Tuesday, March 12, 2013

Statutes of Limitations for FBAR Noncompliance Related to Tax Noncompliance (3/12/13)

A person commenting on an earlier blog asked the following question (modified slightly for clarity):
Does the statute of limitations for the FBAR penalty (both civil and criminal) toll if the taxpayer is outside the U.S.? 
I answered at least the criminal part of the question in a comment reply.  I thought the question was worthy of a blog entry to expand the reply and alert readers who may not work their way to the comment and reply.

Suspension of the FBAR Criminal Penalty Statute of Limitations

Before I answer the question, I should first state why the question may be important.  A U.S. person with a concern of criminal prosecution for FBAR violations may absent himself from the U.S. until the statute has run on the FBAR violations and thereby hope to avoid prosecution.  That person, of course, would want to become compliant prospectively upon adopting the strategy, if it worked, so that, with enough time (5 years for FBAR prosecution), the risk of FBAR prosecution would go away.

With that background, I think the direct answer is that the FBAR criminal statute of limitations would be tolled (or suspended). 18 USC 3290, here, provides simply and cryptically "No statute of limitations shall extend to any person fleeing from justice." Title 18 is the general criminal code.  The immediate question, of course, is whether  § 3290 applies to crimes outside Title 18, such as the FBAR crime codified in Title 31.   I have not researched the issue in great detail.  But I did find a case where for an immigration crime (18 USC 1326, felony re-entry), the  Second Circuit applied  § 3290.  United States v. Rivera-Ventura, 72 F.3d 277, 284 (2d Cir. 1995).  Section 3290 requires that the person be "fleeing from justice" (whether inside or outside the U.S.).  I suppose the question then is what this means.  As I say in my Federal Tax Crimes book, the “majority rule” for §  3290 is that “intent to avoid arrest or prosecution must be proved” for § 3290's fugitive definition to apply; the minority rule is that mere absence from the jurisdiction, regardless of intent, is sufficient (I suppose just the objective fact of being absent from prosecution of justice is sufficient).

Now, even if there were no suspension of the statute under §  3290, absence from the U.S. is not a practical solution to the U.S. person with noncompliant legal source income who would be at risk of prosecution.  That person would be subject to prosecution for tax crimes in Title 26 and tax-related crimes in Title 18, both of which have suspension provisions.  The Title 18 tax related crimes would be subject to §  3290.  And the Title 26 crimes (plus conspiracy related to tax crimes) are tolled while the defendant is outside the United States or a fugitive from justice within the meaning of 18 U.S.C. § 3290.   See § 6531, here (flush language). Suspension is in the disjunctive.  Merely being outside the U.S. suffices regardless of the purpose or effect of being outside the U.S.  Thus, in the context of FBAR noncompliance with criminal risk related to tax noncompliance, one must assume that there is risk of criminal prosecution for the tax crimes, so that even escaping §  3290 (not likely) is not a sound strategy.

And, of course, the U.S. can always get a sealed indictment within any applicable statute of limitations permit the indictment to be unsealed and effective after the statute of limitations would otherwise have expired.

Suspension of the FBAR Civil Penalty Statute of Limitations

There is no suspension of the civil period of limitations for FBAR penalties.  So, all persons with the civil risk can potentially outrun the risk by prospective compliance and winning the audit lottery by waiting six years since the last act of  noncompliance.  Keep in mind, of course, that as to the tax noncompliance, there can be longer statutes of limitations - for 25% omission of gross income and certain Form 8938 violations -- and an unlimited statute for civil fraud.

39 comments:

  1. First thanks for starting a blog entry in response to my questions. You comments clarifies issue and at the same time raise some interesting points. My intention in asking was not to suggest to ‘go missing’ but to understand the implications for USC and GC holders who may be outside the country.



    Generally, the criminal FBAR penalty is $250K and/or 5 years for each FBAR year and $500K/10 years if coupled with tax evasion. On civil side, it is $10K to $100K (or50% of account balance) for each year of non-filed FBAR.

    What is the 50% penalty on the highest balance that I have seen in plea agreements or convictions for? Is this ‘settlement’ for criminal or civil penalty. Correct me if I am wrong but I think it is for both criminal and civil.
    I have seen that the tax loss sentencing guidelines are applied for jail time and not the blanket FBAR criminal penalty of 5 to 10 years for each FBAR year not filed – I have not seen people go to jail for 30 to 60 years for not filing FBAR even where no plea was entered. If courts apply the tax loss doctrine to jail time, if the civil statute has run out due to lapse of time and criminal has not (due to absence from the country), even with the relevant conduct rules on tax (not FBAR) for most minnows, it is unlikely that the IRS will try to extort penalties
    The above conclusion is also supported by IRS FAQ that if you had accounts prior to 2002 and were compliant after that there is no penalty for tax evasion or for overseas US citizens for whom the SOL runs forever (I think this issue should be addressed by the Congress but it is a separate discussion)
    For most minnows, tax is small but OVDI/Civil penalties/ are large in proportion to the ‘crime’
    Moreover there is conflict between majority and minority position as you suggest which makes it further unlikely that FBAR criminal penalties would be sought – other penalties based on tax loss will likely be small.
    My understanding is that IRS is interested in your money and not filling jails. That’s why they do not give TAS a breakdown between penalties and taxes for the $3.5B that they collected.
    The duty to keep FBAR records is 5 years and whether SOL runs out or not, the longer it has been the greater the chance nothing will happen as indicated by a. above as well. Moreover so if the foreign amounts involved are NOT in few hundreds of thousands of dollars or more and the tax evasion is not in tens of thousands of dollars or more
    So my conclusion on #2 is that if the civil penalty period runs out, there is small chance of a problem even if criminal SOL has not run out for FBAR as it is more difficult to establish a criminal case than a civil one. Interesting statistic is that according to TAS report, IRS has only opened ~3K civil assessments and 18 criminal proceedings in QD cases. Is this assessment correct as a general rule with the caveat that individual circumstances might give a different answer?



