Wednesday, July 16, 2014

Court of Appeals Rejects Arguments that Instructions on Willfulness and Good Faith Were Reversible Error (7/16/14)

In United States v. Basile, 2014 U.S. App. 12388 (3d Cir. 2014), here, the defendants, husband and wife, chiropractors, engaged an asset protection firm who put them into offshore entities and bank accounts to avoid tax.  The defendants took other actions to obscure their income and avoid tax.  The defendants were intransigent in dealing with the IRS; their intransigence led to criminal prosecution.

As often the case, their  principal defense was the Cheek willfulness defense -- that the defendants did not intend to violate a known legal duty.  The jury convicted.  On appeal, the defendants asserted that the instructions were deficient.  The Court of Appeals held (one footnote omitted; bold face supplied by JAT):
First, the Basiles argue that the instructions wrongly permitted the jury to reject their good-faith defense if jurors found their beliefs objectively unreasonable, in violation of Cheek v. United States, 498 U.S. 192 (1990). We disagree. 
The  jury instructions stated: 
A belief need not be objectively reasonable to be held in good faith; nevertheless, you may consider whether the Defendant's stated belief about the tax statutes was reasonable as a factor in deciding whether the belief was honestly or genuinely held. 
A1685 (emphasis added). This is an accurate statement of law under Cheek, which held that a jury instruction cannot require a tax evasion defendant's claimed good-faith belief to be objectively reasonable to negate the government's evidence of willfulness. 498 U.S. at 203. As "[k]knowledge and belief are characteristically questions for the factfinder," such an instruction erroneously transforms a fact question into a legal one. Id. However, even though a good-faith belief need not be objectively reasonable, the jury can still consider reasonableness in determining whether the belief was honestly held. As the Cheek Court noted, "[o]f course, the more unreasonable the asserted beliefs or misunderstandings are, the more likely the jury will consider them to be nothing more than simple disagreement with known legal duties imposed by the tax laws and will find that the Government has carried its burden of proving knowledge." Id. at 203-04. 
The Basiles also contend that the District Court erred by instructing the jury that they did not act in good faith 
if, even though they honestly held a certain opinion or belief or understanding, they also knowingly made false statements, representations, or promises to others. 
A1686. This sentence comes from the Third Circuit's model instruction on the good faith defense generally, which also states that in tax cases, "the trial judge should give Instruction 6.26.7201-4 (Tax Evasion — Willfully Defined), n5 supplemented if need be under the circumstances of the case, by this instruction." See Third Circuit Model Criminal Jury Instruction 5.07.
   n5 The entire instruction reads as follows:
The third element the government must prove beyond a reasonable doubt is that (name) acted willfully. "Willfully" means a voluntary and intentional violation of a known legal duty. (Name)'s conduct was not willful if (he)(she) acted through negligence, mistake, accident, or due to a good faith misunderstanding of the requirements of the law. A good faith belief is one that is honestly and genuinely held.
The Basiles argue that this statement allowed the jury to conclude that they could not have acted in good faith if they knowingly made false statements to others "at any time during the over ten year course of conduct presented in [the] case." P. Basile Br. at 45. As Paul notes, "[j]ust because at some point Mr. Basile may have made a misrepresentation to another person, for whatever reason, does not mean that he did not sincerely believe that he was acting in compliance with his legal duties." P. Basile Br. at 45. In essence, he contends that one can knowingly make false statements and still be acting in good faith in the tax context. For her part, Barbara argues that the instruction allows false and inaccurate statements in tax returns she crafted in good faith to undermine her entire defense. B. Basile Br. at 27-28. 
These arguments stem from the distinctive meaning of "willfully" in tax cases: Willfulness is required for conviction on charges of tax evasion, willful failure to file, and filing false tax returns, but due to the complexity of the tax code, in tax cases the Supreme Court has "carv[ed] out an exception to the traditional rule" that ignorance or a mistake of law is no defense to criminal prosecution. Cheek, 498 U.S. at 199-200. Thus, in the tax context, a defendant's behavior is not willful if it stems from honest ignorance or mistake—that is, good faith. 
Given how the good-faith defense interacts with the willfulness requirement, we agree that the "false statements" sentence was confusing as used here. At a minimum, it was overbroad: The fact that a person knowingly made a false statement regarding one's duty to pay taxes, and in what amount could be relevant to whether he acted in good faith; whether he knowingly made a false statement about another subject (i.e., "Those frog legs were delicious" or "I'm too tired to work out") would not. 
However, even assuming that the jury instructions were imprecise, our inquiry does not end there. We review for harmless error, asking "whether it appears beyond a reasonable doubt that the error complained of did not contribute to the verdict obtained." Neder v. United States, 527 U.S. 1, 9-10, 15 (1999) (internal citation and quotation marks omitted). Here, the Government did not argue that the Basiles lacked good faith because they had broadly made false statements during the time in question or because they had filed inaccurate tax returns. Rather, it argued they could not have genuinely believed they were complying with the law given their life experience and conduct as it related to paying (or not paying) taxes, relying on considerable supporting evidence to show willfulness. The jury agreed with this, and we see no reason to disturb the verdict based on an unclear but ultimately insignificant sentence in the jury instructions. There is no indication that the instruction obviated an otherwise viable good-faith defense or contributed to the verdict. Any error on this point was harmless. n6
   n6 Barbara also challenges the District Court's jury instruction on willful blindness, arguing that it "wrongly suggested that willful blindness could satisfy the requirement that Mrs. Basile had the specific intent to violate the law." B. Basile Br. at 30. In her brief Barbara acknowledges that the instruction was "technically correct," but contends that it needed more clarification anyway. We disagree. Even more clearly than in United States v. Stadtmauer, where we affirmed in the face of a similar argument, "the Court's instructions made clear that willful blindness applied only to the element of knowledge." 620 F.3d 238, 258 (3d Cir. 2010).
JAT Comments: The two key noteworthy items are:

