Sunday, June 16, 2013

An OVDI Odyssey - an Opt Out Success Story (6/16/13)

A reader of this blog with whom I have corresponded during her journey through the maze of a couple of iterations of the ODVP/OVDI has offered to share her journey with other readers.  She ultimately received a favorable outcome -- on opt out, a no FBAR penalty letter (Letter 3800).  Her journey was tortuous.  I think in part that was due to the design of the program that was a bit simplistic (still is in many respects) and both practitioners and the IRS had to deal with the nuances and uncertainties that had not been considered in designing the program.  This resulted in long delays and twists and turns in her case -- also experienced by others in their respective situations. Ultimately, after a lot of grief and angst, this reader got assigned an agent to process the case within the program penalty structure and then for opt out.  And the right result prevailed.

This reader has offered a narrative of her journey and the key documents in the hope that other readers will find them useful and be encouraged that, at the end of their respective journeys which, hopefully, will have fewer twists and turns, they too will achieve a fair result.  In the process, she hopes that others will not be frightened to opt out because of the mere remote possibility of hypothetical onerous penalties.

Here are the links to her documents.  The key document is the summary.  It is extended (16 pages), but well worth the read.  She presents the materials well.

  • A summary (actually detailed) presentation of her journey, here.
  • Her opt out letter, here.
  • Her opt out reasonable cause arguments, here.
  • A Streamlined Program acceptance letter, here.
  • Her Letter 3800, here.
  • A spreadsheet with the Agent calculation of mitigated Level II Non-Willful Penalties, here.

I think that there are some in the OVDI/OVDP programs who should opt out but do not because they fear what the IRS could do.  For example, many of the agents are trained when asked about what penalties could apply on opt out to assert that the IRS could, depending on the facts, assert the maximum willful penalties for up to six years (depending on the FBAR statute of limitations still open).  This is truly scary that an agent will tell his customer -- in the IRS metaphor -- that this could happen.  Yet, although apparently telling this reader that whopping amount, the agent immediately said:

The agent then clearly stated, at least 3 times, that in more than a decade of the agent’s experience in international individual tax, the agent “had never seen anyone receive more than one year of FBAR penalties”. I repeat, the agent told me this at least 3 times.
Based on my experience and the experiences other practitioners have shared with me, the agent was clearly giving her a good signal.  Unfortunately, many agents do not give taxpayers -- their customers -- that signal.

At any rate, this reader's experience I hope will be helpful to other readers going through the process.  And it appears the IRS personnel involved in her experience have learned something about how to run the program and I hope other IRS personnel who read her story will learn something.  Hopefully, although it is fairly late in the processing of these various initiatives, they can improve the program to make it fairer.

Thanks to this reader for sharing her journey.

29 comments:

  1. Congrats on this wonderful result. I assume this is anon5%'s story. What a waste of energy and resources for what could be solved so much more efficiently. And we wonder about our governments deficits and government waste. A happy result but very sad state of affairs.

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  2. Congratulations to anon5percent. I would not call your result "wonderful" but "just, fair and logical." It should have been obvious to the IRS from the very beginning that a letter 3800 was appropriate and they should not have wasted so much valuable time (yours and theirs) over $133/year average tax.

    Thank you for sharing all this with us. I have read it all and have a couple of questions, if you could be kind enough to answer them.

    When the agent referred to never having seen more than one year of penalties, can I assume he was talking about the nonwillful penalty? I am assuming he was silent about the willful, potentially 50% per year which is much more than the in-lieu.

    You said that inside the program you would have faced a penalty that was 5% and in the mid figures (if I understood you correctly.) For example, that would be $50K on $1 million. Yet the unredacted balance in your penalty calculation worksheet is $180 K. Were the other accounts redacted because they were tax compliant (no interest earned) or to eliminate double counting due to balance transfers? It is my understanding that tax compliant accounts and double counting are eliminated even inside the program.

    Thanks!

