -- yes I love to be audited --so my penalty fee is well spent -:)

      Delete
    2. Hi ij,

      Thanks for your fight which benefits all.

      Here is what I found but not quit sure. Maybe you guys knows better?

      http://www.irs.gov/irm/part4/irm_04-026-016.html#d0e529
      4.26.16.4.6.2 (07-01-2008)
      Mitigation of the Non-willful FBAR Penalty :

      There are three penalty levels depending on the highest amount in the account during the period for which the FBAR should have been filed.

      - If the aggregate balance of all accounts held during the year does not exceed $50,000, then the penalty for each violation is $500, not to exceed a total of $5,000 in penalties.

      - If the aggregate balance of the accounts is over $50,000, but less than $250,000, the penalty is, per violation, the lesser of $5,000 or ten per cent of the highest balance in the account during the year for which the account should have been reported.

      - For violations regarding an account exceeding $250,000, the penalty per violation is the statutory maximum of $10,000.

      My question is :

      1.when they calculated aggregate balance of the accounts, does funds transfered between accouts counted twice?

      2.what about my case aggregate balance of the accounts (include RRSP) is more than $250,000 but no "an account" exceeding $250,000?
      catagory two or three?

      Sounds like if more than $50k but each less than $250k, then calculated on account basis.

      Is this true? could it still have some mercy to just char $5k per year even total balance is more than $50k?

      Would RRSP be included at all if opt out?

      Delete
  40. Hi ij,

    Thanks for the quick response. I read your story last night and really admire your courage to fight.

    I am wondering how could I bargain my RRSP.
    Unlike you, I made contribution to RRSP in year 2006 through my employer which deduct the payment from payrol. Since I moved in the middle of the year and file jointly with my husband, I do need to report my canadian salary of year 2006 to U.S. but I did not for lack of knowledge. They could argue the contribution is tax non compliance. :-(

    For your case, I am a little bit concerns about it:

    We are not OVDI 09 who has FAQ #35 that clearly state IRS agent should make comparison between 20% panelty vs exiting panelty.

    For us, FAQ 50 states examiner should not consider willingful or not at all. Anybody could think of a way to argue that?

    I am wondering if this is the root for TAS to bargin for "just for me"

    According to the IRM, they do calculate per account per year instead of whole violation.
    For "just for me", I am wondering if his segragate bank accounts value is less than $50, so that IRM $5k max per year kicks in (max unwillingful penalty for person whose segegate value is less than $50k should pay no more than 5k. not sure if funds transfer between these accounts should double count though.)

    Please don't be upset by my words, with all the people's participant, we might find a good way to address the issue. I am just not that smart and strong :-(

    ReplyDelete
    Replies
    1. Sorry I have not read much of what IRM -- and what they will impose penalty on each account or total -- I really don't care what they want to do when opting out.

      I want to take the case to the court if I am not happy with their ruling on penalty. I am prepared to lose 50% or even 100% of my total "offshore assets" --but that will take big trunk of IRS resource for exchange.

      So my focus is not only to minimize my own loss (not much to lose anyway compared what OVDI can do to me), but how much I can take it own IRS.

      I am a mad but rational/reasonable man.

      Delete
    2. I see your point. Just check with my tax agent. Yes, IRS is reviewing for all RRSPs. It might end up with a reasonable solution. Anyway, give us a bit more time to prepare.

      Good luck!

      Delete
    3. ij, I admire you. You inspire me to try and be braver. Thank you so much. Also I like your sense of humour. Bless you, and I wish all the best for you. We owe you also a big thanks for what you are doing - and for sharing your thinking.

      Delete
  41. "Anonymous Apr 19, 2012 06:11 PM"

    Thanks for your kind words, and we all should thank Just Me, Moby, M, Anon123, Sleeper (of course Jack), and many others who participate in this discussion. United we have strength to fight what is right for us -- and for this country as well.

    ReplyDelete
  42. ij, Your the fearless leader/Captain now! You go man!

    To anonymous Apr 19, 2012 11:24 AM, who is trying to figure out all the mitigation charts of the IRM and penalty applications...

    I would not get too hung up on them...

    Regarding 4.26.16.4 (07-01-2008)
    FBAR Penalties

    I would focus instead on paragraphs 3, 4, 5, 6 and the later part of 7.

    In an Opt Out penalty negotiation, and that is what it will be, you would want to be drawing your examiners attention to these paragraphs.

    The penalties are not black and white like they are inside the OVDI. The IRM is practically screaming at the agent to be reasonable, and not get carried away with an inappropriate (absurd is my characterization) penalty...

    Read these carefully...

    Item 4. Penalties should be asserted only to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising their discretion, examiners should consider whether the issuance of a warning letter and the securing of delinquent FBARs, rather than the assertion of a penalty, will achieve the desired result of improving compliance in the future.

    Item 5 FBAR civil penalties have varying upper limits, but "no floor." The examiner has discretion in determining the amount of the penalty, if any. Examiner discretion is necessary because the total amount of penalties that can be applied under the statute can greatly exceed an amount that would be appropriate in view of the violation.