1. The overbroad and confusing instruction about making false statements generally as negating good faith.  The court adequately discusses that.

2.  The willful blindness instruction.  I have noted in this blog on several occasions that the precise function of willful blindness has not been definitively resolved.  Is willful blindness a substitute for willfulness -- specific intent -- or is willful blindness mere a fact that the jury can consider in determining whether the Government has proved specific intent beyond a reasonable doubt?  The jury instruction above seems to instruct the jury that, if it finds willful blindness, it must find willfulness.  I don't think there is any certainty about that, despite the fact that the wife apparently conceded it was technically correct.

Also, most practitioners know that pattern jury instructions are not sacrosanct and can misstate the law either generally or in the context of the case at hand.  I note the following in a footnote my my Federal Tax Crimes book:
Often, I use so-called “pattern jury instruction” approved by panels for one or more of the United States Circuit Courts of Appeals.  Within the circuits, these pattern jury instructions are usually the starting point for fashioning the actual instructions that will be used in any case.  The district judge trying the case is required to give instructions appropriate to the specific case being tried, and hence may modify the pattern instructions as appropriate to the case.  Moreover, merely because the Circuit Courts in some manner sponsor the pattern jury instructions does not mean that they are necessarily correct instructions on the law or cannot be improved.  Even, on their face, they can be deficient, thus requiring judges and trial lawyers to exercise some diligence in their use. n5 Nevertheless, unless I specifically caution otherwise, the Circuit pattern jury instructions I use in this text do adequately state the law (in my judgment).
  n5 See e.g., United States v. Svete, 521 F.3d 1302, 1310(11th Cir. 2008) (holding that the 11th Circuit pattern jury instruction on mail fraud is “deficient” as to the scope of the burden on the Government.)  The holding that the pattern instruction was deficient was subsequently reversed in United States v. Svete, 556 F.3d 1157 (11th Cir. 2009), but the key point is that pattern jury instructions do not necessarily state the law.  When they do, the use of the instruction will be sustained, but when they do not, the use will not be sustained provided that the resulting error rises to the level of a reversible error.
I also give another example below for the crime of tax evasion, the first crime discussed in this text.  I use an actual charge from a recent case rather than a pattern jury instruction.  I previously used the Fifth Circuit pattern jury instruction.  In my opinion, the Fifth Circuit pattern jury instruction is misleading or incorrect.  See also United States v. Maggert, 2011 U.S. App. LEXIS 10976 (11th Cir. 2011) (involving a similarly deficient Eleventh Circuit pattern jury instruction which, in the case, was sustained under the plain error standard). 


  1. Jack, I am right now beside myself and also little upset with myself. I also want to apoligize to everyone on here for assuming the NW certification does not carry the full weight responsibility of proving nonwillfulness:

    I just got off the phone with an OVDP examiner on a different case of mine, and he told me that any OVDP participant wanting to get the 5% transitionary treatment in SDOP, he/she has to effectively PROVE nonwillfulness, enough so that a committee of IRS managers would be convinced of his/her nonwilfulness. He said if that takes 2 pages, 3 pages, whatever, it does not matter. He and I both agreed the NW certification will go to a committee and the decision for the 5% would be made at a "higher up" level. He also agreed with me outside of any sort of disclosure program, that willfulness has to be proven by the Service. But he was adamant that inside of OVDP, you HAVE to prove nonwillfulness because even though one might be going for the 5% SDOP, he/she is STILL in OVDP (which I think you had correctly stated before elsewhere on your blog).