    The other question is about the joint liability for FBAR – is the wife criminally or civilly liable for husband’s failure to file an FBAR for an account which was single ownership of the husband – even though they filed tax return jointly? I did not see a provision where joint filing of FBAR’s was permitted even in case they file a joint tax return, so the liability is not of the wife even though she knew of the account, though I think she can be held liable for the taxes due but not FBAR civil or criminal penalties as filing FBAR is not a joint responsibility– is this assessment correct.
    While the answer depends on every individual case, all things being equal, at what amount of foreign account balance and/or tax loss would the case be ‘warning letter’ to civil penalties to criminal prosecution? Based on the litigation guideline memorandum of the 1990’s the threshold was $2,500 tax loss for each year before criminal action can be considered. If course, this requirement can be waived based on enforcement priorities, I would think that the amount currently should be higher.

    ReplyDelete
  2. Jack – thanks for the reply. My responses and follow up questions, if any, are indicated in the format Qx-1, for example follow up to question Q1 would be Q1-1.
    Q1-1 In your opinion, would you think that a taxpayer would be convicted for an FBAR violation for the same year as the taxpayer committed evasion but was not charged or convicted for evasion. If there is no conviction, motive is not proved and hence FBAR violation conviction might fail as well.

    Q3 -1. You mention that the max criminal sentence per FBAR violation is 5 years. How is this determined? Tax conviction is based on tax loss, so is FBAR sentence based on foreign account balance. If so, is there a chart of account balance and months of sentence.
    Q6-1. The TAS report on 18 criminal proceedings is on ACA website - http://americansabroad.org/files/5613/5807/4473/IRSsOVDPsDiscourageVoluntaryCompliance.pdf (please refer to page 9 of PDF or 142 of the document.
    Q8-1. This was more a question as to - at what amount of foreign account balance and/or tax loss would the case be ‘warning letter’ to civil penalties and further to criminal prosecution? The reference to the $2500 threshold for criminal prosection is here - http://www.nysscpa.org/cpajournal/1997/0497/depts/fedtax.htm
    Q8-1A. Is there a latest amount that has been publicized, if not, what is the general experience in the current threshold - $3K, $5K, or $10K of tax loss per year to be criminal

    ReplyDelete
  3. Jack – thanks for the reply. My responses and follow up questions, if any, are indicated in the format Qx-1, for example follow up to question Q1 would be Q1-1.
    Q1-1 In your opinion, would you think that a taxpayer would be convicted for an FBAR violation for the same year as the taxpayer committed evasion but was not charged or convicted for evasion. If there is no conviction, motive is not proved and hence FBAR violation conviction might fail as well.

    Q3 -1. You mention that the max criminal sentence per FBAR violation is 5 years. How is this determined? Tax conviction is based on tax loss, so is FBAR sentence based on foreign account balance. If so, is there a chart of account balance and months of sentence.
    Q6-1. The TAS report on 18 criminal proceedings is on ACA website - http://americansabroad.org/files/5613/5807/4473/IRSsOVDPsDiscourageVoluntaryCompliance.pdf (please refer to page 9 of PDF or 142 of the document.
    Q8-1. This was more a question as to - at what amount of foreign account balance and/or tax loss would the case be ‘warning letter’ to civil penalties and further to criminal prosecution? The reference to the $2500 threshold for criminal prosection is here - http://www.nysscpa.org/cpajournal/1997/0497/depts/fedtax.htm
    Q8-1A. Is there a latest amount that has been publicized, if not, what is the general experience in the current threshold - $3K, $5K, or $10K of tax loss per year to be criminal

    ReplyDelete
  4. Jack – thanks for the reply. My responses and follow up questions, if any, are indicated in the format Qx-1, for example follow up to question Q1 would be Q1-1.
    Q1-1 In your opinion, would you think that a taxpayer would be convicted for an FBAR violation for the same year as the taxpayer committed evasion but was not charged or convicted for evasion. If there is no conviction, motive is not proved and hence FBAR violation conviction might fail as well.

    Q3 -1. You mention that the max criminal sentence per FBAR violation is 5 years. How is this determined? Tax conviction is based on tax loss, so is FBAR sentence based on foreign account balance. If so, is there a chart of account balance and months of sentence.
    Q6-1. The TAS report on 18 criminal proceedings is on ACA website - http://americansabroad.org/files/5613/5807/4473/IRSsOVDPsDiscourageVoluntaryCompliance.pdf (please refer to page 9 of PDF or 142 of the document.
    Q8-1. This was more a question as to - at what amount of foreign account balance and/or tax loss would the case be ‘warning letter’ to civil penalties and further to criminal prosecution? The reference to the $2500 threshold for criminal prosection is here - http://www.nysscpa.org/cpajournal/1997/0497/depts/fedtax.htm
    Q8-1A. Is there a latest amount that has been publicized, if not, what is the general experience in the current threshold - $3K, $5K, or $10K of tax loss per year to be criminal

    ReplyDelete
  5. Jack – thanks for the reply. My responses and follow up questions, if any, are indicated in the format Qx-1, for example follow up to question Q1 would be Q1-1.
    Q1-1 In your opinion, would you think that a taxpayer would be convicted for an FBAR violation for the same year as the taxpayer committed evasion but was not charged or convicted for evasion. If there is no conviction, motive is not proved and hence FBAR violation conviction might fail as well.