    That means even if the chart shows a penalty of $XXXX amount, that is not a floor. It CAN BE less! The agent is only limited on the up side. They can NOT exceed the amount, but they can certainly lower it.

    I would remind you that those charts are "guidelines". Guidelines are not FIXED and RIGID. Also, the penalties are not supposed to be absurd, and double counting account transfers or assessing a penalty for each of multiple small accounts would result in absurd penalties.

    Read item 6. Examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted. Because FBAR penalties do not have a set amount, IRS has developed penalty mitigation "guidelines" to assist examiners in the exercise of their discretion in applying these penalties. The mitigation guidelines are "only intended as an aid" for the examiner in determining an appropriate penalty amount. The examiner must still consider whether a warning letter or a penalty amount that is less than what would be called for under the mitigation guidelines would be more appropriate given the facts and circumstances of a particular case.

    So, relax a bit. I do believe agent discretion for minnows in an Opt Out will not be as black and white severe as you are trying to determine from those guideline charts. That is what I learned from the TAS negotiation that occurred on my behalf. My final amount did not fit neatly into any of the chart guidelines.

    ReplyDelete
    Replies
    1. I agree with Just Me on this one. I think that in compelling cases, the IRS will not be bound by the structure outlined by the Illinois CPA.

      Nevertheless, this is useful information if it is correct -- in that it at least may be a point of departure in negotiations with the IRS for a lesser penalty.

      Jack Townsend

      Delete
    2. There is one interesting thing I observed in that link http://www.irs.gov/irm/part4/irm_04-026-016.html#d0e5294.26.16.4.6.2 (07-01-2008)

      Under “non willfull” penalty section.

      The penalty should not be imposed if:
      A. The violation was due to reasonable cause, and
      B. The balance in the account was properly reported on an FBAR. This means that the examiner must receive the delinquent FBARs from the nonfiler in order to avoid application of the non-willfulness penalty.

      Read “B”. does this mean that, delinquent filers may get a preferable tretmetn compared to “Go forward files”?

      Delete
    3. Your conclusion is not correct. The IRM portion you are looking at has been the audit instructions since before the offshore initiatives started 2009. What that provision means is that, during the audit process (however the audit process starts (i.e., whether on opt out, on quiet disclosure or go-forward), the taxpayer can submit the delinquent FBAR(s) and meet that requirement of the IRM. That is a bit counterintuitive, but that is the proper construction of that provision. In short, the same audit results should obtain whether on opt out, quiet disclosure or go-forward.

      Jack Townsend

      Delete
    4. I will try to post something else on this this afternoon. But this type of nuance is why many people confronting the problem of offshore accounts without tax reporting and FBAR reporting need an attorney to guide through the nuances, including this particular nuance.

      This is much like whac-a-mole. See Wikipedia on colloquial uses. http://en.wikipedia.org/wiki/Whac-A-Mole#Colloquial_usage.

      The problem is that there are many moving parts in determining a proper strategy. Most taxpayers themselves can read the code, the regs, the IRM, web blogs, etc., and understand what the text says if they are reasonably intelligent. The problem is that the solutions are more than the sum of the words.

      I am not arguing for keeping lawyers' cash flow going. I am suggesting that the task of the experienced lawyer is to advise the clients on the nuance and, based on the nuance, the possible.

      Let me say finally that I think most taxpayers dealing only with the text and in terrorem horror possibilities that the IRS has chosen to leave out there unanswered -- unwisely in my perspective -- will fear draconian possibilities that in actuality are not going to happen. There is a lot of angst in the taxpayer community that, I would hope, enlightened lawyers could mitigate.

      And, of course, it is not just lawyers that can help in the process. For example, Just Me is not a lawyer. But he probably knows as much about the real world workings of the IRS offshore account initiative as any lawyer. Listen to him. His advice is spread throughout this blog. He is good. Like most of us -- really all of us - he is not perfect, but if you want the next best thing, listen to Just Me and, if you need it for further advice and comfort, a good lawyer.

      Best,

      Jack Townsend

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    5. The FBAR provision is this:

      B. The balance in the account was properly reported on an FBAR. This means that the examiner must receive the delinquent FBARs from the nonfiler in order to avoid application of the non-willfulness penalty.

      Parse it carefully. One could read "properly reported" to mean a timely and accurate (at least reasonably accurate) FBAR. But, the term is not left to speculation and the next sentence explains what it means. The "nonfiler" -- repeat for emphasis NONFILER -- must submit the FBAR. There is no temporal requirement as to when the "nonflier" must submit the FBAR; hence, if upon initiation of the audit, the nonfiler gets off his butt and submits the FBAR, the condition will be met.

      I think that is the right way to read the IRM provision. If it was really insisting upon the filing of a delinquent FBAR before the audit was initiated, it could very easily have said that.

      Now keep in mind that this relates to the reasonable cause exception, but I think it is a good step for the taxpayer to take on audit. And, as I understand it, in the audits where the taxpayer has not joined the OVDI or OVDP, the IRS is asking the taxpayer to file the FBAR(s).