  2. Anon2014R anon,

    I am correcting my statement to you yesterday. I now believe the IRS is looking for a "bullseye" reasonable cause for you or any OVDP participant to prove nonwillfulness. Whether that takes one paragraph, two pages, or 5 pages, it would depend on your case. But stay tuned. I'll give you more later.

  3. Thanks Milan and Jack..

    I have

  4. Thanks Milan and Jack..

    Does multiple CD accounts under 1 Customer ID qualify as 1 account or multiple accounts?

    Also Milan, In your above case, wouldn't the above person qualify for SDOP?

    I am on VISA for past 10+ years, never heard of global income concept, FBAR etc. till this year..

    I have been paying 30% Tax in my native country for the past several years. My highest balance has been around 100K. Are there are risks for me for SDOP?


  5. FallingAsleep,

    I agree. What they can do and what they will do are two different things. If they even assert the nonwillful $10,000 per account per year, I infer that they will have to believe that the taxpayer is a very bad actor and just don't won't to fool with the willful penalty. To date, I have had a number of situations where, if the IRS were acting punitively, it could have asserted $10,000 per account per year and got far more than we ultimately settled for based on the IRS's offer of settlement.

    Jack Townsend

  6. ............I have been paying 30% Tax in my native country for the past several years.......

    This good fact is key in your case !

  7. I have read all the comments, but it is still not clear: I submitted a disclosure letter to the OVDP and received a preliminary acceptance letter, but haven't submitted anything else. I am a US citizen who has lived abroad for 16 years and never filed in the US during that time. I don't lose one second of sleep regarding criminal actions. Can I opt out of OVDP and do a 3 year SFOP or do I have to "transition" and do the whole 8 year OVDP submission?

  8. So, Milan, the examiner was loud and clear that the OVDP participant streamlining had to prove non willfulness bullseye fashion, because he was still within the OVDP. Now, was there any clarity as to what happens if the committee decides to reject the certification and determine the taxpayer was willful? Does the taxpayer simply get back to the OVPD and pay the 27.5% or are there potential other charges? (The Pandora's box idea).

  9. Interestingly, I spoke with an agent from the IRS Hotline earlier this week. He informed me that an agent will be assigned to review the nonwillfulness certification and penalty computation. If the taxpayer is not eligible for nonwillfulness treatment or there are issues with the penalty computation, they will be notified.

  10. Additionally, I asked the agent whether taxpayers who checked "no" on Schedule B would automatically be treated as willful for purposes of the Streamlined Procedure. I was informed that would not be the case and it depends on the facts and circumstances of the case.

  11. Hi RON,

    "Bullseye" would be my euphemism, but that's correct. You must prove nonwillfulness enough to convince a committee of IRS managers that you are nonwillful. And yes, he told me that the only repurcussion is the OVDP/I Misc Penalty of 25% or 27.5%, for the OVDP 2011 & OVDP 2012 participants, respectively speaking. That's it.

  12. There were some comments on this website that if you would have withdrawn by or before July the 1st, you would not have been subject to the transition rules to streamlined. If you have a lawery/CPA/power of attorney helping you, I think you should try, if you wish, to STILL exit the program, by cancelling your submission. If they agree, you would NOT have to Opt Out or transition.

  13. Imagine a taxpayer with several, tens of accounts, who's always just had $100-$130K in his accounts, over the last 8 years. But the monies have always moved around in several accounts, such that his December 31st balances are markedly different than his actual calendar year high balance (FBAR balances), which are then more different than each year's net high balance, after accounting for account closures & openings (per OVDP FAQ 37). A taxpayer could have had 20 accounts, all of which opened and closed in a year, with that same $100,000 balance. But his Dec. 31st balance was either $100,000, or less, or more. One would have to use his/her imagination to see how the SDOP 5% penalty could be higher or lower due to the varying times at which his NET balances were either the less or more than his net OVDP balances. I have exactly this case.

  14. Jack, a few things jump out at me here. Perhaps it would be interesting to readers, and they, or your students would have other nuanced opinions as well. I am specifically focusing on willful blindness, conscious avoidance & willful intent. Here is what the Court had said in the above appeals case:

    "Barbara also challenges the District Court’s jury instruction on willful blindness,
    arguing that it 'wrongly suggested that willful blindness could satisfy the requirement
    that Mrs. Basile had the specific intent to violate the law.' B. Basile Br. at 30. In her brief
    Barbara acknowledges that the instruction was 'technically correct,' but contends that it
    needed more clarification anyway. We disagree. Even more clearly than in United States
    v. Stadtmauer, where we affirmed in the face of a similar argument, “the Court’s
    instructions made clear that willfulEven more clearly than in United States v. Stadtmauer, where we affirmed in the face of a similar argument, 'the Court’s instructions made clear that willful blindness applied only to the element of knowledge.' 620 F.3d 238, 258 (3d Cir. 2010)."