    Q3 -1. You mention that the max criminal sentence per FBAR violation is 5 years. How is this determined? Tax conviction is based on tax loss, so is FBAR sentence based on foreign account balance. If so, is there a chart of account balance and months of sentence.
    Q6-1. The TAS report on 18 criminal proceedings is on ACA website - http://americansabroad.org/files/5613/5807/4473/IRSsOVDPsDiscourageVoluntaryCompliance.pdf (please refer to page 9 of PDF or 142 of the document.
    Q8-1. This was more a question as to - at what amount of foreign account balance and/or tax loss would the case be ‘warning letter’ to civil penalties and further to criminal prosecution? The reference to the $2500 threshold for criminal prosection is here - http://www.nysscpa.org/cpajournal/1997/0497/depts/fedtax.htm
    Q8-1A. Is there a latest amount that has been publicized, if not, what is the general experience in the current threshold - $3K, $5K, or $10K of tax loss per year to be criminal

    ReplyDelete
  6. Jack – thanks for the reply. My responses and follow up questions, if any, are indicated in the format Qx-1, for example follow up to question Q1 would be Q1-1.
    Q1-1 In your opinion, would you think that a taxpayer would be convicted for an FBAR violation for the same year as the taxpayer committed evasion but was not charged or convicted for evasion. If there is no conviction, motive is not proved and hence FBAR violation conviction might fail as well.

    Q3 -1. You mention that the max criminal sentence per FBAR violation is 5 years. How is this determined? Tax conviction is based on tax loss, so is FBAR sentence based on foreign account balance. If so, is there a chart of account balance and months of sentence.
    Q6-1. The TAS report on 18 criminal proceedings is on ACA website - http://americansabroad.org/files/5613/5807/4473/IRSsOVDPsDiscourageVoluntaryCompliance.pdf (please refer to page 9 of PDF or 142 of the document.
    Q8-1. This was more a question as to - at what amount of foreign account balance and/or tax loss would the case be ‘warning letter’ to civil penalties and further to criminal prosecution? The reference to the $2500 threshold for criminal prosection is here - http://www.nysscpa.org/cpajournal/1997/0497/depts/fedtax.htm
    Q8-1A. Is there a latest amount that has been publicized, if not, what is the general experience in the current threshold - $3K, $5K, or $10K of tax loss per year to be criminal

    ReplyDelete
  7. I am unable to post inspite of numerous attempts. Any reasons why? I also tried to use new name. I am trying one more time.

    Jack – thanks for the reply. My responses and follow up questions, if any, are indicated in the format Qx-1, for example follow up to question Q1 would be Q1-1.
    Q1-1 In your opinion, would you think that a taxpayer would be convicted for an FBAR violation for the same year as the taxpayer committed evasion but was not charged or convicted for evasion. If there is no conviction, motive is not proved and hence FBAR violation conviction might fail as well.

    Q3 -1. You mention that the max criminal sentence per FBAR violation is 5 years. How is this determined? Tax conviction is based on tax loss, so is FBAR sentence based on foreign account balance. If so, is there a chart of account balance and months of sentence.
    Q6-1. The TAS report on 18 criminal proceedings is on ACA website - http://americansabroad.org/files/5613/5807/4473/IRSsOVDPsDiscourageVoluntaryCompliance.pdf (please refer to page 9 of PDF or 142 of the document.
    Q8-1. This was more a question as to - at what amount of foreign account balance and/or tax loss would the case be ‘warning letter’ to civil penalties and further to criminal prosecution? The reference to the $2500 threshold for criminal prosection is here - http://www.nysscpa.org/cpajournal/1997/0497/depts/fedtax.htm
    Q8-1A. Is there a latest amount that has been publicized, if not, what is the general experience in the current threshold - $3K, $5K, or $10K of tax loss per year to be criminal

    ReplyDelete
  8. I tried multiple attempts to post over the last few days but i am trying again as new name

    Jack
    – thanks for the reply. My responses and follow up questions, if any,
    are indicated in the format Qx-1, for example follow up to question Q1
    would be Q1-1.

    Q1-1 In your opinion, would you think that a taxpayer would be convicted for an FBAR
    violation for the same year as the taxpayer committed evasion but was
    not charged or convicted for evasion. If there is no conviction, motive
    is not proved and hence FBAR violation conviction might fail as well.



    Q3
    -1. You mention that the max criminal sentence per FBAR violation is 5
    years. How is this determined? Tax conviction is based on tax loss, so
    is FBAR sentence based on foreign account balance. If so, is there a
    chart of account balance and months of sentence.

    Q6-1. The TAS report on 18 criminal proceedings is on ACA website - http://americansabroad.org/files/5613/5807/4473/IRSsOVDPsDiscourageVoluntaryCompliance.pdf (please refer to page 9 of PDF or 142 of the document.

    Q8-1.
    This was more a question as to - at what amount of foreign account
    balance and/or tax loss would the case be ‘warning letter’ to civil
    penalties and further to criminal prosecution? The reference to the $2500 threshold for criminal prosection is here - http://www.nysscpa.org/cpajournal/1997/0497/depts/fedtax.htm

    Q8-1A.
    Is there a latest amount that has been publicized, if not, what is the
    general experience in the current threshold - $3K, $5K, or $10K of tax
    loss per year to be criminal

    ReplyDelete
  9. I tried several times to post but was unsuccessful. here is it again under a new name

    Jack
    – thanks for the reply. My responses and follow up questions, if any,
    are indicated in the format Qx-1, for example follow up to question Q1
    would be Q1-1.

    Q1-1 In your opinion, would you think that a taxpayer would be convicted for an FBAR
    violation for the same year as the taxpayer committed evasion but was
    not charged or convicted for evasion. If there is no conviction, motive
    is not proved and hence FBAR violation conviction might fail as well.



    Q3
    -1. You mention that the max criminal sentence per FBAR violation is 5
    years. How is this determined? Tax conviction is based on tax loss, so
    is FBAR sentence based on foreign account balance. If so, is there a
    chart of account balance and months of sentence.

    Q6-1. The TAS report on 18 criminal proceedings is on ACA website - http://americansabroad.org/files/5613/5807/4473/IRSsOVDPsDiscourageVoluntaryCompliance.pdf (please refer to page 9 of PDF or 142 of the document.