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  3. Thanks Anon123. I hope your health is doing well. This process also impacted me health wise and I am trying to come back. Your posts on your experience were some of the first that revealed how the program was being managed. Thanks to you and Just Me, I realized that staying in the program was not appropriate for me and began working on how to get out. Thanks so much for being one of the first to go public. While your result was not good, you helped me by sharing. Take care.

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  4. As to your first comment, that it should have been obvious to the IRS that a Letter 3800 was appropriate, I think it was. It just took me a long time to get to an agent who could see this. It was the design of the program that was flawed. The IRS threw out a net and brought in a catch of 30,000, but had no way for efficiently sorting and dealing with what it drew in if it was not a whale. I think it was also questionable practice to direct everyone into the OVD programs just because someone had a foreign account. There are other legal ways of resolving foreign account issues. I also question any practitioner who does not look at the facts of a client, including taxes owed, before directing them into an OVD program. Times were different in 2010 because it was thought that everyone who would come in would be an intentional tax evader, but it is still no excuse for subjecting minnows to what was essentially a program intended for criminals.

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  5. anon5percent

    Great result considering what we prepared to pay when entering the program -:). If we read OVDI FAQ 33.

    Is there a de minimis unreported income exception to the 27.5 percent penalty?

    No. No amount of unreported income is considered de minimis for purposes of determining whether there has been tax non-compliance with respect to an account or asset and whether the account or asset should be included in the base for the 27.5 percent penalty

    At that time we really had no clue (so did the professionals) -- If or not small amount tax owed should have a chance to be exempted from penalty.

    It was not until Moby -- the very first open successful opt-out story --- a game change for all the minnows who have the guts to opt-out.

    I would be surprised if the same lawyer/account that you consulted would have the same approach today. Sorry that you had paid such a big amount money for really nothing.

    Anon123, please stay health -- we all owe you (and Just Me and others) a great deal for speaking out --- we shared your pain two years ago --- and together we all share this new relief/happy ending.

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  6. Congratulations to anon5percent! Her case was certainly a lot more complicated than mine was, although when I entered the 2009 no one at the IRS except the revenue agent assigned to me seemed to realize that there were people in the program who weren't "crooks wanting to come clean". The agent's attempts to let me off (relatively) easy were initially stopped by the agent's supervisor. Later on, after I had asked the TAS for help, I was assigned to a TAS case advocate who was at the same IRS site as the revenue agent: the case advocate had a meeting with the revenue agent. It was after that that the case advocate told me that opting out would "probably not be worse, and likely better" for me. It most certainly was.


    That opt-out letter is quite something! I thought mine was too long, but it was only 4 pages.

    I continue to be amazed that IRS chose to waste so much time and effort on me and cases like mine. It should have been clear to them from my initial cover letter that I wasn't the kind of fish they were supposedly fishing for.

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  7. anon5percent: Your conclusions section answered every question I was formulating while reading your whole ordeal.

    Aside from it being a complete waste of time (as you mentioned), I question why any US Citizen who is living abroad for any length of time would bother with the IRS or US Govt.

    I understand there might still be IRS ingrained fear, but once a free human has left the plantation (US borders) there really isn't much the IRS can do and their threats carry no weight if one has removed all of their assets from the USA.

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  8. @ij - In some ways, in the beginning, I was like you. I thought I deserved to give up 25% of the assets I had accumulated just because I did not have any acquaintance with a form. I thought I was the only one in the world who was in this position. My lawyer did nothing to dispel me of this notion as we never had any consultations in spite of tons of documents I sent him. In that firm, there were at least 6 rookie associates who were assigned to process OVDI cases and that is all they did, process. As I watched your evolution, I was aware that I was evolving, too. I was more informed and saw that I could do what you did. I also really appreciated your accounts of your contacts with the Revenue Agents. In years prior to OVDI, the few contacts I had with IRS representatives were positive. The representatives were helpful and they tried to solve issues. You convinced me that this was still the case. One just had to be out of OVDI in order to have agent discretion. Moby and Sally were the first to take those steps and you risked it too and shared your experiences and that encouraged me. You were always supportive of me and I thank you very much for that.

