Monday, June 30, 2014

Good Article on the Non-Willfulness Certification for Streamlined and Related Issues (6/30/14)

I have written on the risks in the non-willful certification to get the Streamlined program benefits.  See The New Streamlined Processes' Requirement of Certifying Non-Willfulness (Federal Tax Crimes Blog 6/19/14; rev'd 6/21/14), here.  Readers interested in this subject will find the following article helpful:  Laura Saunders, The Hazards of Offshore-Account Disclosure (WSJ 6/27/14), here.

Key points:

1.  People certifying non-willfulness can be a risk of "severe penalties and criminal prosecution."

2.  Willful / non-willful is a facts and circumstances test requiring careful judgment.

3.  Loser Arguments for Certification of Non-Willfulness:
Scott Michel, a criminal tax lawyer at Caplin & Drysdale in Washington, says people often assume they weren't willful if they had "compelling emotional reasons for not declaring the account," such as safeguarding assets from expropriation, or that they were told by a relative never to reveal it. "If those are your only reasons, they're losers," he says.
4.  Evidences / indicia of willfulness include:
having an account in a country with bank secrecy rules; holding the account in a trust, foundation or other entity typically used to conceal ownership; moving the account from a firm under U.S. pressure to another, presumably to avoid disclosure; making large cash withdrawals; instructing a firm not to mail statements to the U.S., or communicating in code with it; or having secret meetings with advisers or account representatives.
5.  Size Matters (Maybe, Well Likely but not Certainly):
The amount of money at stake also is important, says Edward Robbins, a criminal tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez in Los Angeles. "In the real world, the biggest factor determining willfulness is the size of the account," he says. "If a person has a $10 million account, I don't want to hear he was nonwillful, and neither does the government."
* * * * 
Mr. Robbins says that although IRS resources are severely strained, he expects the agency will keep an eye out for taxpayers with large accounts making fraudulent claims in the streamlined program and punish them severely to send a warning.
 6.  Evidence of Non-Willful Behavior:
Experts say that evidence of nonwillful behavior could include having a small account, especially in comparison to the taxpayer's other assets; an account on which no U.S. tax is due; a foreign government-sponsored savings or pension account; minimal or no withdrawals; and no prior U.S. tax filings.
7.  Following on a go-forward strategy:
While the streamlined program offers a welcome option for many taxpayers with undeclared accounts, other ways to address past noncompliance remain viable, experts say. Both Mr. Robbins and Bryan Skarlatos, a criminal tax lawyer at Kostelanetz & Fink in New York, say they sometimes counsel people with smaller undeclared accounts—say, $500,000 or less—and little evidence of willfulness not to enter a program but simply to file correct returns going forward. 
"I say, 'If it blows up on you, call me,' but none of them ever has," Mr. Robbins says. "The important question is not 'What can the IRS do to me?' but 'What will the IRS want to do to me?'"
I know her quoted sources and they are top practitioners in this area.  If I disagree with the article and the quotes, it would be only in nuance and not overall thrust.  I think there is a smallness factor for the go-forward strategy in paragraph 7, but $500,000 would be pushing the limits in terms of hitting the IRS radar screen.  Note the "sometimes" qualification.  And, of course, if the taxpayer has a good non-willful story to tell, even that may not be a practical limit except to the extent as suggested in paragraph 5 that size does matter.

86 comments:

  1. size matters ? it depends -- if bill gates "forgot" to report of his offshore account of $10million that amount is too small for him to track down.

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  2. Let's think about that, because I think other context is required. If he had only a single foreign account that he used for walking around money when he visited Switzerland, then I don't think he can argue that he has a free or cheap pass on the issue. (But, of course, a willful FBAR penalty to Bill Gates would be meaningless to him.)


    If, however, he had 20 foreign accounts aggregating $500MM,and left off a Swiss account of $10MM, without any other indicia of willfulness, I think he would not draw the penalty.


    So, perhaps I should have said that size and context matters. But size is just part of context, so that would be partially redundant. And, in any event, it would not be a cute as size matters.


    Jack Townsend

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  3. The big change with streamlined is that you are certifying the determination that you were nonwillful whereas under optout you are making the argument that you were nonwillful. This is somewhat analogous to a court case: the plaintiff makes one argument, the defendant makes the opposite argument. As long as the evidence provided is truthful, there is no penalty for a defgendant saying that he was nonwillful. But once the judge has decided the case then you cannot certify that someone was willful when the court has decided nonwillful, or viceversa.

    The "evidence" of willfulness or lack thereof is somewhat subjective, and it's the subjectivity that scares people.

    And one could argue that some of the factors cited mean just the opposite. "no prior US tax filings" is cited as nonwillfulness -- so if you don't file returns you're seen as less willful? Ditto for "minimal or no wlthdrawals" -- sounds like that could be someone willfully sending money overseas. So it sounds to me that if you did one thing it's a sign of willfulness, if you did the opposite it can also be considered as nonwilfulness.

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  4. You might be right, but ONLY for 2013 afterwards. See PWC's comments below. As for SDOP, SFOP, OVDP, and QD, you would have to follow suite and file the 8621.

    http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-temporary-regulations-define-pfic-shareholder.pdf

    Here's EY's take:

    "The temporary regulations provide special rules for estates and trusts. In general, domestic estates and nongrantor trusts are required to file an annual report under the rules generally applicable to US persons.14 US persons treated as the owners of domestic and foreign grantor trusts that own PFIC stock generally are also required to file an annual report.15 The temporary regulations specify, however, that this filing requirement does not apply to a US person treated as the owner of any portion of a domestic “liquidating trust” or a domestic “widely held fixed investment trust” that itself owns an interest in a PFIC.16 The filing requirement also does not apply to a US person that is treated as the owner of any portion of a foreign grantor trust that is a foreign pension fund operated principally to provide pension or retirement benefits, if, pursuant to an income tax convention to which the US is a party, income earned by the pension fund is taxed as income of the US person only when and to the extent it is paid to, or for the benefit of, the US person.17 Finally, under the temporary regulations, a US person that is a beneficiary of a foreign estate or nongrantor trust that itself owns an interest in a PFIC need not file an annual report with respect to a particular taxable year if the US person neither (i) has made an election under Section 1295 (QEF election) or Section 1296 (MTM election) with respect to the PFIC nor (ii) received (or was treated as receiving) an excess distribution from the PFIC in that taxable year."