    Q8-1.
    This was more a question as to - at what amount of foreign account
    balance and/or tax loss would the case be ‘warning letter’ to civil
    penalties and further to criminal prosecution? The reference to the $2500 threshold for criminal prosection is here - http://www.nysscpa.org/cpajournal/1997/0497/depts/fedtax.htm

    Q8-1A.
    Is there a latest amount that has been publicized, if not, what is the
    general experience in the current threshold - $3K, $5K, or $10K of tax
    loss per year to be criminal

    ReplyDelete
  10. Q1-1. The prosecutors / grand jury can charge whichever crime they desire and will generally choose the crime or crimes that are most significant and provable. They thus could charge both evasion and FBAR crime for the same year or either for the same year. FBAR conviction does not require a prior or contemporaneous income tax evasion conviction. But, if the prosecutors / grand jury did not charge tax evasion because they were concerned that they could not prove "intentional violation of a known legal duty," which is basically the FBAR conviction standard, then they might have a weak case for a solo FBAR charge.

    Q3-1. Your question is not clear to me, but perhaps this will help. FBAR convictions use the related tax loss Guideline to set the base offense level. This would mean that the FBAR sentence is not based on the account balance.

    Q6-1. I took a quick look at the document. I think you refer to the following: "the government opened only 3,220 civil FBAR examinations and 18 criminal investigations in calendar year (CY) 2011." I don't think these are QD (quiet disclosure) cases. I think this is the entire universe of those taxpayers who did not join OVDI / OVDP.

    Q8-1. I suspect that there is some level of amount that, in the general run of cases, the IRS will want before prosecuting. The IRS will not announce that number. And, in any event, it would be just a general rule. There may be exceptions if the facts suggest that the case is unusual for other reasons. The $2,500 figure you refer to is the old general rule for what was required for a criminal tax prosecution. That too was just a general rule. So far as I am aware, the IRS has not publicly disclosed whether it has a similar threshold general rule (I suspect it does) or what it is (almost all criminal prosecutions will involve much larger amounts in any event.)

    Q8-1A. Same answer. The FBAR prosecutions have involved much more the figures you give. Again, I don't think there is enough discernible data to draw any conclusions as to what the figure is.



    Jack Townsend

    ReplyDelete
  11. Firstly, thanks so much for creating a blog for those of us with tax issues. It is comforting to know I am not alone. Can you answer the following questions please?

    The facts: I moved to the USA in 2009, and didn't know about the FBAR requirements, I am a resident Alien, and all the assets I have in my country of citizenship were legally acquired, with taxed income, prior to moving to the USA. I have 2 foreign bank accounts in my name, an apartment and a house in my home country which are generating rental income which I didn't declare in the USA but did in my home country. Furthermore, I have mutual funds, RRSP's and have signatory over my 82 year old father's bank accounts. I plan to enter into the OVDP after I file amended tax returns for the rental income and then file delinquent FBAR's. I believe some years will have zero tax liability and some will have small amounts. I see my situation as very messy and I have not slept since tripping upon this whale of an issue. My questions follow:
    1. Under OVDP-Will the IRS impose 27.5% on all the account balances each year or just for the year with the highest balance?
    2. Under the OVDP-Will the IRS impose 27.5% on the FMV of the apartment ?
    3. Is there a way to leave out my father's accounts from the penalty?
    4. If I feel the OVDP penalty amount is too high, I can opt out. How difficult is this? I am hearing the IRS makes it very difficult.
    5. What would be a disproportionate penalty to pay considering the above facts? Has anyone argued disproportionate in any penalty application, if so, what was the result?
    6. If I opt out of OVDP, are my two alternatives to be deemed either willful or un-willful? Will both of these leave my property out of the calculation?
    7. What are my chances of being deemed un-willfull given the following:
    a. I didn't originally declare worldwide income on the rental income because I didn't know I needed to

    b I checked the bank account box on the 1040 only for one year but not the others and my only excuse is I didn't read the form carefully or understand my obligations

    c. On the checklist from my CPA tax preparer I answered I did not have a foreign bank account due to sheer carelessness (see b)

    d. I declared the dividends and interest earned on my foreign mutual funds on my USA return

    e.all the bank accounts and investments with my name only have my USA address (not so my father's accounts)

    f. The tax return I filed in my home country, including my rental income, has my USA address


    8. How is the IRS collecting penalties on resident aliens if they don't have enough assets in the USA to pay the fines? I will be repatriating with my employer this year, I want to clear this up but I don't want to have to continually fly to the USA to fight this in court if I don't have the means to pay other than selling my foreign property. Basically, what negotiating can I do?


    Thanks so much for your opinions, I know I will need to engage a lawyer but wanted your preliminary assessment based on the facts above to use to interview lawyers.

    ReplyDelete
  12. I see my situation as very messy...... I don`t think so :-) Your facts are pretty straightforward with obvious options and pros/cons but I don’t mean to jump in and answer for Jack .

    ReplyDelete
  13. A1. Just the highest balance year. It is important to note (as suggested by Q2) that U.S. tax noncompliant foreign assets other than financial accounts are included in the base to which the 27.5% applies.

    A2. Yes, the apartment and the house will be included in the spreadsheet (and thus in the base) for U.S. tax noncompliant years.

    A3. My experience is that, if you can convince the IRS that the accounts are really your father's accounts so that there is no U.S. tax noncompliance with respect to the accounts (i.e., because the income is his income and not yours), it will be excluded from the base to which the 27.5% penalty applies. My experience also is that, upon opt out, if you make the same showing, the FBAR penalty will not be applied.

    A4. The IRS does not make the opt out process difficult. The requirements are that you write up a statement of why you should be exempted from the FBAR penalties and the income tax penalties. This is like a legal brief to state your best case. The IRS will then conduct such further audit work as it deems warranted. From the taxpayer's perspective, that will mean submitting to an interview (so far, always by telephone in my cases) and perhaps some IDRs. The IRS controls the scope of the audit work, so it is hard to give you an idea of what the scope will be in your particular situation. The lawyer you engage should be able to better calibrate that.

    A5. I can't answer that question on the facts given. Disproportionate is usually in the eye of the beholder and, in any event, can only be assessed based on all of the relevant and material facts involved which my experience tells taxpayers cannot really summarize as you have above. The lawyer you engage will be better able to assess that.