      Jack Townsend

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    6. Jack

      If anything, you've done more harm to lawyer's cash flow (or looking at it more benignly, preserved more cash flow for taxpayers) than almost anyone else in this process. Your invaluable and reasoned pro bono advice has probably comforted many taxpayers.

      On a more general comment, the IRS has (I think) deliberately chosen to highlight horrors on occasion to scare willful whales into submission. That does not mean they can, will or are able to apply those horrors to minnows on opt-out.

      Delete
    7. Geeze Jack... :) The under statement of the century, "I am not perfect." LOL. If I had been perfect, I would have been paying attention and NOT got caught in this net!

      Sure have learned a lot from you. I have gone to school on your blog and every link and reference you have provided. Thanks for your kind comments and all that you have done for so many. I am amazed at how you keep up with level headed non hyperbolic advice and answer the same questions over and over and over again without losing patience. That qualifies you for sainthood, in my opinion. I am still learning the non hyperbole side of the equation and when it comes to patience, I probably need another 40 years in the wilderness, or so my wife would say. Thanks again.

      Delete
    8. Re: Anonymous 4/20/2012 12:02

      Yes, but although he IRS' emphasis on horrific penalties may have encouraged whales to disclose, it has also scared a whole school of smaller fish away from noisy disclosure and into silent, forward, or non-disclosure options.

      I and others have gone the noisy path, but many more have not.

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  43. Jack

    As I commented in the other blog post, Mr Kothari's penalty structure seems to be essentially a repeat of the IRM section 4.2.16. It is of course up to you, but I think it has very little (if any) new information or insight into the penalties that the IRS is actually applying or able to apply and sustain. So I don't think it merits your adding an addendum to it in the top of the blog post (or maybe adding a caution as to how these are the maximums the IRS can reasonably apply outside the program to people with reasonably good facts). As Just Me's last and eloquent post points out, the IRS manual practically screams for lower penalties.

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    1. @ AnonymousApr 20, 2012 05:03 AM

      I went on that CPA's web site you have mentioned. I was curious to see what Mr Kothari was saying, and you are right. It was essentially a repeat of the IRM guideline section. I am somewhat surprised that he allowed another opinion other than just the black and white penalties he was mentioning.

      I have a lot of empathy for the immigrants to America that are being severely impacted by all of this. Actually, I am embarrassed for America that we are treating these new comers so harshly.

      Yes, as residents of America they have to comply with these laws, but I can fully understand why many might have missed this FBAR requirement or didn't think it was important to report as they were paying taxes in their homeland. The IRS should be doing everything possible to help them be compliant in an EASY way, not like this.

      Anyway, that has all been said before, and Mr Kothari was fair enough to accept another view on his blog. I respect that. He did not have to.

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  44. Jack and all readers,

    Please provide your opinion. The agent assigned to my OVDI 2011 case has mailed me the final clearance letter.

    My accountant spoke to her and asked her what would be my penalty on opting out. She said it would be the same as what I have paid inside the program.

    Is she trying to scare me or should I take her word for it and not opt-out? I am grappling with the problem of how much weight to put on this remark that she has made during the phone conversation.

    I remember reading Just-Me's story of how his agent was also scaring her on the opt-out audit but that was back in 2010 when the opt-out procedure was not finalized and rules not established. But this is now ......she is supposed to know what happens in an opt-out.

    So should I just ignore her remark and still pursue an opt-out or would I be going on a quixotic adventure?

    Thank you.

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    1. You should not have yet paid the in lieu of penalty inside the program. Some taxpayers did based on their calculation of the penalty worksheet, but technically the in lieu of penalty should not be paid until you agree to the actually pay that penalty.

      Now, you were required to send in the income tax, the income tax 20% accuracy related penalty and the interest on both, but those amounts allocable to otherwise closed years should not be paid on the opt out.

      Either the OVDI 2011 agent gave you bad information or you did not understand what she was telling you.

      Moreover, at least according to the IRS's rules, they are not supposed to be telling you what would happen if you opt out.

      It is, of course, true that they would like for you to take the program penalties without opt. That preserves IRS resources. But they should not be threatening you or even suggesting that you will get no better result if you opt out. They really do not have all of the potentially mitigating information at that stage to make a fair assessment.

      Best,

      Jack Townsend

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    2. Thank you Jack.

      I am surprised that some OVDI participants did not pay the in-lieu penalty when joining because I remember reading in the FAQ that all penalties have to be paid with the package. May be the FAQ got modified later or I misunderstood.

      But as far as what the agent said over the phone is concerned, my accountant clearly told me that she said that my FBAR penalty upon opting out is unlikely to be significantly less than what I have already paid inside. May be she made an off-the-cuff remark but it has serious consequences for me.

      I was not on that initial call. I am thinking of having a conversation with her myself.

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    3. I don't recall that the "in lieu of" penalty was ever required with the package. At least in my experience, the "in lieu of" penalty only was forwarded when and if the taxpayer agreed to the "in lieu of" penalty amount determined by the IRS.