    Thus the Court was saying that willful blindness was sufficiently applied to not only establish knowledge of the law, but to establish intent.

    Is it because the Basiles' beliefs were so objectively unreasonable, that they could not have reasonably have held those beliefs (i.e., that they relied on a objectively unreasonable position that they were complying with the law by not filing returns or by filing fraudlent returns of varying varieties)? Thus the Cheek Instruction is that the jury is able to establish willful blindness, and thus intent, by discerning how (objectively) unreasonable a stated belief is, and thus by proxy, a defendant's probably reliance on such beliefs.

    Thus with the Basiles, it might be inferred they had the knowledge of what the law was (since they had complied well into their adult life), but then veered into the tax protester belief area, filing all manners of fraudulent returns (most of which had specific different willful acts of noncompliance). I think intent was well established, but I just did not see how willful blindness here could be equated with intent, which was Ms. Basile's contention in the above quote I pasted.


  15. If each account has a unique account number, or a separate opening or closing date with separate principal & maturity amounts, they are treated as a separate account. Some banks did not give unique account numbers to those accounts, in years past, but they are still separate accounts, due to them having separate opening amounts, and different closing amounts, different principal amounts, etc. Yes, the above person can qualify for SDOP, but only if he PROVES nonwillfulness, which have I might do, granted his Dec. 31st balances are markedly different than his OVDP balances.

    Hard to say what your risks are. You need to probably sit down with someone, a lawyer, a CPA (not me), and write out, or explain to him/her everything about your case. They can glean important willful and nonwillful characteristics of your case to see if you should do an SDOP.

  16. yes agreed. Tax compliance anywhere is an element to show that the taxpayer does not hold untenable positions like tax naysers (Cheeks, Basile, etc.), which would then purport willful blindness.

  17. I assume you did file and pay taxes in the country you currently live and work.
    Who gave you this advice to join OVDP ?

    If you have not sent in the OVDL intake letter (the step after receipt
    of the pre-clearance), you do not do anything else in OVDP and go straight to
    streamlined. If you are not going to complete the OVDP process, you should write a
    formal letter (even after 7/1/2014) withdrawing from the process otherwise you will be processed under the transition rules which are not quite as favorable . The same applies to OVDL intake letter and final package submission - if
    you withdraw it does not make a difference in which particular stage of
    the process you were. There is no hold
    procedure on that and there is no preclearance under streamlined. If you
    look at the streamline transition FAQ 2, it indicates that for
    the transition rule to apply the person must have "remained in OVDI/P
    not yet completed the OVDI/P certification process where a Form 906
    Closing Agreement has been fully executed by the IRS.

  18. I would be interested to better understand what a "bullseye" approach means and how it relates to reasonable cause. On the latter, as I read it, the definition of non-wilfulness provided in the streamlined is broader than reasonable cause, since it includes negligence. From the FBAR rules, RC is defence against non-wilfulness (as well, obviously as wilfulness) but in the streamlined, you are more or less certifying that any "culpability" you might have rises only to the level of non-wilfulness, even if you could not provide reasonable cause exonerating you from being non-wilful. On the former, it seems clear from transition rules that any NW Certification will be reviewed more strictly in the OVDP setting than outside it, mainly because you know it is going to be reviewed by multiple people who will have 8 years of return information. With the streamlined approach outside of OVDP, it is not clear whether it will be reviewed at all (and if so, by whom). Finally, in terms of burden of "proof", this is an interesting question but ultimately, one would think the IRS would review a NW certification (whether in the OVDP or outside - if reviewed) with the question as to whether it can ultimately prove wilfulness, since even if it rejects the NW certification, the TP can still opt out and take his chances (whether that would be advisable, who knows, but I guess in certain cases, where for example assets would be included in the penalty base that wouldn't be included in the FBAR, someone might still consider it).

  19. Thanks Milan..

    I am not a OVDP Participant.. I realized my obligations to report my foreign accounts only this year.. this is the 1st year i am reporting

    I am on VISA for past 10+ years and been paying 30% tax on accounts in my native country


  20. RON,

    I just posted an update on the blog entry for these comments dealing with an aspect of the issue you address.

    Jack Townsend

  21. I just posted an update on the blog entry for these comments dealing with an aspect of the issue you address.

    Jack Townsend

  22. I think the nuance that Cheek requires is that a jury cannot convict because it feels that the position is objectively unreasonable. If the defendant sincerely held an objectively unreasonable position that he did not owe the tax, then the defendant cannot be convicted. But, in assessing the overall milieu of the evidence in determining whether the defendant had the necessary intent, the jury can consider just how objectively unreasonable the position was. As the Supreme Court noted in Cheek, the more objectively unreasonable the position is, the less likely it is that the defendant had a sincere belief that the position was correct. But, mere objective unreasonableness alone does not establish willfulness. In effect, the Court punts that question to the jury under proper instructions.

