Monday, January 9, 2012

IRS Re-Opens Offshore Voluntary Disclosure Program (1/9/12)

In IR 2012-5, here, the IRS announces that it is "Reopening" its Voluntary Disclosure Program.  For now, I will just refer readers to the Notice and make comments later if appropriate.  The key features of the program (IRS puffing omitted).
Issue Number:    IR-2012-5 
IRS Offshore Programs Produce $4.4 Billion to Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens 
WASHINGTON — The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs. 
 * * * * 
The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point. 
 * * * * 
In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program. 
The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category. For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011. 
Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties. 
Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.
JAT Comments:

1. After OVDI 2011, the IRS announced that it would accept voluntary disclosures for offshore account matters pursuant to its long-standing voluntary disclosure policy.  I understand that the IRS had determined to process such disclosures pursuant to the procedures developed in the OVDP and OVDI programs.  Hence, the formal announcement of a 3rd or "re-opened" program seems to add only the penalty amount (27.5 percent rather than 25% in OVDI 2011).  And, that penalty presumably could rise in the future for those who tarry.  So, the key point added by the new announcement is the penalty amount (including confirming the mitigated penalty amounts from OVDI 2011 in limited circumstances).

2.  The community buzz is that this new announcement may precede some development related to a settlement with some Swiss banks.  See e.g., Marie Sapirie, IRS Announces Open-Ended Third Offshore Voluntary Disclosure Program, 2012 TNT 6-1 (1/10/12) (including practitioner speculation about this).

3.  Taxpayers with offshore accounts (or who, having now closed them, who had them in the lookback period) and have not yet joined the programs might want to consider or re-consider what to do now.  Those taxpayers' names could well dribble into the IRS whether from a settlement with the Swiss banks or otherwise (and there is plenty of otherwise opportunities for the IRS to obtain information about previously below-the-radar U.S. taxpayers).

4.  As I have discussed before, those whose situations would justify an opt out if they were to join the program might seriously consider not joining the program at all.  The reason is simple.  On an opt out, they will be subject to an audit in which income tax adjustments and penalties could be asserted for open years (usually just three if they indeed would benefit from an opt out).  If they do nothing and are audited (by no means a certainty and probably not even a likelihood for most), they will be audited and, providing that they would have been good candidates for opting out, they will get the same result on audit anyway.


  1. My reading on this is that IRS is now learning the fact that most folks in OVDI 2011 may not have been trying to hiding money at all, they were simply ignorant (or ill-informed) on their filing responsibly (can't expect expats/temp visa workers to know all the filing requirements)

    So, they decided extend the so called last chance and added small increase on base penalty.

    I think base penalty should not only be based on the amount money, it should also be based on taxpayers residency status. Expats/temp visa workers should get none penalty at all.

    Also, IRS should make it clear that retirement plan should be excluded on penalty base.

  2. So much for 'last, best chance' as mentioned in the last program.

    My take on this:

    1) The IRS loses enforcement credibility as there is little incentive for people to disclose as long as the penalty is only marginally more (27.5 vs. 25) than in the last program UNLESS there is a another major agreement to hand names over in the offing (John Doe summons, agreement with Swiss banks etc.).
    2) It may be that the IRS is realizing that it cannot possibly do full audits of all the names and leads it has except for really large accounts. So it wants people to come in voluntarily. If so, I think people with smaller accounts in OVDI 2011 should feel emboldened to opt out.

  3. N said
    "credibility as there is little incentive for people to disclose as long as the penalty is only marginally more "
    I do not understand your logic.
    Are you saying that if the penalty was increased to 50% then there would have been a lot of incentive for people to disclose.

  4. To Anon of "January 9, 2012 3:51 PM",

    There are two approaches that IRS can take..

    1. fear factor, say increase penalty each year from 2009, 2011 to 2012 -- with huge increase, also with some jail time if they catch someone.

    2. fair factor, like to treat people differently based on their residency (where they live), and immigration status.

    I would have responded both well -- as I am a wimp, and fair minded as well.

    US Gov is known to play hardliner as it is evident like FATCA, war in Iraq, military position in Asia Pacific, etc. But to its own citizens/residents, this may be not a smart policy.

    Fear of the government should only happen in countries like North Korea, Iran and Former Soviet and China under Mao.

  5. so for people entering in 2012 ovdi, max 27.5% penalty and years covered 2004 to 2011? or its still
    2003 onwards?


  6. It is possible that the IRS's decision to make the announcement is the result of three important developments:

    • first the Taxpayer Advocate Service's Advocate Directive issued on August 16, 2011, which acknowledged problems in the 2009 OVDP that resulted in inequitable treatment of similar taxpayers and directed the IRS to address these problems. Click here for further discussion.

    • Second, recognition that the publicity surrounding the OVDI and OVDP has made it difficult for the taxpayer to assert that failure to file FBARS was not willful.

    • Third, similar recognition that such publicity will make it difficult for the taxpayer to assert ignorance as a basis of making a reasonable cause argument.

    Considering the foregoing, I believe the new program is very beneficial to unwitting taxpayers who, otherwise, would have no mechanism to bring returns current without the possible application of draconian penalties

  7. Here is my opinion, and you know what they say about opinions ;-).

    I think this may mark the end of the active jihad that has been conducted against those committing the sin of having financial affairs originating from outside the US.

    The IRS is all out of tricks. Everyone who was going to be made aware of the FBAR requirements by the IRS/media drum-beating and be scared enough to come forward voluntarily has done so. 99% of non-compliant people are still unaware of the FBAR's existence and nothing the IRS has been doing will change that. The IRS has no more credibility when it comes to saying "this is your last chance" as this is another in a long line of last chances. Deadlines and threats won't make any impact to the remaining non-compliant people. They'll probably just wait it out (if they even are aware of FBARs) so no point in imposing deadlines anymore. I think this is new OVDI is just a way of leaving a mechanism in place for any laggards who stray into the process from now on.

    The 2009/2011 OVDIs were a dismal failure. Low rates of participation, unexpected tidal wave of innocent participants, confusion amongst taxpayers, practitioners and the IRS employees. Angry Canadians and government, TAS issuing damning statements about the process, numerous backtrackings on rules/FAQs and criteria for relief and the corresponding destruction in credibility of the IRS. Also, at least some participants opting out and fighting tooth and nail with all the associated admin overhead for the IRS. By any measure the OVDIs were a total clusterF&$%. I think if the IRS bods could go back in time they would have done the OVDIs completely differently and probably just not do it at all to avoid the headache.

    Also, the abilities of the IRS to find out non-US accounts have proven to be very limited. One Swiss bank giving info on a portion of their customers, HSBC India data breach and that's about it. I'm sure there there will be such events in the future but it's still the statistical equivalent of being hit lightning. FATCA is a bit of a wild card and remains to be seen what its true effect will be. Indications so far is that it is an imaginary boogyman; i.e implementation delayed by 1 year already (classic sign of vaporware) and the draft regulations mysteriously failing to appear by the end of 2011 as promised. Some flies in the ointment perhaps?

    I figure they'll wait a few years until the current round of OVDIs are a memory and then do a proper OVDI where FBAR penalties are waived and only tax plus accuracy penalties are levied. This will probably be done post-Shulman (to save face) so they can announce a new strategy as a departure from the old ineffective one.



  8. Well, I have been reading how the press has been mischaracterizing this story and basically has no idea of what has been happening the last 3 years, and then finally, I came upon a story by someone who knows something!! Charles Rettig

    Jack has posted his excellent analysis on the blog before, and at least when you read his article you know that the subject is being covered indepth while staying away from the more emotional issues related to US citizenship taxation model or the current TAS / IRS dispute over fairness. This is a balls and strikes piece, that the reporters from WSJ, NYTs, WaPo NBC, NPR, PBS, FOX, AP, Reuters Bloomberg etc would do well to read to improve their otherwise miserable reporting.

    Here is the link at Forbes

  9. Anon @January 9, 2012 3:51 PM

    What I am saying is that there is very little incentive for anyone to disclose accounts if the disclosure penalty regime (27.5%) is open indefinitely and any increase in penalty is just incremental (25 -> 27.5%). How many people in the last program would have come in if the plan was open practically indefinitely ? People would wait down until it looked like their account was actually in danger of being exposed, then quickly join the disclosure program. Maybe the penalty by then will be 30%, but that is not that much higher than 27.5% -- people might be willing to risk it against the prospect of loss of 27.5%. To put it another way, an indefinite program essentially caps the penalty way below the max of 300% or even 50% , at 27.5% or slightly over it.


    'Also, the abilities of the IRS to find out non-US accounts have proven to be very limited. One Swiss bank giving info on a portion of their customers, HSBC India data breach and that's about it.'

    I don't think HSBC India was a data breach. The HSBC breach was Swiss accounts. I think HSBC India was a grand jury subpoena. And it seems like some other Swiss banks might give up some names too.

  10. N - I agree with your assessment. As long as you are earning more than 2.5% to 3% yield on the foreign account why would any of the remaining people come forward unless there is clear and present danger - all the unwitting offenders have in any case come forward. I think the IRS is also doing this to accomodate the Canadians as frankly not too many relative to total Candians who footfaulted participated in this 2011 program.

    In addition, I think this 2012 VDP given lack of deadlines opens up avenue for quiet disclosure i.e. tax payers may do QD, take a chance and then join 2012 OVDP - anecdotal evidence suggests that IRS has been pushing quiet disclosures into the VDP ...however I presume that does not apply to 100% of QDs

  11. "so for people entering in 2012 ovdi, max 27.5% penalty and years covered 2004 to 2011? or its still 2003 onwards?"

    It should star from 2004 to 2011. as stated at

    in IR-2012-5, Jan. 9, 2012

    "Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties."

    This might be a good deal for some folks who have been following offshore events. Like to avoid peak balance in later years. Also some banks do not keep old records, so for some folks with peak balance in 2003, this is a good shift.

  12. "Also some banks do not keep old records, so for some folks with peak balance in 2003, this is a good shift."

    This is not fair for people who entered 2011 ovdi.
    If some has max in 2003, he will get hit with a
    higher penalty than folks in ovdi 2012 with a similar situation as 2003 is taken off from penalty.

  13. "This is not fair for people who entered 2011 ovdi. If some has max in 2003, he will get hit with a higher penalty than folks in ovdi 2012 with a similar situation as 2003 is taken off from penalty."

    For those who are not aware of FBAR, this shift does not give them any advantage -- as they may have a lot more money offshore in later years.

    For those who have been following FBAR/OVDI, this may give them advantage of lower peak balance as they would not keep putting money offshore in later years. However, if they do decide to join, that means they have been sleepless while you have made peace by joining earlier.

    Regardless, there is no fairness in OVDI, for people like Anon5%, Just Me and other expats, they should not really look at OVDI at all. Also for those who have peak at 75001 to pay 25% while for those who have 74999 to pay only 12.5%...

    So, it is best to get it over with -- and move on with peaceful life. After I get my 906 or settle down with opt out -- I will not look at others -- if or not they have better deal. I know a lot people (some I know well) will never bother to look at OVDI even with much worse problem than I have. I just wish them well -- and in fact I hope they will never have to pay one penny.

    1. ij, you wrote expats "should not really look at OVDI at all." What would you recommend for ex-pats, then?

    2. I was talking about fairness, not on legal obligation.

      What if Chinese gov/Canadian gov impose the same kind FBAR rules on me as I have US financial accounts (offshore to China and Canada)?

      In fairness, US expats should be only required to report offshore relative to their residency countries.

      So in fairness, I should pay the FBAR penalty to US being a US resident but not to Canada for being a Canadian citizen.

      Again, don't take any word of mine on this board as recommendation at all. I only speak on common sense and fairness.

    3. This document (FS-2011-13, which I don't think has been discussed here?) is directed specifically at expats and dual citizens. It says not a word about any kind of Disclosure program, and suggests simply filing all back years with FBARs along with a letter stating reasonable cause. While they repeat all the usual threats, they also seem to be a bit more reassuring about their leniency in these kinds of cases:,,id=250788,00.html

      It doesn't say anything about ammended returns (e.g., if "no" was checked in error on shedule B in previous years), but it seems to me this document might generally cover such a situation. For example:

      "If you learn you were required to file FBARs for earlier years, you should file the delinquent FBARs and attach a statement explaining why they are filed late. You do not need to file FBARs that were due more than six years ago, since the statute of limitations for assessing FBAR penalties is six years from the due date of the FBAR. As discussed below, no penalty will be asserted if IRS determines that the late filings were due to reasonable cause."

      Any comments?

  14. Moby said...

    I totally agree with your observation and i had told that we will have another last chance in 2013 but not in my wildest imagination thought we would have a 2012 indefinite open ovdi. There is atleast 95-99% non compliance and with this penalty i do not think any of these 99 percenters are going to walk in.
    I would presume with the new 8938 reporting requirement in about a year or so there may be no FBAR Reporting requirement or if so the bar may be increased to say 300 or 500k. At some point i would presume the 99 percenters will become compliant on a go forward basis.

  15. It seems logical that the 20, 25, 27.5% penalty should apply ONLY to those who wait to disclose until informed by the bank that disclosure is imminent (i.e. gthe 4,450 UBS customers and 200 or so CS customers.) Everyone else seems to have shown good faith, maybe negligence not wilfulness and a 2% 2.5% or 2.75% retroactive penalty reduction should be appropriate.

    In section 4.16 it says the FBAR pnealty is intended to ensure future compliance. Is anyone who disclosed voluntarily, especailly those NOT under imminent threat of disclosure, likely to NOT file future FBARS?

    Right now, 30,000 disclosures is maybe 1% or 2% tops of undeclared accounts. Seems to me it would be good strategy to get the other 99% to declare by offering a very low penalty maybe 5% retroactive to all EXCEPT the 4,450 UBS customers. Future income taxes for the declared amounts of these 99% people will far outweigh 25% penalty from the 1% who have disclosed so far. In simple terms, Kodak and Gillette practiced this by selling cameras and razors at zero profit and making the money on future sales of film and razor blades. As Jack pointed out in point 4, it makes little sense for may to disclose now, better to wait if and when disclosure by the bank is likely.