      Again, while it is fact depended, I can just say that some have reported penalties on opt out that are significantly less than the "in lieu of" penalty inside the program. Indeed, I have very limited anecdotal data of resolutions with no penalties or very low penalties after the "in lieu of" penalty was very, very high.

      To repeat, however, it is totally fact dependent as to the result that can be obtained outside the program. I am surprised that the agent would make that kind of representation. My experience is that agents will not say anything except the standard line -- the results on opt out are uncertain and could be worse. I don't recall any that have said that they could be better, but I already know that which is precisely why I told the agent my client was opting out.

      Having said that, an experienced negotiator can usually read the mind of the person on the other side and, with a really sympathetic case, can understand that inside the program agent's disposition. But, keep in mind that, on opt out, another agent is the one who does the audit (at least in theory).

      I don't know what else to say except that, if you have not yet signed the 906, it might be worth a discussion -- like a second opinion --with an attorney who understands what is achievable on opt out. If you are going to do that, it will be critical to hold down costs, that the attorney be given the critical information as succinctly as possible. In such a situation, the attorney will be charged for his time (often a premium because of the limited engagement), and holding down the time he is required to spend to give you the very best advice is dependent upon your giving on the front end all of the relevant information.

      Good luck!

      Jack Townsend

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    4. Jack,

      My accountant called her again and requested her to apply only 5% penalty on my retirement accounts (not RRSP, I am not canadian).

      (These retirement accounts were opened by my company for me. Opening these accounts was mandatory as part of my employment and contributing to them is also mandatory in India. The funds in the account are held by the company until the person quits after which they are disbursed to him.)

      But the agent said she can't do anything without the permission of her technical advisor. And she said that she will set up a conference call with her technical advisor.

      Can you please tell me what the technical advisor might ask and how is he going to decide on the spot whether he can offer me reduced penalty on my retirement account or not?

      Thank you.

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    5. I don't know your facts. I suspect that the technical adviser would ask about the facts and mitigating factors. Your accountant should be able to help with that since the accountant should know the facts.

      Best,

      Jack Townsend

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  45. The big unanswered question (and I'm not sure if anyone can provide any insight into that) is how much one can negotiate penalties on opt out. Do you get only one shot at making a counter-offer, with the IRS saying no, now we apply full penalties ? or is there any scope for back and forth negotiation. CPA tells me you can do that in normal tax cases, but this is not a tax matter, but an FBAR matter.

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    1. You are correct that the results on opt out are not known in advance. Everything is fact dependent, but in some cases I am able to give the client reasonable assurance -- no guarantee -- that the result on opt out is better than the result if there is no opt out.

      The process will involve the opt out auditor reviewing the materials submitted in the OVDI process and asking such for such further information or documents as he or she thinks appropriate. In addition, the taxpayer will have submitted a penalty statement upon the opt out stating what he or she thinks the penalty should be with appropriate mitigating information and documents. The agent will then apply the standards he or she understands should be applied and inform the taxpayer accordingly. There can be negotiations at that stage. The agent (in conjunction with his manager) will then make the determination and propose the assessment. In actuality, although the agent is not going to give away the store, will try to come to a number that is acceptable to the IRS and the taxpayer to avoid the further use of limited IRS and court resources.

      If the taxpayer is still unhappy with the agent's final demands, the taxpayer will have the right to appeal to an Appeals Officer. The Appeals Officer is supposed to settle on the basis of the litigating hazards. That is the articulated standards, but again the IRS is better off to achieve a settlement without further devotion of resources if it can do that in any reasonable way.

      Finally, and there may be some uncertainty about exactly how this proceeds, but I think that if the Appeals Officer comes up with a number the taxpayer can't or won't accept, the IRS will assess and the Government must then sue which requires the devotion of considerable resources.

      For all of these reasons, there are pressures on the Government to come to an amount the taxpayer can accept and on the taxpayer to come to an amount the Government can accept (further proceedings are costly for the taxpayer as well).

      Finally, contrary to some of the fears expressed because of all the uncertainties, the IRS is not out to hammer minnows. I just urge the minnows to hang with the process, get reasonable advice as to when to hold 'em and when to fold 'em, be realistic, strike the settlement and get on with your lives.

      Best,

      Jack Townsend

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    2. Jack,

      You said multiple times that the audit result should be the same on opt out vs quiet disclosure vs just disclose forward.
      For people who choose not to do OVDI, could you offer some insights on how we should choose between QD vs just being compliant forward, especially if the audit outcome is the same (assuming reasonable cause and no risk of criminal prosecution). Is it more likely to get higher FBAR penalties if we do nothing? If we do nothing and we are audited later, then assuming we file correctly from now on, it seems that we would face less years of FBAR penalties and back taxes and that that solution might work in favor of the tax payer, vs quiet disclosure which has a bigger chance of triggering an audit sooner rather than later.
      Would that be possible to guide us through an analytical process on how you would advise one or the other, like the analytical process you described for choosing OVDI or not?

      Thanks!

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    3. You have correctly identified some of the key factors in choosing between quiet disclosure and go-forward.

      I cannot walk you through the process because I don't know the facts. But, generally, the process involves considering factors such as you have identified.

