Friday, February 1, 2013

Report of Government Comments on FBAR Penalties at ABA Tax Section Meeting (2/1/13)

I have just picked up the TNT report for a session that I did not attend at the Orlando ABA Tax Section meeting last weekend.  Jeremiah Coder, OVDP Opt-Outs Face Normal Exam Procedures, 2013 TNT 19-6 (1/29/13).  The report is of a Court Procedure and Practice session.  I offer some excerpts from the report and some comments.  The items presented in the following discussion are my own thoughts except as attributed to the article.

1. The context.  As I have noted before, the OVDI/P benefits principally persons who (1) have material criminal exposure and (2) have material civil penalty exposure based on civil fraud or the FBAR equivalent of willfulness.  Those exposures substantially overlap -- i.e., material criminal exposure would certainly indicate material civil penalty exposure.  Persons without those exposures can generally obtain better results outside the inside the program penalty structure (principally the 20%/25%/27.5% miscellaneous or in lieu of penalty).  Those persons can obtain those better results upon opt out or simply by not getting into the program to start with.  There is a lot of nuance behind this context, but readers of this blog should be able to pick up much of that nuance from earlier blogs.

2.  Mr. McDougal, a principal IRS player in the process, was a participant and made some comments.

3.  Mr. McDougal raised the point that all of us knew anyway -- in an opt out audit, the IRS can audit the entire return and not just the offshore account related matters.  (Note this is the opt out analog to the Form 906 provision that permits audits for other matters even if the inside penalty structure is accepted.)  I address that potential with my clients early on in the process of preparing the amended returns to submit in the program.  I tell the client to identify all issues whether related to the offshore accounts or any other aspect of the return.  I then ask the accountants to be looking for issues other than those related to the offshore accounts.  I emphasize to the clients that the amended returns have to be true, correct and complete and not just correcting the offshore account matters.  With that scrubbing, at least in our cases assuming the truthfulness of the clients, we do not fear an opt out audit except for the time and resulting expense involved.

4.  Mr. McDougal said:
Fraud penalties may be appropriate in some opt-out cases because a correct amended return cannot fix previously filed fraudulent returns, McDougal warned. Also, the requirement of taxpayer cooperation to get clearance from the IRS Criminal Investigation division to participate in the OVDP probably means that taxpayers must file six or eight years of returns and can't simply opt out after getting pre-clearance and submitting an initial disclosure letter, he said. "There is an affirmative obligation to cooperate" in helping the IRS determine the correct amount of civil tax as part of using the OVDP, he said. There is room for the IRS to argue that failure to file the return, foreign bank account report waivers, and dissolved entity statements disqualifies a taxpayer from avoiding criminal exposure, he said.
I think we all knew that. Hence, taxpayers with material civil fraud penalty exposure should not opt out.  And, carrying that consideration to an earlier decision point, those with material civil fraud exposure should join the program ab initio because they will not like audit results (either audit results upon opt out or audit results pursuant to losing the audit lottery).  Further, it should be obvious, failing to cooperate in the opt out audit will expose the taxpayer to criminal prosecution if the client has material criminal exposure.  But, on the other hand, those taxpayers with material criminal exposure should not opt out because, even if they cooperate, they will be at high risk of the major civil fraud consequences -- civil fraud penalty, open civil years, and the willful FBAR penalties.

5. Mr. McDougal is a major IRS spokesman, but I should caution that one needs to be careful about what Mr. McDougal and probably other IRS participants say at these public forums.  I address a specific instance of concern in a prior blog, Report on Webinar on Opting Out and Litigating FBAR Penalties (1/17/13), here, which I just updated.

6.  The report indicates that the Taxpayer Advocate is making the right noises:
National Taxpayer Advocate Nina Olson, who spoke from the audience, said her office deals with taxpayers weekly about potential criminal exposure resulting from unreported offshore accounts. The expatriate community especially is suffering from the IRS's approach to FBARs, she said, offering a stinging indictment of the OVDP program. "It is a profoundly wrong way to run a program," she said, because it is "based on rumor and innuendo, and it's just getting worse; it's not getting better as all of these forms of guidance proliferate." The absence of formal guidance for international taxpayers to rely on is frustrating and unfair, she said.
7.  Thomas Sawyer, DOJ's senior litigation counsel (international tax), discussed the resolution of the cases once the agency determines the penalty.  He said that, "once the claim has been determined, compromise of a claim greater than $100,000 can be authorized only by the DOJ."  Further, it is not clear how a taxpayer, having paid the penalty, might sue for its return:
whether they are Tucker Act claims properly brought in the Court of Federal Claims or a suit available in federal district courts. Whether full prepayment of the penalty can be initiated before a refund suit is uncertain, he added.