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  9. @Sally - As you are, like I am, a long term resident abroad, I really appreciated the answers that you supplied when I asked questions. They helped a lot. I also think we are from the same state. The help of my Congresswoman was enough, but when I read that even Chuck Schumer was willing to act on your behalf, I had to admire you for approaching him. You did everything you could to raise awareness of your situation and you helped me by doing so.

    And you are right, the opt out letter has everything in it but the kitchen sink, but I think that came because I read the IRM hundreds of times and began to see my behavior in the context of it and I did not want to miss out on anything. A lot of time went into the opt out letter, unfortunately part of a Christmas vacation and about a week off of work. As you shared a few key words that helped me to understand how to present my situation, I can only hope that others will see things in common with their behavior and be able to use some of the arguments I used to successfully obtain relief. Thanks again for speaking openly and for your help.

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  10. Actually it was my brother who asked Chuck Schumer (his Senator, never mine) for help and what his staff did was get me in touch with the TAS. I really doubt he knew anything about it. I think the only member of Congress who got anywhere near to my problem was "my" Congressman, who actually signed a letter to me. (Very much changed my opinion of him.) That Mr. Schumer does not care a whit about us is abundantly clear from his statements concerning FATCA and his apparent desire to punish us for the "sin" of living where we do.


    I did most of my work evenings (midnight oil, yawn) and weekends. Except for the Great Photocopying, Translating and Table Creation Event, trying to get 6 years of bank statements (conveniently printed on teeny bits of paper) into a form where the Revenue Agent could understand what was up. I needed time off work for that.

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  11. Here is a quick follow-up to the postings above. I have had two issues related to monies being refunded. So beware - even once your case is closed, payment issues may arise. Hopefully, your agent will not just blow you off to Collections. Considering that OVDI and Streamlined opt outs suffer from a lack of clarity, their involvement is likely required if any payment issues arise.



    The good news in my case is that I called the agent and even though the case was closed the agent went the extra mile to figure out what needed to be done. The issues were resolved overnight once I brought them to the agent's attention. There are good people in the regular IRS who go out of their way to make
    sure processes work.

    The only thing I have learned from this last hiccup is to check – before one opts out into the Streamlined Program- what the agent thinks the policy is for tax penalty abatement for taxes owed in years prior to 2009. There is a belief amongst some agents that the tax penalties are only abated from 2009 onwards. The policy should be clarified with the agent before opting out so situations like the mine can be avoided. The agent then has to know the right way to remove these penalties. Have the agent check with the OVDI and Streamlined advisors. This is the essence of what a part of my last hiccup was about. All my tax penalties for years prior to 2009 were ultimately abated.

    Also, check with your agent before the agent closes the case how much you will be getting back. The amount in my refund check was at least $1000 less than what the agent told me I would be receiving. The documents I got from the IRS center that does the payments made perfect sense for the lesser amount. Had the agent and I not discussed the amount previously, I might have just accepted the wrong amount. Again kudos to my agent for being able to sort through the processing issues.

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  12. Jack - I feel even more grateful to the TAS than before. I just saw that the Taxpayer Advocate 2013 Mid Year Report has been issued. In Section J, on page 38, it is stated that the TAS helped 474 taxpayers with OVD issues and issued 4 TAOs related to OVD issues. Only one of them was accepted - mine. The TAO is described in the first document you have posted above.



    What one can also learn from that is that a TAO needs to be really simple for the IRS to comply. I am not sure if that is good or bad considering how complex the IRS often makes things.

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  13. I noticed that anon5percent's disclosure occurred after the 2009/20% OVDI had ended and before the 2011/25% OVDI had started and she was forced into OVDI. Those who made disclosures after the 2011 OVDI ended and before the 2012 OVDI was announced are also in the same situation.

    Does the IRS have the authority to force someone in such a situation into OVDI? Would there be cases in which it might make sense to press the issue (as opposed to being forced into OVDI and then opting out?) I'm thinking that by staying out of OVDI one would avoid the time and expense of filing amended returns going back eight years and calculating the high balances for the FBARs for eight years, since all that costly paperwork would be ignored upon optout anyway.