      I will say that some taxpayers want to do a quiet because they want to get partially right with Government without the hit of the "in lieu of" or FBAR penalties.

      Also, you should note that one advantage of a "quiet" is that the amended returns should be qualified amended returns which would avoid the accuracy related 20% penalty on the years for which you do the quiet (assuming the statute of limitations is open). By contrast, if you do a go-forward, the accuracy related penalty can be asserted on the income tax returns. At least in theory, the FBAR audit should produce the same results.

      Best,

      Jack Townsend

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    4. Thanks a lot Jack. Can you clarify one point:
      The 20% accuracy penalty applies to which amount in case of go forward?
      Say the original tax return was $10,000 (and was paid), the tax due is $100.
      If the tax payer does not amend and get audited, will the amount due be $100 + interest + 20% of $100?
      Or 100 + interests + 20% of 10,000 (original tax return that was not accurate?)

      Delete
    5. The accuracy related penalty (20%), if applicable, applies to income tax for open years. There are some outs from the penalty, including a reasonable cause out.

      So, the accuracy related penalty could apply in the opt out audit and in the go-forward audit (meaning the audit of past years for those going forward).

      The accuracy related penalty should not apply to quiet disclosures because the amended returns will be qualified amended returns, which means in essence that the penalty does not apply. So, in a sense, there is this marginal benefit of doing the QD with QAR rather than (i) getting into the program and opting out, or (ii) doing a go forward with a subsequent audit. Of course, the go forward may not draw and audit and, if it did, some of the otherwise open years may have dropped off.

      Jack Townsend

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  46. Hi Jack and Just Me, I've taken many opinions and have gotten options from go forward to quiet to ovdi to opt out and even to stay silent (off the records). Lovely isn't it. I'm a immigrant and all this offshore account money is legitimate W2 income. I was not aware of this obligation even on visa guys. And never even heard from anyone that world wide interest income is to be entered in US returns. Even today, i could find a irs publication which said, us citizens have to show their worldwide interest income...it did not say aliens but citizens.
    I have quite a few accounts with multiple banks. some are old but some recent accounts opened over last 3 years. High balance is about 200K. This is all my life's savings all legitimate. I intend to return to my home so used to send all savings back home. Never brought a single penny back to US in all these last 10 years. I don't keep more than what i need in US. Some accounts belong to HSBC (<50K) which is under summons. Heard of this rule only recently. 27.5% will break me financially. This amount will be about 60-70% of my current net worth, so I cannot pay this for a honest mistake. I don't even know whether my employer will proceed with my permanent residency or if he does, will i get permanent residency. What do you think would be my best course of action. I will have to pay about < 10K in taxes and penalties which i don't have problem with but its the in lieu 27.5% which is killing me. Should I join OVDI or be silent or go forward or do quiet disclosure. I want to get it right but not at the cost of giving away all my hard earned money. I can't sleep well, can't concentrate well.

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    1. I understand your dilemma. But, you can't make a decision without a full review of facts and circumstances. You probably -- not certainly -- have no criminal exposure or heavy civil penalty exposure (civil fraud or willfulness). In that environment, you really have all options -- OVDI, quiet disclosure and go-forward. Which is best is a matter of judgment and risk-tolerance. Seek assistance.

      Best,

      Jack Townsend

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  47. "Even today, i could find a irs publication which said, us citizens have to show their worldwide interest income...it did not say aliens but citizens. "

    First, reporting global income for residents is common to many countries. The above statement is more about US citizens wherever they live who are also required to report global income -- this is very uncommon. Often, the US government emphasis this very uncommon requirement for its citizens living abroad -- US expats. It assumes that all the residents (green card holders, visa workers) by default residents and expected to know this common global income reporting requirement.

    China is developing its tax system -- but as of today -- it taxes only on the source of income. So if you get paid in China, for example, it will tax on the source -- by withhold. This of course, does not require global income reporting.

    I used to blame US government misleading on "global income reporting for its citizens", but I accept its logic that the phrase is to stress this very uncommon global income reporting requirement for US citizens regardless their residency.

    I paid huge price to have myself FULLY understood this phrase...

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  48. If you submitted an amended return for 2006 in 2011 as part of OVDI and it shows that you are entitled to a refund, can you still claim it? What are agents doing with something like this inside the program? Do they subtract it from your overall taxes due?

    What would happen with this refund if you opt out? Will it be denied to you because the return is not considered "qualified"?

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  49. "What do you think would be my best course of action."

    Personally I would stay silent on the tax front and simply leave the US as soon as possible. Otherwise you risk participating in a government sponsored shakedown amounting to little more than legalized robbery. The US has lost the plot, and does not deserve you. Much better to live and work in a country where your efforts are appreciated.

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  50. As a follow up question to my previous one about claiming refunds that one never knew about which are shown in OVDI amended returns, what if the 2006 statute of limitations is still open because of a 25% underdeclaration of income, can the refund be claimed?

    If we can claim this refund for 2006, as the statute of limitations runs out in 2012, should we submit some kind of claim for this refund immediately, or is the amended return sufficient for claiming the refund within the next two (or X) years either as part of OVDI or upon opt out? We submitted in 2011, so what would X be?

