Thursday, April 19, 2012

IRS OVDI: Holding the IRS to Proper Payment Application (4/19/12)

The following is a guest blog written by Asher Rubinstein, Esq., whose web site is here and his bio information is here.

IRS OVDI: Holding the IRS to Proper Payment Application

by Asher Rubinstein, Esq.

It has been said that the 2011 Offshore Voluntary Disclosure Initiative (OVDI) corrected many of the hiccups of the 2009 Offshore Voluntary Disclosure Program (OVDP).  For instance, midway during the 2009 program, the IRS began to enforce PFIC tax methodology, required taxpayers to sign new and revised Powers of Attorney, required taxpayers to sign statute of limitations waivers, and transferred and re-transferred case files to IRS agents across the country, all of which caused confusion and delay in the resolution of OVDP cases.  In addition, the IRS revoked OVDP FAQ 35, to the detriment of many taxpayers who entered the OVDP in reliance upon FAQ 35.  By the time the 2011 OVDI program was introduced, the IRS seemed to have standardized and centralized its voluntary disclosure procedure, building upon the lessons learned during the OVDP.

However, as more OVDI cases now head toward resolution, it appears that the IRS is again wavering in certain policy decisions, again to the detriment of taxpayers.

Under the 2009 program, there were months of back-and-forth communications between IRS agents and taxpayers, as the IRS issued multiple Information Document Requests (IDRs) for the same case.  Once the taxpayer answered the questions in the IDR and provided the documents requested, the IRS would process the answers and documents, and then issue a new IDR, with additional questions and requests for documents.  This pattern was often repeated again and again, causing months of delays in the case.

Thus, under the 2011 OVDI, all documents were due in the initial submission, reducing the likelihood of a back-and-forth.  Along with the complete OVDI package (consisting of amended returns, FBARs, OVDI forms, etc.) taxpayers had to include payment of back taxes, interest and accuracy penalties.

Accordingly, for our OVDI clients, we submitted payment for each year on a separate check, noting the applicable year on each check.  Our cover letter also included a year-by-year itemization of tax, interest and penalties being paid, and corresponding check numbers.  We addressed tax liability, interest and accuracy penalty on a year-by-year basis and requested that the IRS apply the payments as we specified.

Reminiscent of the mistakes of the 2009 OVDP, the IRS now appears to be applying all of the separate annual payments to the 2007 tax year alone.  This means that interest continues to accrue for all other years, even though the tax liability, accuracy penalty and interest for each year had been paid with the initial OVDI submission, many months ago.  In addition, taxpayers have gotten “refunds” for 2007, because of the application of multi-year payments to that single year, and the IRS is issuing demands for payment for all other years of the voluntary disclosure.  The demands include interest, notwithstanding that interest has already been paid.  Moreover, in some cases, the IRS is assessing failure to pay penalties, notwithstanding that full payment has in fact been made months ago.  In one case, the “refund” for 2007, which should never have been issued in the first place, resulted in a new demand for the amount “refunded”.

When we raise these issues with the IRS agent assigned to the voluntary disclosure, the agent advises that the application of payments is made at the IRS campus, and the OVDI agent is powerless to alter them.  The agent then advises us (orally) that “it will all reconcile at the end”.

We are not persuaded by the agent’s assurances.

The IRS’ failure to apply taxpayer’s payment to taxpayer’s entire tax liability, including penalties and interest, on a year-by-year basis, will result in more delays, additional interest and penalty assessments, additional back-and-forth between the IRS and the taxpayer, and additional professional fees to resolve what should otherwise be a straightforward application of payment.

In addition, disregarding the taxpayer’s instructions as to application of payments is in violation of taxpayer’s rights, because “[w]here a taxpayer makes voluntary payments to the IRS, he does have the right to direct the application of payments to whatever type of liability he chooses.” Salazar v. CIR, T.C. Memo 2008-28, *34 (February 25, 2008); Estate of Wilson v. CIR, T.C. Memo 199-221, *14 (July 6, 1999); Muntwyler v. U.S., 703 F.2d 1030, 1032 (7th Cir. 1983).

We are therefore requesting that the IRS recalculate taxpayer payments in a manner consistent with the taxpayer’s instructions as made in the OVDI submission.  We are also arguing that any interest or penalties which may have accrued as a result of the misapplication of taxpayer payments be cancelled.

While we were optimistic that the procedural mistakes of the OVDP had been addressed and corrected in the OVDI, recent developments suggest otherwise.\

181 comments:

  1. Thank you for this comment. I submitted one check with a note that said, "In response to Item 4 of the Requirements, a check made out to US Treasury for $XXX which includes the amount of additional tax owed, applicable penalties and interest thereon and a spreadsheet showing calculations of said amounts is submitted."

    I checked and I know my payment is posted to 2007. Is what I wrote sufficient to be considered to direct payment to each relevant year? Any suggestions on whether I need to do something else?

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    Replies
    1. How do you check such things with the IRS?

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    2. You can request a transcript from the IRS. Your practitioner, if qualified, should be able to log onto the IRS computer and pull a transcript.

      In addition, when the IRS posts the amount, they should let you know by correspondence.

      Jack Townsend

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    3. You can also establish a log in ID via phone where you can check some remedial information by phone. I did this. Every time you inquire though, they seem to spit out a form as well via mail showing what you checked on.

      Anon123

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    4. So my cheques (one per year) were processed back in December but I have not had any correspondence at all. Is this normal? Can I assume that the package is accepted? My attorney only instructed me to pay the taxes due but no late payment penalty or interest. I am worried that it may be rejected because of this. Its like a black hole, stuff disappears into and nothing comes out.

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    5. Who knows? I am certain your package is accepted if you had the CI clearance. It will eventually get processed by a civil examiner and in the end it will get settled but you are in for a process of delay, uncertainty, confusion, high legal fees and a high penalty. These programs are a disgrace in implementation and productivity. What the real kicker is, is that they act like they want the entire non-compliant community to come in with their hands up when they have handled the 30,000 to 40,000 cases over the last 3.5 years like a Somali fire drill in slow motion. I came from a country that used to get in wars every so many years with another country that would kick our ass. When I was of the draft age, I used to joke about getting in shape to go to battle by doing jumping jacks while chanting: I surrender. This ain't gonna happen here because the word is getting out about these programs. People are finding alternative ways to deal with the issues while the government continues to chase its tail in circles while patting itself on the back and bragging on its success.

      Anon123

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  2. "It has been said that the 2011 Offshore Voluntary Disclosure Initiative (OVDI) corrected many of the hiccups of the 2009 Offshore Voluntary Disclosure Program (OVDP)."

    Yah! I almost ran over a unicorn on my way home last night too.

    ReplyDelete
  3. There may be another reason to make sure the taxes are properly applied to proper years rather than just paperwork.

    If you opt out, you want to make sure you can get a refund for the 'closed' years. I recollect Jack said in a blog earlier that you actually have until 2 years after the payment was submitted to claim a refund. If so, this point might be moot, but I don't know enough of the case law behind this to know whether you can claim a refund even if the IRS (for whatever bureaucratic reason) applied the payment to a closed year.

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    Replies
    1. Anonymous has a good memory. There is a potential issue for statutes of limitations on refunds. Generally, for payments after the return, the statute of limitations is two years from the date of payment. I think that is two years from the date the IRS posts payment. Now, for those years in which the IRS has signed a valid consent to extend the statute of limitations, the refund statute stays open so long as the consent applies (actually plus 6 months). So, for example, say the taxpayer and the IRS signed the consent for all years 2003 forward but, at the time the IRS signed the consent, only the years 2007 forward were open. Although the consent says it applies to pre-2007 years, it does not - the reason is that a consent cannot open up an otherwise closed year. So, relying on the consent to keep the refund statute of limitations open is problematic for years that were otherwise closed on the date the consent is signed. For payments posted to those closed years, the taxpayer will have the normal 2 year period to file a claim for refund.

      Now, I have given a traditional analysis. Since most people in the program are not going to pay that much attention, I have to think that the IRS may not be a stickler on the statute of limitations and will apply the payments in a way that permits it to be refunded. This only becomes important on the opt out where the statute of limitations may shut off some years.

      Sorry the foregoing is probably not as tight and crisp as it should have been.

      Jack Townsend

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  4. Two very recent additional examples of IRS inefficiency in OVDI procedure.

    First, an IRS agent assigned to one taxpayer's voluntary disclosure called and asked us to forward additional copies of the taxpayer's amended tax returns and FBARs. Although we had forwarded these documents, as part of the complete OVDI submission package, to the centralized IRS OVDI address in Austin, back in August 2011, somehow only the 2007 amended return was forwarded to this agent (who is in an IRS office 2,000 miles away). This agent specifically informed us that every agent handling OVDI cases at her IRS field office was having difficulty in getting the complete files from Austin.

    So much for centralization of OVDI processing and overcoming the hiccups of the 2009 OVDP.

    Second, in line with the issue of application of taxpayer multi-year payments to the single 2007 tax year, one of OVDI client recently received four deficiency notices for four other years. Of course, this taxpayer paid for every year, but the IRS applied every payment to 2007. The four deficiency notices came from four separate IRS field offices across the country.

    Again, so much for OVDI centralization and efficiency. We will now be spending much time and aggravation straightening this out with four separate IRS offices.
    Taxpayer met every one of his OVDI obligations and made full and proper payment. It will take months to navigate the procedural and bureaucratic difficulties that have resulted solely from how the IRS has handled taxpayer's completely proper payments.