    A6. Yes. And, the foreign nonfinancial accounts (the property specifically) will not be included in the calculation of the penalty. Keep in mind that the income from the foreign nonfinancial accounts will be included in any income tax imposed (if not willful or fraud, will include fewer years than required if you do not opt out).

    A7. I cannot answer that question because the answer will ultimately depend upon a lot more facts and factual nuance than you present.

    A8. If you have enough assets to pay but all or a material amount are not in the U.S., the IRS will expect that you will bring them into the U.S. to pay the amounts required. You will not be able to negotiate the payment. If you do not have enough assets to pay the entire amount due, the IRS has regular procedures to pay in installments or to compromise the amount to be paid. The key negotiations with the IRS will be at the determination of the amount phase. Inside the penalty structure (the 27.5% penalty), there is little room to negotiate. If you opt out, I think substantial negotiation can occur around the facts and nuances that go into the decision of whether the penalty is to be asserted and the amount. Once the amount is determined, however, it is simply a collection matter that will depend upon your ability to pay.

    Best,

    Jack Townsend


    Thanks so much for your opinions, I know I will need to engage a lawyer but wanted your preliminary assessment based on the facts above to use to interview lawyers.

    ReplyDelete
  14. With respect to answer A4, Jack is laying it out as it is. The process of opting out is not that difficult. I am opting out without a lawyer and I am having the experience Jack describes. The only two differences I note are 1) as I have no lawyer, the agent had already had a number of contacts with me so no interview has been requested and 2) I got the IDR requests before I opted out. As for the scope of the IDR, it has been nothing horrible - the IDRs were mostly related to proof of taxes paid and calculations of tax credits.



    I opted out about two months ago and still have not had a response back, but as the agents have their plates full, it took one month before the agent sent me the opt out acknowledgement letter telling me about all the penalties that could apply. The agent was kind and warned me that this was just a routine letter they have to send out. The agent also warned me that the opt out would take time as they are backed up with processing applications from the Streamlined Program and other opt outs.

    ReplyDelete
  15. ....proof of taxes paid and calculations of tax credits.... thanks anon for this little detail. Do I understand this correctly with regards to tax credits that your examiner was not able to understand how your CPA filled out form 1116 or 6251 ?

    ReplyDelete
  16. Jack - thanks

    Q3-1. Thanks for confirming that the FBAR sentence is not related to the account balance. So for most minnows, if the tax loss is lesser than $10K, it is NOT aggravated felony and hence will not bar naturalization

    Does a civil fraud penalty constitute a crime of moral turpitude? It is very unlikely, but if 6 years later, IRS pursues a civil fraud case, can it be considered a crime of moral turpitude for naturalization purposes. Can the IRS share the civil fraud penalty (not criminal) information with the INS.

    Can the USCIS revoke citizenship and render the person stateless in a minnow case (not a whale) if the person is prosecuted and convicted of a tax crime and the INS proves that applicant lied during naturalization by wrongly answering the question - have you committed a crime for which you have not been arrested - as a 'No'. Theoritically it may be a yes but is it pratically done as in the case of Dahake who prosecution years covered years when he was a green card holder

    Q6-1. Are we sure it is the full universe. Based on the information you have put togehter, i believe more than 100 people (primarily UBS account holders) have been prosecuted, so i think it is the QD or GF cases.


    thanks

    ReplyDelete
  17. I think you need to be careful in comparing apples and oranges. If there is a conviction for the FBAR penalty, although sentencing may be driven by the tax loss, it is still an FBAR conviction, not a tax conviction. I do think that, as with sentencing, the loss for purposes of 8 U.S.C. § 1101(a)(43)(M)(i) would include the tax loss, so staying under $10,000 for purposes of the sentencing tax loss will set the right tone. I don't know, however, that the immigration judge will be bound by the determination in the sentencing proceeding. I think you would need to speak to an immigration attorney on that issue.

    Also, civil penalties -- whether the FBAR civil penalty (willful or nonwillful) or the civil fraud income tax penalty -- are not criminal convictions or determinations that the person has committed a felony. Because the willful FBAR penalty and the civil fraud income tax penalty are based upon the same conduct that would, if charged and proved as a felony beyond a reasonable doubt, be considered an aggravated felony (if the amount exceeded the threshold), it is possible (although I think it not likely) that a court determination of either penalty might be preclusive in the immigration proceeding. You should consult an immigration attorney if you are concerned about that.

    Jack Townsend

    ReplyDelete
  18. Jack,

    Immigration attorneys have no clue, and refer us to tax attorneys to FIX the issue before doing anything. Basically, they're telling us to FIX the problem before applying for citizenship or renewing our green cards. This is why this is so depressing. My immigration attorney basically told me that I HAD to enter any amnesty program that the IRS is conducting (i.e. OVDI), without knowing any of my facts.

    What are we supposed to do? I consulted 3 attorneys and got answers from go forward to OVDI (one even mentioned I was a criminal). My facts are similar to IJ, with a tax due of roughly $100 per year during the 3 years SOL. One year within 8 years was more than that. Talk about being criminal for not filing a form.

    I am terrified of the IRS rhetoric of "The only solution is OVDI, and we'll go harsly after you if you try to correct your problem with a QD".
    Back in December of 2011, she said, talking to CANADIANS:
    "The IRS is on the lookout for taxpayers who attempt to bring their returns current by using “quiet disclosure” and those who attempt to resolve their filing obligations in this way will face harsh penalties."
    http://www.moodystax.com/irs-says-no-new-relief-planned-for-canadians/

    Based on what I read on your blog, I chose the Go Forward, ignoring what my immigration lawyer told me, and because I was terrified of that statement from Rosemary Sereti, and the potential impact of my immigration status if I did a QD and was audited. I chose the mimimal response.