    Jack Townsend

  23. Milan,

    That is a good question. It might be worth a try. All the IRS can do, I think, is insist that you continue in OVDP and transition there. Alternatively, the IRS could say that your withdrawal from ODVP kicks you out of both opportunities, so that you are left to an audit result. And, of course, if you project the audit result would be better than OVDP with restricted streamlined, you could opt out any way. In either case you end up with an audit result that, if you accurately assessed the case, might even be better than Streamlined -- with or without transition. But it will require the IRS and the taxpayer to spend a lot of resources to get to that point.

    Jack Townsend

  24. Ok good. So I got this right then. The defendant's position was so unreasonable, they couldn't have possibly have sincerely believed in it, thus the jury convicted. But is this willful blindness (knowledge of the law through objectivley unreasonable disagreements with the law), and thus by proxy, willful intent?

  25. You know, I was thinking along similar lines, Yes, am aware the taxpayer still has the Opt Out option. But I was leaning towards saying that the Opt Out RC letter could double as the verbage for the NW certification towards streamlined.

    But boy oh boy...the IRS is making taxpayers really work for this one. One look at the form, and one would not surmise that the IRS really wants something so precise, but it would seem so.

    So a sidebar here: I have only listed one or two sentences as to RC cause in the NW certificaiton, on the one case I have up for streamlined submission. The case has positive recommendations from the OVDP manager and OVDP examiner for the SDOP. Let me see.

    I feel like I am at a Six Flags roller coaster sometimes. Here we go..

  26. I think what Mr. Ortiz is saying has to be taken seriously. This is the same message I go yesterday from an OVDP examiner who was asking me about a client I was requesting transitionary treatment for. Jack, you made a comment that the Examiner would allow you to simply reference the lenghty Opt Out letter you had for the client. I am going to ask if I can do the same. Let us see.

  27. Thanks. That is helpful, albeit extremely disappointing. I thought the whole point of the streamlined was to give people more certainty, reduce the impact on benign actors and encourage compliance. It would appear that the IRS might be using the reasonable cause standard developed in its IRM for transition purpose, which doesn't make sense, since reasonable cause is effectively a defense to non-wilfulness. If that is the case, then their new procedures are going to disproportionately impact people in the OVDP and scare people who use the full streamlined (since they are playing an audit lottery.) Either that, or the IRS is taking a hard-line approach publicly to discourage people from automatically assuming they can transition. I guess this makes the attempt to withdraw from the OVPD prior to July 1 all the more important. Be interesting to see where they come out.

  28. Do you think that same risk exists for someone who tried "withdrawal" prior to July 1, that the IRS deems it an opt out and they go straight to exam?

  29. correct would be OVDI 25% Misc.Penalty and OVDP 27.5% Misc. Penalty

  30. I would think that, since the pre-7/1 withdrawal was based on statements of IRS personnel, the IRS would offer the opportunity to complete OVDP and opt out. However, since in the cases I did this, I am comfortable about what will happen in audit, I may not want to waste time in OVDP getting to an opt out audit. A direct audit without the OVDP commotion may be the best result if, for any reason, the IRS were to say that the withdrawal was ineffective.

    Jack Townsend

  31. Milan, it is called NRI accounts not NRE

  32. Milan - Thank you so much for your kind reply.. It's a BIG help..

    I never had more than 100K balance in my account and it was all after Tax

    I have proof of Tax Deducted at source(30%) from my foreign account for the past 5 years however don't have it before that nor does my bank seem to have it. Would that be an issue?

    Would IRS go back beyond 5 years?

    Thanks again

  33. I meant to use the terms, NRI, NRE, NRO interchangeably, as NRE accounts are also not taxable in India, although I do know there are differences between them, although at this point, from a US perspective, they are all foreign accounts, and care should be taken to see what, if any sort of tax compliance due diligence a person holding such accounts did as to their responsibility for US taxes on such accounts.

  34. Jack, just read your update from today's date based on Mr. Severiano Ortiz's entry. It is too bad that it is becoming so black and white. The point he makes that if certification is rejected the taxpayer can still opt pout implies, I guess, that once rejected the taxpayer gets back to the OVDP (without any further penalties or prosecution or whatever), that is, the only consequence is that one is rejected and back to the beginning, the OVDP. Am I reading correctly?