    ReplyDelete
    Replies
    1. Asher - thanks for sharing your insights around the OVDI processing. I am surprised to see that you have a client that submitted in August that is being processed. I submitted my package back in July and still no sign of any processing. In fact, I remember I was so paranoid that I was missing something in the package that I spent a few sleepless nights even after submission. Lo and behold the processing center itself is losing people's documents.

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    2. We are seeing that the IRS is beginning to process the OVDI packages submitted before the initial deadline, which was August 31, 2011 (and then extended to September 9, 2011).

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  5. Asher,

    It also happened to me of the first problem. I had to submit twice of some missing files (like schedule B etc). When my agent asked me for those docs, I told him they were all in the original package. My agent is really nice and he graciously admitted that was likely IRS OVDI center processing problem. And he even passed his email address to me so I could send e-docs to him instead USPS again.

    I hope the 2nd problem would not happen to me -- as I sent a big check (including in lieu penalty) to IRS. That would be for an yearly penalty for a whale -:)

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  6. Shhhhhhh! I tink I taw a unicorn!

    ReplyDelete
  7. So why am I not surprised by this? Another item for Nina Olsen to try to correct, and Shulman to ignore. Sigh.

    BTW, from the final 906 to reconciliation was about 5 months, and I too had concern about proper application of payments made. In the end, the refund checks I got made absolutely no sense, and you could not tie them to any to the documents that accompanied them, or the reconciliation spread sheet the Examiner prepared.

    In the end I just cashed them and quit worrying about accuracy. The amounts were in the ball park, and maybe a little higher than my detailed reconciliation spread sheet indicated where I calculated the daily interest and when the penalty clock should have stopped running based upon my payments and years applied. At some point you just give up with these guys. So it goes.

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  8. To All: Great post and good to know. Our office handles quite a few OVDI cases and we are now getting close to six months after receiving the preliminary clearance letters where we still have not had an agent assigned to actually work the case. My guess is the IRS is absolutely swamped with OVDI requests and Congress' mean-spirited and hypocritical cutting of the IRS budget is not helping matters.
    We also advise our clients to write separate checks for each year with an SSN written on the check and a written designation on the check indicating the year to which the payment is to be applied, and labeling what is for tax, interest and the 6662(20%) penalty. What most of you are complaining about results from computer generated correspondence which is mailed automatically without any human input, but don't let an IRS agent tell you there is nothing they can do about it because the agent and his/her manager,can get control and jurisdiction over a taxpayer's IRS account on the computer system they call IDRS and they can, and have a duty under the Internal Revenue Manual, to assist taxpayers in straightening out mistakes on each taxpayer’s IRS computer account. As for the 2007 SNAFU mentioned above, I was told by an agent that the IRS "wants to show the big FBAR penalty in 2007" but there is no excuse for the misapplication of funds described above when a taxpayer makes a voluntary designated payment as the OVDI rules require.
    NOW FOR A TOUGH ONE: We have also been advising clients to submit checks for the tax, interest and the 20% section 6662 penalty BUT NOT FOR THE BIG 20%, 25% and now 27.5% big FBAR penalty for a couple of reasons. 1. In some cases we hope to opt out at the appropriate time so why tie up money we may not have to ultimately pay? 2. The IRS is not rejecting our packages as non-processable (which is the default IRS position for 80% of all offers in compromises filed) for failure to tender the big penalty; 3. We thought interest only ran on the tax, interest and 20% 6662 penalty BUT NOT on the big FBAR penalty. I could be wrong, but somewhere along the way, the answer to FAQ number 7 was changed to make the big FBAR penalty a title 26 penalty (meaning under the Internal Revenue Code) as opposed to title 31 of the United States Code where the FBAR provisions are.
    What this means is interest is running on the big penalty too, presumably from 2007. Since it looks like an OVDI case is likely to take two years or more, from start to finish, a lot of folks are going to be in for a big surprise at the very end when the final bill comes.

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  9. "somewhere along the way, the answer to FAQ number 7 was changed to make the big FBAR penalty a title 26 penalty (meaning under the Internal Revenue Code) as opposed to title 31 of the United States Code where the FBAR provisions are."

    How can IRS change the code from 31 to 26 ? Jack, can you explain to us what is going on ?

    If this is true, that means IRS can impose FBAR penalty at will and collect them without much trouble going to courts ?

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  10. @Steven,

    Here is my correction to your post. FBAR penalty is still under code 31, but thie 12.5% or 25% in FAQ7 is not FBAR penalty, it is OVDI in lieu penalty -- so it is under code 26.

    Jack, am I right ?

    ReplyDelete
    Replies
    1. Yes. You are right. It is a Title 26 miscellaneous penalty rather than an FBAR penalty.

      Jack Townsend

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  11. So Steve,
    What the heck is a taxpayer in one of these shakedown programs supposed to do when this happens:
    "but don't let an IRS agent tell you there is nothing they can do about it because the agent and his/her manager,can get control and jurisdiction over a taxpayer's IRS account on the computer system they call IDRS and they can, and have a duty under the Internal Revenue Manual, to assist taxpayers in straightening out mistakes on each taxpayer’s IRS computer account." This situation happened to me and the agent stuck his head in the sand. It went on for months and even generated collection letters from one of the IRS facilities that did not stop until we made payments to that facility for those years after the agent agreed in writing to make adjustments for those payments. What a joke! Talk about confusion and a waste of time and money for both parties. So much for their "duty to assist taxpayers".
    I think you are wrong about interest on the "in lieu of penalty. Firstly, it does not apply until the taxpayer signs a 906 accepting it so how could they assess it without that signature on the closing agreement? Secondly, I made submission early in 2009 and signed a 906 in October 2010 and there was not a penny of interest on the misc in lieu of penalty. I do not believe there is mention anywhere in the FAQ's of interest on the so called FBAR penalty. Maybe I am wrong and maybe Jack has some thoughts on this concept.
    Have you finalized any cases for any of your clients with a fully executed 906 as of yet?

    Anon123

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    Replies
    1. My understanding is that interest does not accrue until assessment on the "in lieu of penalty" or, if audited, upon the FBAR penalty.

      Jack Townsend

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  12. This is such a poorly designed program impacting thousands of people's lives and hard earned properties. I wonder why major news channels across the country are not reporting about such a poorly designed tax program. Is it that they have no time OR are they are not aware of such programs?

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    Replies
    1. " Is it that they have no time OR are they are not aware of such programs?"

      Not speaking of US expats, US residents who are struggled in OVDI do have tax issues (we are tax cheats if we owe tax), and it is even worse "hiding assets offshore".

      Politically it is not a good thing for any politician or media to speak out on our behalf. The country is in deep debt and people do not look at the big picture how we have come to this point rather they blame the wealthy for not taking fair share. Our president is certainly trying to take advantage of this situation to get him re-elected.

      The only defense we have is to opt-out -- then we are under rule of law and protection from our constitution. Even worst criminals won't face unusual/excessive punishment -- why should we ?

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    2. "US residents who are struggled in OVDI do have tax issues (we are tax cheats if we owe tax), and it is even worse "hiding assets offshore"."

      US residents, especially immigrants may have sent money for their family maintenance, or inherited assets which could have been left in their home country. These would have generated nominal interest income which compared to the total tax paid by the US residents may be small/negligible. Categorizing
      all these US residents as tax cheats is harsh.
      Now if you want to claim yourself as tax cheat that is your wish. however immigrants/US residents who fall under the above pattern are different from the US born citizens who intentionally opened the Swiss accounts to hide/evade tax and a tax cheat label for these people may be too harsh a label especially the
      intent is not to cheat in the first place.

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    3. To Anonymous Apr 24, 2012 08:43 AM

      I think you have bought into the rampant hyperbole in thinking that the IRS treats persons such as you describe as a tax cheat. The IRS does not do that. While I would hesitate to state what the IRS thinks, I do think that it believes it designed the program to encourage the cheats to join in and accept the penalties under the program. That's the way amnesty works.

      And, for persons who are not tax cheats, the IRS believes that the safety valve is the opt out procedure where, I suspect, in most cases the persons who are not tax cheats will be treated fairly (within a range of fairness).

      The reason this hyperbolic -- and incorrect -- description of persons improperly being treated as tax cheats is that the IRS has not clarified what will happen on audits -- except in very broad strokes that suggest to some inexperienced taxpayers (and even practitioners), that the IRS will behave unfairly in administering the audit and imposing penalties. I don't think that will happen in the bulk of the cases (there may be some few where it happens for some reason). But I do understand the fear based on uncertainty as to what will happen.

      For those with serious concerns about what might happen on audit, I do suggest that you consult with an experienced practitioner who might be able to give you better guidance.

      Jack Townsend

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    4. I don't understand why the IRS is not giving better guidance on who they want in OVDP. From the posts from the lawyers who work on these cases, it seems the IRS can't keep up with the filings, and it takes at least 6 months to get an examiner assigned. If they're not after minnows, why are they telling us that the only way to become compliant is to enter the program (answer that I got when I called either the FBAR hotline or my local CI office). The additional cost to the taxpayer to enter the program is just not right (attorney fees + CPA fees for 8 years of amended taxes add up! - in my case to more than the amount left in the account), especially if we know that if we have good facts, the opt out is a real possibility.

      The IRS should clearly say that for simple cases (amount of taxes owed less than x amount, account balance less than x amount), don't do the program, but instead just send your delinquent FBAR and do a QD for example.

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    5. "I do think that it believes it designed the program to encourage the cheats to join in and accept the penalties under the program. That's the way amnesty works."
      I wish and hope what you say is true so that there is a whiff of sanity and some justice done to those minnows who got entrapped in this quagmire. Now these otherwise law abiding, productive citizen have to spend countless hours worrying about this mess.