    It doesn't make any sense to spend $50K or more in legal fees to help me through OVDI and sign the 906 and paying 12.5% or my max balance, or even more legal fees to go through the opt out. Besides, I refuse to submit myself to this extortion. I make a decent living, but we're not rich. My wife is a stay at home mom. It would take us decades to recover from spending 70K to fix this issue.

    And if they don't want to renew my green card, or grant me citizenship so be it. I wouldn't be worth living here anyway. But this would have destroyed a family or what's left of it.

    The IRS needs to understand the impact this has on people and start listening to Nina Olson. It is pretty depressing that the tax payer advocate is ignored the way she is. Let's hope things change once we have new commisionner. For god's sake, I just want to pay what I owe and get on with my life, but right now, they're preventing us to do that. There is not one day when I don't think about what might happen if my green card is not renewed. I dread going to the mailbox. I am depressed.

    The IRS policy and refusal to provide a simple way to adress the problem is a cruel punishment.

    Sorry for my rant, but it helps writing about it.

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  19. Actually, as I have opted out and I was a filer, almost all years are closed. I was a self filer and never took tax credits. When the returns were done for OVDI by an accountant, it turns out that I had tons of tax credits that could be applied to taxes owed and carried forward. Once I opted out of OVDI and some years were closed, I could not benefit In later open years from tax credits carried forward from the closed years. My agent refused to do the recalculation of the tax credits for the open years. The agent basically told us, "This is what is not allowed (due to the fact the years are closed), adjust the credits for the open years." As a contrast, the agent wanted to maintain total control of the PFIC calculations and did them all. I think that says something about where their priorities lie.

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  20. Thanks Jack. Some questions on the facts of law:

    1. Are state taxes owed considered for tax sentencing or is it just federal taxes that are considered for the sentencing guidelines

    2. What is the lowest tax amount that you have seen result in prosecution (successful or not) by the IRS

    3. I am assuming that IRS needs to go to court in ALL cases if it needs to levy the civil fraud penalty, especially if it is after 6 years SOL and IRS wants to show a 'criminal' intent - is this correct understanding of the procedures.

    4. In you opinion, what is the probability (from very very slim, to probably to highly possible) that IRS will pursue a case in court for criminal fraud (if within 6 years) or civil fraud (after 6 years SOL) for a federal tax loss of $4500 + state tax loss of $1500 or $6,000 in total over 8 years.

    thanks

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  21. To add to my comments from earlier, a couple of more points


    Are tax court records public documents, i.e. can a civil fraud issue settled in a tax court be accessible to USCIS, so for example, if after 6 years SOL IRS finds civil fraud and litigates in court and IRS prevails, are the court records avaible to USCIS



    Is a settlement upon opt-out be considered an acceptable of a crime or moral turpitude


    thanks again

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  22. 1. Tax court records are public.

    2. I think a word is missing, but I infer the missing word is "proof" or some such. A settlement upon opt out would not be proof -- the legal term is collateral estoppel -- of any conduct forming the basis of the settlement.

    Jack Townsend

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  23. 1. State taxes may be included as relevant conduct.

    2. The lowest that I have been personally involved with has been around $33,000. The tax loss started out in excess of $100,000, but we were able to whittle it down to about $33,000 by convicing the Government that some of the proposed adjustments were civil in nature only and did not arise from fraud.

    3. The IRS does not need to go to court to assess and collect the civil fraud penalty. Normally, if it is going to go to court, the IRS will issue a notice of deficiency and the taxpayer will bring the court proceeding to prevent the assessment (if he can) or the IRS will assess (after an unpetitioned notice of deficiency) and the taxpayer will bring a refund suit.

    4. Criminal case. Very slim on the sparse facts given (but keep in mind that the decision whether to prosecute is based on a range of potentially relevant facts). Civil case. Very likely (keep in mind that the IRS needs simply to assert via notice of deficiency and assessment if not petitioned, so the IRS has no reluctance to assert a civil penalty even where the case would not be a good candidate for criminal prosecution.

    Jack Townsend

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  24. Many thanks Jack.

    I read at the IRS website http://www.irs.gov/irm/part25/irm_25-001-006.html that Civil fraud penalties will be asserted when there is clear and convincing evidence to prove that some part of the underpayment of tax was due to fraud. If not in court, where does IRS need to prove civil fraud. Can you provide a website/link where the process for civil fraud penalty levy is mentioned - i am assuming that IRS can by its own will levy this penalty without court order?

    To understand the step by step process re:civil fraud penalty, 1) IRS
    decides to levy civil fraud penalty wtihout going to court 2) taxpayer
    can litigate 3) if litigation happens, matter decided by court. Is this
    right?

    If after expiry of 6 years SOL, the IRS re-assesses tax for the past years due to fraud and decides to levy civil fraud penalty suo moto (without court order), it might be better to pay it than litigate (if the amounts are small), since the court order is a public document and may impact future re:naturalization etc. Is this observation correct?

    ReplyDelete
  25. I don't have handy a web site that discusses the levy of the civil fraud penalty. Maybe I could clarify the terminilogy. The IRS must first assess the civil fraud penalty. Before it can assess, it must issue a notice of deficiency which gives the taxpayer an opportunity to litigate the issue in the Tax Court before the assessment and before the payment. If the taxpayer litigates and wins, there will be no assessment and no requirement to pay; indeed, legally, no civil fraud penalty will be due. If the taxpayer litigates and loses, the IRS will assess and then the taxpayer will be legally obligated to pay the civil fraud penalty. However, if the taxpayer does not litigate the issue in the Tax Court pursuant to the notice of deficiency, the IRS will assess and the IRS can use its collection methods (levy, etc.) to collect the civil fraud penalty. Even then, however, if the taxpayer has not litigated the issue before, the taxpayer may have an opportunity to litigate liability for the civil fraud penalty in a refund suit, a collection suit or perhaps in bankruptcy.