  35. RON,

    I am not sure that is the only consequence. Let's assume that the taxpayer was clearly willful but nonetheless certifies that he was nonwillful and presents a misleading statement. I am concerned that the IRS might (i) consider that taxpayer for criminal prosecution for false statements and (ii) kick the taxpayer out of OVDP because the false statements are inconsistent with his obligations in OVDP. I don't believe that the IRS intends that anybody can run that up the flagpole to see if it sneaks past the IRS. So, I would encourage the taxpayer to have a "reasonable basis" -- to use a similar concept -- with something like fair disclosure.

    It is true that in most cases, the only consequence of the IRS not accepting certification will be that the taxpayer proceeds back to OVDP where he or she can make a fresh decision whether to opt out. But, I would think there is some considerable risk that one or two or three or more may suffer other consequences.

    Jack Townsend

  36. Milan - How many Indians are in similar shoes as I am? I personally don't know anyone or maybe they aren't revealing anything..

    Past few months have been really challenging and taken a heavy toll on my personal and work life.. I can only hope and pray i don't lose my job and indeed my life...

    I just want this to get this over with and move on .. this thing has completely taken over my life..

    Ignorance is bliss.. i wish i had never heard of FBAR, Global income etc. and did my usual return..its been months since i had a good night sleep

  37. Milan please do some research first before you make such statements that the IRS is and was not maximizing revenue (of course there are always limits, like hazard of litigation etc.) Your weak argument of not assessing the max. NW penalty per year and/or account has nothing to do with not maximizing penalties where possible on a relative basis compared to Title 26 civil tax penalties.

    The substantial majority of the $6.5 billion OVDI/P revenue are FBAR penalties, not tax collection and not tax penalty !!

    In the July 16, 2014 report, the Taxpayer Advocate found that the 2009 OVD program, the median offshore penalty paid by those with the smallest accounts ($87,145 or less) was nearly 6x the tax on their unreported income. Among unrepresented taxpayers with small accounts it was nearly 8x the unpaid tax. The penalty was also disproportionately greater than the amount paid by those with the largest accounts (more than $4.2 million) who paid a median of about 3x their unreported tax.

    In her January 9, 2014 report, the Taxpayer Advocate previously found that for noncompliant taxpayers with small accounts, the FBAR and tax penalties reached nearly 600% of the actual tax due! The median offshore penalty was about 381% of the additional tax assessed for taxpayers with median-sized account balances.

  38. Michael J. MillerJuly 18, 2014 at 5:57 AM

    I agree with this. If the IRS considers the claim of NW to be plausible but decides it's not convinced you should simply be back in OVDP. If they decide it's implausible, bad things can happen.

  39. Well and succinctly said. Thanks,

    Jack Townsend

  40. Hi! This article is really helpful and informative. Good thing I've come across this site while surfing. I just thought to share this website I've visited prior to your blog, I find it very helpful, especially for people like us. Here's the link (, check it out.

  41. Hello Milan,
    Did you hear back on the message you left?

  42. RajNIL - have you filed for SDOP yet? are you doing it yourself or have some CPA/Attorney?


  43. Thank you for confirming that the penalty base is different between OVDP and new streamlined. The IRS should mention it in the changes made recently. If anyone hears differently from the IRS, please post.
    Regarding the comment on transitioning, maybe I'm not getting it right but the website states that you do have a 906 closing agreement required even when you are receiving transitional treatment (in FAQ 9) you also don't have to opt out.

  44. Thanks for the links. I will go through them, and yes, they seem to be very disproportionate. But I still must say, that the IRS is not looking to wholly just raise revenue from this exercise of law enforcement, regardless of how disproportionate the penalties are to the amount of income tax involved. They are after all, asset-based penalties within a voluntary disclosure program. And you state that those penalties were from within the OVDP of 2009, and although I did not participate in that program with any clients, I believe the penalties within the OVDP are miscellanous asset penalties, These people came forward and agreed to be charged a penalty other than what a POSSIBLE FBAR penalty would have been in a random audit situation. In a random audit situation, assuming the taxpayer is aduited, I don't believe the IRS would be going for the max for all of the years involved in a NW situation.

  45. All of the OVDI/P revenue for non-opt outs is Title 26 revenue and is not FBAR revenue. The offshore penalty is a Title 26 penalty, not an FBAR penalty. (It is a Title 26 miscellaneous penalty in lieu of an FBAR penalty and all other penalties that might apply.) The only time an FBAR penalty is asserted for someone who joined OVDI/P is if he or she opts out. Opt outs are rare. Therefore the substantial majority of the revenue from the OVDI/P program (both non-opt outs and opt outs) is from the Title 26 sources -- the income tax, income tax penalties, interest on the income tax and offshore penalty (aka miscellaneous or in lieu of penalty).

    Now, if your point is that the offshore penalty is high relative to the income tax, that is correct.