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    1. The 25% omission of income operates to extend the assessment statute of limitations only. It does not operate to extend the refund statute of limitations.

      To remind you, the refund statute of limitations is three years from the date the return is filed or two years from the date of payment, whichever is later.

      Jack Townsend

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  51. Jack

    Do you have any idea how many years the IRS might audit under opt out ? I know the standard statutory exceptions for the 3 year rule, none apply in my case at all, the offshore income (not just tax)is less than 1% of my regular income in every single year. My income is almost entirely W-2 and 1099 income. I'm not really concerned about years before 2008 being opened, but it would be a hassle and a lot of expenditure of LCUs.

    Since an FBAR audit can extend to previous years, can the IRS open previous income tax returns as well when auditing FBARs ? What can the IRS ask for in an FBAR audit other than foreign bank account data ? Can they use the unspoken threat of being dubbed uncooperative for FBAR penalty mitigation purposes to get the taxpayer to agree to open a previous year ? I would think that for minor accounts and extra income, there is only a limited amount of data they can glean from US bank records.

    I know in the perfect world that is not supposed to happen, but in the real world, the IRS has indeed wielded the rather horrendous FBAR penalty to 'induce' people into the VD programs. I would hope they realize its a poor use of their time to open past years when they realize its a poor use of their audit resources

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    1. The IRS may audit even years that it has no reason to believe has an open statute of limitations.

      The more pertinent concern for most taxpayers is the scope of the audit. Will the IRS focus and spend its limited resources just on the package documents that were submitted in OVDP or OVDI. As I have said before, taxpayers would be incredibly stupid to submit false amended returns and / or false FBARs. So, playing the odds, the IRS may not want to devote substantial audit resources to dig behind these amended returns and FBARs, other than reviewing the additional documentation with the package (the foreign account statements, etc., that were submitted). Of course, the IRS might spot in those materials avenues for further inquiry that would justify the devotion of resources. And, the IRS might just do a few random more detailed audit investigations so that taxpayers will not be complacent about the IRS checking what it is being told. But, I suspect that, for most taxpayers, there will be relatively little in the way of audit -- perhaps some standard IDRs for information or additional documents, but not, in most cases, a sweeping audit for additional taxes unrelated to foreign accounts or foreign activity. Just my speculation.

      Now, if you are asking about audits of persons who did not join the program (quiet disclosure audits or go-forward audits), there is not enough public information to discern a pattern of what the IRS might do. One can only infer from past IRS practice outside the context of foreign accounts. At least as to the income tax, it is the same issue -- how much additional tax, penalties and interest can the IRS pick up by going back any number of years?

      The answer to that is that, even where the statute of limitations might otherwise be open (no return, fraud on the return), the IRS usually does not go beyond perhaps 5 or 6 years. The information that old often is just to hard to gather and, presumably, since the IRS usually does not go back many years, the IRS has determined that it is not worth the devotion of resources to chase back too far.

      Now, having said that, there are cases where the IRS has gone back many, many years, but they are the exception and not the rule.

      Jack Townsend

      Jack Townsend

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  52. Jack, Thank you for your input. I just filed 2011 tax return and first time FBAR this year, and now I am in the process of collecting past years of documents as I decided to do a QD. My understanding is that due to statute of limitations, I need to file 2010, 2009 and 2008 three years of amended 1040s and 6 years of FBAR. If I got audited, will IRS go beyond 2008 and ask me to amend 1040s for 2007, 2006 and 2005?

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    1. I would suggest that you consider whether a quiet disclosure is the right option. Assuming that you are a proper candidate for quiet disclosure, you are also a proper candidate for go-forward. Just make sure you have thought through those options carefully.

      Now, if you do a QD, there are some nuances in making the decision as to the number of years to file for both amended tax returns and delinquent FBARs. The number of years you should file amended tax returns depends upon whether the applicable statute of limitations is 3 years or 6 years. I assume that you did not willfully file the original returns, so that you have no criminal or civil fraud exposure. Then your civil statute of limitations is 3 or 6 years (the latter is you made a 25% omission of income). You should file the number of years consistent with your applicable civil statute of limitations. Perhaps, and you really should consult with a professional on this, you could even shave off one year (i.e., file only for 2 or 5 years). But those are nuanced judgment calls.

      Best,

      Jack Townsend

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  53. Jack

    I read this comment on another forum about how many years might remain open for FBAR violation assessment on opt out. The poster claims not to be a lawyer, but the comments seem fairly well reasoned (the form referred to here is the extension form required with the package). This is not about tax extensions, where the law is pretty clear and opt-out friendly for minnows. What do you think about FBAR open years ?

    "But the form is pretty open ended. Purely on the basis of this form, the IRS could say the extension is valid even if you opt out. However, if they say elsewhere that you would go back to standard SOL, then that can be considered to be an implicit guarantee that they will honor. Now the question is what's a standard SOL ?