    As to whether it is "better" to pay a civil fraud penalty asserted by the IRS in a notice of deficiency or in an assessment (if not previously litigated), I cannot speak. Your concern apparently is naturalization and I am not sure that a civil fraud penalty will be preclusive or even relevant to a naturalization proceeding. I suspect that, in a naturalization proceeding, actual proof of some aggravated felony would be required. But, I am not an immigration attorney, so you will have to direct your question to an immigration attorney..

    Jack Townsend

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  26. I have questions I hope someone can share insight on. Are surviving spouses liable for underreported foreign income and undeclared foreign accounts that are uncovered by audit? The deceased spouse handled all financial affairs and tax returns prior to their death. Surviving spouse had signed all the joint tax returns. I see information on Innocent Spouse Relief on the IRS website, but what does it take to "establish that at the time you signed the joint return you did not know, and had no reason to know, that there was an understatement of tax"? The surviving spouse signed the joint returns assuming they were in proper order. Is this punishable negligence? Would other factors such as surviving spouse's income/occupation/education be considered? Could surviving spouse be subject to any civil or criminal charges?

    ReplyDelete
  27. An answer from an immigration lawyer would help. Mr Townsend, do you know one who would be willing to participate in the discussion?

    I think naturalization requires to provide tax return transcripts and account transcripts for the years they don't have return transcripts, going back 5 years.
    The question is would civil penalties appear on these transcripts and how would this impact the naturization process?
    Could we be considered as not having good moral character if we had a civil penalty and declined naturalization? Only an immigration lawyer could answer.

    I think the more serious problem is the consequence of having checked the wrong box of form 1040B. Say an immigrant who chose the Go Forward or chose to amend taxes is audited. If the tax due was low (say $100 per year), could he still be charged with filing a false tax return? Or will the case likely stay civil? In which case, he would be assessed only civil penalties, and then it's back to the previous question.

    There has been a case (Purpura), where pleading guilty to filing a false tax return can result in deportation for a green card holder (on the grounds or moral turpitude), so I assume that this would also prevent naturalization.
    If an immigrant ends up in that situation, then his tax lawyer should consult with an immigration lawyer to come up with a deal that don't risk deportation.
    I have another question regarding the discrepancy in the status of limitation with tax returns (3 years) vs FBARs (6 years).
    Say someone who choses to go forward is lucky enough not to have been audited for the past 3 years, and is good for the tax return statute of limitation, but he's audited on year 4. The IRS should not check past 3 years on the tax return, so they technically don't know if you had to file a FBAR 4 years back.
    How does that work? If they pull out your tax return from years 4 to 6 and the tax payer was not compliant, the return would have shown no foreign account and no FBAR was filed. I guess they can ask when the account was open.
    So in this case, they just don't look at the tax returns from year 4 to 6, but just if the FBAR were filed?
    I guess my question is how "safe" is someone who chooses to go forward after 3 years?

    ReplyDelete
  28. Yes, the surviving spouse's income, occupation and education is an important factor when considering innocent spouse relief. A spouse who was a housewife and left financial affairs largely to her husband would be treated very differently from a spouse who has run a business for years and has a high level of financial sophistication.

    Now, when it comes to FBAR penalties, there is no explicit provision for innocent spouse relief. But I would say that if a spouse qualifies for innocent spouse relief, then he or she would likely also qualify for reasonable cause relief from FBAR penalties. Also, since FBAR penalties are separate for each spouse, a surviving spouse would not be subject to FBAR penalties for a husband's separately held accounts even if she does not qualify for innocent spouse relief. I think the same argument could be made for joint foreign accounts as well, but if the spouse has filing requirements of her own for individual foreign accounts, then it could be a different issue.

    [ Reverse sexes in my comments above if you find that less stereotyped]

    ReplyDelete
  29. There is a separate issue relating to transferee liability. The estate, and hence the legatee, can be held liable for the unpaid tax and (in the US, unlike Europe where the European Court of Human Rights has held otherwise) penalties.

    ReplyDelete
  30. A tax crime has been held to be an "aggravated felony" justifying deportation. http://www.shautsova.com/law-publications/aggravated-felony-deportation-legal-immigrants.html Under current law the threshold amount is $10,000 according to that blog. There is more here on the "good character" requirement for naturalisation: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799524

    ReplyDelete
  31. Thanks for the information, Punktlich. Yes, I was aware of the Kawashima case.

    In this case, the tax loss was in the hundreds on thousand (which was fully repaid, and the husband even did some jail time).

    The Purpura case is a lot more scary for the immigrant. I could not find more information than what was published on this article:
    http://www.pennlive.com/midstate/index.ssf/2012/03/salvatore_purpura_owner_of_joj.html

    The facts presented in the article don't seem outrageous:

    He held some money for an acquaintaince, and did not declare the account.

    There was a trial at the time, because the case was related to drug money, but the investigation did not show that he knew about the wrong doing.

    There was no tax loss to the government. Yet, initially, because of the conviction, he faced deportation. And the article said that even after his conviction was revoked by the same judge decades later, Immigration Services still wanted to deport him on moral grounds. We're not even talking about being denied naturalization.

    Potentially all immigrants caught in this FBAR mess face the same. That is what's scaring me to death. Yet, I think this is so wrong to force middle class immigrants with this issue to pay tens of thousand in legal fees AND 27.5% of the max balance of the accounts left if their home country to be able to stay here. I see this as extortion. I want to make it right without ruining myself and my American family, yet, the IRS says that they'll go harshly after you if you try to fix it by amending returns. I don't want to pay tens of thousand of dollars for a couple hundred bucks of tax due.

    ReplyDelete
  32. The blog posting puts an interesting gloss on the issue of "absconding". I've not heard of the IRS seeking a writ "ne exeat republica" but there's no reason why it couldn't. The IRM makes clear that the IRS can and does use TECS ( (IRM 5.1.18.14.7, TECS Historical Travel Information) to track absconders and nonresidents. The number of nonresidents who remain noncompliant with FBAR requirements is so large as to lead one to wonder how the IRS will prioritize its enforcement activity among this class of (non-?)taxpayers. Assuming expatriates are not deemed to be "absconders" they are still likely to have Form 3520 issues, perhaps 5471 issues, and almost certainly FBAR and FATCA deficiencies. I have seen the IRS bargain with foreign estates/successors of deceased Americans; perhaps analogously noncollectability (except maybe under mutual collection provisions which may or may not be helpful to the IRS) can encourage them to compromise.