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  5. From the PWC link:

    "In brief

    On December 30, 2013, the Treasury Department and IRS issued temporary and proposed regulations (2013 temporary regulations) defining passive foreign investment company (PFIC) shareholders and

    their reporting requirements under Section 1298(f). The 2013 temporary regulations are generally effective for tax years ending on or after December 31, 2013, and thus apply to calendar-year taxpayers
    for the coming filing season. In light of the new guidance, taxpayers should determine whether they are considered ‘shareholders’ of any directly or indirectly owned PFICs and whether they are required to
    report their investment in such PFICs under the new reporting rules.

    De minimis exceptions:
    In response to a comment, the 2013 temporary regulations include de
    minimis PFIC reporting exceptions for Section 1298(f) purposes. Temp.
    Treas. Reg. sec. 1.1298-1T(c)(2)(i) provides an exception to the annual filing requirement if: (i) the shareholder has not made a QEF or
    MTM election, (ii) is not treated as receiving an excess distribution or
    recognizing gain treated as such during the shareholder’s tax year, and (iii) either (A) the aggregate value of all PFIC stock owned directly or indirectly at year-end does not exceed $25,000 ($50,000 in a joint return), or (B) the PFIC stock is owned through another PFIC, and the
    shareholder’s proportionate share of the upper-tier PFIC’s interest in the lower-tier PFIC does not exceed $5,000 in value."



    Hope this helps, and good sleuthing!

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  6. No. Then you have to figure out the convention. If you have a software it will default to a mid month, or a mid quarter method. Like, if you placed it in service on July 1st, the depreciation would only be $1,250.

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  7. Thanks, And yes, I did check the box on the bottom of Schedule B. Also, there are some thoughts on filing Foreign income and FBAR on a go forward basis. Can you please let me know your thoughts on that.

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  8. Hi Milan,

    Yes I just filed the FBAR 2013 with the help of a tax attorney. After reviewing the details of my case, he also suggested we do the regular 'quiet' disclosure and submit 2011 & 2012 showing reasonable cause.

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  9. Truly appreciate your opinion. I feel pretty much like you. My main question is whether the IRS will AGREE TO MY DELEGATING TO THEM the final decision of whether I was/was not no -willful (based on all the "shades" of between black and white and the fact that I have no clue what wilfull/nonwilfull means depending on what code section as I read in these blogs. It is all gibberish to me. And if they did agree to my delegating to them the final decision of willful-nonwilfull, would they just send me bcd to the OVDP where I am right now, or would I have opened myself up to a while new investigation if they decided for "willful"?

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  10. Left a voice message on 6/27 to the agent and sent a fax to two fax numbers I had (given previously by the agent) with the request to stop the execution of the Form 906 and stating my desire to transition to the Streamlined Domestic Procedures. No return call from agent since 6/27. Today (6/30/14) I also mailed (certified) the same request. Is there anything else I could do to stop my train and catch the Streamliner?

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  11. I probably took more than 30 days to respond, because I asked for an extension (for medical reasons) before I responded to the Form 906. Then, arround 5/20 came the ultimatum phone call. Being threatened with removal from OVDI raised my blood pressure, which lead to the painful decision to pay the OVDI penalty. After all, my health and my family's peace is more important. Now I see that they were pressed to close the case before the announcement of the new rules. Once again I have a good chance to fall between the chairs (first time was when my case did not really fit into OVDI, but for lack of better alternatives I had to apply).

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  12. I am unable to edit the SDOP related IRS pdf Certification document. Do we have to convert it to Microsoft Word to be able to edit it. It has text like [List Year] in the text. Has anyone already completed it and if so how was it edited?

    I am in 20111 OVDI (2003 to 2010). Do I fill out the non-willful certification document by listing 2008, 2009 and 2010 tax years and accounts for the 6 years 2005 - 2010 ? My tax returns from 2011 don't need any amendment. Also accounts from 2011 have been FBAR reported.

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  13. Hoping you have a power of attorney/adviser who is helpig you with this. They could also email the examiner & his/her manager to indicate the same. But other than what you've done, there's proabably not much more you can do. But you should send a fax also. Also, call & email the examiner's manager, and indicate the same to him/her. They should honor it because even though you sent the 906 in, you are having second thoughts now. If you are having issues, and then they are still not honoring your wish to transition to SDOP, I believe you CAN call and email Nina Olsen's office and tell your story to her. Her email IS public. Make sure you call taxpayer advocate and open a case and reference the case number to Nina so that she can move the domino chain so that your OVDI examiner and his/her manager gets the message that you want SDOP/SFOP.


    Good luck.