  16. IRS' incentive to enforce FBAR is to get as much money as possible. It is 100% NOT to educate taxpayers get into compliance with the law.

    Otherwise they would have spent much resource to educate taxpayers, and make filing simple and easy.

    Lowing the penalty rate would not do good for the government.

    Poor immigrants' hard saving (maybe retirement saving) will be part of "spread wealth" -- this is what the change we should believe in.

  17. Just an update,

    IRS is not going to impose penalty on RRSP. So the past rumor about penalty on RRSP is unfounded.

    Great move on IRS, it is more reasonable than most of us have expected. However, I do hope they will treat other countries retirement plans with same kindness.

  18. ij.... Regarding the RRSP.... That would be good news for Canadians. Do you have a reference that one could refer to, or is this just what your Examiner said...

  19. Just ME,

    I was told by my examiner this morning. Of course, each one has its own unique case. My RRSP has never been cashed out and has never been moved since becoming a US person. So there is no tax implication except missing the deferral election.

    I would not be surprised penalty would be imposed to some RRSP owners (US residents) have cashed out RRSP but never reported as income in US return.

    That is why IRS has never publicly stated what is the rule on RRSP inside OVDI, and even some OVDI hotliners have said that penalty would be imposed on RRSP.

  20. Just Me,

    This is a reference (sort of)

  21. Jan 6:

    Steven Miller, deputy IRS commissioner for services and enforcement, told the Associated Press the high audit rate for the rich is designed to “assure that those at the lower end of the spectrum know that those at the higher end of the spectrum are subject to the same rules and enforcement as everyone else.”

    Jan 9,,id=252162,00.html
    “Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman.

    I wanted to bring this to the discussion. Lay people may not know this but the tax code and the IRS are often used by Congress and the White House for "social engineering", income redistribution, vote buying, environmental protection, etc.

    Take from the rich (often white men) and give to the poor (often minorities, women and children).

    So one consideration before engaging the IRS (particularly for those doing DIY offshore disclosures), is to find out which end of the the income redistribution "spectrum" you are perceived to be on.

    Will your participation be perceived to "produce strong, substantial results for the nation’s taxpayers"?

    The laws are one thing, how IRS is supposed to apply them is another, but how IRS enforces them (from the tone at the top) is perhaps the most important thing.

    1. But then IRS should do 100% audit of all this rich people. If IRS does only 10% audit & 90% are left out, it only means that some discretionary critrion applied by IRS & persons who are audited are the sufferers.
      Same with OVDI. 33,000 participants is hardly 1% or 2% of the total non-compliant.To be fair, IRS should get all the non-compliant people. OR it should not charge 25% FBAR penalty for the poor 1% who came forward. Those who came forward should be treated fairly like IRS did in 2003 OVCI. In 2003 OVCI IRS did not charge any FBAR penalty.Is it because 2004 was the reelection year for Junior BUSH

  22. What if someone has created his own retirement fund, by never withdrawing from it. Will that be allowed with no penalty.

  23. "What if someone has created his own retirement fund, by never withdrawing from it. Will that be allowed with no penalty. "

    You can certainly argue for 5% penalty as listed FAQ of OVDI 2011

    1. I created various CDs for my retirement, But I did not touch them, not withdrew from it, nor I cashed nor I moved this CDs. Since it's cration, It has been accumulating interest. I have other 2 checking accounts. I don't have anything else. I don't have any layer of entities. I created this CDs in my native country & NOT in a tax-heaven country. When I opened the CDS, I gave my US address & that address has never been changed.

      So in the above situation, if I get 5% penalty, my penalty will still be $ 20,000 instead of $ 75,000.

      But please let me know, can I get the benefit og 5% penalty. I will appreciate your input. Please let me know which FAQ of 2011 OVDI should I refer to.

    2. OVDI 2011 FAQ 52 that is not really for retirement plan only -- to any account that meet the conditions. It seems to me that you have a strong argument for 5%.

      Good luck and being the 2nd mouse -:)

    3. Thank you very much. Are you a lawyer ? Is there any way I can contact you.

      You really made my day. I have a reason to be hopeful for a lower penalty.

    4. I am not a laywer, but that 5% should be applied to your case and I am even thinking of get rid off all penalty on retirement (if no tax deferral treaty). Anyway, this is something you should fight for, and in case of opt out (if you do not have other problem), your argument of reasonable cause will be strong.

      Good luck my friend..

    5. ij
      you mentioned FAQ 52. But as per FAQ 52 4 conditions are required. First condition is the accont should not have been opened by the tax payer. So in your case how did you get NO PENALTY for your RRSP. Even if you satisfied the other 3 conditions of FAQ 52, you did not satisfy the 1st condition. Can you clarify this ? you must have opened your RRSP, So how come the exaaminer allowed you to use FAQ 52. OR rather NO penalty. In that case examiner did notlook that part of the FAQ 52

    6. Well, I did open my RRSP but that was done before I became a US person.

      So logically (if IRS will take this logic), I did not open my accounts as a US person. That is equivalent as I (as a US person) inherited the accounts from myself (as non-US person).

      I think this is a strong argument, and I don't think/hope IRS would so narrowly define 1st condition.

      My RRSP will be excluded from base penalty not because FAQ 52, it is US/Canada tax treaty. So I did not use this argument at all. Indeed I would take this argument in case IRS would not let me to make late tax deferral election (my RRSP would have tax implication), and then FAQ 52 will be my weapon to get penalty reduced (5%).

      Again, I am not a lawyer, but my logic is just as good as any lawyer could have -:}. When fighting for bloody earned money, we have to be logical and creative -- to make the best case.

  24. ij: "Great move on IRS, it is more reasonable than most of us have expected. However, I do hope they will treat other countries retirement plans with same kindness."

    The problem other countries have is that RRSPs are a special case with the IRS, likely due to Canada's proximity to the US. Form 8891 applies *only* to Canadian retirement accounts.

    Citizens of the other 190 or so countries do not have the same advantage, and face reporting requirements and penalties that are well beyond those faced even by Canadians. As a general rule the IRS point-blank refuses to recognize other nations' retirement savings accounts.

    1. if a taxpayer has pure offshore retirement plan reporting problem, I think opt out is a good choice. Reasonable cause is a strong argument as we do not really report anything inside 401K, Roth IRA etc..

  25. M

    'So one consideration before engaging the IRS (particularly for those doing DIY offshore disclosures), is to find out which end of the the income redistribution "spectrum" you are perceived to be on.'

    As usual, your insights are dazzling and brilliant and bring an original, highly relevant perspective to the discussion. Indeed, rather than considering other matters such as residence, tax due, immigration/expat etc. issues, the relevant matter for people is what side of this redistribution spectrum they are on.

  26. Hi N,

    This "spectrum" language is that of the deputy IRS commissioner for services and enforcement Steven Miller, as quoted above, not my language.

    Sorry to be so indirect.

    My point is to note how the IRS staff (and leadership) perceives the person entering the program. If it is a program for whales (per the IRS leadership), one should respect that design and perception. I noticed that many OVDI filers on these blogs have difficultly accepting that.

    I am not sure why. Perhaps the IRS language is not to their liking, maybe it is not clear and being immigrants, they might miss the nuances of the English language in press releases. Perhaps they are looking for a program that meets their needs, never mind what the IRS wants.

    I think one should tune one's antennas (or radar) to the political "vibes", in addition to the laws. These OVD programs are 90% politics, 10% revenue, in my opinion.

    They are designed as public policy, public information, scare tactics, etc. They have made "offshore" a household word, which is saying something.

    (Of course 90% of households don't know what a true offshore account is, where Grand Cayman is, and the IRS is not about to educate them, but that is another story).

    One can follow all the laws, residence, citizenship, filing requirements, etc, only to have the laws changed the next year.

    One can spend thousands of dollars (or millions per these blogs) on various tax strategies, only to have them negated via legislation or regulations the following year.

    So I am saying to stay attuned to the political language (perhaps first of all).

    1. M

      Your insight will undoubtedly be welcomed by Indian immigrants. Since they are not likely to be white men, they should be automatically excluded from any IRS penalties.

      However, I do note with some dismay that the IRS/DoJ did seek out and penalize Dahake and Ahuja. Perhaps the IRS CI agents conducted some genealogical research on their backgrounds and determined that they had a white ancestor and thus were not eligible for the remedy you suggest. Perhaps Indian OVDI participants should verify their ancestry and submit a detailed genealogical report with their requst for penalty relief.

      It is indeed unfortunate that some immigrants might have missed the nuances of the English language in the IRS press releases. Unfortunately, some might be proficient enough in mathematics to note that the IRS gives 75K as a cutoff limit for a lower penalty, but not for NO penalty. This application of simple algebra may have lead to conclude that the IRS program may be seeking non whales as well.

  27. ij

    Thanks for the info. You know, you might share that information on RRSPs also with

    They are Dual citizens and US Expat Canadians which are trying to share information for Canadians, and they might have an interest. I will pass along in an email, and see if there are any in the program still wondering about the RRSPs...


  28. Is it necessary to be in the USA to resolve this OVDI mess? I took part in the 2011 OVDI last year but will have to be out of country for few years on a foreign assignment. What happens if IRS starts looking into my case when I'm out of the country?

  29. "Is it necessary to be in the USA to resolve this OVDI mess? I took part in the 2011 OVDI last year but will have to be out of country for few years on a foreign assignment. What happens if IRS starts looking into my case when I'm out of the country?"

    You can telecommunicate with your agent. My agent is good and he even gives me his email. So any correction that I need, just send it over email

  30. To AnonymousJan 12, 2012 08:07 AM

    No, it is not necessary to be in the USA to resolve this OVDI mess. I did most of mine outside the country. It just probably slows it down due to mail issues and communication as the IRS refuses to join the electronic revolution. No exchange of spread sheets and no email. In some ways, being outside might be to your advantage as the longer it takes the greater the likelihood that changes emerge that might lead to more reasonable results.

  31. ij

    I see that some analysis of your comments and the FAQs that could be applied to RRSPs has been done at the blog below. The author is not an attorney, but there might be some reasoning there that is helpful in your arguments with your Examiner and his technical adviser. You should just press the argument, in written from, from as many angles as you can, and then ask for written rulings. That slows them up, and mildly frustrates them. They may come back with a no, but then try again with another angle. Again, be nice, but be persistent.

    1. Just Me, thanks for the link..

      As for now, I will take my agent's words as they are.
      He is a really nice person. This morning he called me and told me that I had paid over $100 more for one particular year and he was going to make the correction.
      This taxpayer-examiner communication gives me the impression that I am not really being treated as a tax cheat (I am certainly not), and he has been helping me to make all the correction that I would otherwise have to pay a professional.

      So I will keep following this process and will keep you folks updated. I am hopeful that I will get a 906 without opt out -- that is RRSP is excluded.

    2. ij

      are you not considering opt out ? You seem to have a good reasonable cause argument.

    3. I will not opt out if RRSP is excluded from base penalty. I am not sure if I have a good argument for reasonable cause, eve if so, I do not think it is worth to put myself into this process for another possible year.

    4. Thats up to you certainly, but based on what you describe it seems like you have reasonable cause, and it also seems like the IRS is not being unreasonable about reasonable cause on opt out.

    5. Thanks, and I really appreciate it. My case is not 100% RRSP, so it is a hard case for "reasonable cause", given 1. tax owed, 2. so many years of non-compliance.

  32. I think your comments regarding the "income spectrum" merit consideration. I did everything I could in writing to make the point I was not in the spectrum they designed the program for. That is why I fell into the Whale/Minnow analogy. Did it work? Well, in a way, as it finally got concessions from the Examiner that I didn't belong in the process, and I wasn’t who they were looking for. But as I pointed out, given the IRS guidance at the time, what choice did I have? I had to join, as to do otherwise was a willful act, or at least that is how I saw it. I would say that the point definitely helped with the TAS, so would advise readers to take on board what you say.

  33. Hi Just Me,

    Thank you for your comments. I am not following your logic though:

    Not joining OVDP would have been interpreted as a willful act?

    You could have made a quiet disclosure (ie amended returns), or simply file going forward. Did you consider those options?

    Or you thought the OVDP program would let you off with a small 5% penalty, then they did the bait and switch on you?

    1. M...

      Well, rightfully or wrongly, I came to the conclusion that joining was my only option. My logic was probably flawed, but it went like this... (I think I have said this before, but for new readers I will repeat it.)

      When I first became aware of my non compliance and that there was this program designed for Whales, I began to view it as the IRS fisherman encircling me with his seine net. It never occurred to me prior to then, that I was a fish to be caught.

      I had a hard time getting my Aussie wife to understand that this program (net) that the IRS marketed for rich evading Whales hiding funds in offshore accounts was encompassing us too, as she/we had foreign accounts. It was drawing around us, and we had to take notice.

      While I suppose I did have time to dive deeper to escape the net through the hole in the bottom (no nothing or do a QD). However, such an escape attempt now, it seemed to me, was a willful decision brought on by the presence of the net. I could see that doing anything but entering the OVDP would come back against me in future arguments in an audit were I discovered via a QD (diving deep).

      Maybe I was too passive in allowing myself to be netted. Maybe I was too fearful and risk adverse. I should have noticed the vessel on the horizon before the net was set and swam clear, but this fisherman has other harpooning skills and other nets, (as shown by FATCA which came later), so I joined.

      Then months later, my Examiner tried to tell me that I didn't have to join, and it was voluntary decision (so I must be a criminal, so to speak., so just pay up and quit complaining. My response was basically "Bull S....". Just because you put voluntary in the title, doesn't make it voluntary, just like calling deregulation of the coal industry a "Clean Air Act." Sure, I voluntarily decide daily not to murder the annoying kids doing wheelies out front in the gravel, but given the death penalty for following that voluntary decision is very much coerced by the penalties for disobeying the “Do not Kill” statutes to say nothing about the Ten Commandments. I know it is a bit of convoluted logic, but that was how I saw it.