    And given the right set of circumstances, couldn't some people make a very noisy disclosure without entering OVDI?

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  14. 1.I believe (Anonymous?) mentioned an Opt Out case where the penalty assessed was
    the same as under the OVDI- could someone point me to the details on this case
    please ?


    1.a) There was also a very recent post by Mr. Patel, which indicated their firm had received several favorable Opt out results. Would someone be kind enough to point me to this?
    ( Sorry, I'm a new user and seem to be a bit of a novice at using this blog)

    2. After Opt Out, have taxpayers been interviewed by the IRS, or does the IRS
    decide based on a decision made based on the Opt out Letter the taxpayer later
    sends? ie what is the "typical" or most common process if there is such a thing

    3. After Opt Out, does anyone have an instance of the CPAs or Tax
    preparers being interviewed by the IRS with reference to the clients case?

    4. Are there any cases of favorable Opt out results for Naturalized US Citizens? (vs. the cases below which seem to be US Citizens or Green card Holders residing overseas?)

    5.What is the average or typical wait time to receive a response from the IRS AFTER Opting out ?


    6. In my case the penalty proposed is 7X the tax owed . For example, if the tax owed on the overseas income is $20K (over 8 years), the proposed penalty is ~$150K
    Does anyone else know of such a lop-sided penalty?




    *********************************************************************
    Re: below : I am in agreement with Anonymous's comments. OVDI is a good deal for egregious violators- 27.5% of some dubiously acquired gains may not cause much harm for a wealthy person

    For benign ( and perhaps naive actors) , the OVDI is a bad deal

    After going through the OVDI nightmare myself and still being in it, I realize I was naive. Most, if not, all lawyers will advise you to enter the OVDI program- that's their paycheck , but the taxpayer should expect to pay the penalties 27.5% etc

    I agree there is a strong case to be made for simply filing amended tax returns . The IRS cannot force you to join the OVDI- its a Voluntary program. I know of one case where the IRS asked the taxpayer to join the OVDI after he sent in Amended returns and the taxpayer refused. He keeps getting 45 day notices to join the OVDI. I suppose the IRS could audit him but it cant force anyone to join.
    The sad thing is, the IRS's aggressive statements about the OVDI have resulted in SCARING people and toll of countless hours, $, energy and anxiety to innocent or at best negligent or uninformed taxpayers who are viewed under the default lens of being 'Tax Cheats'. This is further amplified by the press specially Forbes.


    HonestAbe94

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  15. 1.a. I suggest you use the search feature to locate Mr. Patel's information.


    2. In all opt outs I have done, the taxpayer(s) has(have) been interviewed. Keep in mind that the opt out is supposedly an audit, but unless the amended returns and FBARs are in some way deficient (they should not be), then the only thing left to audit is the FBAR penalty. This requires an interview of the taxpayers and, if they used a preparer, the preparer (including getting the files of the preparer which will include the organizer if the preparer got one).


    3. See above. In every instance where a preparer was used, the preparer has been interviewed and the relevant files obtained.


    4. Yes.


    5. There are several levels of wait. Wait until the "audit" process starts? In my experience it "starts" with the taxpayer interview and then goes to the preparer interview. It then goes quiet for a while, as the IRS processes the case internally (including a committee review of the agent's recommendations which are not shared with the taxpayer). The whole process can take several months (say 3-4 months), but the IRS is getting better (i.e., more timely) about processing the opt outs.


    6. I know of much worse penalties than that as to the miscellaneous, "in lieu of" penalty. That is a point to make in your opt out statement -- that the punishment does not fit the crime.


    Thanks for your other comments. The OVDI/P programs are not for everytaxpayer with offshore account issues. It certainly is a good deal for the egregious violators. But for others it is equivocal, often extracting money to which the IRS is not entitled because the taxpayers fear the black box OVDI/P opt out. But, for those taxpayers with good audit narratives to tell, they should opt out and, indeed (hindsight better than foresight), probably should not have joined at all and just taken their audit risks.


    Jack Townsend

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  16. HonestAbe94, I am numbering my answers to correspond to your questions.