      Very few are like you Jack giving the (hopefully)
      correct way to approach this mess. Most other
      practitioners including the ones you have in your board are scaring the heck out of the minnows/immigrants and expats leading many to question if they made a good choice of coming
      to US

      http://sum2llc.wordpress.com/2009/10/14/file-an-fbar-or-find-yourself-behind-bars/
      http://bx.businessweek.com/asset-protection/view?url=http%3A%2F%2Fwww.mahanylaw.com%2Fmahanylaw%2F%3Fp%3D110

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    6. You might consider posting this genre of message to

      http://federaltaxcrimes.blogspot.com/2012/04/open-forum-comments-to-congress-and-irs.html

      Thanks,

      Jack Townsend

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    7. I had the same concerns but I finally decided to join the OVDI. I am paying for lawyer fees through my nose. First of all, the tax system is based on self assessment. We know that there are literally hundreds of thousands of people in the same boat as us. If IRS was so concerned about such situations, they should have required every tax filer to either go through a certified tax preparer for filing taxes or go through the certification oneself before filing taxes. Innocent mistakes are entirely possible with such a complex tax system where one self-assesses taxes in good faith. IRS is a government organization to serve us. Salaries of all including the ones who designed this ridiculous program are paid by my and your tax payments. And here we have this situation where not only the OVDI program is poorly designed (where lawyers are required for most cases) but the incompetent IRS administration of the poorly designed program (mistakes at every level) is forcing the very hand that feeds them to feel the brunt even more. Just because we made an innocent mistake will not stop me from demanding more accountability from the IRS. Write to Congressmen every year detailing how incompetent this organization is.

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    8. You might consider posting some variation of this comment here:

      http://federaltaxcrimes.blogspot.com/2012/04/open-forum-comments-to-congress-and-irs.html

      Thanks,

      Jack Townsend

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    9. Jack and the others,

      I used "cheats" to simply reflect OVDI policy that is

      Anyone who owes tax with offshore financial asset over 10K is very welcomed by IRS to join OVDI and IRS did not set a rule for whale only (if there is such a thing as whale in the mind of IRS)

      I still do not have a clear definition of a "whale", and I myself could be a whale if $75K is the dividing line -:)

      Regardless, opt-out is a game to play if one can do a good risk assessment.

      Delete
    10. $75K is the dividing line for a resolution inside the program. I don't think that it is the dividing line for whale/minnow outside the program. Anecdotally, I have heard from trusted sources of very great results for amounts that most people would think would be whales.

      I still lament the fact that the IRS will not be more transparent for what the results will be on opt out (or better still apply those results when submitting the initial package).

      Best,

      Jack Townsend

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    11. To Anonymous' comments at April 24 at 12:25pm, "Very few are like you Jack giving the (hopefully) correct way to approach this mess. Most other practitioners including the ones you have in your board are scaring the heck out of the minnows/immigrants and expats leading many to question if they made a good choice of coming to US."

      I have heard from many people that tax lawyers have been "scaring" them into making a voluntary disclosure.

      I wrote the following about this:
      Many people have reported to us that their advisors have “pressured” them into making disclosures, instilling a fear of either making a voluntary disclosure or “going to jail”. Other advisors were little more than paper-pushers, taking foreign banking statements and other documents, and simply turning them over to the IRS with little to no advocacy on behalf of the clients. While practitioners may be correct that failing to bring an offshore account into compliance could result in criminal prosecution, we believe that the role of the client representative is not merely to scare, but to properly advise the client as to all options and all potential outcomes.

      Delete
    12. In case of minnows who wants to do the right thing, save for some lawyers like Jack/Asher
      the real cheats are the scare mongering lawyers
      and to a degree the IRS for robbing their life savings for a non filling mistake.

      Delete
  13. Unfortunately, this is not surprising. Back in the early days of the 2009 program the IRS agents handling these cases couldn't even return phone calls from outside the US.

    While helping me with the FBAR mess, a TAS representative, who had spent many years as an examiner, was able to "jiggle" something in the IRS computer system on an unrelated issue, causing the IRS computers to spit out the correct letter to me. He said that he knew the keystrokes to make this happen.

    Is it possible that not all IRS agents are equally skilled in actually doing this? (In my experience, "It can't be done" often stands in for "I don't know how.")

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  14. Mr. Rubinstein

    This is slightly off topic, but I wonder if you had some information regarding how your clients had fared in 2009/2011 opt outs that you could share either here or on your own website. I remember you posted some success stories for VD 2009 entrants under FAQ #35.

    Of course, I realize that you have client confidentiality concerns and may also have cases in the pipeline that you do not want to impact negatively by commenting on closed cases.

    ReplyDelete
    Replies
    1. I appreciate that you recall my post on successful results for clients in the 2009 OVDP. Unfortunately, once the IRS revoked FAQ 35, the situation completely changed. 2011/2012 OVDI clients do not have the benefit of FAQ 35.

      As for opt-outs, we are representing taxpayers in the opt-out process. However, because these are pending cases, as you suggested, I do not want to publicly discuss the opt-outs. I will note that opt-outs are very fact-specific and are geared for clients where there was little or no tax loss to the IRS, and where the facts support arguments of reasonable cause and/or non-willfulness.

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    2. Mr. Rubinstein. Thanks for your answer.
      May I ask why for these specific customers (little or not tax loss and facts supporting reasonable cause), you advised (or they chose) OVDI in the first place?
      Was it the customers' fear of prosecution that made them choose OVDI? What it the amount in their accounts and the possible FBAR penalties outside of it (according to the IRS manual)?
      Was it because they were not US citizen and afraid of being deported?
      Just trying to understand the logic of entering the program with the intent of opting out for these specific cases. It seems that it would cost a lot more in attorney and CPA fees for the same results that the customers would get by doing a quiet disclosure of being compliant forward.

      Thanks for your insights.

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    3. Anonymous,

      I think that during the early period of uncertainty, it was just to easy to advise all clients to join the program. But over time, I think most lawyers refined their views of the pros and cons of the program. At this point (and for some time), I have felt that taxpayers who would be good candidates for opting out of the program should seriously consider the QD alternative and the go-forward alternative, with perhaps the tilt being to go-forward. The analysis to get to this point is highly nuanced and requires consideration of a host of relevant facts and circumstances. But it certainly is an option based on the information now available.

      I would hope that the IRS will issue some guidance on what happens in FBAR and income tax audits related to offshore accounts so that the process and considerations can be more transparent. Transparency will allay a lot of the concerns that the minnows have. I think the IRS should be concerned these concerns -- rising to levels of angst, anxiety, depression, etc. Taxpayers who have committed no criminal misconduct (the vast bulk have not) should not be subjected to this level of uncertainty.

      Jack Townsend

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    4. I appreciate Jack's response, but I would not put myself into a group of practitioners for whom it was "just easy to advise all clients to join the program."

      Again, the issues are very fact-specific. In some cases, taxpayers wanted a "foot in the door" because they felt that their identities would be revealed to the IRS imminently. In other cases, clients may have entered the program because they knew that they had undeclared foreign income. Then, when the foreign bank records were (finally) received from the foreign institutions, and were then examined with a view towards amending past tax returns, it was discovered that the tax loss was actually much less than expected (for instance, because of foreign tax withholding, application of foreign tax credits, etc.). In other words, the facts changed. When new facts came to light, the strategy then changed.

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    5. Mr. Rubinstein

      I am the Anon who asked you the original question about whether you could share public experience with opt-outs. [We anons need to pick a way to distinguish ourselves] Thank you for your response.

      My only thought about your FAQ 35 comment is that I would expect that the general result for someone on opt out would be approximately the same as with FAQ 35 -- after all, the same facts and circumstances hold. The difference for the taxpayer is that there is a safe harbor against the horrendous FBAR penalties, so there is some piece of mind. The IRS feels (possibly correctly) that a number of FAQ 35 cases were not meritorious, and that there needs to be some potential downside of requesting relief.

      On Opt-Out, the game is a little different, and more risky for both parties. The taxpayer and the IRS both face the risk of a long drawn out process. This is more stressful on the taxpayer, but the IRS faces the risk of uncollectable judgements, and getting slapped down by a judge.

      Delete
    6. To Anonymous,

      You are correct that the FAQ 35 result (if less than the program result) should, at least in theory, be the audit result which is the result that would apply in an opt out audit (or, for that matter in any other way an audit can occur, such as QD and go-forward). You are also correct that, at least with FAQ 35, the program penalty set the maximum cost. Without the FAQ 35 process on opt out, there is no maximum cost, but I suspect that most experienced attorneys can properly advise the client when the is material risk of the audit result exceeding the inside the program penalty so that the client will not opt out if he or she is risk averse.

      Of course, the FAQ 35 process is better because you do get the maximum limit, but I find that in many cases the practitioner will know that the risk of exceeding that limit on opt out is minimal and so advise the client.

      Finally, you are right that there are incentives on both the taxpayers and the IRS's parts to reach an acceptable settlement on opt out which, in most cases where the taxpayers opting out have the right profile, will be less than the program penalty.

      Thanks for your excellent comments.

      Jack Townsend

      Delete
  15. "AnonymousApr 24, 2012 08:43 AM"

    You did not read the whole post or you did not understand the whole point. I was saying that residents reporting global income is NOT ONLY in US - it is very common other developed countries as well. One does become "tax cheat" if he/she owes tax otherwise OVDI will let him/her off the hock --- just file amend FBAR.

    Yes, there is difference between whales and minnows (again those who do not owe tax are not even minnows -- they have really nothing to do with OVDI), that is why one should consider opt-out to fight for less penalty instead of whining and begging for mercy inside OVDI. I won't even bother to ask TAS to help me -- I will take on IRS myself -- this is a true minnow (but still a tax cheat)

    ReplyDelete
  16. ij...