  1. I think it should be emphasized as well that even in the absence of a civil penalty exposure for fraud/willfulness, there are other civil penalties that may induce one to consider the program. For example, if the taxpayer is at risk of penalties for failing to file Form 5471 (relating to interests in certain foreign corporations) or for failing to file Forms 3520 and/or 3520-A (relating to certain interests in or distributions from foreign trusts), the cost under the program may potentially be less than the civil penalties applicable for not filing those forms. Notably, the IRS need not demonstrate fraud or willfulness (whatever that currently means) to impose harsh penalties for failing to file those forms. It is sufficient that the taxpayer fails to demonstrate reasonable cause.

  2. One of the Government speakers also stated that taxpayers and their advisors should not assume that the worst possible FBAR penalty outside the program is 50%. I don't know if that's just posturing, but thought it worth passing on.

  3. The TNT report does not say that, but those reports are sometimes incomplete as to key points. I did report in a blog that Kathy Keneally, DOJ TAX AAG had made that point. See Warnings on Continued Government Patience for Offshore Account Ostriches (1/31/13), here:

    It is hard to know precisely what this threat means in the real world. But, certainly, even apart from the threat, U.S. taxpayers who have materially criminal prosecution risk and fraud or willful civil penalty risk should join the program and not opt out.

    Thanks for your comment.

    Jack Townsend

  4. Your points are, as usual, well taken.



  5. Hi Jack (and others),

    I just read through a lot of posts on your blog about the FBAR penalties, and choosing between the so called quiet disclosure and joining the OVDI.

    I think my case puts me in the class of minnows. 2011 was the first year I qualified as a resident for tax purposes, being my 6th year in the US on a student visa (F-1 students are exempt from counting their first 5 calendar years for "substantial presence"). In all previous years, I had filed accurate tax returns using 1040NR, and did not have any reporting requirements on my accounts back home, or interests thereof. Also, all of these accounts are savings/term-deposit accounts that contain my parents' savings, not money I transferred from the US.

    In 2012, when I filed my taxes for 2011, I did not realize that I was required to report these accounts and income, and filed a simple 1040EZ with only my US income--- I did not include the interest income from my accounts at home, and I did not file an 8938 or an FBAR. I am trying to figure out how to correct this right now. These correspond to about $85k in money in the accounts, and about $800 in extra taxes.

    Based on an informal conversations I have had with a CPA (I'm not sure how much he's familiar with international tax issues), I was advised to simply file an amended return with the 8938, and send in the late FBAR--- both with explanation letters, and I'm in the process of doing this right now.

    Based on your experience, I was wondering if you could answer/give me guesses on the following questions:

    1. I don't think the OVDP would be appropriate for me right ? I don't think I have any criminal exposure whatsoever. Also, even I was assessed with a mitigated non-willful penalty would be $8.5k for only the one year, and the full $10k penalty for 8938, these would be lower than the 27.5% penalty. Is there any rationale for joining the OVDP, or joining and then opting out ?

    2. Will only submitting an amended return and late FBAR with letters make the IRS predisposed to treat me more harshly (over joining the OVDP) ? I was planning to mention in each letter that I was also amending the other--- i.e. with the FBAR letter mention that I also had $800 in taxes that I'm submitting an unpaid return for, and with the return+8938 mention that I had submitted the late FBAR. Is this advisable/necessary/helpful ?

    3. I was wondering how likely it is that the IRS would determine that my situation qualifies as reasonable cause (first time being required to file as a resident, less than a year to filing amended returns, only $800 under-reported in taxes) in which the 8938 and FBAR penalties can be waived. I was heartened by the success of ij (although he did join the OVDI and opted out, instead of doing a "QD").