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  14. Ron, Jack has commented in may places on this blog as to what willful means. It can mean willful blindness or conscience avoidance, the nuances of which can be see from the court cases which Jack has posted. I don't know every facet of your case, but only an adviser can sift through your specific situation and tell you what elements of your situation & fact patter are willful & nonwillful. But by you entering SDOP, the IRS automatically has in their hands, the decision to label you much later, willful or nonwillful. So if you get SDOP/SFOP penalty treatment, it's in their hands to decide if you are willful. But Jack has commented here many a few times that by the IRS granting you SDOP/SFOP transitionary penalty mitigation, would indicate that you are nonwillful. However, I tend to disagree because I just had an OVDP client, who was told they would be construed willful were they to Opt Out, but anyways received SDOP transitionary treatment. These programs are like a giant funnel with many, many holes, traps, snares, and selective sections of IRC. You need a good adviser.

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  15. I am not going to cocmment on the specificities of Subpart F & your specific situaiton on your CFC issues. I don't thin it's appropriate here, especially on Jack's blogsite. However, I can say that the IRS has NO STATUTE OF LIMITATIONS on returns NEVER filed. SFOP is giving you a NICE FREEBIE!! File last 3 years, come clean. Now, hopefully the home country's taxes are HOPEFULLY higher than the USA's and you have enough foreign tax credit to offset any taxes on any wages and dividends from the CFC. Also, remember the De Minimis exception of the CFC.


    Good luck.

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  16. Thank you Milan

    My CPA prepared the amended returns for both Federal and State for 2010, 2011 and 2012 for the Streamlined procedures. Since we need to submit only the Federal for the streamlined procedures, do we need to send to the State seperately or just ignore the State?

    Regards

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  17. I think context is EXTREMELY key. For the article's author just to say that a $10M account is completely willful, is to ignore context. Mr. Robbins and Bryan Skarlatos seem to just say, correct it going forward, and not even advocating QDs (unless I'm mistaken)

    But in any case, looking back on it, I think OVDP was a terrible first (& 2nd--2011, & 3rd--2012) attempt at trying to bring in taxpayers who were noncompliant; abent the new streamlined procedures, QDs would have been much better for MANY involved, despite the uncertainty of willful & nonwillful conduct. That is a BOLD statement by me, but after having done many OVDP cases, reading many stories online, and understanding willful conduct much deeper, this is my opinion. Given the SDOP situation, and Jack's statement that size AND context matters, QDs just might be better. To ignore context is to ignore Internal Revenue Manual's guidelines & court cases about reasonable cause and good faith conduct. Size CANNOT be THE only thing. How about a $100M account owned by Mitt Romney in Belgium?? Okay, perhaps he was negligent, but NOT willful (he has a top 4 accounting firm handling that stuff for him), and the fine would only be $10K, and NOT worth the hassle of arguing the penalty (given what his time is worth). But even in that case, there CANNOT be willfulness (he has too many other fish to fry for him to worry about one account).

    Numbers 5 (the fact pattern, and situational context), & numbers 6 (reasonable cause, good faith), are ALL reasons to do number 7 (QDs) -- especially, in light of number 1 (prosecution for knowingly signing the streamlined certifification statement while knowing about one's willful conduct, although this can STILL be hard to prove). I am not worried about 1 for most my people because there is CLEARLY (or at least what my clients tell me) NO willful conduct, regardless of size of the accounts.

    So my point that CONTEXT, an element of reasonable cause, is so important.


    My closing statement is that, I think it's safe to say that the jury is out on QDs. 1)IRS sources severelyl strained; 2)probability, they won't find the taxpayer in time to examine him/her within statute; 3)even if they do audit, there would have been no certification signed by taxpayer to prosecute on; 4)reasonable cause arguments STILL do exist in an examination setting for that QD; 5)Appeals and the court system exist.

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  18. Milan,

    Just curious, have you done case for immigrants?

    Based on your experience, I am interested in your opinion. Some facts in my case:
    Indian immigrant with US Citizenship with family in home country.
    Accounts opened in home country originally to support parents, buy real-estate for myself (relocation plans) and parents to live. Money transferred were from US savings.
    W2 employee. Self-prepared taxes for all years.
    CD accounts (which are tax exempt in home country) with US tax underpayment ranging from $1500-$2200 in last 3 years
    No US tax liability for Indian MF (confirmed this with a professional)

    Reason for missing foreign interest :
    - CD renewal was automatic over the years. No interest statement from foreign bank (similar to 1099 we get here)
    - Taxes were self-prepared for all years. So missed foreign interest.
    Good enough reasonable cause? Worth considering SDOP?

    SSD

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  19. Yeah, you see, that's why I don't like a single brushstroke paint applied to everyone. Bill Gates having a passive foreign account versus a client whose inheriance he didn't know was necessarily his, is NOT enough to say one is willful or nonwillful. I still do not understand the hubaloo about signing the certification, because willful conduct is the burden of the government, and if a committee let you into SDOP or SFOP, then the IRS is essentially saying, "we believe you are nonwillful, FOR NOW." So evidence SUBSEQUENT evidence to the contrary, or a reinterpretation by someone else higher up of the same evidence provided in SDOP/SFOP, then the certification can be used against the taxpayer.


    But again, the CONTEXT has to also tell the taxpayer's story for a reasonable defense in an examination setting, appeals setting, or a court setting.

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  20. If you are in OVDP, your years remain the same (see faq transition # 9). Both FBARs & Returns are still going to be teh same for 2003-2010 for you. Only mitigation allowed for you would be the 5%.

    http://www.irs.gov/Individuals/International-Taxpayers/Transition-Rules-Frequently-Asked-Questions-FAQs

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  21. I think you're 99% correct. Trying for SDOP (5%) while in OVDP means you get a "freebie" shot at the 5%. Jack has commented somewhere else on his blog that if the IRS does NOT allow you into SDOP/SFOP, then that might be a "hint, hint" that you are willful. But I must say, I respectfully disagree with the Professor. I just had a case where the examiner and her manager were saying my guy was willful were he to Opt Out, but then again, he got the SDOP treatment. Go figure. I have another guy with nearly 200 accounts over the 8 year period in OVDP, who is now being considered for SDOP. It's all context, situationa, and fact-pattern based, and it depends on also, who your examiner is. So these programs are somewhat partial to examiner personalities and human interpretations of the program rules & IRS law.