      Prior to the moment I heard about the program on the radio, I didn’t know that a FBAR existed or even understand foreign income reporting requirements. Those considerations never enter your mind when gardening in NZ. Maybe that represented some due diligence failure on my part for not staying aware of all the complex tax rules and reporting required even for my simple life. I discovered there was this site called that was supposed to have dominion over me even in this foreign land. However, once I became aware of my failures and aware of the program.... I KNEW! There was no escaping that knowledge. At that point, I had to decide if I was going to cross the line into willful behavior (ie dive deep) or enter the front door of disclosure. QDs, it seemed to me, from IRS language, were ruled out. By any rationale reading of the FAQs you knew they were strongly discouraging it with threats.

      So, what was the choice given my knowledge? To me it was to enter the OVDP. My big mistake was assuming that the IRS would see that I was a Minnow and not subject me to the 20% penalties. I naively thought my appeals to logic and reason would prevail. They would do the right thing and not treat me as a Whale. How wrong I was!! There was no 5% penalty at that time, if I remember correctly, so that did not factor into my decision.

      In the end, it was the “reasonable cause” implications of FAQ 35 that finally got me some relief with the much appreciated help of the TAS. Without them, I was fish fertilizer!

      Btw. I fully understand that others in similar circumstance saw the issues differently than me, and made other decisions. I can not fault them, if they went the QD route, I hope the IRS leaves them alone. It is a waste of resources.

    2. Just me,
      I see it just as you do only I did not have the intestinal fortitude to opt out. I buckled to the threats be they real or percieved. Honestly, what good choices are there when you are presumed guilty to begin with. Its the opposite of what American justice supposedly stands for. The word is surely getting out and one day they will realize that this money grab is a mistake fraught with unintended and perverse consequences as Phil would say.


  34. Does anyone have opinions on what this means for the ordinary ex-pat dual citizen, in the EU for over 15 years, all savings (c. $200k) made in the EU and taxed appropriately, and never moved money out of the US? I was a student most of that time, and my savings came from buying and selling a house with the help of family loans; and from savings when I have worked.

    As per a post on another thread, I never knew I had to file at all, then an ex-CPA relative who was "helping" me erroneously ticked the "no" box re: foreign accounts on Schedule B; and of course I knew nothing of the FBAR....

    Been looking for advice in various quarters, but am wondering if this news changes anything for innocent (!!!) people like me?

    Also, is the best place for objective advice a reliable CPA, an enrolled agent, or a tax lawyer?


    1. I would talk to a CPA/Chartered Accountant in the EU who specializes in cross-border individual taxation.

      One who is familiar with US tax laws obviously.

      You should also get advice regarding the tax implications of residencies and citizenship (and of losing said residencies and citizenship).

    2. Sally,

      At what points did you seek legal advice? At what point did you go to TAS? What parts did you do alone?

  35. Being new to this blog I just want to put up a video link of the Canadian government's position on FBAR collection.

    By starting up this whole mess with OVDI, FATCA, FBAR etc the US is now in a position of having its closest trading partner indicating it will not help enforce a critical piece of tax law in the minds of the US IRS.

  36. ij Jan 12, 2012 12:10 PM

    'I was talking about fairness, not on legal obligation.'

    I think you are rationalizing based on your perspective. I wouldn't call FBAR penalty "fair" in most cases.

    Assuming non-willfulness, what is fair about a law that penalizes already taxed money based on untaxed interest? What is fair about threatening to fine $10K per account per year when the "account" never had more than $100? Why is 20% or any % of taxed money fair when all it did was pass through my account to a relative earning paltry interest. And I believe there are enough posts on this blog about how this penalty results can be ridiculous.

    ACA is fighting for itself like any good organization would, but ultimately the problem is the definition of the penalty itself - not who or which specific group is subjected to it.

    If tax loss is being remedied, I would argue that the penalty should be a function of the tax loss or perhaps of the untaxed income

    1. Anon,

      Fairness is relatively meaningful. As a long term US resident myself, I enjoy the same treatment as temporal visa workers, and other than penalty rate, I also almost enjoy the same treatment as expat US citizens. So speaking what is not fair to me, then it would be far much worse to US expats and temporal visa workers.

      I certainly do not support one size for all OVDI penalty (based on peak balance), and FBAR penalty on accounts, as I have posted many times of my view. The fairness discussion was brought up on this new OVDI, it is also relatively meaningful.

    2. I respect your view but perhaps you are saying "survivable" instead of "fair".

      In my opinion (2c), this fairness issue comes up because of the way the penalty is defined. I may be able to swallow my penalty, but a fellow as innocent as I may go bankrupt and it is still not fair to either of us by any standard. People are trying to carve out innocent groups (canadians, expats, immigrants, minnows, indians, accidental-americans, non-filers, ...). It is useless to find which group doesn't deserve this penalty - very few do.

      One-size-fits-all penalty can still be defined as a function of the tax loss. The definition is the problem.

    3. This whole discussion is based on "Anonymous Jan 10, 2012 12:04 PM" who was talking about "fair". I was just following up. So we really do not need play word game here.

      I have said before about penalty should be based on tax due instead of peak balance of offshore assets
      where I posted the following
      1. Penalty should be on due tax rather than total amount of offshore assets as the program is in the name of enforcing tax compliance.
      2. Total wavier FBAR penalty on expats/temporal visa workers

      IRS does offer opt out for those who have a strong argument of "reasonable cause", but I do not see myself qualify, some folks may qualify but may be too afraid of uncertainty..

      I can only speak for myself, my own case, that is as long as IRS does not impose penalty on RRSP, I will accept whatever the penalty imposed on my other offshore accounts, and I think it is a fair (only for my own case) penalty to a long term US resident who has failed so many years of his filing responsibility.

      However, I will still voice my view the unfair treatment to US expats and temporal visa workers.

    4. The whole FBAR is word play. I am not trying to show you up. There is no "fair" here. If you believe so for your case, thats fine. But I don't think there should be any penalty for informational forms. If it is tax compliance that they are after, then penalize on tax loss. If you believe that then anything else is "not-fair". If you define it this way, you don't need to lobby for expats or canadian-expats or the like (most cases). You don't need waivers for RRSP, or play with words like reasonable cause. You pay what you owe and a fine relative to the amount you owe and move on. Anything else is a rat-trap waiting to spring.

    5. IRS' rational of using FBAR penalty on offshore is that it is the only vehicle that they enforce tax compliance beyond their jurisdiction. For US residents, offshore bank activities (such as earning, transaction and even the source of the money) are not under IRS's radar. Domestic financial accounts are different story.

      I can see the reason of FBAR is imposed on US residents, but I don't see the same reason that is imposed on US expats (also very sympathetic to visa workers). I think everyone is entitled his/her own opinion. Collectively, it becomes public view on what is fair or not.

    6. Also we need a realistic strategy to deal with IRS, public support is important. Get rid of FBAR entirely for US residents won't sell well. The public support is important. Most Americans living in US do not have offshore accounts, but I think they can be fair to see what is right/wrong to impose FBAR law.

    7. Hi ij,

      IRS does claim jurisdiction over foreign earnings for the resident taxpayer. Ie they are just as taxable as domestic earnings.

      Are you saying that non-reported earnings should be subject to special penalties above and beyond monetary tax loss, just because they are non-reported?

      If so, non-reported domestic earnings should be also subject to the same penalties? Like when homeless people deal in recycling and get cash for aluminum cans and don't file, should they lose 50% of their shopping cart to the IRS, just because the recycling center does not report their earnings to the IRS?

      Or a homeowner who rents out a room in his house and neither he nor the tenant reports to the IRS, should he be penalized 50% of the value of his house?

      Please clarify such a public policy.

    8. 'For US residents, offshore bank activities (such as earning, transaction and even the source of the money) are not under IRS's radar.'

      Offshore bank statements are not under IRS radar even for expats (even more so). They should have relief because they didn't know about FBAR. Not because they reside outside. I am not asking to get rid of FBAR or a penalty. If as you say, IRS rationale is tax compliance, we need to ask that it be a function of the tax loss.

      There are side effects of FATCA, but perhaps IRS wouldn't need to put this onus on the taxpayer once banks are required to report this information. FATCA is probably very irritating to banks - but it may relieve the little guy of this obligation that has a devastating consequence for just not knowing.

    9. M,

      Domestic banks report to IRS while offshore banks do not non-reporting (I am talking about IRS jurisdiction on these banks, maybe FATCA will change this fact).

      IRS has published the study that double reporting (payee and payer) will make less likely taxpayers to evade tax.


      It is also my hope that penalty is a function of tax loss to IRS, but that would be a long shot, I do not think it is even possible. Expats keep money where they live (you can not call that is hiding), that is on top of "less likely knowing FBAR",

      I believe the public is fair, so get rid of FBAR penalty on retirement plan, and get rid of FBAR penalty on Expats and visa workers are realistic.

    10. Re: radars

      We should make a distinction between offshore and foreign. Readers and participants and even the IRS do not make this difference, but the politicians do, and they are the ones who designed this program.

      As the US has treaties with most of the industrialized world, they can get your information and assets. Examples: Canada, UK, EU, OECD.
      Also, those countries have taxes.

      Offshore: The US cannot get the information, or the assets. Example: Cayman, Bermuda, British Virgin Islands, (formerly Switzerland), Panama, Hong Kong.
      These countries do not tax your investments.

      So that is where the rich park (and hide) their money. By rich I mean above $1 mil in financial assets.

      Because the fees are high. The service charges are thousands of dollars.

      So Congress, the President, and the IRS have a vendetta against these offshore financial centers and the rich folk with money there. This is the "target" of the OVD programs.

      Now, it is possible to hide money and income in non-offshore countries too, as it is possible to hide income and assets inside the US (gold bars for example). But that does not mean off-shore, in a traditional interpretation.

    11. "Or a homeowner who rents out a room in his house and neither he nor the tenant reports to the IRS, should he be penalized 50% of the value of his house?"

      Yes, that would be fair. IRS will have the same difficulty in finding out of the unreported rent (especially if paid in cash) as with finding out the foreign account. What is the real difference for IRS if the house was rented out in USA or China. The only difference I see IRS can audit the USA person bank account and see the deposited checks.

      Don't you agree that the under-reporting of income of few hundred dollars from offshore bank account can get you a minimum 10K fine. I think this is absurd. I am sure that this was not the intention of the people that wrote the laws. This is IRS going overboard.

    12. "There are side effects of FATCA, but perhaps IRS wouldn't need to put this onus on the taxpayer once banks are required to report this information..."

      Huh? Post-FATCA the IRS has not only left the FBAR in place, but actually doubled the onus on the taxpayer with the new form 8938 along with yet more penalties for non-filing. Your speculations here seem to be way off base.

    13. 'Post-FATCA the IRS has not only left ...'

      Post-FATCA? FATCA will at best come after next year, if that. So it "may" be possible that IRS will not need reporting from taxpayer. I don't think there is anyone at present lobbying for less forms-with-fines (very unpopular). But when the information starts coming in consistently - who knows?

      8938 is on all assets (so no other source of information) and is yet another unfortunate onus on US persons with foreign connections.

    14. 'IRS has published the study that double reporting (payee and payer) will make less likely taxpayers to evade tax.'

      Yes, and this is from different sources (as in checks and balances). There is no evidence that compliance increases when all information comes from the same source (tax payer). It is akin to me writing up a 1099-INT and putting that on schedule B as well.

      Retirement plans and expats are not the only genuine cases. Perhaps all retirement plans and expats are not equally genuine. There are plenty of if-else-if groups that need to be carved out once you go that route. I don't know of any rule in any country that takes away your net assets for not furnishing information about them - does anyone?

    15. To: ij,

      Most foreign banks will report to the IRS if asked, though not as a matter of routine. Canada will report.

      But offshore jurisdictions will not report to the IRS even if asked (due to secrecy laws). This was the main reason for FATCA: to force offshore banks to report, under penalty of not being able to do business with the US.

      And offshore banks are the reason for anger in Congress. That is where the rich keep their money so the IRS cannot see it, no matter how hard they look.

      To: Anon,

      Do you really think it is fair for people to lose their assets because of non-reporting? Would you vote for such a law? Most Americans would not.

      Here is something I read:
      "Excessive bail shall not be required, nor excessive fines imposed."

      It is called the 8th Amendment to the Constitution.

      Maybe that is why the IRS wants OVD people to sign off, they don't want a Constitutional challenge to their penalties.

  37. Hi N,

    Thank you for the analysis.

    I still think one should be mindful of the colonial (if not racial) mentality, prejudice, expectations, etc.

    Yes, Indians and Chinese are less likely to be targeted for tax evasion because they are not thought to have as much money, are obedient, and respect (and are fearful of) authority and therefore pay taxes to the powers that be.

    However, non-whites are also perceived to engage in (successful) small, cash-intensive businesses, with trusted relatives and countrymen. That would give rise to suspicions that they are sometimes avoiding taxes, or doing unreported gray-market activities (ie. smuggling Iphones), or even laundering money, dealing drugs, or other illicit activities.

    (How would most people explain an American black man with $1,000,000 in cash? How about a Central or South-American man?)

    In the case of the charged Indian doctor and businessman, I think that the DOJ did not think that they had enough respect for the tax laws, ie the colonial power. So the colonial powers will teach them and other Indians a lesson.

    They became wealthy, and thought themselves above the law, perhaps like in India? I don't know their reasoning, but their defense seems weak.

    (Though it might work in India, with a few large bribes to poor officials and jurors. Where wages are $1/day, $1000 is a lot of money.)

    So yes, money, race, ethnicity, culture, gender, age, all play a part. And prosecutors, defense lawyers, judges and juries are not immune to these cultural perceptions and stereotypes.

    1. You are right. The mentality to evade taxes is very popular in Europe as well, not only in India. I don't think the attitude is to think about yourself to be above the law, it is rather some type of habit that some nationals of certain countries exhibit. In Greece if you pay all your taxes people think you are weird, as it is the case with all Eastern European countries.