    I posted something on another thread but I don't know if it went through. I don't know the difference between 'whales' and 'minnows' in terms of the IRS, but from what I have read, I may be considered a whale through no real fault of my own. I am not a tax cheat - far from it. I am absolutely horrified about what I might be dealing with to the point where I can't sleep or eat. I can't take on the IRS myself and at this point I don't know what to do.

    ReplyDelete
    Replies
    1. "AnonymousApr 24, 2012 08:26 PM"

      The key is a good risk assessment. When opt-out, the exposure to FBAR penalty such as how much IRS can collect is a big part decision IRS will consider -- regardless what could be a "reasonable cause" from the taxpayer. Moby shows a good example of opt-out -- but his case is so unique on two points
      1. his FBAR/tax non-compliance was very brief (two years)
      2. he has left US and there is really nothing IRS can control.

      For my case, it is simple math decision -- with RRSP included -- I will be subjected almost 50% penalty on my tax related offshore asset. This is the upper limit penalty for those who plea guilty in the willful/criminal prosecution. That is why I will choose opt-out unless RRSP is excluded. So my decision is not really a matter (if i am a cheat or i have reasonable cause or not, of course everybody will make such an argument) but the outcome is much same inside ovdi and outside of the worst case 50% penalty.

      So my taking on IRS is also no loss to me either -- otherwise I would have to pay attorney fee on top of penalty.

      So my risk assessment is purely mathematical which is really easy for me to figure out.

      Delete
    2. Here is what I think the difference between a minnow and a whale.

      A whale should have an incentive to keep money offshore for better tax rate. For example, a taxpayer has high income in US (35%), then keeping money offshore will certainly reduce his tax in US.

      For a minnow (often immigrants) he/she sends money offshore for different reason such as helping family/relatives/buying home etc -- often she/he is at low tax rate in US (like 15%).

      So there is an obvious difference between a minnow and a whale.

      IRS should take a look at the income level of a taxpayer in US rather than focusing on total balance of offshore (I know this is what IRS can take from FBAR penalty). It is also clear that often a whale uses entity to cover up -- minnows don't.

      Delete
    3. ij, you are mistaken. Remember that 35% people in the US can get capital gains at 15% too, which is pretty good. The really rich can use complicated funds for lower rates (perfectly legally, I add). So I don't think assets in the US matter that much.

      But even assets abroad can be misleading. Expat is likely to have large portion of assets abroad. Or an inherited account abroad can be large.

      But I agree on use of entities, trusts, complicated methods.

      Delete
    4. "AnonymousApr 25, 2012 07:10 AM"

      Points well taken -- I have been speaking only on US residents (in my view, US expats should have never been subjected any FBAR penalty).
      I am also talking the incentive of keeping money offshore -- for better tax rate. If someone is paying 15% here in US, then keeping the money offshore (paying offshore tax at the same or even higher rate) does not make sense on hiding money and evading tax.

      I pay 20% tax on my account in China (not a lot money) which is much higher than my US tax rate -- that is not an incentive to hide money either.

      Delete
    5. ij,
      there are other factors such as in case of immigrants assets may have been purchased before they came to the us and could have been sold during the ovdi years and reported in the foreign jurisdiction but not in the US. accounts where father/son may be owners with different citizenship and cloudy ownership.

      Delete
  17. Anonymous April 24, 2013 8:26 PM

    This is exactly what they want. You have to learn from information posted on this blog and understand that you likely have what is a money problem. Remember that if you voluntarily address the problem, there is very minimal chance of criminal retribution. Now the question becomes how to best resolve the money problem.Take a few deep breaths, go to your local vitamin store and get some mega vitamin B-12. This really puts a curb on anxiety. Make sure you understand your situation completely by doing the Just Me Drudgery. Consult with Jack and pay him well. Then decide your best course of action. If you have already joined the program, then there is nothing you can do but be prepared if opt out is a good idea for you. In this case you know what your worst possible outcome will likely be: 8 years backtaxes plus interest, 20% accuracy penalty, 27.5% HB in lieu of penalty and legal fees if you engage council. I let this process destroy me in 2009. Last year I suffered heart failure and kidney failure as a result. DO NOT GO THERE! Its simply not worth it. Also your fear and anxiety will hinder your making sound decisions. Get control over it if you can. The B-12 will help but it takes so week or so to build up. I feel your pain and wish you the best in this disgusting process.

    Anon123

    ReplyDelete
    Replies
    1. really sorry to hear about your heart/kidney failure. I shall get the B-12 soon and see how that helps.

      Delete
    2. Anon123...

      "8 years backtaxes plus interest, 20% accuracy penalty, 27.5% HB in lieu of penalty"

      What about the penalties for every year I didn't file the FBAR? After a few calculations, the total amount of money is almost unfathomable for me.

      I can't afford a lawyer, so I can't even get any professional advice about this. I have been reading this blog carefully (thank you Mr. Townsend!) trying to get a feel for what I should do, but at this point I see nothing but a big black hole in my future. Not to mention any thought of securing my children's future is gone. At this point I am teetering on the edge of complete despair.

      Delete
    3. Anon123

      Despair is debilitating; you need to make important decisions and despair is not helpful. I infer from the fact that you can't afford a lawyer that the amounts involved are not that great (you are really a minnow). That may not be a good inference, but in most cases it would be given that you say you can't afford a lawyer.

      Now, what you may need is an efficient and experienced lawyer to help you navigate the mine field. You should think about engaging a lawyer for perhaps 2 hours to make basic decisions -- if you really are a minnow with no material risk of criminal prosecution, you might well be able to get to a decision that is right for you to just go-forward and deal with an audit when and if it comes. That would be attorneys fees well incurred. Then, even if you decide to do a QD or even get into the program, the bulk of the fees you will incur will be in gathering the documents, analyzing them and preparing the required amended returns and delinquent FBARs. That is accountants work, at hourly rates far less than lawyers. Indeed, I find that, in many cases and most with minnows, the lawyers fees are relatively small and the accountants' fees relatively large as the work is passed to those who can do it most efficiently (i.e., lower effective billing rate).

      So, don't despair. Act. Get the advice you need. Make the decision and move forward.

      Jack Townsend

      Delete
    4. Thank you for responding Mr. Townsend. In IRS terms I don't believe I am considered a minnow. I inherited what I consider to be quite a large amount of money from my mother in 2003. It was put into a foreign bank account in my name, but the point of the money was to help my father out (the interest). I had NO idea it was taxable in this country. So now I am looking at interest/penalties of more than the original amount. I am heartsick about this situation. I have also had to inform my 88 year old father (with a heart condition) of the situation. He doesn't understand why the IRS would do this over (from my calculations) approximately 15,000 of unpaid interest over 8 years. I don't really have access to the money because I have never considered it 'my' money. It just sits in an account in another country. Obviously I have made major mistakes that will affect not only me but my family, but from reading this and other blogs I can't see any reason for the IRS not taking everything, and maybe filing criminal charges against me.

      Delete
    5. I assume you meant unpaid tax of $15,000 rather than unpaid tax on interest of $15,000. Either way, $15,000 is a small amount relative to a lot of the disclosures. If that assumption is correct, then one could infer that the omitted taxable income is perhaps $70,000 over all the 8 years. That would be on average less than $10,000 interest income per year. And, assuming, say a 3% interest rate, the principal would be slightly above $300,000. The maximum amount may be more if your Father has been taking some principal out in the later years in the period.

      The point I want to make is that that is a lot of money for you, but relative to the whales in the program, it is not a lot of money.

      Rather than going through a lot of angst over it, get some individualized advice to help you deal with the issue.

      Sounds like you have some positive factors (i.e., the principal was an inheritance, which means it was not part of any U.S. tax avoidance, the interest was used by your father, and I suspect other favorable factors). These favorable factors can substantially mitigate the opt out penalty.

      Jack Townsend

      Delete
    6. TO Anonymous Apr 25, 2012 05:00 PM

      I too want to echo Jack's and annon123 about despair. We understand the feeling, but you have to buck up and control it. Easy to say, but much harder to do, I know. Just realize that many that read here and comment from time to time, have been there and experienced that, and...trust me... This too will pass!

      Anon123 mentioned the Just Me Drudgery. What he is referring to how I describe the process of information gathering to get to a place where you can make logical and intelligent decisions, not driven by emotion, fear or despair. It is not rocket science. It is a drudgery for most folks, but there are no short cuts to building up your knowledge base unless money is no object. You can certainly pay someone to handle everything, but if you do, and you haven't done your drudgery, how do you know the advice you are being given is good? It is a buyers beware world out there, even for expert tax attorneys.

      Here is the link to something I wrote just for folks like you.

      OVDI Drudgery for Minnows.

      http://isaacbrocksociety.com/2012/01/28/the-ovdi-drudgery-for-minnows/

      You will find, at the end, I will bring you back here to the selected threads, in order, that I think will help you build up your knowledge base. Jack's blog is the very best for the drudgery. If you do as I suggest, it should help turn despair into determination and hope. Look at ij, who has commented on this thread. He is a case in point. You should read his first comments months ago compared to him now. That is what knowledge does for you! He has become fearless!

      True, doing the drudgery will cost you in LCUs, but if you have more of them than $$$, I recommend the process. Get yourself to a knowledge level where a paid consultation with an OVDI attorney is a collaborative effort, not just one expert telling a novice (you) what to do.

      Best wishes. I have confidence, if you do your own drudgery, you will come to a solution that is right for you!