    Jack Townsend

  46. Some practitioners think that there will be refinements in the penalty base for SDOP. For example, there are those who assert that the IRS did not intend to include signatory accounts only in the penalty base. I think that may be right, but the SDOP instructions are not consistent on the point. I think there will be other refinements as well.

    Jack Townsend

  47. 1. In OVDP, the in -lieu of FBAR penalty basis was the Ownership Value of the Account
    For example, if I co -owned an overseas account with my father, the Ownership value for the purpose of OVDP penalty calculation was say $100 ( highest aggregate year end balance ) *.5 = $50. Now the 25% or 27% penalty would be calculated on this $50.

    2. For OVDP TRANSITION, I understand that the account balance is the YEAR END balance ( vs the highest aggregate) BUT does the Ownership value still apply ie would the penalty be 5% of $50 or 5% of the Year end balance ( $100) ie . REGARDLESS of co -ownership

    First, hope you are feeling better and have recovered.
    Second: Re Your comment about keeping the NW Transition Certification BRIEF
    Since it seems the Transition certification will be considered as final and the taxpayer is unlikely to be asked for more clarification or information, don't you think it makes sense to lay out all the facts ( all over again even though you may have done so previously)

    The OVDP commitee will not dig into the OVDP file to understand the taxpayers background and circumstances- I am convinced of this based on my experience appealing for a 5% OVDP penalty. The technical advisor , Agents manager etc. only focused on the most recent letter I had sent, I ended up directing them to previous letters in our conversations

  48. I believe the ' proof' you have of 30% tax deducted at source ( TDS). Is this the 30% deducted at source on INTEREST earned by Indian Banks for Non _Resident ( NRI) accounts is Form 16- A

    There is also 15% TDS on Dividends, this is deducted directly by the the Companies and they do not provide any statement to the stockholder . The Cos simply pay 15% less and there is no reference anywhere (other than in Indian tax law) to the fact that this is deducted.
    Does anyone have a suggestion on how a US Taxpayer in the Transition program can show that 15% tax has been deducted from his Indian dividends ( since there is no statement or Form) and he only sees the net amount in hand?

  49. If practitioners think there will be refinements (maybe not only regarding the penalty base) for SDOP, would you recommend to wait - where possible - with the submission of the certification for transition to SDOP? If I don't wait, do you think that changes, which might be published in the near future, would apply retroactively to those cases recently submitted?

  50. Jack you are missing the point ... my 15 year old daughter knows by now what Title 26 and Title 31 penalties are and what the 27.5% Misc. OVDI/P penalties entails. Please go back to the archive and review our discussion from 2013 on this topic.

  51. lol...Jack for your continued education on this topic:
    Can the IRS learn from the UK’s Voluntary Compliance Program
    Posted by William Byrnes on July 21, 2014

  52. Jack I was told that you currently face a malpractice lawsuit with regards to one of your OVDI clients.... Is this true ?!

  53. Anon , Will all the SDOP return will go through Audit?. Or will they randomly select for Audit?. I am really didn't want to caught in this mess. It is lot of time waste and mental strain. Do they really think we are having foreign account to avoid tax?. That too to save few hundreds of dollars while we are paying so much tax every year. It is known fact that most foreigners came to this country have bank accounts in their home country and there was no public knowledge on FBAR and Global tax. People are getting aware of this requirement now. It is also natural tendency to send money to their home country where they have family and other ties. Also there are lot of people who come to work on temporary VISA and they will be having plan to move back. Some people may have to pay 5% penalty for all of their savings. It may not be saving also ..some people might already spent those money on something. Hope better sense prevail at the end.

  54. Thanks for your reply honestabe1947. I do have Form 16-A for the past 5 years; however don't have it for the earlier years. I am checking with the bank however don't think they will be able to provide it either.

    Would IRS go back more than 5 years?

    Thank you in advance!

  55. Look at point # 2, above in this blog, at the top of the page.

  56. You have valid questions concerns. But the answers would best be suited for your specific case, and coming from your own adviser. All else equal, if you have a considerable amount of "signatory" accounts, you might want to wait till new pronouncements have been released. However, if you have a lot of accounts at a bank already publicy disclosed as housing foreign accounts of US account holders, you might consider entering OVDP (although that is not a hard and fast rule). If they release pronouncements, at this stage, they will probably be retroactive. However the longer the time elapses from when the program was released to taxpayers, the more potential for pronouncements to be effective for new entrants, rather than existing SDOP or SFOP participants. Given that the SDOP & SFOP are without any examiner, and essentially a "method" of providing amended returns, penalties, & late FBARs, once a taxpayer has submitted everything to the IRS, any pronouncements which would be retroactive would probably not also be effective for those who have finalized submission of all taxes, penalties, and filings through the SDOP & SFOP programs. But again, you need specific customized answers to your very unique questions you ask.