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  22. What I have done, is if I had an OVDP case, QD case, I have simply amended BOTH federal & state returns at the same time, and had the taxpayer send in both the fed & state tax payments, with extra for penalties & interest. This stops the clock as far as interest charges. Remember, state returns go to the state, with a copy of the federal returns.


    Be careful, some states have their OWN OVDPs (California and New Jersey are two which I know of), so they have different protocols for handling international income based state returns.

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  23. Jack & Anon2014 anon, SDOP page says this here:

    "For information on the meaning of foreign financial asset, see the instructions for FinCEN Form 114and the instructions for Form 8938."


    (basically anything you report on FBAR & 8938, is a foreign financial asset, and real estate is NOT one of them).

    Also:
    "A foreign financial asset is also subject to the 5-percent miscellaneous offshore penalty in a given year in the covered tax return period if the asset was properly reported for that year, but gross income in respect of the asset was not reported in that year."

    http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States

    So even though rental income was NOT included on the original returns, it's STILL NOT a foreign financial asset for SDOP or SFOP due to it not ever having to be reported on an 8938 or an FBAR.


    Sorry Jack, just tying it up (more for my benefit also).

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  24. Why not even do a QD in the manner the IRS wants you to do it witih reasonable cause attached, if you are SURE you are nonwilful? Follow this 'yellow brick road' to Oz, if you will:

    http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-International-Information-Return-Submission-Procedures

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  25. Thanks, useful detail.

    Jack Townsend

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  26. Yes yes. Agreed. But that's assuming one of the taxpayer's foreign banks is "outed" by DOJ/Treasury.

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  27. Your comments are excellent. On behalf of the readers and myself, thank you.

    Jack Townsend

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  28. Great read, and a lot to digest. I think you might have pasted a couple paragraphs twice though. Not sure, but I'll reread this. But, considering all that is in play, I do not expect a 2009 replay of the CSFB debacle, where, much to Senator Levin's chagrin, 22,000 Americans with foreign accounts at CSFB in 2009 and before, remain undisclosed. Today is D-Day, and all FFIs which have signed up, are now beholden to FATCA. Thus, the notion of too big to fail, may not hold much water anymore, and I am sure CSFB and Switzerland has surely taken note.

    Here is a May 2014 list of FFIs of EACH FATCA partner country which have signed up; the link is available RIGHT on the www.irs.gov website, without having to click hunt for it.

    http://www.irs.gov/Businesses/Corporations/FATCA-Foreign-Financial-Institution-List-Search-and-Download-Tool

    With India being a country I watch specifically, I can see many government owned & run banks have not yet signed up, like Bank of Baroda, Punjab National Bank, as well as major Indian banks with a US footprint, like ICICI. Unless the list on the IRS's website needs to be updated. Since India is a signatory to the IGA with the USA, and a FATCA partner country, I believe it is giving all its banks more time to sign up (possibly till Dec. 31st, 2014). Here are some links for people on Jack's blogs who have Indian accounts. But the IGA with the USA has not been approved by the new government in Delhi yet, but I don't expect India NOT to sign that, in light of all the other agreements India has with the USA.

    So now, I am wondering if more information can be provided regarding FATCA partner country's obligations to report and who their top administrator is when it comes to tax exchange information. Wondering if Jack would be so kind to make a post as to each FATCA partner country's tax department page regarding its IGA & FATCA information. ;)


    http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8970&Mode=0

    http://articles.economictimes.indiatimes.com/2014-06-29/news/50946744_1_financial-entities-foreign-entities-branches

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  29. Hi,
    I am about thinking to do the stramline domestic.process. Please help me understand the penalties I will be paying, would really appreciate it .

    A). I will be paying tax and interest for the last 3 years amended returns
    B) Then I will be paying T26 5% miscallaneous penalty
    C). I will be paying 5% miscallaneous penalty for each 6 years FBARS on the total financial assets.

    If I have all most same amount for last 6 years I will be paying whopping 35% penalty + tax and interests. Then what is the use of going streamlined, OVD will be cheaper for me.

    Is my understanding correct ? What am I missing here ?

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  30. Jack I just got off the phone with someone at the IRS who said that despite the ABA webinar comments, it is unclear whether the IRS will allow people to leave the OVDI and that there is nothing in writing permitting that. Apparently the issue is being considered by the Commissioner's Office.

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  31. jack, my last post did not go through. Not sure why.

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  32. I have to review the comments before approving them. Sometimes, I am on other projects and can't get to the new comments to approve them.

    Jack Townsend

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  33. Thanks for this update. There is, of course, the statement in transition FAQ 2 than the taxpayer has to be in OVDI/P as of 7/1/14. But, than was not a statement than the taxpayer can withdraw from OVDI/P. But than is the inference I drew and than Ms. Best confirmed, rightly or wrongly.

    Jack Townsend

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  34. Anor,

    Your statement in B) is incorrect for the domestic program. The only miscellaneous penalty you will pay (assuming you qualify) is 5% on the financial assets. You do not pay the 27.5% penalty. Again, assuming you qualify.

    Jack Townsend

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  35. I think its a fair inference and in any event we should be able to rely on the statements of IRS representatives, especially when there is such a short window in which to advise our clients. If anyone were inclined to contact the Commissioner's Office and urge them to stand by Best's comments that might be helpful.