      Delete
    7. Oh my goodness! This is the first ray of light that I have found in my 7 days of sleepless nights. Yes, I think the unpaid tax is approximately $15,000. From looking at it, the bulk of the interest was paid between 07 and 09. My father put some more money into the account in 07 and decided to withdraw it in 09. It's my name on the account though, so I have figured out that I am responsible for this nightmare. I can't believe that I am subjected to this because I was always taught that you have to look after your parents. I have lived in the US for 20 years as a resident alien and have never taken a damn penny from the government. We live a very frugal life and I can't believe that after years of scrimping and saving I may have to fork over $100,000 +

      Delete
  18. Anonymous April 25, 2012 5:00PM
    I think Jack mistook your post for me posting. Regardless, within the program there is no FBAR penalty for every year. The 27.5% high balance penalty remedies all FBAR reporting violations. If you join and opt out, the situation becomes fact and circumstance dependent. That is why you should spend some money up front and consult with an attorney like Jack. You need help in this matter. Maybe like Jack said above, your best interest will be served by complying on a go forward basis or maybe even a quiet disclosure. Contact Jack and pay him to review your facts. That is a sound course of action for you. Do not be penny wise and pound foolish. Pay for a consultation. It may be the best couple thousand dollars you ever spent.

    Anon123

    ReplyDelete
  19. But I still believe I am stuck with a penalty for every year I didn't report a bank account, or am I getting this wrong somewhere? I was under the assumption that it's the high balance penalty + the yearly charges for not reporting an account + whatever else.

    ReplyDelete
  20. Please get a consultation. You need better insight on this matter. It is likely you have much better options than you think you do. And within the program, assuming you stay in it and pay the 27.5% penalty, No there is no other yearly penalty for FBAR. Thats why you pay the 27.5%. You would only have to pay backtaxes, interest, 20% accuracy on backtaxes and the one time 27.5% high balance penalty within the program. This is the worst case situation. With proper consultation you may discover better options. So get on the phone and get advice.
    Good luck to you.

    Anon123

    ReplyDelete
  21. I'm still a little confused. I was referring to the $10,000 per year penalty for not filing the FBAR on top of the 27.5% penalty.

    ReplyDelete
  22. If you go through the program and pay the 27.5% penalty there is no other penalties PERIOD. You just have to pay the backtaxes for up to 8 years plus interest plus an accuracy penalty of 20% of the backtaxes.

    For example: Assume the high balance over the last 8 years was 300,000. Assume you earned 5% interest over the 8 year period. Assume your tax rate is 20%. Assume interest is 6%.

    Your FBAR penalty is 300,000 x 27.5% = 82,500
    Your backtax is 300,000 x 5% = 15,000
    Your Accuracy penalty is 15,000 x 20% = 3,000
    Your Interst on backtax and accuracy penalty is 18,000 x 6% = 1,080

    Your total owing amount would be: 101,580

    This is the worst case situation. With proper consultation you may have much better options.Maybe even no FBAR penalty and maybe you could comply on a go forward basis which would make your cost zero. Get the consultation. You need it because you are misunderstanding even the basic program.

    Anon123

    ReplyDelete
  23. Anon123...

    Thank you so much for clarifying. I am just starting on this journey, and yes, I seem to be misunderstanding a lot of things! That is what a combination of no sleep and sheer panic will do to a person. Thanks to you and Mr. Townsend things are now a lot clearer.

    ReplyDelete
    Replies
    1. @ AnonymousApr 26, 2012 08:03 AM

      Listen to Anon 123.

      You are a newbie. It is natural you are misunderstanding a lot of things! You have not digested or understood the program or your options yet. Your questions show that. You are naturally fearful of the penalties and the prosecution threats. It is exactly what the IRS wants, as that fear rushes you to their open net, and makes you easy pickings!

      This whole OVDI program is confusing, especially when confronting the complexity the IRS has thrown in the path of compliance. It is sad they make it so hard and stressful with all the hyperbolic threats. (Yes, the IRS engages in hyperbole too.) You counter that with reading drudgery, as I have suggested above,(Apr 25, 2012 08:15 PM) and then you will be in a better position to decide your course of action.

      Annon123's advice on a consultation is probably a good one for you, but I do fear you running to an expert right now, as you are a "babe in the wilderness". You seem desperate for "someone" to tell you what to do. If I read your wrong, I apologize. Maybe it would be money well spent for you to get a detailed verbal explanation of the program and the various options, but...and this is a BIG BUT... I don't think you are in a position yet to assess any advice given to you. You are in a vulnerable frame of mind. You don't know enough! If you choose the wrong adviser, given your mental state, you are at risk of being taken advantage of, even unintentionally. You need to make yourself "fool proof", and the drudgery will do that for you. But it isn't easy either.

      However, if you are having a difficult time right now getting your head around this program, all the penalty considerations and the risks presented by the various options of joining the OVDI, opting out, doing a QD, or just filing and being compliant from this time forward, yes, do buy an "expert's" time . It may be of good value for you if it is limited to an educational consultation.

      I bought several during my OVDP journey! All were money well spent, and they built upon the knowledge I had already gained and helped me assess better what I was reading.


      So, do as Annon123 suggests, but limit yourself to just explanations at this point. You don't have to make a decision tomorrow. You need knowledge more than you need direction right now. You are not staring at a deadline. The direction will come once you have built up a knowledge level sufficient for the task of decision making.

      So in summary, get expert education if the reading drudgery is too much for you right now. Limit the time and dollars you spend. This might help you sleep better. Then, go back and do more drudgery before you make a decision.

      Best wishes for the difficult journey. I am sure you will get to the right decision for you if you are willing to spend some of your LCUs on the drudgery.

      Delete
    2. Thank you so much Just Me. I am finally starting to realize that I have a battle on my hands, but I haven't lost the war yet, so to speak. I have been looking at the situation all wrong: I thought it was over before it even started and I had no options open to me.

      From this point forward I am going to educate myself thoroughly, rather than just anticipating the worst. This situation was caused by my own ignorance of the subject, but I intend to remedy that going forward. Before paying for expert advice I need to be completely aware of all possible outcomes myself so I don't enter the situation like a deer in the headlights. Once I have a good grasp of what to expect I should be able to handle myself a little better.

      Thanks to everyone here who has offered me advice. I no longer feel like I am on my own in this nightmare. Once again, many thanks.

      Delete
    3. Well said!

      Anon123

      Delete
    4. Now it sounds like you are on an even keel! Much better. You are not on your own. Lots have gone before you, and while outcomes vary, depending on risk tolerances, you will emerge from this without "the worst" happening. Education will over come fear and despondency! Cheers.

      Delete
    5. Trying to go forward with this, and beginning with my limited resources, a couple of connections were able to talk to a lawyer here in the PNW who said he would be able to help me. I haven't spoken to him myself yet, but the gist of the conversation that my husband got was "Yes, she has to do it, but given the circumstances it shouldn't be that bad."

      Armed with that information, I contacted the CPA that we used (when we could actually afford a CPA). I originally called him a few days ago when I wasn't sure of the situation and he told me he had never heard of the FBAR and not to worry. When I called him today letting him know that I needed to get going on this and asked if he could amend my tax returns he said that he doesn't want to get involved. I said that I simply wanted to hire him because he knows us and had a good relationship with us in the past, but he refused. I have no idea why he would do this - all I'm trying to do is PAY him to amend my tax returns! I was hoping to work with him because he knows me and my family, but obviously I'll have to look elsewhere or just try to do them myself. It boggles my mind why he wouldn't want my business in this economy, as well as the fact that I wonder why he doesn't want to get involved.

      Delete
    6. He doesn't want to get involved because he's afraid of the consequences for himself for not knowing the tax laws that he's supposed to know to do his job correctly.
      He doesn't want to be investigated or charged for a mistake that he made, not you. That's why he sending you away.
      I have the feeling that this whole mess is going to generate some lawsuits against CPAs and tax preparators. In a LOT of cases, they are the ones who didn't ask immigrants about foreign accounts. They should be the ones paying for the penalties, not us.
      I apologize for being bitter, that whole thing is just wrong.

      Delete
    7. many CPA's who prepared the original returns are taking this stand of not preparing amended returns with foreign income since they feel they could be litigated against.

      Delete
    8. I do not see how this discussion is relevant to proper payment application by the IRS, but I want to answer you.

      I was scared into the Voluntary Disclosure program by a US based accountant I contacted to review my returns. I told him I lived overseas and had accounts overseas as result. With that the conversation went cold and he refused to speak further with me. He was thinking about his liability. I am still not 100% sure if it had to do with the fact that he might learn about possible past non-compliance and could be considered complicit, or if he was afraid to work with me because the IRS was saying that QDs were not recommended when there was undeclared income related to an account. While he did not even know if I had undeclared income, he assumed the worst case. His refusal to speak with me only scared me and to this day, I do not respect him for what he did. He could have at least explained his reasons.

      In your case, if your accountant has not advised you about the FBAR, he may also be liable to you because he gave you erroneous advice. You may start to push him for written proof of this and he is going to try to avoid giving you this.

      It may also have to do with the fact that his conversations with you are not protected and the only way in which he cannot incriminate you, and possibly himself, is to work with you via a Kovel agreement with a lawyer. That is an expensive deal. It means you play a ridiculous kind of telephone with the accountant through the lawyer. If you truly are a minnow, this is likely overkill. As it has to do with liability, some accountants are very fussy about the agreement and may still refuse to work with you.

      Other minnows that have had similar experiences and kept looking for accountants have found them. So it might be worthwhile to contact a number of accountants.