  57. go fuck yourself YOU piece of shit !!

  58. Confused Person - I am in the same boat as you are .. on VISA and paying 30% tax in home country and had no knowledge of global tax and FBAR (

    have you filed your SDOP? did you file it yourself or have some attorney do it for you? can you please email me anon2014r @


  59. Jack I think you're splitting hairs. Yes, form 906 says that the FBAR penalty is converted into a Title 26 misc. penalty.) But the underlying conduct being penalized is the FBAR nonreporting. And as TAS data shows (the point US tax was making) sometimes this in-lieu penalty is 600%, even 1300%or more of unpaid tax. (In cases of tax fraud the max penalty is only 75%.)

  60. Thanks for the answer. However, the OVDI covers eight years; there is the possibility of opting out (or going streamlined) in which case only more recent years would be covered; thus there is the risk of paying earlier year taxes to the state, and not getting those back if the person opts out or goes into streamlined.

  61. But the point is that the FBAR was filed in the example above. So the penalty is for not violating the law.

  62. The issue is still being considered. I was advised today that it will take some time to obtain an answer. Same with the signatory authority issue for DSCP

    Jack hope you are feeling better.

  63. You raise a vital issue here. One of the many striking features of the SDOP is the difference in the look-back period compared to the OVDP. I have a client who inherited funds in 2006, then brought most of them into the U.S. in 2007. For those two years, the penalties under the OVDP would be considerable (and possibly even worse after 8/4/14, since the bank involved was a "bad bank" with which the client had a very long relationship, due to her nationality).

    In the non-willfulness certification, some mention of the source of the funds that remained overseas in 2008 (and a few years thereafter) definitely seems to be in order. I wonder to what extent the IRS is going to miss the opportunity to apply the penalties that could have applied to 2006 and 2007 under the OVDP, or even under an audited quiet disclosure or opt-out in which they pursued the normal FBAR penalties.

    Is it reasonable to suppose that they have considered such scenarios and decided to accept those lost opportunities in the expectation of securing additional revenue through the SDOP, which seems likely to attract a host of people who had been holding back?

  64. I'm wondering whether there is an **implicit cost to gamble** with a transition. If your transitional request gets rejected, and then you decide to opt out, the auditor could look at the failed transition and make a willful judgement when he would have decided *otherwise* (i.e., RC or NW) without an attempted transition. Why? A rejected candidate is left with the stigma that he:
    - "falsely" certified.
    - was deemed "willful" by a rigorous process from senior examiners.
    I put the term willful in quotation marks because the standard seems to be much lower for transitional requests than for SFCP newcomers (based on Severiano Ortiz's comments).

  65. Are you in OVDP- if so IRS will want 8 years of statements. If in Streamlined , only 3 years are relevant for tax purposes
    What do you plan to do for dividend deducted at source at 15% before payment to taxpayers?

  66. In response to Mr. Ortiz's post about the IRS treating OVDP Transition requests more skeptically than standard Streamlind Requests, this seems very unfair. Taxpayers who voluntarily came forward to redress past errors had only 2 options- quiet disclosure (discouraged by the IRS) or OVDP.

    Once caught in the OVDP trap, they are expected to scale a higher barrier in the Transition program than if they were to enter the normal Streamlined program.


    Per the official IRS Non- willful certification, on the face of it transition participants have the same standard of non- willfullness as normal streamlined participants. ie negligence, inadvertence, good faith mistake are all OK. So now why are we hearing about a higher standard for transition cases?

    I think the IRS has to be clear here and not hide behind some 'secret' internal guidance for transition cases.

    All other feedback on how the IRS views Transition cases is most welcome

    Further ,this is an indication of the mindset at the IRS- that taxpayers in OVDP (or any taxpayer) are mostly dishonest .
    Besides the OVDP Agent, and a hostile Technical Advisor , I have experienced firsthand, 2 ex- IRS personnel

    One was an ex IRS Attorney, in private practice who I fired because he was plain rude and could never keep my account balances or numbers straight- ie incompetent and did his best to ' scare' me about what the IRS ' could ' do

    The second was a lady who had worked at the IRS and their ' police' force like attitude so turned her off, that she quit and is now at Deloitte

    I think the IRS Apple itself is rotten at the core, because of the quality of the people and what appears to be a culture of treating anyone in OVDP like they are a crook.

    The IRS has dusted off the FBAR penalties which were intended by Congress for Money Laundering and is abusing these FBAR rules to extract out of proportion penalties from US Taxpayers who were born overseas and therefore have overseas bank accounts

  67. Milan

    Any additional info on how IRS plans to treat Transition cases?

  68. Do you think the IRS will force those people who tried to exit the program to leave (thus making them ineligible for transition) or simply tell them they have to either stay in and then transition or opt out?


Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.