      In my opinion the Indians charged with FBARs and tax evasion just did not realize the consequences of their actions. I would like Jack to comment here if their mentality could be used as a defense for willful tax evasion. I remember there was a case when a Jewish American that had funds in Switzerland was not convicted because the court determined that because of the second world war trauma that he endured it was a habit for him to have a hidden nest egg that made him feel secure.

  38. If you talk to someone, it should be a lawyer, not a CPA.

    In my case--now faírly resolved, but not without 2 years worth of repeated distress, lack of sleep etc--I handled most of the stuff myself. But a discussion with a lawyer was extremely helpful. (Yes it cost, but it was worth it.)

    Of course my experience has left its scars and I was so fed up that I changed my citizenship.

    An acquaintance who has lived outside the US since childhood and was totally off the IRS radar (no social security number or anything) didn't bother with any of the IRS nonsense. This person just went and renounced US citizenship.


    1. Sally,

      It is amazing isn't it, how such an agonizing period of time can be reduced to just 10 simple words?

      "2 years worth of repeated distress, lack of sleep, etc".

      You certainly are the master of the understatement. Boy, do I know what those 10 words represent in actual grief and LCUs!!

      This cost is never accounted for on a ledger sheet, or acknowledged by our friends running the OVDP. It is just a trifle for them, but for you it was 17,520 stressful hours of time now lost. Hopefully soon to diminished in memory, even if the scars will remain. I wish one of those bureaucrats who dreamed up this "non amnesty" OVDP process would just acknowledge it. If I was religious and believed in purgatory, I might fantasize about it being a fitting place for them to spend some time in personal reflection on the harm they have done :)

      Instead, they will continue their merry way, dreaming up new rules, regs and technical adjustments to add ever increasing compliance complexity and cost to our lives. I think they care not, as represented by “get over it” type comment I received from my examiner with my last contact. There is little real empathy within those IRS walls. It is just an 8-5 job for them with great retirement benefits compliments of those FBAR penalties! I wonder if they are on a commission. I joke.

      At least Nina Olson at the TAS has tried to rectify things with her Tax Advocacy Directive (TAD). Commissioner Shulman now has 10 days left to do decide whether or not he will affirm her directive and do the right thing. If you Tweet, you might direct something to this hash tag.


      I am doing a count down to January 26th, when the decision is due, and also sending it to @YourVoiceAtIRS

      This is just one of the little efforts that I do to raise awareness of the injustice being perpetuated on the Minnows of the world, in the name of snaring some homeland tax cheating Whales. In the scope of things, it won’t make a difference, but I keep pecking away at it. “You gotta have high hopes”, as they say.

      I am really glad to hear you say you are done and fairly resolved. I don't blame you at all for changing you citizenship. I have to say, after this experience, that thought has occurred to me too. When I was younger, and a little more hot headed, I think I might have raced you to the ceremony! :) Instead, I am just issuing warnings to those who might want to immigrant to America to steer clear. Just gave out 3 more today to Kiwis not to consider doing anything that would trap them into “US Personhood”. If they are looking for a change, they should go to Australia instead, as they are more welcoming there. And in the future, should they decide to leave, they can without further tax liability! Like the other countries of the OECD, they have a territorial system of taxation. That comes with the concept of tax residency, which is just like you moving from California to Kansas. You don’t pay taxes to California, after you have taken up residency in Kansas. How simple is that? They won’t follow you to the ends of the earth trying to tax you just because they can! With the US passport, however, you will carry a heavy chain and anchor the rest of your life, and as the recent NTA report to Congress so clearly pointed out, it is an incredible burden in time and cost.

      Sadly, it appears, that America is no longer the land of the free. Read Jonathan Turley's piece in the January 14th edition of the Washington Post.

      "10 reasons the U.S. is no longer the land of the free."

      I would just add number eleven to the list.

      US Citizenship taxation, and total world wide bank account surveillance by the IRS, brought on by FATCA and the domestic equivalent for US banks which I call DATCA.

      It is not such a pretty picture in the Homeland anymore. Do you see any electable politicians on the horizon that are going to reverse the trend? Me either.

    2. Sally, can I ask in what way the lawyer was helpful and generally what kind of advice he/she gave? If I'm not mistaken, you posted on another thread that you went into VD then opted out. Did you speak to a lawyer before VD, or only after?

      Renunciation is not an option for me - my family is all in the US and I actually plan on returning this year.

      Can anyone else weigh in on the CPA vs. lawyer vs. enrolled agent issue?

    3. Sally,

      At what points did you seek legal advice? At what point did you go to TAS? What parts did you do alone?

    4. I have spoken to the value of Attorney advice a lot scattered around these blogs, and I concur with Sally.

      Attorneys who are really knowledgeable about the mine fields of the VDPs are worth the advice they can provide. They have a different skill set than CPAs. They understand the Statutes and the rules and regs that have arisen from them. They can help you weigh your decisions, and generally speaking a CPA is not so well informed and versed in all the nuisances of the VDP vs QDs vs just VDs.

      Although you can find Attorneys who are also CPAs, and that is a nice combination.

      CPAs generally speaking are more focused on tax preparation issues. They might know how to fill out the 1040x, and get the form 1116 correct (mine did not, btw) but as to good advice, I would default to a specialized attorney in these matters. An hour or two with them, for me, was a good investment. But then I prepped for my time with them, so as not to waste the $ spent. If you think you can just drop a pile of paper in someone’s lap for them to figure it all out for you it is going to be very very expensive.

      I am not going to down value a CPA. They have their place, and even mine was not a total waste of money, as I did learn something about the form 1116. However, he was still useless on FBAR compliance rules and VDP procedures, etc.

      So, depending on your complexity, and your tolerance for excel spread sheet work, you might need both, Attorney advice, and CPA form completion guidance. I, like Sally I think, was more of a DIY sort of person, but not all are so inclined.

      If you are wanting a full service operation, advice plus clerical work, I am sure there are many attorneys like Phil Hodgen that have both in house. But, that is expensive for Minnow failures.

      As for VDP attorneys, Jack posts a list on his site here.

    5. My opinion:
      For Minnows (under $500K in assets), tax preparation (current and future) should suffice. A CPA or EA can do that.

      Tax attorneys are for Whales who need confidentiality, and who have been intentionally (willfully) stashing money offshore to avoid taxes, and want to disclose.

    6. M,
      IRS sees 500k as a whale. Anything over 75k gets the same whale penalty unless there is successful opt out or TAS help. Determination of willful vs nonwillful is a slippery slope. No?


    7. My advice was for people with foreign accounts, whether to join OVD or not.

      My numbers are different than those of the IRS; I would not retain the IRS as your attorney.

      They are already representing your opponent, enemy if you will. It is not a good idea to see them as being on your side, especially in an audit situation like the OVD is.

      I think you should actually try to do something willful (in tax evasion), so you know what non-willful is.

      Just like you should try to open a real offshore account, just to know what an non-offshore account is.

      These words, willful and offshore, are thrown around a lot, but few know what they mean. Yet that is what they are charged with.

      So it would help your defense to know what the charges are, so you can agree or disagree, from a foundation of experience.

      This is why I would advise a lay person to never engage the IRS directly, only through a professional. (The IRS agents are professionals in their own way, and they do not have you best interest at heart.)

    8. @M
      "This is why I would advise a lay person to never engage the IRS directly, only through a professional. (The IRS agents are professionals in their own way, and they do not have you best interest at heart.)"

      In my experience the attorney that you hire for OVDI advice works even harder against you than the IRS does. Attorneys' focus seems to be on saying whatever is necessary to make you go into the OVDI regardless of the actual risks and your situation. Allows them to fleece you for fees; avoids them falling foul of professional conduct issues.

      More valuable advice can be found online now that plenty of people with real experience have weighed in on the matter.

      BTW: I deal with the IRS directly.

  39. Jack, others -

    I am in a dilemma. How do I compute my penalty if I had a house on rent that produced income. As per the rules, one has to include the market value of the house but read Q.50 from the irs site :...."Under no circumstances will taxpayers be required to pay a penalty greater than what they would otherwise be liable for under the maximum penalties imposed under existing statutes. For example, if a taxpayer had $100,000 in an offshore bank account in only one year and foreign income-producing real estate with a fair market value of $1,000,000, only the bank account would be subject to the FBAR penalty. Consequently, the maximum FBAR penalty would only be $100,000 (that is, the greater of $100,000 or 50% of the amount in the foreign account), which is substantially less than the offshore penalty of $275,000 (25% of $1,100,000). If this FBAR penalty, plus tax, interest and all other applicable penalties, are less than what is due under this offshore initiative, the taxpayer will only pay the lesser amount."

    Does that mean I Wont have to include the house value under the 25% penalty ? Cam I just include the Highest bank balance only ?

    Please help how to interpret this rule.


  40. To PK (Anonymous) @ 1/15/12 12:41 AM.

    As I understand your question, I think the answer is yes. You make the calculation by computing the worst FBAR only penalty (generally the willful being the greater of $100,000 or 50% of the highest amount, but possibly penalty at $10,000 per account per year if enough accounts are involved.

    Assuming that calculation produces an in lieu of miscellaneous penalty of less than the 25% OVDI penalty amount, you pay the lesser penalty. And you should get that inside OVDI 2011 without having to opt out.

    Best regards,

    Jack Townsend

  41. Please advise:

    If one is an immigrant and gifts money to her parents living in a foreign country, is it illegal? If parents are paying tax on the gifted money and there was no intention to evade US taxes, should the gifts be any cause of concern inside OVDI or even after an opt-out?

    ij at Jan 12, 2012 12:10 PM mentioned something about money having passed from his account to his relatives account. What is wrong with this? Please i am in a similar situation.

    Thank you and god bless you.

  42. 'Just Me', Sally or anyone else who opted out or nearly opted out:

    Are you supposed to get a copy of the 'Revenue agents report' at the end of the OVD certification ? If so, does that contain a judgement as to whether the violation is willful or not, whether there was reasonable cause or not ? Or is that left for after opt out ?

    1. I did not get a document called a "Revenue agents report" at any point in the 26 month process. Additionally, there was not any “willful” or “non willful” determination on the infamous 906 closing document at the end.

      There was a document, called an "Agreement to Assessment and Collection of Penalties Under 31 USC 5321(a)(5) and 5321 (a)(6)" That is government form 13449. Actually, there was 5 of them in my case, one for each year, 2003 - 2008.

      It was on this form, where they documented the penalty assessment by year for the OVDP FAQ 35 relief I received, as negotiated by the TAS on my behalf.

      If you recall I received this help after appealing to the TAS just a few days before my Examiner was forcing a decision on me, to “Pay Up”, “Opt Out”, or be “Kicked Out.”

      The IRS had just issued the "Opt Out" guidelines letter a few days before. No one had "Opted Out" yet. No one really knew what to expect of the process. There were lots of crocodiles in those murky waters that my Examiner was suggesting I dive into. I was naturally reticent to leap!

      I would now think that form 13449 would be used in an "Opt Out" "reasonable cause" or penalty mitigation settlement that is less than, or different from the original "in lieu of" OVDI penalty.

      On this form they have 5 definitions of Penalty Statutes from #1, "He is a Willful criminal, and he should be taken out and shot!" (I joke). Basically #1 is the only definition category of the 5 penalty levels that has language of "willfulness".

      The other 4 definitions are silent on "willfulness," so assume that means they are considered to be "non willful". So if #1 is not checked, then by default, the IRS is conceding “non willful” behavior, or so it seems to me.

      In my case, they checked #3. It stated simply "Negligent Failure to Report" which again, by implication, is “non willful”.

      Now, maybe in an Opt Out, if there is to be no penalty assessed at all, you will just get the warning letter to "go and sin no more." I think that is what happened to Sally. That would be the best outcome, which in my opinion, is exactly what the IRS should do! If Shulman was really trying to increase compliance, and not just collect revenues, then it is what he would do for all Minnows. Now that is a real Amnesty!!

      Maybe we should call it the "Geithner Amnesty", as that is what he apparently got for his tax failures which, as I understand it, did not even include the 20% accuracy penalty. How sweet is that? If you want an effective amnesty, that how the enlightened Canadian Tax authorities do it. However, that is not the America way, as we so well know. Our government loves “shock and awe”. But then, we have this thing called a deficit, so revenue needs trump fairness.

      Does that answer your question?

      PS.... 7 days left for IRS Commissioner Shulman to do the right thing on January 26th, and affirm the TAD issued by Nina Olson which was meant to address the unfair practices of the IRS.

      I don't know if anyone is close to signing a 906, but if it were me, I would be dragging my feet another 7 days to see what he decides. That will tell you something about the mindset at the top, and if they “Get it”, or if they are just going to plod on with their “willful” mischaracterizations in press releases about all the success they are having catching all those "Tax Cheats".

    2. Just Me,

      Could you please tell us what Definitions 2, 4 and 5 were? We cannot find a copy of the form online. Thanks in advance.

    3. I did get a Revenue Agents Examination Report. It actually has a form number (4549). It showed the calculations year by year with interest and the 20% Accuracy Penalty. It did not include the In Lieu of Penalty. The In Lieu of Penalty was included in my 906 Closing Agreement. I however did not opt out or have TAS involvement. The issue of Reasonable Cause, Willfulnes vs. Nonwillfulness came about in a hearing with a Technical Advisor who rejected my argument for a reduced In Lieu of or Misc. Penalty. The Revenue Agent said he had no authority to vary from the program and passed it on to the Technical Advisor. They basically said pay the 20% Penalty for the 2009 program or opt out and take your chances. This happened in October of 2010. I closed to end the nearly 2 year process.


    4. Annon5%

      As you requested...

      #2. Foreign Financial Agency Transaction Violation - Failure to meet recordkeeping requirements and/or failure to report a foreign account on Department Treasure Form TD F90-22.1 FBAR.

      #4. Negligent failure to meet recordkeeping requirements

      #5. Pattern of Negligent Activity.