    I think you would need an expert in law (common, statutory or case) relating to extensions of SOL to do a fair amount of research to answer that. If there aren't any specific provisions, then *maybe* this can be considered a contract between the IRS and you and contractual law applies. Although, I remember reading that consents to extend SoLs are NOT considered contracts. But I think the fact that this form is very contract-like, and both parties get some consideration (you say you will co-operate, the IRS says it will let you join the program) means that most contractual principles should apply.

    Now, the question is what date is this contract effective, and what does a 'normal' SOL mean. I think that the contract is likely valid when the IRS rep countersigns the form (although other interpretations are possible).

    So, I'm not a lawyer, but my conclusion is that on opt out 2005 is definitely included, 2003 is definitely closed, and 2004 will likely be closed if you submitted your package after June 30th, 2011. Realistically, there is no way the IRS is going to let you close 2005 -- otherwise people would join the program, drag the process on, and then opt out as SOLs expired.

    But in reality it might matter less than you think, because you're likely hoping for a big break from the maximum penalties. My guess is the IRS may calibrate the penalty even if a year slides off. It matters little whether they penalize you $2500/year for 4 years or $2000/year for 5 years."

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    1. To Anonymous:

      Thanks for your comments. You have done a good job of thinking through the issues. I agree with almost all you say, but would say it a little differently.

      1. We know that income tax consents apply only to years that are still open when the IRS signs the consents. Even if they nominally apply to closed years, the "contract" will not re-open the closed years. I think that is because of the way the statute permitting consents is interpreted.

      2. There is no statute for FBAR consents. Hence, we go back to general contract principles and to general waiver of the statute of limitations principles. Generally, statutes of limitations can be unilaterally waived and that usually occurs after the statute of limitations has closed. So that is one thread that a court could use to uphold the consents that participants in OVDI signed. Another thread would be to operate by analogy to the tax statutes and say that consents only affect open statute years when they are signed. I don't know how that will be ultimately resolved. It just has not be resolved yet.

      3. It may make little difference. Because of the 6-year statute of limitations for FBARs, the IRS should have plenty of years to visit punishment on the individual. Where the taxpayer closed out the account, say in 2004, the issue could come up, but I doubt that there are many taxpayers who are clean after 2004 that joined the program. Moreover, for those who had much smaller accounts after 2004, the issue may come up and some of those may have joined the program.

      Best,

      Jack Townsend

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    2. Jack

      Just for clarification, I did not write the detailed commentary on the impact of the extension. I just cut and pasted from another forum. I wish I knew legalese enough to write such comments.

      Thanks for your response. It may soon become clear from opt outs what standard the IRS is applying. For reasonable cause, it doesn't matter since there are no penalties. Probably not for minnows with non-willful violations too, as you point out, they can get the number they want from the other years.

      Delete
  54. I'm a US citizen that lived in the UK from 2000 through 2008 and opened a checking account there in April of 2000. I never filed a FBAR (knew about them, vaguely, but never got around to filing one -- as I didn't think they were a big deal as I reported ALL the foreign income on my 1040).

    I just now discovered that, in 2000, my accountant erroneously checked "no" on the 1040 form question asking if I had a foreign bank account. They also didn't include the UK interest income on my 2000 US form (but they included it on my UK form, so I know that they were aware of the income). The interest for 2000, in that account, was less than 5 dollars, so perhaps they saw it as a de-minimus exception (although, the account value did exceed US$10k at some points during the year, so it seems that "yes" clearly should have been checked).

    Anyway, from 2001 to 2008, my new accountant checked "yes" on the question and the income from that UK bank was all reported on my US tax forms (seperately listed as either "UK interest" or "Natwest"). The UK bank interest was also reported on my 2009 and 2010 forms (and will be on my 2011 form), but my accountant (this time a US guy) erroneously marked "no" for 2009 after asking me if I "had any offshore accounts with over 10k". This was before I became aware of the details of these isues and I didn't have over 10k at the time he asked me the question, but at some point in 2009 I did (which is what is relevant). Again, while "no" was checked in 2009, the interest income from the UK bank was included and seperately listed on the 1040 form for that year. By 2010, the balance was below 10k, so the "no" answer was correct as reported.

    So, in summary, I have alway declared the UK interest income (except for less than $5 dollars in 2000) and I have always declared the accounts (except for when my accountants erroneously checked "no" in 2000 and 2009) on my 1040 forms, but I have never seperately reported them on a FBAR.

    Anyway, opting out would be hugely detrimental to me, as a large lump sum bonus would get paid into my UK account each year and BRIEFLY remain there. As a result, there was a very brief period (like a month) in 2008, when I had over $250k in my UK bank (before I got around to transferring my bonus back to the US).

    I am HORRIFIED at the prospect of paying over a $60k penalty (27% of $250k) for the late filing of an IRS form when I have always been extremely diligent in reporting my foreign income, have always been overly conservative on my tax returns, and have not tried or wanted to hide or avoid taxes on anything. I just procrastinated and didn't think it was that big of a deal -- as I know that people file VERY late 1040 tax forms (MANY years late) with virtually no consequences, if no tax was owed (which would, intuitively, seem to be a MUCH bigger deal to the IRS, but strangely it isn't).