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  36. I did double up on 4 consecutive paragraphs. I have eliminate than now. Thanks for called than to my attention.

    Jack Townsend

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  37. Got it. Thanks. I had just wanted to add to my comment below that the IRS just updated the FATCA FFI list this morning at 10am. Same link I pasted below in my original comment to your analysis above.

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  38. I thought I might have been wrong and that you were trying to highlight something by being redundant for tax exchange information agreements and treaties. I read each of your posts very, very carefully, and for as much granular detail I can find about the law. It's like being in class without having to pay the tuition fee. ;)

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  39. Who were you speaking to (and how did you get a contact). I tried to get guidance but couldn't.

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  40. My understanding is than, until you sign the 906, you are still in OVDP and should be able to qualify for the new transition rules (i.e., 5% for the offshore penalties). The question, of course, is whether you qualify.

    I am not as comfortable as others than signing the certification is a freebie. You have to certify non-willfulness to the IRS. I would be surprised if the IRS felt than the only consequence of an improper certification would be than you fall back to the OVDI/P miscellaneous penalty result 20%/25%/27 1/2%. Than may be the case for many taxpayers -- there is no harm in asking. But, for those taxpayers who make a false certification of non-willfulness, I would be very concerned than there could be consequences than are worse than just proceeding under OVDI/P.

    Until we know more about than process and how it is being administered, I cannot counsel taxpayers to make a false certification. If we have reasonable arguments than the certification is true, then the taxpayer can make them and avoid the consequences of a false certification.

    Jack Townsend

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  41. Where they have mentioned about 5% penalty for 6 years. I can see following statement in certification document.

    Highest Account Balance/Asset Value (enter the highest total balance/asset value among the years listed above).


    As per my understanding it 5% penalty is for the year where you have highest balance. Correct me if I am wrong in my understanding.

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  42. QD is what I was considering until I found out SDOP.
    In
    the new environment with SDOP, I wonder if a post-audit QD will get
    more painful. IRS will see the taxpayer as knowingly avoided SDOP to
    avoid the 5% penalty.

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  43. I agree. Signing a certifiation is a willful act in itself -- so that, I agree is dangerous, especially if the taxpayer KNOWS his/her original filings (or lack thereof) were willful in nature (willful blindness, conscious avoidance, etc.). However, my comment was more to see if any taxpayer inside an OVDP and who has not received a dually signed, and fully executed 906, and feels sure that they are nonwillful, can then request transition to the SDOP/SFOP, if he/she so feels they have the necessary requirements. Also, those taxpayers not comfortable about possible willful characteristics and the IRS pursuing them based on their fact pattern of their original filings (or lack thereof), would probably be best advised to stay put inside the OVDP, until they have better counsel which leads them to assert overall nonwillfulness. Assuming someone is nonwfillful, then its two situations: Opt Out, or Streamlined. That's the game changer, as someone on this blog once said.

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  44. 1) No, just the highest year. Each year is the sum of each account's HIGHEST balance.

    2) It's on the asset balances. Each account's highest balance is added to other account's highest balance for that year. The highest balance of any account is the year end balance (dec. 31st). I am presuming the SDOP/SFOP means year-end to be Dec. 31st, and not any fiscal year end for a fiscal year taxpayer.

    See here:

    "For this purpose, the highest aggregate balance/value is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the years in the covered tax return period and the covered FBAR period and selecting the highest aggregate balance/value from among those years."

    http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States

    3) Not sure I can necessarily answer this question. Not sure you filed 2010 as a resident if you were a nonresident. A nonresident is someone usually with a F, M, or Q visa, or even an H1, L1, or business visa not passing the substantial presence test, or who takes the "closer to home country exception." The term resident is very specific, and does NOT only mean GC or citizen, so be careful you know what it means. If you filed as a resident for 2011 or 2010, the IRS can use that to deny you for nonresident treatment for subsequent years, if that's your plan.

    But to be claimed as a "nonresident" per the streamlined definition, I think the IRS is very specific for that. They are asserting that you must have lived outside of the USA for at least 330 days for either 2010, 2011 or 2012. Not sure how much they will use your residential 2010 filing against you.

    "Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, meet the applicable non-residency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days."

    http://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-Outside-the-United-States

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  45. Agreed. I will take this up, with a little help. But what would we use to hold her proverbial feet to the fire, so to speak? Is there a transcript of that chat on ABA's site? Jack?

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  46. I am wondering what would be the downside of going ahead with QD (3 amendment + 6 FBAR) while assessing SDOP and its relative merits.
    I am guessing I can still file SDOP after QD is all filed and done.

    Comments?

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  47. Thanks tooth of you.


    I wonder if the IRS would accept a certification form for the SDOP transitional rule (since I am in the OVDP) stating that the taxpayer believes his case to represent non willfulness, asserting that given the many shades between willful and non willful and the various ways it is applied to different IRS code sections (which I read in this blog and which I find totally incomprehensible as a regular taxpayer), I am DEFERRING TO THE IRS to make the determination as peer the facts and circumstances of my case. Of course I would write the facts and circumstances as I do understand and remember them.

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  48. I am not aware than there is a transcript. I did get the recording from the ABA web site, though.

    Jack Townsend

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  49. Jack,
    Thank you very much for the quick reply.so may be I mis understood , the fear factor played a big role .
    On the IRS website it states for streamlined domestic US residents

    The Title 26 miscellaneous offshore penalty is equal to 5 percent of the highest aggregate balance/value of the taxpayer’s foreign financial assets
    And also
    A foreign financial asset is subject to the 5-percent miscellaneous offshore penalty in a given year in the covered FBAR period if the asset should have been, but was not, reported on an FBAR (FinCEN Form 114) for that year.