    1. I have previously posted anonymously and read this blog assiduously, but I do not recall me (or anyone else) mentioning a specific case where the optout result was the same (or about the same) as the in-lieu penalty. I have however said a) that those considering optout are primarily concerned about the possibility of a penalty much higher than the in-lieu, and it would be good to know the likelihood of this happening and the circumstances under which it would happen and b) that the IRS ought to establish the in-lieu as a ceiling on optout, i.e. if you opt out you cannot end up worse off than if you took the percentage penalty. I don't think this would result in a ton of opt outs since those with really bad facts would still be deterred from opting out by the cost of legal representation vis a vis the small likelihood of a better result.

    1.a It would be great if Mr. Patel would talk not only about successes but also about instances in which opting out resulted in a larger penalty, and the circumstances of those cases. I asked him on this blog but he has not answered. I did track down his website and I got the impression that he (like many others) is pushing many people into OVDI that perhaps should not be joining the program. If such is the case, then the people who really shouldn't have joined OVDI are good candidates for optout.

    5. I would suppose that the time for optout also depends on whether the first answer from the IRS is acceptable to the taxpayer, or whether there is additional negotiating or additional information provided. This is heavily dependent on individual circumstances.

    6. Sadly there is nothing unusual about the in-lieu FBAR penalty being 700% of unpaid taxes in your case; there was a post which analyzed the numbers from the GAO report and for smaller accounts it was typically much worse.

    I agree with the comments after your questions, and the TAS is on the same wavelength. But will the IRS listen?

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  17. FBAR story. Under a deadline to take the OVDI/FBAR settlement of
    $120,000 or opt out and face (according to the opt out letter from IRS)
    FBAR fines of $117,000, Form 3520 fines of $40,000, and a potential PFIC
    tax. Entered OVDI in 2012.
    Had between 10-12 foreign accounts in years 2003-2010. All funds were
    from the foreign country (all funds were gifts and inheritance from
    spouse's parents). After entering OVDI, IRS came back with full 27.5%
    penalty (as expected). Now when considering opt out, IRS is coming back
    with additional penalties and taxes that will be on the table in the
    opt out. Total foreign taxes that were owed for 2003-2010 were about
    $4500. That has been paid with interest and penalties associated with
    the tax. Returns have been self-prepared in all years. During the OVDI
    process, neither attorneys or CPAs advised us of a potential PFIC tax
    associated with foreign held funds that are held in mutual funds. (CPA
    engaged to prepare amended returns to true up back taxes owed). In
    addition, the Form 3520 issue is novel in our case in that the funds
    were received as an inheritance (by intestacy), not a bequest (will or
    other document). The form 3520 states that amounts treated "as a gift
    or bequest over $100,000)" in any year are to be reported on the 3520.
    Unlike the FBAR statute, the Form 3520 statute has a reasonable cause
    provision. IRS contends that opting out will put us at a much bigger
    risk, but paying the $120,000 to settle the case is also draconian.
    What are the chances of IRS coming back with something less that
    $120,000 considering very little owed in foreign capital gains and
    interest?

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  18. HonestAbe94 - I will respond to a few of your questions by number.

    1a. Search on Patel law offices in New Jersey. This is not a recommendation, but the lawyer does have a small blog which provides basic updates on OVDI/OVDP.

    2. After I opted out, I received Letter 4265 that says "an appointment is scheduled to conduct an examination of your compliance with TDF 90-22.1." However, my agent added to the letter that the appointment had not been scheduled and the letter served as notice of the FBAR exam. When I called the agent to figure out what this meant, the agent explained that an interview is required, but as we had a lot of contact by phone the agent had a good understanding of my situation and did not feel a specific interview was necessary.

    3. My accountant was not contacted for an interview. Everything I supplied to the agent went through me. My agent was very aware that I supplied the documents that substantiated my income and my accountant was the one that did the calculations and provided simple explanations on how the calculations were done. I explained that this is the way I was going to manage things to the agent. As my case was relatively simple and straightforward, my accountant's work and mine matched up easily. The agent asked questions about income sources and tax credit sources in the Information Document Requests (IDRs) sent. If I did not understand what the agent wanted, I would call the agent and ask about it. This is what led to most of our contact. The accountant would not have provided any more information than I had provided and the agent was aware of this.