      Since you will consult with a lawyer, I would question this lawyer as to why you “have to” do OVDP. Why is QD or a go forward strategy so risky for you? Why do you have to do what will make him a lot of money? If you decide to do OVDP, to minimize your legal costs, what parts of the submission process can you take over? What parts does he absolutely need to be involved in, if any, in your case?

      Maybe that lawyer can refer you to an accountant who will amend your returns. Check if this is possible before you meet the lawyer and this way you will have a better basis for a discussion of your material risk. Definitely try to get it done before you make your decision about OVDP. The results may lead you to choose a strategy other than OVDP. People are adopting other strategies, they just don’t advertise it.

      Delete
  24. Hi This is JK, I have submitted my package last Aug, but no response from IRS, all the checks have been cashed within a week of submission. Any one submitted in Aug got officer assigned or got the final clearance?

    ReplyDelete
    Replies
    1. I submitted August 2nd week as well and have not heard back. Asher Rubinstein posted that he has some clients that submitted in August that are begining to get processed.

      Delete
    2. my opinion is that they will process fat cats first then go to little guys. i am also hopeful that when IRS gets swamped with opt outs it will come up with a new streamlined process to get everyone out the door.

      Delete
    3. I submitted the complete package in May 2011 and still waiting. Anybody else in that time frame?

      Delete
  25. JK...

    You might be in the wrong thread for this question... Try here, and some others might have answers for you...

    http://federaltaxcrimes.blogspot.co.nz/2012/04/experiences-inside-ovdp-ovdi-2-4412.html

    In the OVDP, it took about 6 months for them to just contact me. Not sure what the average time is in the OVDI.

    ReplyDelete
  26. What is ironic is that the IRS seems to insist on strict punctuality from VD participants (you MUST respond in x days to this letter or we'll kick you out), but itself takes so long to respond and drags out the process so much. If they're in such a bloody hurry to get you to respond, why can't they be timely ?

    ReplyDelete
    Replies
    1. @AnonymousApr 28, 2012 04:25 AM

      Do you really expect an answer...?? LOL! It's a bureaucracy! It does what bureaucracies do.. They are inefficient, slow, and makes rules for others that they couldn't follow themselves. No surprises. It is just the harsh reality of what we have to deal with.

      Delete
    2. Will they allow some extra time to consider closing statements ? I need to talk to a pro before deciding whether to accept. I know they say its X days only, but given the time they take, and given that they have extended the last date for the original submission multiple times before, I don't see why they can't wait a few weeks more.

      Delete
    3. My wishful thought: complex IRM guidelines that specify the penalties for IRS for the delays, mistakes they make in order to compensate for the mental stress, added legal fees and time lost by IRS paymasters, the tax filers.

      Delete
    4. @Anonymous Apr 28, 2012 4:07pm
      Yes, it is likely they will give you extra time. I was concerned about this also and my lawyer told me that he had never had a problem getting extra time. I have no idea how he does this.

      Delete
    5. @Anonymous Apr 28, 2012 04:07 PM

      My examiner was always tolerate with the timelines. She sent me four (4) 906s in all, and after each one, I wrote back with reasons why I couldn't make that timeline or wouldn't accept it as constructed. The time was extended for consideration each time.

      If nothing else, look for something technically wrong, and have them correct it before you will consider signing the 906. For me, I kept challenging their reconciliation documents, and / or their calculations of taxes / penalties as shown on the 4549-A Income Tax Discrepancy Adjustments form.
      The first ones were incomplete, or inaccurate.

      So take a very close look at the 4549A. Have you audited each year, line by line to be sure it is right? If you find one mistake, write them and ask that it be corrected before you consider the 906. They make lots of mistakes, so use that to your advantage. I audited their work more critically then they audited mine! You can drive them crazy for a while. LOL

      I made up a spread sheet to audit their work.
      You can find a copy of it here, if you want to use it... I really recommend auditing them in detail.

      Go here...

      http://bit.ly/y5NQr4

      Scroll down, or do a find for this file name...

      "4549-A Audit adjustment workbook"

      It is just a few lines down from Exhibit I. You can download it and use it to audit them!

      At some point you will hit a wall with your examiner. They finally did send me the form letter that basically says sign the 906, Opt Out, or get kicked out. I think that was form 4564. You can see a copy of it in the Opt Out guidelines that were issued June 1st, 2011

      http://www.irs.gov/pub/newsroom/2011_ovdi_opt_out_and_removal_guide_and_memo_june_1_2011.pdf

      That gave me another 20 days to deal with the dilemma of what to do. I ended up appealing to the TAS at that point, and then they extended the deadline another 30 days.

      So that is my experience. If you communicate with them and hold them to every one of their internal procedures, they have to work with you. Therefore, effectively you can extend your time to consider.

      It should go without saying, put everything in writing. :)

      Hope that helps.
      cheers

      Delete
    6. Just Me,

      I made the process much simpler. I told my agent I would sign 906 based on what I believe the penalty should be (that I sent with my package already) and I would not sign if there is a huge discrepancy.

      When my agent was about to send me 906, he did call me to alert me this huge discrepancy -- 3 times more than my calculation based on 1. RRSP inclusion 2. Penalty rate jump from 12.5% to 25%.

      I told him that no need to send me 906 -- let's move to opt-out process. Instead of going through a lot papers mails -- this would be easy -- just phone conversation...

      Now, it is under review if or not RRSP should be included in lieu penalty, I hope it comes with a right/consistent policy not a robbery on pension plan (Mr. Obama, do you really know what your taxmen, these top elite/smart/ best educated are doing ?)

      I don't really want to spend any time to what is going on with OVDI policy -- good or bad -- I will have a final say --or the court will have the final say !!!

      When you have nothing more to lose, you become fearless !!

      Delete
    7. @ij..(aka Fearless)

      Good strategy putting it back on them to do something. I would still put it in writing what you told them. I always followed up every major phone conversation with a letter with my understanding or come back. Also, being overseas and with mail delays that did drag out the time somewhat. Again, if a person is stalling for time to decide, I would use that strategy. Document when you either received their mail or when you talked and what you are waiting for from them before you can decide. Just be more bureaucratic, politely so, then they are! LOL

      BTW, I think, if you don't get satisfaction on your RRSP, they will still go through the form letter process outlined in the Opt Out procedures. If you wanted to drag out the time, you can use every day that is allowed by their guidance.

      Delete
    8. ij,
      From the time an agent was assigned, how long did it take for him to tell you the 906 was ready? I think you got an agent assigned in December. If so, this would be 5 months.
      I heard from my attorney that an agent contacted him on Friday.

      Delete
    9. "Anonymous Apr 29, 2012 01:49 PM"

      My agent first told me that 906 would be ready in Jan -- then Feb, and finally in April. Of course, it would have been over for me now had I agreed to pay three times as much in lieu penalty as I agreed to. Here is my timeline

      Submit in late April 2011
      Amending correction in July 2011
      first contacted by an agent in Dec. 2011
      906 would have been ready in April 2012

      Now, I have to praise my agent who spent a lot time to calculate my PFIC (his and mine calculation differs $150 -- but it took another 3 months to have the mission complete)

      My agent is a decent/sensible public servant -- and I would have closed the deal just for him (only if RRSP is off the table)

      Delete
    10. "ij @ Apr 29, 2012 06:12 PM"
      Thanks ij. I am hoping my ordeal gets over in the next 2 or 3 months.

      Delete
  27. Just Me,
    After your case was assigned to the agent, how long did it take to get it to closure?

    ReplyDelete
  28. There is a well-known Chinese saying

    鱼死网破 --- a desperate fish breaks the fishing nets

    ReplyDelete
    Replies
    1. ij,
      IMO, Some of these proverbs are meaningless.
      most of the fish caught in a net, if they know they are caught will try to escape. Won't they? which means all of them will be desperate. So
      does this proverb mean one of those desperate fish will escape.:)

      Anyways, i think i am rambling and went off course trying to make sense of the proverb :) Irrespective of all these proverbs, chinese or otherwise, i think based on your circumstances, if RRSP is included, IMO, you should opt out. That seems reasonable to me and
      even if it goes to a court, IMO the decision
      should be in your favor.

      All i can say is 有錢能使鬼推磨 - money talks

      Delete
  29. @ AnonymousApr 29, 2012 05:52 AM

    Well, it depends on how you define "closure", and where you calculate start and stop. I calculate from first to last contact with the IRS.

    I calculate from OVDP submission date when I walked into a CI office and hand delivered my letter to the final reconciliation check issued to me for money over paid to the IRS. That was 851 days.

    I haven't actually calculated the time of agent assignment to closure (if you mean just getting back a signed copy of the 906) Final refund or payment checks will take longer and is more hassle.

    Agent assignment took about 6 months from OVDP submission, so you can subtract from that from the 851 days if you want.

    From signing of 906 to receiving my reconciliation checks took another 5 months and lots of calls to the audit offices to figure out what was going on. So if you don't want to include that in the final closure process you can subtract that from the 851 days too.

    Bottom line. A long time for Shulman's efficient process that he is so proud of. :)

    ReplyDelete
  30. Just Me,

    I would like to opt-out more than anything else inside OVDI even with RRSP excluded. However, I want to give IRS a reason to opt-out. I have to be consistent myself as my policy is to penalize only tax related accounts (that is all about OVDI in the first place).

    So I care much less what would be OVDI result -- it would be either my calculation on in lieu penalty or FBAR penalty decided in the court.

    My agent is a nice person, I think he is trying hard to get RRSP issue resolved -- so we can all move on. The top managers of IRS should make a smart decision -- do not keep minnows in fighting and let whales escaping from the finishing nets.