      To Annon123 Jan 19, 2012.

      I too got a form 4549-A, but the title of that report is "Income Tax Discrepancy Adjustments," and not "Revenue Agent Examination Report." There was one form issued for each year, and it looked like this...

      Although in this example it has a different title, "Income Tax Examination Changes" but it was in exactly the same format, except the 4549A was the 2 summary pages followed by worksheets showing how the sums were calculated. It did not have any of the explanation pages, like this example seems to have.

  43. "If one is an immigrant and gifts money to her parents living in a foreign country, is it illegal? If parents are paying tax on the gifted money and there was no intention to evade US taxes, should the gifts be any cause of concern inside OVDI or even after an opt-out?"

    nothing illegal. it is very common especially with immigrants. gifting/giving money for thier upkeep as well as giving money to purchase property for them to live/stay or for medical expenses.

    should be a concern in ovdi but the agent may have ways to scrutinize if it was really a gift or if after gifting you held a proxy control. i think there are a lots of people in similar situation.

    1. you are subjected gift tax if it is over 13K/year (singl) or 26K/year (if you file jointly).

      You should not include it (if it is not under your name) into OVDI penalty base.

    2. ij,

      what if money in under parents name, not under my name but parents can give back the money any time...i.e. belongs to me. does it have to be included then in the penalty?

    3. no, you do not include into penalty, it is your parents money (even if they decide to reject the gift later). or they decide to borrow your money, in any case, you do not have the signature authority, so you do not include it.

    4. here how it works,

      your parents have your money in an offshore bank but it is under their name. So your parents control the money and make earning of the money, and they will be taxed for this income.
      So if you sent the money from US, that is after US tax income. And your money is US tax compliance, and has no offshore income that is under your name (yes it is under your parents name). So based on OVDI FAQ, this fund should not be included.

      Is that simple ?

    5. If there was a pass through account in the US person's name, then it would be included in OVDI penalty (in the year that there was a pass through). The highest balance is counted even if it was in your account for minutes. Yet another unhealthy side effect of these definitions.

    6. ij,

      "So based on OVDI FAQ, this fund should not be included."

      Can you point me to a FAQ number?

    7. All OVDI FAQ is about taxpayer's offshore accounts. if it is his parents money (when gift to parents, or loan to parents), and it is not under his name of the offshore accounts, he/she does not have the signature authority. Is that simple ?

    8. I also should add, other tax non-compliance assets. if you send your (after US tax) money to your parents (as gift or loan) and the money offshore is under your parents account (you do not have signature authority), and you do not earn one penny of interests (because it is not under your name but your parents earn the interests and they report to their local gov), so there is no US tax non-compliance at all on your side. Why should it be subjected to OVDI penalty ?

    9. tj's comment is well taken. Generally the law is that, if the facts are as tj describes it, you had no FBAR or income reporting requirement because you did not have a beneficial interest in the foreign accounts and, as a consequence, did not have reportable income from the foreign accounts. If, however, the parents were acting for you, then you did have reportable foreign accounts and did have reportable income.

      So, if you go inside the program, you should be able to get relief on this.

      Of course, you need to make sure that the facts are consistent with the representations you make to the IRS. Making representations that the IRS can later disprove (proving falsity may be difficult, but sometimes it happens), can create far greater problems than the representations would have ever solved.


      Jack Townsend

  44. or if it is too much gift tax on you, your parents can reject your gift, send the money back. You can give them year by year later -:)

    no need for OVDI/FBAR penalty!

    1. There is no gift tax unless you are giving away millions. There are forms to be filed so that the given money count towards your life time limit.

      OVDI penalty doesn't depend on the amount of gift given as much as it depends on whether any amount (gift or non-gift) resided in the US person's account for any amount of time. Direct transfer into NRA's account has zero OVDI penalty. But transfer to RA's foreign account and subsequent transfer to NRA gets a 25% penalty on assets.


      How many annual exclusions are available?
      The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, and $13,000 on or after January 1, 2009, the annual exclusion applies to each gift.

      What if my spouse and I want to give away property that we own together?
      You are each entitled to the annual exclusion amount on the gift. Together, you can give $22,000 to each donee (2002-2005) or $24,000 (2006-2008), $26,000 (effective on or after January 1, 2009).

  45. "what if money in under parents name, not under my name but parents can give back the money any time...i.e. belongs to me. does it have to be included then in the penalty?"

    you state money belongs to me which then implies you need
    to include in the ovdi penalty calculation. I think if you gift them and then they give it back you may need to include the entire amount as income and then again include it in the FBAR penalty calculation.

    1. Does the context of using parents and gifts put me on the same level as using entities to hide the true ownership of the funds. Does it make me a willful violator subject to prosecution?

      Can I use the confusion that my name was not under accounts for reasonable cause to file FBAR when required?

    2. To Anonymous @ Jan 18, 2012 04:50 PM

      I don't think you are on the same level as persons using entities, simply because entities with no other purpose than hiding the funds are so obviously willful. The use of parents (and gifts, really different thing though) is, at least facially, less suspect and more likely to permit different conclusions in terms of willfulness.

      That is only a general response to your concern but it is the best that I can give because each client situation involves a myriad of unique circumstances that can go in different directions. I urge you to consult with an attorney if you are concerned.

      Now, having said that, I will offer one scenario in which it could put the U.S. person on the same level as using entities. This would be if the IRS were to discover some contemporaneous email from the U.S. person to his or her parents stating that the money offshore is being held in the parents name subject to the sole direction of the U.S. person and that that was being done solely to hide the money from the IRS. But, since that type of express admission of a crime is rarely available to the IRS (and certainly is not being requested either in the OVD initiatives or in audits), the issue may be moot.

      The only caution I would prescribe for those who do have the bad facts (e.g., parents holding as nominees to avoid U.S. tax), do not make any false representations to the IRS as to the reason for the account. If you are going to have to cross that mine-field, you need the guidance of an attorney so as to make sure your responses to the IRS are lawful responses.

      Jack Townsend

    3. Anon @Jan 18, 2012 04:50 PM

      Listen to what Jack says. if you're seriously concerned, talk to an attorney rather than posting personal details (even if anonymously) on a public board.

  46. Appreciate if anyone has any insight on the following:
    In context of offshore income, are there any specifcs for capital gains for individuals? I read somewhere that companies sometimes park their offshore income offshore and repatriate when desired, sometimes when the govt offers a tax holiday for such income to encourage repatriation.
    Wondering if there's any such provision for individuals... especially when the assets were procured using offshore income in the first place and no funds from the US were involved.

    1. No such provision for individuals. Capital gains have to be recognized the year they occur, except in exceptional circumstances.

    2. Amazing isn't it. One regulation for the Corporation, and one for the individual.

      Corporations are people when they want to be, and not people when they need to be.

      That is what is wrong with our Citizenship taxation model, and the best loopholes lobbyist money can buy!

  47. I also have a similar situation.

    a) assets procured using offhosre income not subjected to US tax.
    b) Assets sold and capital gains still parked offshore.
    c) The capital gains are in funds that cannot be easily repatriated to the US.
    Can we defer this income to a later date when the funds are either repatriated?

    1. To Anonymous @ Jan 18, 2012 06:32 PM

      If, when you return the funds to the U.S. you report them as income (or at least the portion that, during the years, would have been U.S. income but not reported or taxed), that would be powerful evidence of nonwillfulness which would effectively escape the significant FBAR civil and criminal penalties and the income tax civil and criminal penalties.

      Another approach you might consider taking (if you can get comfortable with your risk of being found willful and you are risk tolerant) might be to just report 6 years as income upon transferring into the U.S.

      The IRS could theoretically assert some type of duty of consistency -- i.e., you did not report the income in the years properly reportable and have to report them when there is some significant event (such as the transfer to the U.S.) If that were to happen, of course, the income would be taxed in the year of return, but still the benefit of deferral over a number of years would have been achieved.

      Now, I am not sure that the duty of consistency would catch you on this one. That duty is a common-law tax doctrine of uncertain scope. So before you go down this trail, I would visit with an attorney and get complete advice based on all relevant facts.

      Jack Townsend

  48. Jack Townsend:
    I have the following situation: I created various CDs for my personal retirement fund.
    1) The source of the funding of these accounts from personal savings-after tax money.
    2) No money was ever cashed out nor withdrawn nor these CD accounts were moved to any other bank or country. Interest kept accruing in the accounts.
    3) Never had any debit cards OR credit cards issued fro or against these accounts.
    4) Never created any layers of entities to hide these accounts.
    5) All these CDs are in my native country & not in any tax-heaven country.
    6) All these accounts have USA addresses from the beginning.
    7) I learnt about the FBAR responsibility in the press & in the media only in March- 2011. I immediately took the steps to report in 2011_ OVDI.
    My question is can I get the NO Penalty benefit.

    1. Let me restate certain key facts to make sure I understand.

      1. the source of the funds in the foreign account CDs was U.S. taxed income (except for the growth in the CDs which was not U.S. tax (but should have been).

      2. You are in the OVDI program.

      Inside the program, you cannot get no penalty benefit (I presume you are talking about both the in lieu of miscellaneous penalty and the income tax penalty.

      If you opt out of the program's penalty regime, you may be able to convince the IRS that you are not willful. The problem is the nonwillful penalty. Unless you can show that you had reasonable cause (probably not likely), you will have to depend upon marshaling all the facts to get the auditing agent to go as low as possible on the non-willful penalty. That will require presentation of a lot more facts than can be presented in this blog and, not just presenting them, but presenting them in a way that brings as much sympathy to your situation as possible.

      I can't know whether your facts, on balance, will permit such a persuasive presentation to be made, but that is the drill.

      And, of course, if there are any facts that might be negative as to your willfulness, you must carefully consider them before opting out.


      Jack Townsend

    2. I guess you only want to hear from an expert, but I just want to step in to share my view.

      (1), your personal retirement plan may not be recognized by IRS (unless there is tax treaty to your native country with some specification).

      (2), OVDI is all about tax non-compliance with offshore assets.

      So your CSs are just as same as other offshore accounts if there is not tax treaty (1) and you have never reported income (2)

      There is no chance that you can get no penalty on these inside OVDI if you have the above two problems.

      So your chance inside OVDI is to take FAQ 52 for 5% penalty or if it is indeed some kind retirement plan (such as being recognized by your native country), then you may consider opt out for zero penalty based on reasonable cause.

    3. Jack,
      Given the circumstances above would you think such individual has a criminal risk or if his bank is not being investigated is it worth assuming the risk and be compliant going forward

    4. Dear Jack:

      Is it possible to get 5% penalty as per FAQ # 52.It is unfair to realize that I can't get any benefit within the OVDI. Not everybody knew about this FBAR before the 2009 OVDP. Not even the Lawyers & the tax preparers. Most of the CPAs privately admit that they did not know about it until OVDP & some untill OVDI. Only 300,000 FBARS were filed in 2008 out of millions of Expats & Immigrants.
      Will IRS not do anything about this ?

    5. To Anonymous @ Jan 19, 2012 08:34 AM

      The only answer I can give is that it is possible to get a 5% rate if you qualify. I can't address your comment / lament or the subsequent question as to whether the IRS will do anything about it, except to note that the process has been going on for some time now and I doubt that the IRS will change its posted position. Perhaps, the IRS will loosen the agents' discretion within OVDI and, where applicable, on opt out. But I can't see the IRS changing its public posture.


      Jack Townsend

    6. Bank is not under investigation. How do you think such individual will have a criminal risk.

    7. "AnonymousJan 19, 2012 08:34 AM"

      Your chance of getting 5% penalty is based on FAQ 4 conditions. All that you have listed seem good for FAQ 52 except you did not say when these CD were created (opened). Were they done before you became a US taxpayer ? If so, you have good chance to argue for 5%

    8. Let's see what Shulman does with the TAD...

      A tweet :)
      #WillShulmandotherightthing? 7 days left to affirm Tax Advocacy Directive to treat Minnow Expats & Immigrants fairly

    9. To Anonymous @ Jan 19, 2012 08:41 AM

      You confuse criminal risk with likelihood that the criminal conduct will not be caught. Lawyers differentiate the two.

      Basically, in my practice I downplay the any perception of opportunity from not getting caught. There are just a myriad of ways that the actor can be discovered. In the case of foreign accounts, from bank disclosures to disgruntled bank worker disclosure to business partners, girl friends or boy friends, to things I just don't know about.

      I can offer an informed assessment of whether the client has criminal risk based on the facts of his or her case. Clients should not be willing to pay me or heed my advice about speculations that they will not be caught. And, taxpayers should also not engage in those speculations because they generally know less about the subject than lawyers do.

      You are best to focus on the issue of your potential criminal and civil penalty exposures if the IRS does learn the facts.


      Jack Townsend

    10. ij:
      All the CDs were done while I was an US person. So you mean to say that FAQ # 52 is not applicable ? But how instead FAQ # 4 is applicable ?

    11. Only 300,000 FBARs against the 45 millions of Expats & Immigrants. This indicates the failure of everybody including IRS, Lawyers, Tax preparers, CPAs. But look who is paying for all these peoples' mistake. There should be a some kind of KINDNESS from IRS.

    12. Jack

      Different Anon here. You say

      'If you opt out of the program's penalty regime, you may be able to convince the IRS that you are not willful.'

      Isn't the burden of proof on the service ? I believe both you and Jeff Neiman (in a guest post) have blogged on how hard it might be for the government to prove wilfulness. Now proving wilfulness in a court is different from inferring wilfulness in an audit, but it would seem to be an abuse of Revenue Agent/FTA power to assert wilfulness in cases where wilfulness would be hard to prove.

      This is my long winded way of saying that I assume on opt-out, the burden of establishing willfulness is with the service, whereas the burden of proving reasonable cause is with the taxpayer. So most/many cases would fall in that area in the middle, and the agent would try and assert a non willful penalty, with some of the mitigation guidelines.