    5. I told my agent I was opting out by phone and sent off a letter. The agent responded to it one month later. Then I waited two months and asked the Taxpayer Advocate to intervene as my letter still had not gone to the Opt Out Committee. It still took another month after that before got I my 4549 stating what my final tax was and the Letters 3800 that stated I was not going to have to pay any FBAR penalties. You should also note that if you are getting any refunds it will take additional time and be an additional source of potential errors. I got 85% of my refund back within 30 days of my case being closed by my agent, but I have now been waiting two months for the other 15%. I called my agent today and was told the Processing Unit had not entered the corrections even though they had been faxed over two months ago. The agent faxed the corrections again and told me this is all the agent can do. I contacted the Taxpayer Advocate and apparently they have more tools to help in this type of matter. I hope I can get the money refunded within another month. This would bring my total time in VD/OVDI to approximately 34 months.

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  19. FBAR story. Under a deadline to take the OVDI/FBAR settlement of
    $120,000 or opt out and face (according to the opt out letter from IRS)
    FBAR fines of $117,000, Form 3520 fines of $40,000, and a potential PFIC
    tax. Entered OVDI in 2012.
    Had between 10-12 foreign accounts in years 2003-2010. All funds were
    from the foreign country (all funds were gifts and inheritance from
    spouse's parents). After entering OVDI, IRS came back with full 27.5%
    penalty (as expected). Now when considering opt out, IRS is coming back
    with additional penalties and taxes that will be on the table in the
    opt out. Total foreign taxes that were owed for 2003-2010 were about
    $4500. That has been paid with interest and penalties associated with
    the tax. Returns have been self-prepared in all years. During the OVDI
    process, neither attorneys or CPAs advised us of a potential PFIC tax
    associated with foreign held funds that are held in mutual funds. (CPA
    engaged to prepare amended returns to true up back taxes owed). In
    addition, the Form 3520 issue is novel in our case in that the funds
    were received as an inheritance (by intestacy), not a bequest (will or
    other document). The form 3520 states that amounts treated "as a gift
    or bequest over $100,000)" in any year are to be reported on the 3520.
    Unlike the FBAR statute, the Form 3520 statute has a reasonable cause
    provision. IRS contends that opting out will put us at a much bigger
    risk, but paying the $120,000 to settle the case is also draconian.
    What are the chances of IRS coming back with something less that
    $120,000 considering very little owed in foreign capital gains and
    interest?

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  20. Jack,

    Thank you so much for your comments !

    ReplyDelete
  21. FA1289, you posted the same comment three times, so I deleted the two of the duplicate comments and left the first one.



    The best response I can offer is that opting out requires a detailed inquiry into your unique facts -- far beyond what you have offered. So, I cannot even respond to your question. I think you might be well advised to consult with your lawyer if you have one or engage one if you do not have one. If you will tell me what city you live in (provided it is or is near a major city), I can make a recommendation of an attorney. A face to face meeting will be important if it can be arranged.


    Best regards, and thanks for your interest in the blog.


    Jack Townsend

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  22. Hi anon5percent,

    Thank you for your response- looks like you were in the 2009 program.

    It seems the IRS is trying to centralize the Opt out decision making based on pre-set 'rules' or guidance. ( which the taxpayer cant see)

    The likely downside: the same FUBAR ( Military parlance for screwed up beyond all recall) that exists in the OVDP/ OVDI process, could be replicated in the Opt out by employing a 'one size fits all' approach

    It seems there are atleast 2 changes coming:-

    1.The OVDI agent will no longer review the case after the taxpayers opts out. This could be good if you have a difficult or bad agent and get a more understanding ear. The downside is time and $- Bringing the new agent up to speed seems almost impossible from only reviewing the Opt out letter and prior documents. And the new agent could be worse..