    Anyway, I just started looking into my options and I will do a lot of research and get professional advice before I decide, but any initial thought would be appreciated.

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    1. I think you have such a benign failure that I would not spend too much time thinking about it. You should just do a go forward dislcosure (preferable) or send in past FBARs with a note indicating that you have dislcosed income on your tax return. The IRS is only after people who had both a tax obligation and a failure of file FBAR. It will be unheralded for IRS to go after people like you. And dont worry about 2000 failure of disclose $5 of interest. The tax due on that income is far beyond the statute of limitations.

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    2. UK is one of the countries ins FATCA or whatever that is adn most likely IRS will come to know abt it sonner or later.Please consult couple of CPA about it before taking any decision.60K is a lot of money in this economy.I hope things turn out well for you.

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    3. I think that Anonymous Apr 26, 2012 09:39 AM addresses the right issues and reaches the right conclusions based on the facts as stated.

      The caveat is that there are no unstated facts which might require further consideration or a different conclusion. But on the facts stated, this appears to the be indicated conclusion. If you are concerned, you might see advice.

      Jack Townsend

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  55. Thanks for the comments, guys. If I do end up filing FBARs for prior years, how far would I need to go back (all the way to 2000, when I opened the account)?

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    1. Anon - you should only file FBARs back until calendar year 2005. The rest of the FBARs would in any case limited by statute of limitations by June 2012.

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  56. Jack -

    I know you dont offer generic advise but one of the strategies you do consider for clients without bad facts is go forward compliance. Your logic is that the results of a go forward would not be different from the results of an opt out. However, the IRS specifically mentions in the guidance issued to Canadians in December 2011 that one of the factors that the IRS considers in determining resaonable cause exception is if the tax payer took steps to remedy past non-compliance upon coming to know of his/her legal obligations. That would argue that a person who participated in OVDI and later opts out is much better positioned than someone who knows that he/she had tax due for tax years that were open and knew that there were FBARs due but refused to remedy past non-compliance. Atleast thats the primary premise that a lot of tax practitioners use in advising clients on getting into OVDI (and was used by Moby as well in his opt out letter). What do you think of this argument on why folks in OVDI opt out are better off than those that take audit risk?

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    1. First, let me thank you for reading my comments and also for your astute comment.

      Now, I will address the merits of your comment. Let me assure you that different practitioners and taxpayers may analyze it differently, so it is important to hear from readers like you.

      Historically, for this genre of regulatory penalty, the penalized event is the default in question. If a taxpayer fails to file a tax return, there are civil and criminal consequences of failing to file the tax return, and the focus is the facts as of the date of the penalized event. Some form of reasonable cause or good faith is often a defense in that the conduct with elements of reasonable cause or good faith is not conduct that is penalized. But subsequent actions do not mitigate the penalized conduct in terms of the legal description of the conduct penalized or supply reasonable cause or good faith if it did not exist when the penalized conduct occurred. Thus, filing amended or delinquent tax returns or filing delinquent or amended FBARs does not establish reasonable cause or good faith for the original penalized conduct.

      Through various forms of amnesty, voluntary disclosure, qualified amended return (QAR), etc., the IRS or DOJ Tax can mitigate the penalty by some form of "prosecutorial discretion" or administrative discretion. Thus, there is no question that, if the IRS adopted a policy that it would not penalize past errors that are corrected by the taxpayer, then the IRS could do that. And, if the IRS adopted a policy that it would mitigate penalties (not eliminate but mitigate) if the taxpayer corrects past errors, that could be done. Except in the QAR context, I don't think the IRS has done that.

      Rather, in the immediate context, at best what the IRS has said is that it will treat corrections of past penalizable conduct in some vague unstated way as bearing upon reasonable cause (or, by extension, good faith). But, as I noted above, subsequent actions do not bear upon the existence of facts at the time of the default. So, it seems to me that the IRS has not really offered the taxpayer anything other than some vague concept which is nonsensical in the context it is used.

      Moreover, what the IRS has said is that, if the taxpayer opts out after doing the loudest form of voluntary disclosure (joining the program), the taxpayer will get the audit results that would have applied had the taxpayer not joined OVDI in the first place and been audited. Thus, the inference to be drawn from that notion, is that the taxpayer gets no audit penalty mitigation for voluntary disclosure. If that is what the IRS wanted to say, it really should have said that.

      Finally, I would just say that looking at the IRM instructions for historic FBAR audts, the delinquent FBARs need be filed / delivered to the auditing agent by the time of the audit is concluded in order to get whatever benefit the IRM says is available for after the fact corrections.

      So, I don't doubt that the IRS could provide benefits for persons joining the program or by QD that are not available to persons who are just audited, but the IRS has not made clear that that is what it intends to do and I am aware of no anecdotal information that would show the IRS actually giving better "audit" results to persons who join the program or make QDs.

      Until and unless the IRS speaks more clearly on this issue, I think taxpayers well situated for penalty mitigation without correcting the past, should seriously consider the go-forward strategy.

      Jack Townsend

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