    It says miscellaneous penalty for FBARS for that year, so I got confused and thought it's both.

    You made my day, I was not able to eat or sleep from yesterday night when I first heard the FBARS and fatca. And the implications.
    So if it's

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  50. I think than if you are in OVDP as of 7/1/14 are to (i) accept the 27 1/2%, (ii) get the reduction to 5% if the IRS accepts the certification, or (iii) opt out of OVDP and hope for the best. Of course, if the IRS does not accept certification, than is probably a signal than opting out does not make must sense.

    I am not aware than one can withdraw after 7/1/14 and just do streamlined. Keep in mind than, if the package has already been submitted, the IRS already has 8 years of amended returns with tax, penalty and interest, and there may be some difficulty in getting back the earlier 5 years income tax, penalty and interest. So all than may really be in play is the offshore penalty.

    But, I may not be reading this right.

    Jack Townsend

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  51. Jack,
    Correct me if I am wrong ,
    when you say 5% penalty it's only for that one year with highest balance financial asset of all the last 6 years right ?

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  52. I guess the more important question is if the certification for reduced penalty via streamlined is granted (tax payer truly is non-willful) but then months/years later the bank (to cover its ass) lies or makes accusations as to taxpayers knowledge of not being compliant surfaces do you still get coverage/protection under OVDP?

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  53. Gotta love the person I spoke to does not have the last word on this issue. Its a decision that is going to be made by the Commissioner.

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  54. Sks,
    You are right , they have not mentioned for 6 years.
    Yesterday night when I read this, I mis understood.
    It's 5% for the year which has highest assets.
    Thank you

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  55. My sense from the person I spoke to is that they want to do the right thing. While the webinar comments may not rise to the level of a written guidance, many of us relied on it and it would not be good to have another situation like the reasonable cause changes in the 2009 program.

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  56. Thanks Milan,
    Appreciate your reply. So that clarifies my first 2 question.
    For 3) In 2010 I was a green card holder and stayed out side of USA for more than 330 days, except for 3 business trips of 1 or 2 weeks in between.
    That was the case for both me and my wife.
    We did our returns as resident, as we maintained a house here in USA, not to break the residency for citizenship. We did take foreign income tax credit in the returns. We moved back in July 2011 and have stayed here from then. This April 2014 I became citizen. We did file our 2013 returns in March itself.
    Is there a way I can use 2010 staying outside as non resident ?
    If I amend that 2010 tax returns as non resident , will it effect my citizenship ?

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  57. Regarding the 50% penalty, if an individual has already been pre-cleared but has not sent in his intake letter will he be subject to the higher penalty if his bank is already on the list.

    At first glance it seems like he would not be, but if you read carefully, the language may allow the IRS to claim retroactively that the bank was already under investigation when pre-clearance was submitted. Any thoughts?

    Should this individual rush to send his intake letter?

    "Beginning on August 4, 2014, any taxpayer who has an undisclosed foreign financial account will be subject to a 50-percent miscellaneous offshore penalty if, at the time of submitting the preclearance letter to IRS Criminal Investigation: an event has already occurred that constitutes a public disclosure that either (a) the foreign financial institution where the account is held, or another facilitator who assisted in establishing or maintaining the taxpayer’s offshore arrangement, is or has been under investigation by the IRS or the Department of Justice"

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  58. Could a written transcript be made and then forwarded to the Commissioner's office? Worth an attempt?

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  59. What would be the reason to enter SDOP after all taxes have been paid through a QD? You need approval to enter SDOP, and doing a QD might disqualify you for SDOP. Too early to say however. Anything outside of SDOP, i.e. a QD, means statute is open for unfiled years, fyi, and you could open yourself to an audit for those years beyond the only three you are contemplating amending. Only reason to do a QD, in my book, is because you assess your risk of an audit as low, and because you want to avoid the 5% penalty. You can still do a QD the way the IRS wants you to do it, but only if you do not qualify for SDOP. See below link. But I don't think you can do an SDOP after a QD is done, unless someone has another opinion.

    http://www.irs.gov/Individuals/International-Taxpayers/Options-Available-For-U-S--Taxpayers-with-Undisclosed-Foreign-Financial-Assets

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  60. Good point. Knowing that IRS now offers SDOP, SFOP, OVDP, will the IRS look at QD people even harder and apply higher probability of audits? The cake is still being bakef, I believe. You might want to look at this however.

    http://www.irs.gov/Individuals/International-Taxpayers/Options-Available-For-U-S--Taxpayers-with-Undisclosed-Foreign-Financial-Assets

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  61. Sorry what do you mean by "outed". If you go straight into streamlined and they disagree you belong there you are potential left exposed to higher penalties than OVDP. Are you saying if your bank is not one in category 1 it is a very different ballgame?

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  62. I would like to share with you a few things I found out today re transition to Streamlined Procedures.

    First the background: I have signed the Form 906 shortly before the announcement of the new rules for Domestic Streamlined Procedures. Although I consider my case to be non-willful and even thought I might have good chances to show Reasonable Cause, when it came to the decision to opt-out (the initial plan was to enter OVDI and then opt out), I decided for the benefit of my health to sign the Closing Agreement and pay the 25% OVDI penalty. At that point I was exhausted after fighting for 12 months (following the first Form 906) to have the foreign pension funds excluded from the penalty base. That was a partial victory.

    Powered by the feedback I got on this list (thank you Jack and Milan for your support), I requested from my agent (by voice mail, fax and mail) and from the manager to stop the execution of the Closing Agreement and transition to the Streamlined. Eventually the agent called me and here is what I found out:

    1. Agent told me that Closing Agreements recently signed by tax payers but not yet signed by IRS were put on hold. For example, mine was sent to IRS around May 20. I consider it was a nice gesture from IRS to put them on hold and not to rush to grab the higher OVDI/OVDP penalties.