    2. It is very likely the agent WILL interview the taxpayer, not clear if the accountant ( if there is one) will be interviewed and all relevant files sent to the IRS for review .


    Based on Jack's experience both 1 and 2 will happen .


    3. What happens next :?

    Review the May 2013 article by Adam Fayne ( Journal of Tax Practice and Procedure) which also talks about FBAR Penalties of $10K/ year for open Per year or open statute years and the IRS trying to find signs of negligence

    It only mentions the Taxpayer being interviewed ( Not the Tax - preparer)

    QUESTION : Does anyone know if the FBAR Penalties for Non Willful are Per person, Per Year OR
    Per Person/ Year/ Account?


    QUESTION : Where can we read up on the ' negligence ' penaltie?


    The unfortunate part of all this is:The taxpayer;'s own tax dollars are being arrayed against a small segment of Taxpayers ( mostly immigrants and US citizens residing abroad- who likely would have foreign accounts) with a battery of IRS resources - something does'nt feel fair or right.
    The taxpayer does not have inexhaustible reserves of time and money of the IRS to fight this
    The bright side is: TAS is raising this up the flagpole, but no IRS agent or manager we've talked to knows of the GAO report so i disagree with the comments by Adam Fayne- the OVDI personnel still seem to view people who entered the OVDI as 'tax cheats'


    This blog is invaluable- Jack is the new Mark Zuckerberg ( Facebook) for anyone in this ordeal

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  23. Why are you so concerned about whether the taxpayer will be interviewed and/or whether the preparer will be interviewed or not ? [Possibly in the preparer's case, you may have to pay extra for an hour or so of the preparer's time, but unless the prepaper is a hot shot lawyer, that may not be much. ]

    If you are indeed that apprehensive about the prospect of being interviewed (or the prospect of the preparer being interviewed), then you may not be a good candidate for opt -out.

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  24. HonestAbe94, re question 1 this is already the case: I have been informed that if I decide to opt out my case would be transferred to a different agent in a different office in another state to handle the optout, so even if the agent doing the certification had given me an inkling of what I might expect as far as penalties on opt out (and he has refused to give me any hint) the current agent would have nothing to do with it.

    As to question 3, nonwillful penalties, keep in mind that you are talkign about maximums; the IRS has claimed that it can impose penalties per year/per account, but some lawyers have expressed doubt that the IRS can. Personally I wouldn't focus too much on this, but would focus more on the potential amount based on your own facts, which only an experienced lawyer can evaluate after spending some time developing all the facts.

    As to the interview I agree with the comment that if you are so concerned you shouldn't opt out. Again speaking with a lawyer may help you address concerns about what the IRS may uncover in an interview, and whether you would be able to explain those facts.

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  25. My concern with the interview is the recent article by Adam Fayne ( Journal of Tax Practice & Procedure May 2013) which indicates" the IRS will look for any inclination there was negligence and simply infer negligence from the taxpayer's background and education "


    The article further goes on to say " As for a nonwillful negligence penalty ... the IRS has been assessing FBAR penalties between $0 and $10K per year for open years under the statute of limitations"


    Since ours is a joint return I don't know if there will be 2 FBAR penalties which would make the the total penalty be the same as in the OVDP program .
    I'm trying to understand the downside risk. The interview only seems to increase the downside for the taxpayer (but I suppose it may help too)

    Given the IRS has no qualms about extracting 10X the value of the unpaid taxes in penalties under the OVDP program , and we don't know what the penalty guidelines are after opt out-eg. the downside risk/ exposure is unknown.


    I'm trying to understand
    QUESTION : Does anyone know if the FBAR Penalties for Non Willful are Per person, Per Year OR
    Per Person/ Year/ Account?

    QUESTION : Where can we read up on the ' negligence ' penalties?

    The Article I referenced from

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  26. Mr. Fayne's article may be reviewed here: http://legalnews.arnstein.com/wp-content/uploads/Current-Environment-of-the-Offshore-Voluntary-Disclosure-Initiative-5-2013.pdf


    As to whether there will be one or two FBAR penalties, that will be dependent upon the facts. In many of these cases, one of the spouses is more culpable than the other and hence one spouse may not get the penalty. I have one opt out where both spouses got the penalty. But, I can tell you that the filing of a joint return will not compel FBAR liability for both spouses.