    4. On the other end, is there a chance that I might be assessed non-willful penalties without mitigation. This could be really bad for me, since although all my accounts are with the same bank, they're different accounts (being a number of term deposits). If a $10k penalty was assessed for each account, that would be catastrophic!


  6. TYZ,

    I will try to address your questions, but the answers will be uncertain because there is no clear path to a solution in your case. Uncertainties abound. And, while you have tried to summarize hte facts and may have done a good job, I find that, if it is necessary to dig into the details, almost invariably relevant and material facts will come forward. So you must understand that I can address only the facts you have presented.

    1. In my view, on the facts, you should do one of two things: (i) do a go-forward, correcting the 2011 return and filing a delinquent FBAR with a good complete explanation, like a brief, arguing for the result you want or (2) join OVDP 2012 with the thought of opting out at the end of the process. One of the problems with opting out is that a process kicks in that may be time consuming relative to the amounts involved. And, should you not join in the first place, should the IRS audit, the process also will be time-consuming. Having said that, while the IRS is looking for amended returns and delinquent FBARs, I suspect that they have a materiality standard that will not pick yours up for audit. I don't know that and can just speculate that that is the case, but knowing how the IRS works in other areas, I suspect that is the case here.

    2. Write it explanations to state your best case.

    3. I can't speculate on that. State your best case. The IRS may accept reasonable cause.

    4. You are right that a $10,000 per account might be bad. There is little public information as to what the IRS is doing generally or might do in your situation. However, I doubt that it would assess a nonwillful penalty that would exceed the amount you would pay in the OVDP 2012. But, I don't know that.

    Sorry, this response is so uncertain. I guess I can say that if I were in your shoes (assuming no other relevant and material facts), I would consider the amended return /. delinquent FBAR approach and then wait it out. But that depends upon your personal tolerance for risk and uncertainty.

    Jack Townsend

  7. Jack - You are very kind and have probably saved TYZ thousands of dollars in unnecessary legal and accounting costs. I would also recommend amending the return and just paying the tax, interest, accuracy and failure to pay penalties for 2011, plus send the letter of explanation. It is not illegal to do that and the time between discovery of the requirement and the attempt to comply is very short. If TYZ were to enter OVDI just to opt out, TYZ would be in the same position two years from now upon opt out. The only difference would be a lot of effort, time and money spent to meet the terms and conditions of OVDP. This is what has happened in my case. I regret entering OVDI. I think what you state about materiality standards is very relevant.

  8. I am a dual Canadian and US citizen living in the US. I came to the US on a H1 visa 20 years ago not knowing whether the job will work out or I can stay in the US. I got green card 15 years ago and became a US citizen 10 years ago. I have a mutual fund account and 2 separate RRSPs established 5 years prior to coming to the US. I had not gone back to Canada for 20 years, had minimal contact with the financial institution other than updating them with my US address.The last contribution I made into those accounts were 1 year prior to leaving Canada, I have not withdrawn any money from any of the accounts since they were established. Because I was not sure whether I was staying in the US, I did not close those account nor did I know I was to report them. I learned about the FATCA when it hit the news in 1/13. Since 2009 the mutual fund account generated about 6 or 7 hundred dollars a year in dividends that were just left there after Revenue took out the NR withholding (all the record they have without requesting them by special request, and the amount probably should not be more than that). Since I have not filed FBAR, 8938 and 8891 forms previously, I think I am in big trouble with the IRS. I think I can file 8891 for this year and elect deferment on the RRSP , since I have yet taken any distribution at all. My main concern is the mutual fund account. I probably underpaid my US tax by around a $100 a year on those dividends, but with a 27.5% FBAR penalty, I will take a major hit because the the unrealized capital gain that had increased the asset to about C$ 200k in 20 years. I am just about to retire and that hit will hurt big time. All along I had intended to pay all the tax due to Canada and the IRS when I start to withdraw the money when I retire. I would really appreciate your advice as to whether I should throw myself at the mercy of the IRS and go into the OVDP or can I do a quiet disclosure by filing amended returns ( for how many years?) and belately the FBAR, 8938 and 8891. I certainly would not mind paying all the penalty and interest on the underpayment of tax due, but a 27.5% FBAR penalty is harsh on a pre-existing and inactive account when the tax underpayment was about $100 a year. Thank you very much if you can give me your thought as to how I should move forward to become compliant.


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