    Adam J. Hirsch wrote, some years ago, on "The Problem of the Insolvent Heir" (74 CORN. L. REV. 587 (1989)). I can envisage US-based statutory legatees ("forced heirship") of absconded US taxpayers disclaiming in favor of foreign family members rather than facing claims of transferee liability and I wonder how that would play out. (Use of US entities and trusts to defeat foreign forced heirship laws is another issue, perhaps the reciprocal of that. See Caron v. Odell: http://www.uniset.ca/other/css/caron-odell.html )

    ReplyDelete
  33. Thanks. Good article on levy of civil fraud penalty DURING audit and WITHIN SOL.

    Is the process the same AFTER the SOL period for the levy and collection of tax and civil fraud penalty if IRS believes fraudulent conduct on part of taxpayer, ie. If there was fraudulent conduct BUT 6 years have elapsed, can IRS assess tax and issue a notice of deficiency for civil fraud or would IRS need to prove fraud in a tax court?

    thanks

    ReplyDelete
  34. Jack

    I understand the limitations on answering immigration
    related questions. However, do you know the rationale for seeking
    deportation in the Purpura case where

    - There was no tax loss and
    - It was not a aggravated felony (based on above discussions it is a $10K threshold of tax loss)

    Also
    do you know the sentencing in the Dahake case and whether he will be
    stripped of his citizenship due to lying on naturalization

    Thanks

    ReplyDelete
  35. I have a question on the treatment of real estate for the purposes of 'inclusion' of fair value in the penalty base. Say for example, a person had $100K in a foreign country (full taxed US funds transferred to home country) on Jan 31, Year 1. In March 31, Year 1, he purchases foreign real estate worth $300K, by paying $40K from his foreign account, and taking a mortgage in the foreign country for the balance $260K. Eventually, the mortgage is paid over a period of 2 years, by repaying from the $60K in the foreign account as well as transferring money from US bank account to foreign bank account and then to the mortgage account. Say the foreign account balance and mortgage balance at Feb 28 Year 3 is ZERO, i.e. mortgage has been paid off. Lets assume foreign real estate has appreciated in value to $320K. So the question is what is the penalty base for the FBAR 27.5% penalty


    1. $60K of account balance and $300K of real estate at March 31 Year 1 = $360K (with IRS ignoring the mortgage on the foreign real estate)
    2. $320K which is value of real estate at Feb 28 Year 3
    3. $300K at March 31, Year 1

    3. Some other number


    this is very important for immigrants who have purchased real estate in home countries. Any inputs would be welcome.

    ReplyDelete
  36. SeniorResearcherApril 5, 2013 at 9:26 AM

    In a criminal case the SOL for prosecution expires 6 years from the time the offense was committed. In a civil case where evidence of fraud is developed, the normal 3 year period of limitations does not apply and the tax and penalties may be assessed at any time without regard to the years involved.

    ReplyDelete
  37. Don't know the answers to these questions. As in most costs, all we have a snippets of information that do not tell the full story, so drawing conclusions that can be useful in other cases is risky indeed.

    Jack Townsend

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  38. If civil fraud is involved, there is no income tax statute of limitations. The IRS can assess (provided it issues predicate notice of deficiency).at any time.

    Jack Townsend

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  39. I'm a tax student and my Aunt Sherry told me about her peculiar situation which differs from all the postings in that she lost money in foreign accounts. I am wondering if my analysis and conclusion make sense.

    In 1985 Aunt Sherry was working as an equipment sales person, and went on a regular business trip to a non-treaty banana republic type of country. She was impressed with the economic growth and promise she saw under a newly elected president. One of the guys at a lunch meeting suggests she invest in a few stocks of local companies and introduced her to a guy at the local stock exchange. She wired over $60,000 of "play money" from her US account and the broker bought her stocks in the banana republic's phone company, the steel company, their bank, and a retail chain (none of these are PFICs).

    After that, she never gave much of the investments given her focus on work, family, and social schedule; she received no brokerage statements, etc. She did not report the $300 of annual dividends (which paled in comparison to her six-figure income), and her preparer did not think of asking her whether to check the box on Schedule B. As such she did not file FBARs.

    In 2004, she lost her job and underwent other health and family crises. At that point she remembered the foreign brokerage account and called the broker. The banana republic had undergone an economic crisis and her stocks were down to $22,000. She had the account liquidated. Since the foreign financial institution did not issue a 1099-B, it didn't even cross her mind whether she could report the $38,000 loss on her foreign investment. As of 12/31/2004 she has no foreign assets, and given this misadventure would never invest abroad.

    Does this make sense:

    (1) The due date for her 2004 FBAR was June 30, 2005, and we are past the 6-year statute of limitations. As such, there is no FBAR violation and she needs to do nothing in the FBAR department.


    (2) The due date of her 2004 tax return was April 15, 2005, so she's past the 3-year and 6-year statutes, therefore there is no need to amend the return.


    (3) Now throw in a twist. Aunt Sherry always filed her returns on time so her returns through 2003 are all past SOL. However, due to her life breaking down in 2004, the 2005 return did not get filed until 2008. So she's past the 3-year statute but not the 6-year statute.


    Does this mean she can do opt-out, file an amended 2004 showing the $38,000 loss on her investment, taking a $3,000 capital loss and amendment subsequent returns to report the deductible portion of her capital loss carryover?


    So she would actually get tax refunds by coming clean?











    (2) The due date of her 2004 Form 1040 was April 15, 2005, which is also past the 6-year statute of limitations. As such, there is no need to amend this return or participate in ODVP

    ReplyDelete

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