    13. Anonymous @ Jan 19, 2012 11:51 AM

      You are absolutely correct. I would not expect the IRS to assert willfulness without some colorable basis for doing so. And given the difficulty in doing so, without some strong reason to do so, they probably won't try.

      At least that has been my anecdotal experience in the income tax area where, by proving the equivalent of willful, the IRS can get a much larger penalty. The IRS rarely tries.

      But the issue on opt out is what the risk is. Even if one can say that, based on historical always anecdotal evidence (rather than a true random sample sufficiently large to draw conclusions), the IRS may not be likely to pursue willfulness for the average taxpayer in a certain profile, that does not deal with taxpayer specific information that could make such an extrapolation dangerous.


      Jack Townsend

    14. "ij:
      All the CDs were done while I was an US person. So you mean to say that FAQ # 52 is not applicable ? But how instead FAQ # 4 is applicable ?"

      If you read FAQ 52, it says "the taxpayer did not open the account". That is my understanding what it means. No, 5% won't apply to you.

      I do not know what part of FAQ4 you want to use ? Do I think you should join VD ? Do I think VD is fair game ?

      I can not answer that, it is rally matter of personal choice. I had the very same question for my own -- but I decided to join -- just like what "Just Me" reason. Knowing something wrong not to correct -- it is willful act. So sometimes it is better not to know -- ignorant == innocent -:)

    15. Jack,

      Does this mean that even if pre-opt out the examiner thinks you are willful, IRS will still have to take one to court to collect the willful FBAR penalty?

    16. To Anonymous Jan 19, 2012 01:43 PM

      If you opt out, you are subject to audit, including the FBAR audit. You are not bound to accept any action the IRS takes to assess the FBAR penalty. The IRS through DOJ Tax will have to sue to collect the penalty. The IRS does not have the arsenal of collection tools available to it for tax liabilities that it assesses. Keep in mind though that the IRS will have the regular tax processes for the income tax and any income tax penalty, but at least those processes will allow you some pre-assessment relief. But, on the other hand, you will probably already done the income tax audit for them via the amended returns you file (although the IRS will have to find some basis for going beyond the normal three year statute of limitations).

      This extra FBAR step requiring a Government initiated suit would further stress an already burdened court system and is one reason to doubt that the IRS is going to be especially onerous with opt out FBAR penalties. The IRS will want agreed resolutions that do not require law suit. That does not mean that the IRS will walk away from a clear willfulness case, but it may not be willing to scratch very hard to find one if it can squeeze out a non-willful penalty that the taxpayer will agree to.


      Jack Townsend

    17. Interesting.

      "Clients should not be willing to pay me or heed my advice about speculations that they will not be caught. And, taxpayers should also not engage in those speculations because they generally know less about the subject than lawyers do."

      Taxpayers should not speculate about it because they know less about it than lawyers do? And lawyers don't want to speculate about it even though they (arguably) are best placed to speculate about it? So no-one should speculate about the chance of not being caught. The upshot being that a person should make the assumption that they will inevitably being caught and then decide on their course of action (e.g. enter OVDI) based only the consequences of being caught.

      I suggest that the chance of not being caught is the single most important factor in deciding a course of action. Next most important is the ability of the consequence/sanctions being enforced (enforceability). Last is the motivation of the IRS to impose sanctions based on facts, circumstances(criminal, willful vs non-willful etc).

      We all face the prospect of shark attack every day. The consequences of a shark attack are horrible and usually fatal. They are also incredibly rare. Shark attacks in Kansas are unlikely but possible (freak weather pattern drops great white on you while out walking). Shark attacks on people who surf every morning in Australia every weekend are more common but still very unlikely. If people in either situation made their life decisions based only on the consequences (but not the probability) of a shark attack then they would make awful decisions. They might wrap bloody steak around their arm when surfing to deliberately attract sharks exclusively to their arm and ensure that now-inevitable attack costs an arm only and is not fatal (my analog to entering the OVDI).

      Take an example of an American expat living in Botswana (with Botswanan citizenship) for last 20 years, with $100K saved in the Botswana National Bank. They have a filed tax US returns diligently but (inadvertently) not checked the box on sched B, and not declared interest, and not filed FBARs. Should they enter the OVDI? I would say "don't be ridiculous" due the factors I mentioned above which I think completely outweigh any consequence of being caught. Chance of being caught= next to nil. Chance of enforceable sanctions = Next to nil. Chance of the IRS being motivated to sanction the taxpayer if they suddenly "caught" the taxpayer = Next to nil. Multiply those probabilities together and the alternative to voluntarily coughing up 20-30% of their retirement savings becomes very, and legitimately, attractive. Even if a particularly vindictive agent thought a 50%-per-year penalty was warranted, the other factors negate that.

      I'm intrigued by the reluctance of lawyers to discuss possibilities of not being caught as I believe it would be an important discussion for anyone with FBAR issues. My view is that the reluctance has more to do with reducing risk for the lawyer (liability? circular 230 sanctions?) than the client. I think any discussion of "consequences" should necessarily be accompanied by discussion of probabilities.

    18. 'The upshot being that a person should make the assumption that they will inevitably being caught and then decide on their course of action (e.g. enter OVDI) based only the consequences of being caught.'

      The IRS commissioner probably agrees with you. Hence he thinks anyone who has joined the program is assumed to be someone who has essentially acted simply on the basis of being caught and is subject to a condign penalty.

      I'm intrigued by the reluctance of lawyers to discuss possibilities of not being caught as I believe it would be an important discussion for anyone with FBAR issues. My view is that the reluctance has more to do with reducing risk for the lawyer (liability? circular 230 sanctions?) than the client. I think any discussion of "consequences" should necessarily be accompanied by discussion of probabilities.'

      Lawyers outside the IRS don't know what leads the IRS is pursuing, certainly don't know when a whistle blower might be tempted, and really cannot provide guidance on this, other than speculation. Who would have thought 4 years back that Swiss bank secrecy would be
      breached ? Who would have thought 16 months back that the IRS would focus on India ? Lawyers cannot and should not speculate on the risk level of being caught.

    19. How would a lawyer know if Botswana National Bank would be targeted in 2015?
      Would a lawyer know if the next whistleblower is not going to be in botswana national bank?
      I would think it would be upto to the depositor to check with the bank and see if there are many such depositors like him
      and if so the risks are a little higher. Maybe there are very few expats in that bank and hence there is less risk.

      IMO a lawyer can give you a legal opinion based on your fact pattern what may happen if discovered.

    20. "Shark attacks in Kansas are unlikely but possible (freak weather pattern drops great white on you while out walking). "
      how can someone give a prediction on when that freak weather pattern would occur?

      about five years back the chances that IRS would target UBS was as remote as sharks falling from kansas sky.
      If you had asked me 10 years back, I would say the Swiss relinquishing their banking secrecy would be of a lower probabilty than a shark falling from sky due to freak weather pattern.

  49. To Anonymous @ Jan 19, 2012 07:37 AM

    It is important for nonattorneys to understand that, in any case where the taxpayer checked the box no (or even failed to check the box) and failed to report the income and failed to file the FBAR, there is criminal risk. The question is where on a scale from no serious criminal risk and serious criminal risk the taxpayer's situation falls. That is a detailed factual inquiry that cannot be made over a blog.

    And that inquiry is what will drive the question as to whether to just become compliant on a go forward basis.


    Jack Townsend

    1. Dear Prof Townsend,

      In a case where the filer discloses FBAR assets for 2011, but did not do so for 2010 and 2009.

      I would think the recent disclosure would cover prior years as well. Disclosure is disclosure. The IRS/Treasury knows about the assets.

      They would have to make the argument that the country was somewhat harmed that it did not know of those assets in 2010. Since the FBAR is some kind of terrorist protection, and there were no terrorist acts that could have been prevented as result of the Treasury knowing about these assets, it would be a thin argument.

      Furthermore, as immigrants, (because I cannot see the IRS charging expats, they would not come back), the filers can say that they just learned about the law, just started filing, and have complied when they found out.

      They would show knowledge of the law and compliance with the law.

      Do you know of any cases where charges were filed in such circumstances?

      Even in solely domestic tax-evasion situations, I cannot imagine the IRS bringing criminal charges for past years if the taxpayer is in compliance for the last year.

      I would be curious if you know of such cases.

      Another major issue, is that as immigrants they are dual residents and they always have the option of going back to their native country.

      If they are professionals (ie engineers), they also have the option of working in several countries with the need for their profession.

      So their relationship with IRS/DOJ would inform their decision whether to settle in the US or keep looking for a better place.

      These tax-related arguments and regulations (and even a jail sentence) are "grist for the mill" in their overall life decisions and direction.

      Mobility and flexibility allow people to avoid jurisdictions with onerous and unjust laws.

    2. To M @ Jan 19, 2012 10:22 AM

      Just a few comments:

      1. Disclosure for one year is not effective disclosure for other years (earlier years in your example). The subsequent year disclosure might mitigate the problem, but other factors could override it to give the IRS the incentive to go full bore on civil and, possibly, criminal penalties. Just depends on all the facts and circumstances -- at least as they become known to the IRS.

      2. For a similar reason, the IRS may and will, depending on facts, prosecute years earlier regardless of intervening year(s) of compliance. The IRS will certainly consider the intervening compliant years in the overall mix, but then will prosecute consistent with its tax enforcement priorities. Intervening year compliance is not voluntary disclosure or amnesty for past sins.

      3. The FBAR requirement is not solely about terrorist protection. Indeed, I think one of the principal goals was the war on organized crime (using the term loosely), but the Committee Report also say that the reports are useful in tax enforcement.

      4. In my opinion, IRS will charge ex pats in appropriate cases. The IRS cannot afford a message that ex pats will not be prosecuted and certainly would not selectively prosecute immigrants over ex pats.


      Jack Townsend

    3. Jack,

      How do believe the situation between Canada and the US will work. Canada is taking a position under the Double taxation convention that it is under no obligation to collect FBAR penalties from anyone in Canada or to collect any owed US tax from Canadian citizens. Now how this would effect things on a criminal level or MLAT(MLAT requests have to be unique to Canada, in the "public interest") is unclear however public pressure in Canada seems to building to throw sand in the face of the US on this issues. One analogy I have seen is it a horrific car wreck in progress. In my mind the Canadian government and the opposition parties in parliament have raised expectations to the point that they domestically can't back down if the US starts going after Canadian expats or loosily tied citizens.

    4. To Anonymous @ Jan 21, 2012 02:57 PM

      I don't think the Double Tax Treaty (whether with Canada or otherwise) requires anything more than information gathering on the request of the treaty party. I don't think it encompasses collection efforts. And, of course, the Double Tax Treaty speaks only to income taxes and not to other types of reporting / penalties that are not income taxes. So, I presume that Canada and other countries would take the position that, barring some other treaty (there are some for collection of taxes, but not FBAR penalties), it would not help the U.S. collect the tax.

      But, one has to keep in mind that the U.S. has used U.S. law to assist Canada keep the lid on evasion of Canadian tax (see Pasquatino) so at some point in time, it may be you scratch my back and I'll scratch yours (or, more particularly, if you don't scratch my back, I'll quit scratching yours).

      Jack Townsend

    5. To M,

      You seem knowledgable though you are coming from a different angle than others on this blog. I'm curious if you are a lawyer, CPA or ? I'm wondering to what degree someone's profession informs their advice and perspective, for example some are willing to speculate on likelihood of being "caught" and others aren't.

      I'm also wondering what you would see as the advantages of filing only the current year over filing past FBARs along with amendend returns?

  50. It seems to me that taxpayers doing voluntary disclosures fall into two broad categories:
    1) those who established trusts, shell companies to hide untaxed funds; for them 20/25/27.5% is a sweet deal.
    2) cases where the principal was taxed, and interest income was not. For these 20-27.5% is excessive.
    I predict that most of those who are in the second category and haven't disclosed won't, based on their observation of what has happened, and just keep the money in a foreign relative's name or in cash, here or abroad.
    By treating the second group shabbily the IRS has lost a chance to bring compliance.

    1. I fully agree with you. IRS should make a difference between a whale & a minnow in the name of GOD in who we all trust. Taking innocent people's money is not what USA is about.

    2. Well, in 6 days we will find out if you are right. If taking innocent people's money is not what the USA is about, than Shulman will affirm Nino Olson's TAD. If he does not, than it is a new low for the IRS.

    3. If i were to bet my money, i would bet TAD would be tossed out and no difference would be made between a minnow and a whale.

    4. Here's a Minnow question for the pros: an expat not required to file federal returns at all because her income was below $9,500 threshold. Is she still required to file FBAR? How would she even know about them, since the only direction to their existence is Schedule B, which she wouldn't have seen since she didn't have to file...?

    5. Just Me:
      What happens if TAD is tossed out ? Are we at the mercy of one person in this great democratic country in the world ? There is no one who can come to rescue the Minnows ?
      The slight thought of this creates the high blood pressure.

    6. AnonymousJan 20, 2012 09:55 AM

      well you can hope. The best thing is to calculate
      all penalties,lawyer fees, cpa fees and then
      multiply it by 2. Be prepared to pay this for being
      given the luxury of being an american citizen/resident. with everyone including his uncle in this country broke, dont you think it is patriotic for the immigrants and expats to help out.

    7. Anonymous Jan 20, 2012 09:55 AM

      "What happens if the TAD is tossed out?"

      In the short term, nothing. Things proceed as they are with no changes to any VDP programs, or at least that is how I see it.

      In the longer term, either the Commissioner has to report his decision to Congress, or Nina can take the issue to Congress herself. I am not sure which is the technically correct answer, as I have heard and read it expressed both ways, but that is my understanding. I could be wrong. (Maybe I should research it more.)

      If it does go to Congress, then it gets visibility on the subject, but does Congress do anything about it?

      Given their "broad-brush" views of anyone having an Offshore account as a Rich evader is shown by how poor ole Romney is getting negative press right now without any knowledge of his compliance status.

      Then, there is the provincial view of Expats as expressed in this comment by well known Homeland Offshore Tax cheat Charlie Rangel, I have little hope they will do the fair and right thing.