    2. I was told I need to send a statement under penalty of perjury where I show why my case is non-willful. On previous conversations with agent and manager, while I was discussing my options (e.g. opt-out), I have been told that my case is non-willful. They even calculated with me what the penalty would be after opting out, based on the mitigation table for non-willful cases (max $10K per year). When I mentioned this, the answer was: "We said this ... but don't know now what is considered non-willful under this program".
    How does this look to you? Can the criteria for establishing non-willfulness change with the program or with the penalty applied? If you want to pay only 5% (in the new Streamlined) you need to work harder to prove non-willfulness than when you pay $10K per year when you opt out? Does this make sense?


    3. Was told they have been trained in the new rules only last week.
    What does this mean for those who are now requesting to transition to the Streamlined procedure? The program is so new that maybe those who consider transitioning should wait for a while until the new rules had a chance to be applied to real life cases. I feel I need to make here the analogy with the tech geek who is compelled to acquire a new gadget the very moment it is released. Most times, that first version of the gadget (hardware or software) is soon replaced by a newer version, where most of the bugs discovered during the first months of usage had to be fixed. Those who had the patience to wait and skip the first release got a better product. I wonder whether in this case, waiting a little bit until the IRS agents have been properly trained through real cases might produce better results. Even the program rules might be changed/improved after the first cases have been processed.

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  63. Thanks for the opinion and the link, Milan!



    In the link there two other options:

    3. Delinquent FBAR submission procedures; and
    4. Delinquent international information return submission procedures.

    Clearly #3 does not apply to most of us. I am unclear on what #4 means.

    It says A reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requested So with the amended return, one makes RC arguments similar to SDOP and files it like just like any other amended return?

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  64. Regarding the "outing", let's say taxpayer files SDOP in July of this year. Treasury gets data on taxpayer in say December and determines taxpayer was not in compliance soon after. When SDOP case for taxpayer is being processed say a year from now, Treasury already knows taxpayer was non-complaint. Would that taxpayer treated as been "outed" and considered willful?

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  65. I am just starting out on the disclosure. If I do SDOP and my non-willful arguments are rejected, what happens? Do I get into a regular audit? What happen to the 5% already paid?

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  66. Jack and Milan,


    Thank you so so much for all the input.


    Would much appreciate comments/thoughts on this below, which I had already posted, maybe you did not notice.


    Currently on the OVDP, not signed 906 yet. Could I request treatment under the transitional rule to SDOP and for the certification of non willfulness explain all the facts and circumstances of my case and then state that while I feel I am non-wilfull I am differing it to the IRS to make the final determination. I am not a willful tax evader at all, but I am concerned as most of us about the spectrum of willful to nonwilfull and shades of it that everyone talks about, and of course do not understand a thing about different tax codes/rules and how the concept of willfulness or nonwilfulness is applied differently in various situations.

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  67. I think you or your representative should have a discussion with the IRS agent about the issue. At this stage, if you have the 906 already, all the calculations and work have been done except change the 27 1/2% penalty to 5 %. Of course, you would have to submit the certification, and I understand your concern about than. You will just have to decide if than is a risk worth taking. My sense is than the IRS might not play too much hard ball on the certifications except in egregious cases.

    Jack Townsend

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  68. unfortunately I think your facts do not pass the "smell test"
    If I were an examiner I would really have a problem believing you that you did not know that the interest income from CDs were not reportable especially if you volunteer the information that these accounts were tax exempt in India .

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  69. Jack, I had a chance to read the Cheeks case. I can't imagine anyone would ever really be willful. Cheeks was so far go off the fringe, that he was ignorant of the basic legal duty which thought did not exist. Most people with foreign accounts are not off on any looney fringe, and don't have any "invalidility" claims to IRS's citizenship based tax system. Most people have objectively reasonable arguments about their misunderstandings of the worldwide income & reporting standards of the IRS. The question of willful blindness cannot come into play for most people because no one has really looked into the foreign reporting laws of the IRS so DEEP enough, in order to concoct a different understanding of the laws (like Cheeks did with his objectively unreasonable notions of constitutional invalidility of income tax laws). My thinking now is that


    1) Legal Duty: Yes, there is a legal duty for worldwide reporting, FBARs, foreign income, code section 7701(b), etc. etc...


    2) Known Legal Duty: Most people don't know about number 1. (negates willfulness)


    3) Consciously violated, either with bad or evil intent (Pompanio case), or through willful blindness & conscious avoidance (Cheeks) the known legal duty. This is tenable because most everyone it seems, is not like Cheeks or Pompanio.


    Secondguess, you should read the Cheeks case. Then you might be able to poo-poo examiners' limited understanding and false declarations as to what is willful. Granted I don't know your case, but jeez oh Pete..willful is so far off in never never land for most people.


    Just my opinion. Thanks.

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  70. Kat, see OVDP FAQ 7.2. Being outed means, "...at the time of submitting the preclearance letter to IRS Criminal Investigation: an event has already occurred that constitutes a public disclosure .."

    Not going to paste the whole text here, but rather the link.
    http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised



    This has to do with OVDP, so the fact that a bank has been publicly disclosed as cooperaint with the IRS, being a part of a DOJ summons, being under investigation by IRS or DOJ, etc., will not disqualify you for OVDP. I do NOT know if it would disqualify you from entering SDOP. But assuming you DO go straight into streamlined, first your penalties in SDOP (or SFOP) are extremely less than what they would be (given your asset balances) in OVDP, and second, disqualification from SDOP should not occur if a bank is later publicly disclosed as working with the IRS in some fashion, or being a part of an IRS CI.