    ReplyDelete
    Replies
    1. I agree ij. Most of the agents see the sufferings of minnows. It is the top managers who needs to be convinced or taken to court and let the courts decide. If there are sufficient number of minnows who can conquer their fears and decide to go to court where there are no glaring bad facts, i think the results would be in favor or the minnows. Ultimately it is the fear that we need to fight against more than anything else.

      Delete
    2. I think very few, if any minnow cases will go to court unless the minnow initiates the suit. The government may have to sue to collect the FBAR penalty. There may also be an organizational issue here - I think it would be DoJ Tax, not IRS lawyers, that would have to bring the suit. Given its recent loss of staff, is DoJ Tax really interested in spending resources on these small judgements or is it interested in pursuing the big mammals ?

      The other possibility is that the IRS may try and collect from tax refunds. Its easy to avoid that. If someone has made a prepayment of the OVDI penalty (as mentioned earlier in the thread), could the IRS seize that as an 'offset' ? I think NO, because those are definitely not tax refunds, and the IRS is only allowed to offset tax refunds.

      Delete
    3. For FBAR penalties, the Government has to initiate the suit. I suppose that there is some way the taxpayer could pay the penalty and sue for some type of refund, but have not researched that issue. The problem is that the FBAR penalty is not a tax. If it were, there would be a refund suit available. I would think, however, that at a minimum there might be a suit in the general jurisdiction of the Court of Federal Claims, but have not researched that issue.

      But, back to the point, I don't think many persons who cannot reach agreement at the audit or Appeals stage will initiate a suit. Rather, they will wait to see whether the Government initiates the suit and then respond accordingly. That suit will be in the federal district court.

      The loss of staff to which you refer was in DOJ Tax's Criminal Enforcement Section. FBAR penalty suits are brought by DOJ Tax's civil enforcement sections. I have no idea about staffing in those sections, but certainly think they are capable of bringing some FBAR suits. I doubt, however, that either DOJ Tax or the court system really wants a lot of FBAR civil enforcement suits. Hence, I do think that there will be incentives in the audit and appeals process for the IRS to reach agreement with the taxpayer.

      Your point of collecting from tax refunds is well taken.

      Jack Townsend

      Delete
    4. Jack,
      within the progrom (OVDI) or upon an optout/forceout, do we have any
      incidence where the taxpayer and the IRS
      did not agree on the fines? If so, how was such a situation handled?

      Delete
    5. No, I don't have an incidence. My own are in the pipeline. Everyone I have heard of from other practitioners have settled at the audit stage. That is limited and very anecdotal. I think most of the opt outs either are in the pipeline or are prospective opt outs. Hence, I do not think we will see critical mass of data from which to extrapolate for another year.

      However, I am fairly confident in predicting that there will be incentives on all sides -- particularly on the IRS -- to move to settlement in all except the most egregious cases (which should not have opted out in the first place).

      Jack Townsend

      Delete
    6. Jack,

      I do hope "particularly on the IRS -- to move to settlement in all..."

      And, we shall see the new policy on RRSP which is under review. If or not IRS want to see massive opt-out..

      Delete
    7. ij,
      What makes you think there will be a massive opt-out if they include RRSP?
      There may be well no massive opt outs.

      Delete
    8. @Anonymous Apr 30, 2012 12:27 PM,

      Well, I am one of them, and I know a few in the same position. I am speaking of those with RRSP in this OVDI.

      There are a lot Canadians living in US may not be aware of RRSP filing requirement. So massive -- means those with RRSP are likely to choose opt-out.

      On the other hand, if IRS does take a hardliner position on RRSP, that may even scare a lot folks not to opt-out -- we all know what a bully can do.

      Delete
    9. I'm not sure about massive, but as ancedotal data on opt outs filters out and there is some indication that (for minnows at least), the IRS is not being draconian, more people may opt out.

      Delete
    10. Jac,
      you say "Everyone I have heard of from other practitioners have settled at the audit stage."
      When you say audit stage, is this within
      the ovdi or after opting out and subjecting to an audit.

      Delete
  31. Thanks Just Me. If i take out 11 months out of 851 days
    that works out to about 500 days or 1.4 months for the agent to go through your case. That appears to be quite some time comparing with ij which appears to be about 5 months.

    ReplyDelete
    Replies
    1. Anonymous sApr 29, 2012 01:54 PM
      I meant 1.4 years and not 1.4 months.

      Delete
  32. I posted earlier about owing approximately $15,000 in tax on an inheritance from 2003. I didn't take into account the EIC credit that we took every year, usually getting refunds because my husband earned so little. Looking at it now, it's possibly more than $45,000 in back taxes over 8 years (adding on the refunds). Plus the FBAR penalty of about 82,000. At this point I really don't know what to do. My husband only earns about $20 - 25,000 per year (self employed carpenter). I have gone back and forth on worst case and best case scenarios, but I don't see any light at the end of the tunnel here. Now I am scared.

    ReplyDelete
  33. "Anonymous Apr 30, 2012 08:23 PM"

    The amount tax due seems high, and if you are caught by IRS, it will be a big trouble (it seems to me that your omission were over 25% of your total reported income). Even though you are not the biggest whale or perhaps can still be a minnow -- the tax due (false claim EIC) is troubling.

    I would try to make it clean -- but I do not know how to tell you which way to go -- QD/FD/OVDI ? No idea what is your mental toughness -- Last year this time, when I found myself owe around 3K tax (over 8 years), I jumped into OVDI pool. You should consult a good attorney like Jack who can guide you out this trouble.

    ReplyDelete
    Replies
    1. ij,

      I've read all your posts and we have VERY similar facts. Would you say that you jumped into OVDI pool out of fear at the time? Were you afraid of the potentially hight FBAR penalties outside of OVDI with 6 years of non compliance?
      If history were to be rewritten, with all you know now, and the information available on isaacbrocksociety and this blog, would you do it again?

      Delete
    2. "Anonymous May 1, 2012 01:13 PM",

      I would have a difficult time to decide between QD and FD, but not OVDI. But I will be prepared for full scale audit.

      Basically, I will leave the ball to IRS -- if or not they want to pursue me. This is pretty much same as opting-out from OVDI.

      Delete
    3. I'm not ij, but just a comment: I find this blog very helpful, personally.

      I find some posts on the Isaac Brock blog (Just Me's and Moby's opt out documents and an occasional thread) very useful. However, a lot of posts are too rhetorical, suggesting constitutional claims (none of which except possibly 8th amendment claims) are likely to stand up. And if the author believed in those claims, one wonders why he's posting from Canada rather than from the US.

      Delete
    4. "Anonymous May 1, 2012 01:13 PM",

      I should also add -- one major fact of my consideration then was the assumption of RRSP exclusion. So my penalty base would be lower at 12.5%.
      I have not learned much what would be like outside OVDI except one good opt-out case (Moby).
      So given the fact RRSP is not excluded (at this point, it is not), then I would not consider to join OVDI. As I have said, my worst case of FBAR would not be much different than OVDI with RRSP included.
      So, the decision is not get into OVDI because it is such a sweet deal -:).

      For most minnows, criminal prosecution is highly unlikely (it is hard for IRS to prove -- the financial incentive of keeping that much money offshore), so OVDI gives the protection only needed by whales.

      Delete
    5. ij/Jack,
      Similar story here. Only have unreported bank interest income. Do you have any idea what FULL SCALE AUDIT mean? How does this work? What else does IRS need? Do they contact banks to verify interest income?
      Any input is appreciated. Thanks!

      Delete
    6. I am not familiar with the term full scale audit. The IRS has the right to audit any return. The IRS usually looks only at certain items in a return when it audits. It has limited resources and must work efficiently.

      In the case of opt out audits, since the taxpayer will have done most of the audit work by filing good amended returns, my suspicion is that, in most cases, the IRS will not devote the resources to any type of in depth audit beyond the materials that are submitted with the OVDI package. If something jumps out at an agent, he may follow through with requests for information or documents, but provided that good work has been done on the amended returns, nothing material should be discovered. Now, if good work was not done on the amended returns and there are higher taxes than reported on the amended returns, then one should be concerned about audits. Even there, however, the IRS may not spend resources to discover whether there are additional unreported taxes, because in most cases there will not be additional unreported taxes.

      Jack Townsend

      Delete
    7. i made up this full scale audit -- meaning they can check all the items in the statement covering these years.

      Delete
    8. This might be a stupid question...
      If we choose to be compliant forward and are audited, will the IRS necessary look at the last 3 years of taxes or just the latest correct one submitted? I guess if the audit was triggered from a newly checked foreign account, they might.

      Jack, for go forward audits, would you strongly recommend being represented (and by whom: tax lawyer or EA) because of the unchecked box on schedule B in previous years - or is it fine to just be prepared and have all the documents from the foreign bank and face the IRS by ourselves? (assuming no other bad facts: stupid immigrant who did not know the law/was wrongly advised - small income undeclared in previous years).

      Delete

    9. Jack, for go forward audits, would you strongly recommend being represented (and by whom: tax lawyer or EA)


      Why not cross that bridge if and when you're audited ?

      Delete
    10. I think that, if you are considering a go-forward choice, you should have an attorney to make that strategic choice.

      Now, once you have taken the path of the go forward, then you can be audit if the IRS chooses to audit you. When and if you are audited, you should be represented. You need a good tax practitioner. In truth, I think you could be represented on audit by any type of experienced practitioner with sensitivity to the issues involved. Most of the people I know that fit this bill are attorneys (not all attorneys, but only a limited subset), but I do know some CPAs that could do a great job and, I imagine, there are some enrolled agents that could do a great job. I don't know any enrolled agents with this expertise, but suspect that there are some out there. (Generally lawyers have a tendency to look down on enrolled agents, but I know some enrolled agents who do a better job in their area of specialty than many of the lawyers I know who try to practice in their area of specialty.)