      “I hope that one day we will just publish the names of people that America has given so much to and that they care so little about that citizenship that they would flee in order to avoid taxes.”

      Implication: If you are an Expat, you must be fleeing to avoid taxes.

      Poor Charlie didn't even understand the IRS rules he was writing and voting for. His failure to report his rental income on his offshore condo got him censored. Not sure what his IRS penalty was, but bet it was less than yours!

      Of course, now he has learned, and probably regrets that statement, still there are those in Treasury that probably think like this...

      “If you’ve gotten your riches from America, you should pay your fair share of taxes. These expatriates are really like economic Benedict Arnolds.”

      - Leslie Samuels, Assistant Secretary for tax policy, U.S. Department of the Treasury

      and there are more classic statements in similar veins going back years, but will give it a rest.

      As for Immigrants to America, it is all your own fault for not reading those 77,000 pages of tax regulations before you applied for your Greencard! Or, so their reasoning would go.

      They feel no responsibility at all to work with Immigration and provide full disclosure offshore tax rules with every Visa Application and Citizenship ceremony. The SEC has stricter disclosure provisions on Corporations for financial products with less complex rules than the Tax laws. But never mind. They didn't even enforce those either.

      So, for the IRS, "bait and switch" OVDP actions (intentional or not), and education via fear and prosecution is SOP, There is only the TAS standing in the way. They would just as soon ignore Nina, and I am sure that the underlings that designed the OVDP program are probably lobbying Shulman strongly to “Not affirm.” Let's see what he does. Will be interesting. 5 days left until January 26th.

      So, that is what you are up against.

      Remember, Shulman calls all his VDPs “highly successful” Hard to back away from his public statements. From his end of the hunting rifle, looking down his narrow field scope, I am sure that he sees it that way. You are experiencing what the deer feels.

      PS, You might warn your potential immigrant friends back home what to expect before they come to America. If they have any assets or skills, the Offshore tax issues (and penalty regimes) might take some of the gloss off that Visa application.

  51. Hi ij, you seem to be very knowledgeable. Please advise on my scenario. Immigrant on work visa in US and have been in US for about 5 years now. I used to send my W2 income to offshore accounts. So principal money is already US taxed. These offshore accounts generated some interest which was taxed at offshore interest rate. I never knew of my obligation to show these accounts and interest income in US as well. Else when I already pay so much tax, paying another 400-500 dollars per year wouldn't have been a problem. Also, I've small multiple offshore accounts including few small accts in HSBC india. This is all my till date life's savings. I'm definitely going to comply from this year onwards since now i know about this obligation. I want to correct past few years as well but it seems like paying 27.5% penalty is the only way out which I cannot. That would mean give away 3 years worth of savings for a a honest error. One legal advise was to do quiet amendments and be done with it but seems like its a huge risky way. Legal advise was not to go for OVDI and take the risk as its a genuine case. Can you or someone knowledgeable advise. This is a complete mess.

    1. "AnonymousJan 19, 2012 09:06 PM",

      In my own view, expats and visa workers should be totally exempted FBAR penalty -- it is just wishful thinking, however it does reflect some public view on "fairness".

      Now, you are in a very difficult position, yes doing QD is a risky, but doing onward compliance is also risky -- IRS may have some data mining tool to detect your sudden change (your offshore assets come out of blue).

      So, I really do not have a good answer for you my dear friend. When I found out my problem, all my offshore assets were gone (such as spending on offshore kids child support/education, and some sending to US). So I could just wait for another 5 years to let FBAR status limitation running out. Then it would be 5 years sleepless (you know once you know the problem, it becomes a time bomb). So I decided to join OVDI. Again, it is really matter of personal choice.

      There is one important factor you should consider. Are you planning to stay US for long time ? If you are, then it is better to keep your tax compliance current. You live here, and there is no escape.

    2. thanks for ur opinion. Jack, will you like to please comment as well.

    3. "There is one important factor you should consider. Are you planning to stay US for long time ? If you are,..."

      Or, to turn this decision process around, consider leaving the US either now or very soon, and so avoid the whole mess a different way.

    4. Agree, but for some immigrants, it is hard to make. Their kids were born in US, and they are growing up here in US. So a decision for themselves is simple, but that would affect kids. The worst is that even if IRS would likely take away a lot money that are supposed to raise these little Americans, the immigrants may still have to teach them to love this country.

    5. Totally understand the dilemmas this has to be for immigrants. Unfortunately, even more than US Expats abroad, this story is not told anywhere in the media, that I know of.

      Yes, you came to America, and thus are subject to its laws and tax filing / reporting obligations, just like I am now in NZ, and subject to its foreign income reporting requirements.

      It is the manner that the IRS has gone about it, and now says it is going to embark on an education program. I would say about 3 years late.

      5 more days to see if Shulman affirms Nino Olson's TAD and does the right thing. I hope so, but fear not.

      It should do for immigrants what Canada does with it’s VDP…

      "The Voluntary Disclosures Program (VDP) allows taxpayers to come forward and correct inaccurate or incomplete information or to disclose information they have not reported during previous dealings with the CRA, "without penalty or prosecution."

      Now, combined with a real education program, and not just ‘shock and awe’ VDP penalty regime, they might actually get some real compliance improvement.

      Just my opinion. I could be wrong.

    6. how can you be sure that the future for your kids in this country would be brighter than Canada or China? For all that you know, you may end up paying the penalty and giving your kids a worse of future than if they are in a different place.

    7. "how can you be sure that the future for your kids in this country would be brighter than Canada or China? For all that you know, you may end up paying the penalty and giving your kids a worse of future than if they are in a different place."

      The fact they were born here. Wherever they live, they are US citizens. Are they better of as "US expats" like Just Me who has to deal with NZ plus IRS ?

    8. "Now, combined with a real education program, and not just ‘shock and awe’ VDP penalty regime, they might actually get some real compliance improvement."

      They would. However, compliance is their stated aim but nobody believes it's their real aim. More compliance will bring the IRS a massive added workload year on year, with little or no new revenue. More penalties for non-compliance, on the other hand, produces a smaller added workload but orders of magnitude more revenue.

      Congress's laws and budgeting give the IRS strong incentives to work in this way. It may do so willingly, maliciously, or otherwise, but hasn't much choice. It's bad system design.

    9. Hi all, I had posted the original issue but looks like the replies are deviating from the topic. I'm still seeking help from professionals so please if anyone has advise to give. I've seen very knowledgeble comments from Jack Townsend, ij etc. Jack, would you like to give your opinion. I'm planning to even contact TAS with this dilemma. As of now, I'm still firm on my decision to do it right this year onwards.

    10. To Anonymous Jan 30, 2012 11:32 PM

      I looked at the original post. I am afraid that you do not offer enough facts for me to feel comfortable offering advice. I can make some observations that might be helpful.

      The important thing to keep in mind is that, if you decide to get in the program, you can opt out. If you are a minor player as your post seems to suggest, you should get a much better result on the opt out. The complicating factor for you is that you have a number of accounts. If the IRS were to exact a nonwillful penalty (up to $10,000 but usually much, much less than $10,000), the IRS could still do it per account. I am not saying that the IRS would do that. I am just saying that the IRS claims it can do that. Again, if you have a good story to tell and the aggregate numbers (both in the accounts and in the U.S. tax involved) are not large, you will likely get a favorable result by joining the program and opting out.

      But, the truth is that, if your situation is as it appears to be (I am projecting since I really don't know your facts), you might be better off just to go forward. If the IRS wants to audit you, you should get the no worse result as you would get by joining the program and opting out. And by just going forward, it is not even certain that the IRS will audit you.

      I have presumed in all of this that you have no special factor that would subject you to significant risk of criminal prosecution. If you were to have such a factor or factors, then joining the program would be indicated because its principal benefit is that it resolves the criminal prosecution risk.


      Jack Townsend

    11. Thanks much Jack. Yes I've no factor of criminal investigation. Since one of the acct is in HSBC, I am afraid. I've even taken one paid advice and was suggested to do quiet for past and do it right going forward. Unofficially he even suggested that ppl like mine should not have been candidates also and its not fair to penalize on W2 savings. Now i definitely want to fix it but not at cost of paying 25% of my principal saving. You advise is very encouraging.

    12. If you have no substantial risk of criminal prosecution, then I am not sure what a quiet disclosure does for you other than wave a red flag in front of the IRS. The IRS claims it is looking for amended returns and delinquent FBARs. So, at least if the IRS is to be believed, a quiet disclosure will put you at risk -- perhaps high risk -- of audit. Whereas, on a go-forward basis without cleaning up the past, you are at risk of audit but probably a lower risk. But, in either event, if you are audited, you should get the same result - no criminal prosecution and probably no draconian penalties. Hence, it seems to me that you take the option that offers the least risk of audit -- which is the go-forward only. I can't advise you to do without full knowledge of your unique facts, but that is something to consider.

      Now as to HSBC, I think the IRS has or will have some type of pipeline for HSBC information about U.S. depositors. However, I wonder if the IRS will want all U.S. depositor information or just HSBC accounts where the aggregate amount exceeds some threshold amount. I have no idea what that threshold amount would be, but I can't believe that the IRS really wants to sift through the many small HSBC accounts and devote audit resources to do so. So, either the IRS will ask HSBC to provide only account information above a certain threshold or, if the IRS were to get all such information that HSBC identifies and turns over, the IRS will likely create its own filters that exclude the smaller accounts. So, if your accounts are truly small (again a relative term that I can't quantify for you), then I don't know that you need be that concerned. And, finally, even if the IRS does get the information from HSBC, the worst it can do is to audit. So you are still back to the point where the most attractive option may well be the option with the lowest risk of audit -- i.e., the go-forward option. Every other option you have puts you at higher risk of audit.

      Please keep in mind that I am just suggesting things you should think about and not providing you legal advice. That can only be done in the context of knowing a lot more facts than can be developed in this blog.


      Jack Townsend

    13. Wow! This is an example of the IRS programs giving incentive not to clean up the past. Would it not make more sense to make the programs less draconian and encourage noncriminals to clean up history and comply going forward. They could collect all the backtax and interest as well as reasonable penalties and have much broader compliance in the future. Instead they have pulverized noncriminals and taught those who are still out there that coming forward may very clearly be the wrong thing to do. Its a crying shame! I am considering filing for a refund on my in lieu of penalty based on the published memorandi of the TAS on the matter of the 2009 program deceptions. I will certainly have a law firm review my facts and determine the feasibility of such action. I encourage others that have been pulverized to do the same. We must collectively do what we can to right this wrong confiscation of decent peoples life savings. I do not know if I was a minnow or not cause my account was pretty big. I do know that I did not willfuly cause the situation and had a strong reasonable cause argument that was rejected. I even had an affidavit from a practioner that mislead me in the past but IRS just rejected it. I am thankful to have the pulverization behind me but I just can not for the life of me accept that IRS is being so abusive and so able to do so. How can they be so blind to the damage they are causing?


    14. Jack, can you clarify what the "go-forward" option is? Does this mean simply filing correctly for the current year, without ammending past years, and hoping for the best?

    15. To Anonymous Feb 1, 2012 04:08 AM

      Yes - the go forward option is to get right from this day forward and not doing anything about the past (either join the OVDI or file amended returns or delinquent FBARS).

      Of course, the IRS may audit and require you to deal with the past in the context of an audit. But, as I discussed, that is only the possibility of an audit. Any attempt to deal with the past will give you the certainty of an audit or a higher risk of an audit (at least unless you accept the OVDI civil penalty structure). So taking the lower risk option -- the go forward option -- may be preferable option at least for some. The key, of course, is being certain that you have no appreciable risk of criminal prosecution.


      Jack Townsend

    16. Jack - but isnt go forward option fraught with risk of wilful penalties i.e. once any taxpayer has knowledge that they were supposed to file a FBAR and they should have filed for previous years and taxpayer still refuses to file for previous years does it not make the tax payer subject to wilful FBAR penalties upon a civil audit as the IRS will be able to see that tax payer was filing FBARs 2012 onwards? Also, isnt the IRS looking for first time FBAR filers with closer scrutiny?

    17. The short answer to your question is no. Going forward does not increase the risk of the IRS asserting willfulness. Now that is a cryptic answer to a long discussion that you really need to have with an attorney.

      The technical analysis is the taxpayer's state of mind when he defaulted on the obligation -- i.e., the obligation to report the income and answer the Schedule B question correctly and failed to file the FBAR. If the taxpayer learns that he has not properly complied later and goes forward correctly, then he or she should not be at risk of the willfulness penalties (same issue for both civil fraud and for FBAR) for past years.

      I will just say that resolving some number of past years via a quiet disclosure will generally mitigate any criminal risk. And it might disincentivize the IRS from pursuing the willfulness penalties (both tax and FBAR) for prior years. But, technically, even if there is a quiet disclosure, upon audit the IRS can assert the willfulness penalties if it wants to and feels that they are appropriate. But, keep in mind that the predicate for our conversation is that you are not subject to risk on the willfulness penalties. Whether you are subject to risk is an intense facts and circumstances issue as to which you probably need legal advice unless you are certain yourself and willing to take the risk that the IRS in any context (other than joining OVDI and staying in it (not opting out)) will assert willfulness.


      Jack Townsend

    18. Would not going forward also be a potential red flag - especially with mid-level accounts (over $100k, under $300k)? You suddenly crop up with your first FBARs and entries about foreign interest, when in the previous year you didn't acknowledge your foreign accounts at all? Wouldn't they want to know where the money came from? Or do they not make those kinds of connections?

      Also, if you write a letter of explanation with ammended returns and past FBARs, is that still considered "quiet"?

    19. To Anonymous Feb 1, 2012 08:55 AM

      Red flag? Possibly, but if indeed it is just an audit matter, you probably are no worse off.