    If they decide you are not a part of SDOP or SFOP, it will most likely be based on the merits of your case, unless, like Jack mentioned, there is SPECIFIC information. from a bank, that you specifically, had some willful actions on your part (like conspirng with the bank to hide assets and not get a 1099-int, etc.).

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  71. If you can make a reasonable cause argument, that you were completely comlpiant in ALL areas, in your home country, and the USA, with just the exception of your foreign income & asset reporting, and if you have other mitigating factors (perhaps your relatively short immigration period in USA, you preparing returns yourself, your misunderstanding of US citizenship laws), you could possibly just do a quiet disclosure, albeit, in the manner the IRS wants you to do it. Otherwise, SDOP might be the way you want to go. But you need a good adviser to possibly walk you through your RC arguments. Put them on paper.

    http://www.irs.gov/Individuals/International-Taxpayers/Options-Available-For-U-S--Taxpayers-with-Undisclosed-Foreign-Financial-Assets

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  72. Another update. The initial view on whether people who notified the IRS of their intent to switch from OVDI to streamlined program prior to 1 July was no you are stuck with the transitional provisions, but they had not taken the webinar and our reliance on that webinar into consideration. So the issue is being escalated again. Jack you do such a service to us all with this blog, its a fantastic resource.

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  73. I agree with DOJ
    if your immigration period is in the neighborhood of 10 years ago that would certainly not be a mitigating factor - quite the opposite. The same goes for understanding US citizenship tax laws (declaring interest income). As I remember tax exempt NRI accounts are for former indian citizens which means he cannot be compliant in his home country since he has no obligation to file a tax return. So a QD with a RC letter is a possibility but a very risky one in case he gets audited (Tax and FBAR audit)

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  74. Milan, Just curious where can one find these templates . I found one here

    Moby's link Is this correct?

    Have link to JustMe's template?

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  75. The beanie baby guy was judged guilty. So I am not sure how your statement about a 'tough time proving wilfulness holds.

    He did get no jail time (I don't know if the government is appealing), but he did pay a hefty fine. In any case, at most this would be an example of how the government might have difficulty getting jail terms for some charged willfully. It would NOT be a case of the government having trouble proving wilfulness.

    Was the larger account being penalized at 5% for inherited accounts even under OVDP ? Then the change might have been minimal in any case.

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  76. I think it takes (at least for people who get Green Cards through working visas) normally 7-8 years to get GCs, then 5+ years for citizenship. I don't think 12+ years is a short immigration period to the US. The best case woild be some family visas, which could be as little as 3-4 years (which is a short immigration period), but that's likely rare.

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  77. In the FBAR cases (Williams the like), the willfulness standard is actually very broad. In fact, in theory, the government could allege willful blindness merely from a Schedule B question not properly answered. Now, I don't think that is enough to allege willfulness. More would be required. But your statement about how someone has to be like Cheeks and Pompano to be willful is not correct. I would suggest reading the appellate court decision on Williams (covered by Jack in this blog)

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  78. Any idea on why they worded FAQ 2 of the streamlined the way they did?

    Jack Townsend

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  79. There is clearly some ambiguity and it would be good for them to clarify it. Presumably, they won't punish people who try. Any sense of timing on a decision?

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  80. No idea. The IRS's version of Opaque clarity. But bullet points 1 & 2 is an AND test. I presume so long as you mailed out the OVP letter BY July 1st, and you have not gotten a 906, or an examination notice for your Opt Out, you would still technically be in OVDP. A signed & executed 906, is grounds for not receiving transitionary treatment.

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  81. None in light of the Best comments. Your question could not have been clearer in your question and she reiterated her response twice

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  82. Ok, so lets say you enter SDOP with your certification for non wilfulness. If IRS accepts it, all is well good and done for all with 5% penalty. But again this is a subjective area and IRS may say they don't accept the non wilful reasoning. In that case, if one of your banks is listed in the list, then do you automatically go into 50% penalty bracket? Would Aug 4th date make any play here or the date doesn't matter.


    Another question I've is for SDOP, highest balance is supposed to be Dec 31st balance. But then for delinquent FBARs for those years, the balance should be the any day highest balance. Is this the right understanding?


    Is IRS hotline taking questions on SDOP without disclosing the social?

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  83. Thank you Milan, I apologize to Jack and you, for I didn't mean to be inconsiderate with the first part of my question (I won't repeat it, looks like it's a "bad word"). Here in my country most of us know nothing about these topics.. Thank you.

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  84. No apologies needed. I was only saying that subpart F income is such a broad and complex topic, it would not serve the purpose of answering your question by explaining it on Jack's blog here. And it's okay, most individuals, I dare to say, with foreign financial assets & income are unaware of CFC & Subpart F terminology as well, nevermind any American who does NOT have foreign financial assets & income.

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  85. If anyone has PFICs (Foreign Mutual Funds) and is looking to do the alternative (QEF) method within OVDP or otherwise, I found a great link to AICPA's explanation and illustration. See here:

    http://www.aicpa.org/publications/taxadviser/2012/october/pages/clinic-story-07.aspx

    http://www.aicpa.org/Publications/TaxAdviser/2012/October/DownloadableDocuments/PFIC.pdf



    A picture truly is worth a thousand words. I personally have been doing MTM for those in OVDP since regulatory trading markets and exchanges do exist for foreign mutual funds, and especially if the deemed gain for a taxpayer would be quite large over a small amount of years.


    Sorry to be off topic Jack, but I thought this might be useful for those do-it-yourselfers and other practioners amongst us as well.


    Thanks.

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  86. Thanks for the links. I think they will be useful for some readers. So, it is not off topic.

    Jack Townsend

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