    My experience is that a draconian inside penalty (the miscellaneous in lieu of penalty) will not translate into a draconian opt out penalty if the facts are good. Keep in mind that the inside penalty is, to some extent, arbitrary. There is a rationale for including all noncompliant assets, but the inclusion of non-FBAR assets (for example) can skew the inside penalty and make it draconian. I had that fact pattern that produced an inside penalty of several hundreds of thousand dollars that, upon opt out (since the real estate is not included in the FBAR penalty), produced an FBAR penalty of $11,000 ($5,500 each spouse). And, the maximum theoretical nonwillful penalty ($10K per account per year), was in excess of $100,000. But, you cannot draw any inferences for your case from this result, because each case is heavily fact dependent. All I seek to illustrate is that the IRS will not be punitive on the opt out simply because there was a skewed result in the inside penalty.


    As to your question about the negligence penalties, I am not sure what you are referring to. I think of negligence penalties as the negligence or accuracy related penalties applicable to the income tax. There are a host of materials on those income tax penalties and they are heavily fact dependent.


    There is a BSA negligence penalty. See IRM 4.26.16.4.3 (07-01-2008) BSA Negligence Penalties, but these are not the negligence penalty is usually not in issue on the opt out. Rather, the penalty in issue on opt out is the the nonwillful penalty. Tou might check Chart 1 in Mr. Fayne's article and the IRM iteslf. And, I do recommend Mr. Fayne's concluding "Real World" remarks.


    I wish you the best in working through this process.


    Jack Townsend

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  27. My experience has been that the opt-out audit is handled by the agent handling the processing of the case initially in getting to the proposed Form 906. Now, sometimes the agent will know that in advance of your opting out and might be willing to give you a hint of what might happen on opt out. The problem is that agent will not have done the required "audit" that only occurs after the opt out. The most prominent feature of that audit will be an interview of the taxpayer(s) and the return preparer is a return preparer was involved in preparing the original returns (including gathering the return preparer's files). So, many agents will not be willing to state what might happen on the opt out because the critical relevant facts may not have been evident from the work done to get to the Form 906.


    As to the interview, my experience has been that they are not rigorous inquisitions. You should be prepared to answer the obvious questions (which will be asked), such as when you became aware of the schedule B question and the FBAR filing requirement and why, if you were not aware prior to deciding to join the program, you were not aware. You should have reviewed the questions and your answers with your attorney before you opt out.


    Finally, keep in mind that the agent will interview the preparer and obtain his files (including, most prominently, the organizer which may have the taxpayer's handwriting indicating there are no foreign accounts). In addition, the preparer's files may have the perparer's contemporaneous notes about taxpayer representations that no foreign account exists. So, key due diligence before opting out is interviewing the accountant and reviewing the accountant's files and assessing anything in them that might be damaging so that, even if you still decide to opt out, you can be prepared to mitigate the damage.


    Jack Townsend

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  28. Jack

    I think if the spouse has no requirement to file an FBAR independently, there will be no FBAR penalty irrespective of the level of culpability (i.e. the penalty is per form). If the spouse has an independent FBAR filing requirement, then he/she may or may not be penalized depending on level of culpability.

    I think the term 'negligence' is used by the author as a proxy for the non-willful FBAR penalty (which is slightly confusing since, as you point out, there is a separate BSA negligence penalty, but that applies only to institutions).

    Since the IRS weighs the taxpayers background and financial sophistication when deciding whether to apply the 20% accuracy penalty for taxes, it seems reasonable to me that those should also be considered when deciding whether a non-willful FBAR penalty should be imposed (at least for long time US residents).

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  29. The taxpayer's background and education may be a strong mitigating factor for a high school dropout, or a strong negative factor (lawyer or accountant, particularly if a specialist in tax law.) Few people fall into either extreme.

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