      Is filing amended returns and delinquent FBARs a quiet disclosure? I think the standard practice is to just send in the amended returns with no letter (again assuming no criminal risk), which may cause it to sail through the amended return filing as a Qualified Amended Return (with no penalty). However, the IRS claims that they will pull amended returns changing the offshore bank reporting. In addition, delinquent FBARs require a statement of the reason for the delinquency. This could trigger an audit. Caveat, be very careful what you say on the explanation / request for mercy. False statements could create way more problems than they could solve.

      I do think you need legal advice on this matter and feel that I should stop responding to your more questions in order not to give you the impression that I am offering you legal advice.

      Best to you,

      Jack Townsend

    20. For the HSBC India customer -- I think if your account crossed 100K (which as I recollect was the threshold for the so called premier accounts) then you need to be concerned that your account data might be handed over to the IRS.

      I also do not believe that an account that is funded with post tax money (i.e. income already taxed) and does not use entities/foundations etc. is necessarily immune from audit. The Indian doctor in Wisconsin, as I recollect, had none of these, and is still facing criminal prosecution and the possibility of multiple millions. Of course, he had a large account in several millions, but the threshold for a civil audit and penalties might not be as high as the threshold for a criminal prosecution.

      jack, I think your spreadsheet is missing one HSBC india customer (one Avinash Desai) who was also indicted recently.

      I also disagree with you a little on the assumption that the IRS may not try harder to extract a willful penalty for those who chose to 'go and sin no more'. In the perfect, legal sense, that is correct, but given the discretion that agents have in assessing penalties, even non willful penalties, I think the risk of penalties is higher for those who lose the audit FBAR lottery is higher than for those who do a quiet disclosure (other facts being identical). At the very least, the reasonable cause defense might be excluded.

      And the lottery here is more stacked against you that for someone with domestic issues since a first time FBAR could increase your chances of audit.

    21. Anonymous Feb 1, 2012 11:58 AM

      Good comments all.

      On the spreadsheet, I do have Desai, Ashvin. Is he the one to whom you refer?

      On the Indian doctor, I never did figure out whether he had offshore entities. Also, virtually all who have been prosecuted did allegedly have foreign entities and the few shown on my spreadsheet who did not seem to have atypical facts (charges are focused on other nontax and nonFBAR violations, defendant lied during the disclosure process, very large amounts involved (perhaps the case of the Wisconsin doctor if he did not use entities or nominees, etc.) Assuming that what we have is a large enough dataset to draw conclusions, the prototypical criminal case will involved taxpayers using offshore entities or nominees or some other most unusual facts that would exclude them from the mainstream.

      First time go-forward files will, of course, have a risk. But keep in mind that, if the IRS really were interested in pursuing those en masse, the IRS could easily have asked on the form whether the account was owned before January 1 and whether all FBARs had been filed to report. Two extra fields on the form could have given the IRS the information to do targeted audits for past delinquencies. Having failed to take the direct approach, is it likely that the IRS is going to start audits of first time filers. Perhaps if the reporting on the first time filing exceeds some X threshold number, the IRS might send out some form of letter making certain inquiries. But, I doubt that it would do that in every first time filing case and even when it did, all that will happen will be an audit which the taxpayer would have almost certainly been subject to in OVDI on opt out and by doing a quiet disclosure.

      Jack Townsend

      Jack Townsend

    22. Jack - I think about first time filers you are right except Form 8938 does require you to specify if account was opened during the year. So as long as you are filing Form 8938 you have reasons to worry if you are first time FBAR filer.

    23. It is what it is. will do it rht this time since now i know abt it. if they audit me, will see at that point.

  52. To Anonymous @ Jan 20, 2012 05:41 AM

    You simple data set as presented requires the following conclusions:

    1. The FBAR filing requirement is independents of the income tax filing requirement.

    2. If you properly did not file returns, then you are income tax compliant and like will not draw any FBAR penalty.

    3. And, you also have an extremely strong good faith and reasonable cause argument that would discourage the IRS from asserting a penalty.

    These conclusions are dependent, of course, upon there not being negative facts outside the data set you offer.

    Jack Townsend

    1. That's encouraging, thanks... But (perhaps predictably) it is slightly more complicated: what if the expat filed returns but not FBARs in previous years when she did not actually have to because of low income? In other words, she was not required to file, but did so anyway, and the schedule B box was wrongly checked due to accountant error... (no taxes owed).

      You wrote: "FBAR filing requirement is independent of the income tax filing requirement". This, to me (like much else of the "system") seems insane: generally speaking, how on earth is a low-income expat (i.e., someone who would not necessarily spend their time following tax news in another country!) supposed to know about FBAR requirements if they are not even required to file, and would therefore never see the (small-print, obscurely-worded) instruction on schedule B?

    2. One more thing I have not been able to find an answer to: does interest from foreign savings (compliant in the expat's country of residence) fall under the $92,500 foreign exclusion? Or is it somehow considered/taxed separately?

    3. It is a foreign EARNED income exclusion. It applies to wages or the self-employed income equivalent, NOT to "unearned" interest, dividends, and capital gains.-

    4. Thank - so how do double taxation rules work? If I'm taxed on the interest in the foreign contry, am I taxed on them again in the US since they fall outside the exclusion?

    5. " how do double taxation rules work?": If the foreign country taxes the interest, dividends, and so on you can then claim a foreign tax credit against US taxes.

      However, and it's a big however, this system often doesn't provide a full offset due to assorted "limitations". It also fails horribly when the foreign country wouldn't tax this form of investment income. TFSAs, for example, are tax-free to Canadians (and also to citizens of any of the other 190 or so countries who might be living in Canada), but utterly useless to US citizens, even if living in Canada and perhaps also dual Canadian citizens.

  53. Did Mitt Romney file his FBAR's?

    1. Illustrious and powerful personages are automatically enrolled into a secret IRS initiative called Offshore Involuntary Disclosure Program (where the media discloses their tax indiscretions), which provides such valuable members of the American society, complete exemption from all penalties as evidenced by the treatment given to Mr. Geithner.

      Hence no need to file FBARs.

    2. Mitt Romney paid the tax at the rate of 13.9%. Those who are in OVDI will pay the 25% penalty on top of already taxed money at 35%.It is double taxation at a very heavy rate. Is It FAIR ?

    3. No it is not fair. But who is going to make it fair. People at the power are busy in re-election. No lawyer wants to challenge IRS. Nina did something at TAS, but nothing concrete has hasppened.

  54. Instead of basing the FBAR penalty as a % of assets, it would make sense to base it as % of unreported income. That way it would be proportional to tax loss. Right now someone who made tons of money with the offshore account is assesses same penalty as someone who had the money just earning interest and didn't actively manage the account.

    1. It does not matter what you say OR think OR suggest. Eventually IRS is going to do what it has decided to do on 01/26/2012. I am not hopeful & the TAD will be tossed out.

    2. Agreed. However this means that I will most likely opt out and so will others. A fairer system would be to base the FBAR penalty on untaxed income, and doing so could produce a result that I would find acceptable and not opt out.

  55. Buffoons inside the congress and IRS dont even realize that a person can transfer a million dollars in small chunks of less than $10K to a foreign account and someone at the other end can immediately withdraw the money out of the account to purchase a costly asset. This person would never have to file an FBAR even though technically his violation is greater than some poor guy who let his account balance grow to $100K.

    OVDI was quietly slipped into law as part of the HIRE act. Its sole purpose is to drive out immigrants from this country to create more jobs for native americans. It will succeed in its objective.

    When such vindictive morons are in command of this country's affairs, how can we expect TAD to succeed in taming the wild bull called IRS.

    But there is one authority higher than this superpower that I still have faith in. Wealth that is ill-gotten is ill-spent. Witness the trillions flushed down in the useless wars. These acts don't imperil the economy or the security of this country but a few immigrants and expats putting some chump change in foreign bank accounts is unacceptable !! Vow, Amazing...dont mess with the USA !!

    1. But transferring in small chunks to avoid reporting is called structuring and that is a crime.

    2. Look at the billions of dollars of aid given to America's ally on war on terror. But that same ally was hiding the world's most wanted terrorist.

    3. "Jan 24, 2012 06:50 AM"
      Not sure what your line of argument is. It is better you focus on what is legal and what can be proved or disproved in a court of law.

      13 Strange laws

      1 In Lebanon , men are legally allowed to have sex with animals, but the animals must be female. Having sexual relations with a male animal is punishable by death.

      2 In Bahrain, a male doctor may legally examine a woman's genitals, but is prohibited from
      looking directly at them during the examination. He may only see their reflection in a mirror.

      3 Muslims are banned from looking at the genitals of a corpse. This also applies to undertakers. The sex organs of the deceased must be covered with a brick or piece of wood at all times.

      4 The penalty for masturbation in Indonesia is decapitation.

      5 There are men in Guam whose full-time job is to travel the countryside and deflower young virgins, who pay them for the privilege of having sex for the first time.
      Reason: Under Guam law, it is expressly forbidden for virgins to marry.
      (this one sounds familiar...)

      6 In Hong Kong, a betrayed wife is legally allowed to kill her adulterous husband, but may only do so with her bare hands. The husband's illicit lover, on the other hand, may be killed in any manner desired.

      7 Topless saleswomen are legal in Liverpool , England - but only in tropical fish stores.

      8 In Cali, Colombia , a woman may only have sex with her husband, and the first time this happens, her mother must be in the room to witness the act.

      9 In Santa Cruz, Bolivia , it is illegal for a man to have sex with a woman and her daughter at the same time.

      10 In Maryland, it is illegal to sell condoms from vending machines with one exception:
      Prophylactics may be dispensed from a vending machine only "in places where alcoholic beverages are sold for consumption on the premises."

      11. In the US, the govt cam take 25% of your wealth if you did not report your offshore account.

    4. Correction on 11.
      ......upon entering OVDI.

      12. The US govt can confiscate upto 300% of your assets if you did not report your offshore account for the past 6 years, and the court found you guilty of willfullness in doing so.

    5. To Anonymous Feb 2, 2012 02:55 AM

      It is important to balance what the Government can do against what they are likely to do. Remember that, in the most egregious criminal prosecutions, the Government only demands 50% of the highest amount in the highest year. I think most practitioners infer from this that, in audit cases that the Government does not pursue criminally, the IRS will not assert more than this penalty.

      So, while the 300% of theoretically the exposure, most practitioners think it is theoretical only.

      Jack Townsend

  56. It is possible that Romney's may have entered
    the 2009 OVDI

    •Ann Romney's blind trust in 2003 placed $3 million in an account at UBS, the Swiss bank at the heart of a federal crackdown on offshore tax evasion.

    In 2009, UBS agreed to a $780 million settlement of criminal charges that it had sent bankers posing as tourists into the USA to help clients evade taxes. The Romneys disclosed the UBS account to the IRS, and paid all taxes due, said R. Bradford Malt, the trustee for couple's blind trusts.

    1. I was thinking the same thing. Its funny that they closed the account in 2010 which would make the timing work for a UBS disclosure as the UBS saga really picked up steam in 2008 and dragged on for a long period of time. I looked at the 2010 Romney return and they had the FBAR question ticked yes and Switzerland listed as the country. If this was the case it would be most interesting. However, by disclosing if they in fact did, they erased the wrong just like everyone else except everyone else is not running for president of the United States. Maybe this is one reason Mitt does not want to post prior returns. 2008 and 2009 may be amended returns inside the program.


    2. Should they have Cayman also in addition to Switzerland?

    3. You would think so but there are so many variables with FBAR. Also, keep in mind that if the taxes were paid but no FBARs filed then you just file the unfiled FBARS with explanation and do not enter OVDI. I would think that folks in the financial category of the Romneys would have pros do all their filings. It is probably unlikely that they would utilize offshore for tax evasion but who knows. They would not be the first ultra high net worth folks to do a little funny business to make an extra buck or two. Unless there is a prosecution the information is kept hush hush by IRS. You just wonder though when you hear UBS, account closed in 2010 and etc.. You wonder what the motivation was for a 3 million UBS account. Maybe a petty cash fund for use on a rainy day.


    4. I do not know if Mitt Romney declared all his foreign accounts. But looking at his returns and the taxes he had paid, it could be 12 or 13% of his income but the facts are
      a) he paid more than 2 million as charities to his church.
      b) the aggregate taxes he had paid in 2 to 3 years is probably more than tens of million of dollars.

  57. To Anonymous @ Jan 25, 2012 08:23 AM

    Tax Blawg has a discussion with some nuance.

    The Romneys’ Tax Returns: Have FBARs Been Filed, Or Is Romney An OVDI “Candidate”? (Tax Blawg 1/25/12)

    Jack Townsend

  58. Hi All,

    Need some advice
    Situation: I have a few unreported offshore bank accounts (not more than $25,000 in all). I do own a condo in my native country (worth about $100,000), on which I have had an erratic rental income for a brief period, totaling not more than $4,000

    A relative of mine, with whom I have a couple of very small joint bank accounts abroad, volunteered for the OVDI 2011 and declared my name in his filings as a co-account holder. I met with a tax attorney last year, but he advised me against entering the program, saying that it will be better if I take my chances by staying out of the program since the penalty within the program would be rather steep (25% penalty on my bank balance AND current value of condo), even though the rental income is meager. After a lot of deliberation, I chose to stay out of OVDI 2011. Of course, he asked me to diligently file my FBARs from this point on.

    I recently spoke to my attorney again and he suggested that apart from filing the FBARs, I should consider filing amended returns for the last 3 years. I was not sure if that was a right thing to do after staying away from the OVDI, since I may end up attracting undue attention. Can someone advise?

    1. So i do not understand your attroney's change of mind. Initially he advised you to only file the FBAR and now he is advising you to file the last 3 years. did you ask him why this change of heart in the space of few months?

      What i found is that after going through all these blogs and consulting a few attorneys, based on your fact pattern and circumstances your guess is as good or bad as any other attorneys guess.

  59. Jack,

    What is a nominee account ? Is it a regular bank account held by someone where I am the nominee so that if that person were to die, I get the money?

    If not, what type of arrangement can be construed as a nominee account and how will IRS know that it was a nominee account?

    Thank you.


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