      So, just look for the expertise when and if you need it. To repeat, that is on the front end when you make the strategic choice to go forward and then when and if you get audited.

      Jack Townsend

      Delete
  34. Anon @Apr 30, 2012 08:23 PM

    I think you should consult a good lawyer, like Jack rather than posting too many details of your situation, even anonymously. There seem to be other good factors in your case, but all other things being equal, it seems to me that it is negative to have a large ratio of offshore income to onshore income. [Conversely, a small ratio would seem to be a positive. ]. The EIC issue is definitely a problem too, I think.

    ReplyDelete
    Replies
    1. I agree with Anon May 1, 2012 08:47 AM
      Just because you have a higher income offshore doesnt necessarily mean that you did something intentionally to hide the money. It was an inheritance that you got offshore. You still will have to pay the taxes. As for the FBAR penalties, i think, again i am not a lawyer, based on the circumstances and your ability to marshall the facts and present in good light should
      hopefully help you get some form of penalty mitigation.

      your worst case for FBAR penalty appears to be 82k based on your posting but anything less there should help you.

      Delete
    2. i hope you factored in interest and state taxes. i think state penalties and interest will be a killer as well. some states have 1% interest per month.

      Delete
    3. Thank you!

      I am going to make everything right - I have absolutely no intention of sticking my head in the sand over this. I will pay every last cent that is owed no matter what it takes.

      When people mention things like 'false claims EIC' it only serves to make me more frightened than I already am. I didn't make a false claim, because I had never heard of this until recently. I didn't intentionally underreport anything. I have never seen a Schedule B in my life.

      I understand that I am probably in a lot of trouble, but none of this was intentional. All I want to do is pay what I owe.

      Delete
    4. "Anonymous May 1, 2012 05:20 PM",

      Sorry for poor choice of words, as I call myself a cheat -- the fact we are on the wrong side of law, and it is civil matter if not intentionally.

      Having the cuts to pay the due/penalty, and clean up the mess -- this is nothing more than showing our basic decency.

      Delete
  35. Jack

    If an opt-out case (minnow case) goes to audit and Appeals, can the IRS change the penalty midway ? For instance, suppose the IRS assesses a non-willful penalty of 40K, and after the taxpayer counters with 10K, comes down to 30K, but refuses to go further down and that is not acceptable to the taxpayer, does that mean the IRS has a free hand to increase the penalty back to 40K if the taxpayer chooses to take the case to Appeals ?

    Or worse, could the IRS say that "Well, we think your penalty should actually be 50K, or that it should be considered willful and the penalty should be 100K". Assume all these offers and counter-offers are made in writing, so there is a paper trial.

    I know there is very little practitioner experience with FBAR penalties, but I presume you (and others) have plenty of experience with tax penalties and I assume the general procedure of the IRS will be the same. Are examiners likely (on tax cases) to recommend the civil fraud penalty just to get the taxpayer to agree to an accuracy related penalty even if they (the IRS) may not have a strong enough case for civil fraud. The analogous FBAR case would be the willful penalties, although those are no mind-boggling as to put the civil fraud penalty in the shade, and hence give more power to the examiner.

    This would clearly be an abuse of discretion on the part of the examiner, and you've said before that you don't think the IRS will be draconian (and has a centralized process to avoid rogue examiners getting out of control), so I would assume the answer is, that this sort of thing should not happen as a general rule.

    ReplyDelete
    Replies
    1. The audit and appeals process may be viewed as a negotiation in which parties make offers and counteroffers that are not binding until finalized. So, in this type of negotiation, parties may make offers that, if not accepted, are not then binding on that party. So, the IRS can offer a more favorable deal and, if the deal is not accepted, go back to a less favorable position.

      I think most practitioners' experiences -- certainly my experiences -- are that IRS agents to not propose the civil fraud penalty with the thought of forcing negotiations to the accuracy related penalty. There is a process through which the IRS must go to assert the civil fraud penalty and, generally, it will eliminate the risk of that happening. I cannot say that it never happens, but it is not typical.

      So, extrapolating from those experiences to how agents will apply the willful and nonwillful FBAR penalties, I would suspect that in most audit cases (whether by opt out or otherwise), the willful penalty will not be under serious consideration in most cases.

      Of course, in the opt out audits, taxpayers and practitioners will have self-selected only the cases that does not present material risk of the willfulness penalty.

      Jack Townsend

      Delete
    2. Jack

      Thank you very much. The concern I had was that an examiner might try and raise the willful penalty as an implied threat (I am a minnow too with reasonably favorable facts). I remember from Just Me's comments that his examiner suggested the willful penalty could apply in his case if he opted out, whereas it clearly didn't seem applicable.

      However, your comments are reassuring. It seems that even if an examiner gets a little over-enthuastic, there will likely be institutional restraints.

      Delete
    3. The taxpayer advocate service report recently covering international issue has this response from the IRS:


      Further restraint is provided by requiring that the office of chief counsel provide input upon all FBAR penalties proposed


      I'm not sure at what stage this consultation takes place, but I would assume that this (if actually true) would prevent the assessment of ridiculous penalties when not applicable (or for willful cases, where the burden of proof is not met).

      Delete
    4. It seems that whenever the IRS proposes a penalty they must do some calculations to justify the amount (i.e. they cannot just arbitrarily pick a number out of a hat.)

      So in the above example if their initial offer is 40K, they would be unlikely to later propose 50K or 100K unless some new facts came up, (bad facts that were not disclosed before, or a new legal precedent, or in rare cases a math error in the IRS' original penalty calculation.)

      That's just my two cents ...

      Delete
    5. Hi Jack,
      need your understanding in reporting balances in FBAR form for two accounts which are having transfers in between, I know for OVDI penalty calculation the duplication can be removed by the taxpayer, but the amounts which are to be entered in FBAR form are the maximum values or the amounts after removing the duplication, which have been entered in penalty computation sheet.

      Delete
    6. Jack

      Regarding the posting by Anan earlier which said that according to the IRS, the office of IRS chief counsel has to provide input on all proposed FBAR penalties.

      I presume this is not regular IRS procedure for tax penalties (maybe not even for the civil fraud penalty) otherwise the Chief Counsel office would be overwhelmed. So do you think this indicates some caution on the part of the IRS in assessing large FBAR penalties given some of the legal uncertainties and the possibility of setting unfavorable precedents ?

      Delete
    7. IRS Counsel is a resource available to Examination during audits. The IRM says that, for example, SB/SE counsel are available and have a designated coordinator.

      In audits, if the auditing agent can reach agreement with the taxpayer, I would not think that counsel involvement is mandatory. If agreement cannot be reached so that the IRS will have to convince DOJ Tax to sue, then I would think that counsel involvement is mandatory.

      For that reason, represented taxpayers may want to not only deal with the agent's manager in the event of impasse, but toward the end might ask for a session with counsel. In analogous income tax audits, I sometimes ask for counsel's involvement when exam or appeals is taking a position that my experience tells me the IRS will not defend in litigation. Sometimes the request is granted and sometimes not. But when I have done that and the request was not granted, counsel has conceded the issue when we actually went to litigation. I like to remind the agents or appeals officers of that when they resist the request.

      The reason to meet with counsel is not that counsel will give away the store, but because there are in some cases litigating hazards that only someone who has seen a courtroom and had to defend positions before a judge or jury can appreciate.

      Jack Townsend

      Delete
  36. If I understand correctly, you are asking whether the duplication is eliminated in the FBAR form. The answer is no. The FBAR has to state the high value for the account during the year whether duplicated elsewhere on the FBAR or not.

    As to the penalty worksheet, I enter the high value for each account so that it will tie to the FBAR high value numbers. I then enter separate lines with negative numbers to take into account the duplications. I then sum the columns which produce a base aggregate for each year. The highest aggregate is the base for the penalty.

    Jack Townsend

    ReplyDelete
    Replies
    1. Jack,
      Thanks for your response. This makes things more clear...I have one more question about the account which generated no income in that year...so ideally there should not be any penalty associated with that ...in FBAR we'll report the maximum balance but how we'll handle this in penalty computation sheet... Again Thanks for your help

      Delete
    2. I don't think it matters if an account generated income a particular year or not, just that it generated income at some point. It would only be an issue if that was the max year.

      If you think it should be excluded, just exclude it for that year, and write a note explaining why you think it should be excluded. If the examiner disagrees, then you can debate the point.

      These sort of small procedural details are not likely to be a big deal.

      Delete
    3. To Anonymous May 3, 2012 10:39 AM

      Your points are excellent.

      The key is that, if you do exclude, the exclusion not be hidden. Your note is one way to do it. However, keep in mind that the exclusion because of no US tax noncompliance still requires that the account be shown on the FBARs. For that reason, I show every FBAR account on the penalty worksheet with a separate line showing the reduction as a negative number with an explanation. That way, the penalty worksheet easily ties to the FBAR and everything is above-board. I have not had agents say which method of disclosure is better or preferred, but I have had no negative feedback on this approach and believe it is a better way to get the agent up to speed on the issues.

      Jack Townsend

      Delete
    4. Jack,

      That is what happened to my case. I did not include my RRSP into the penalty calculation sheet. But they were all submitted as FBAR. IRS came back -- to add all the accounts listed in FBAR. Even though I have argued that RRSP has not tax complication due to the treaty and tax deferral.

      IRS examiners look at all in the FBAR and they will come back with their penalty calculation.

      It is really hard to make an argument inside OVDI as it is what they decide -- and our only option is to opt-out.

      Maybe (and maybe) IRS really wants minnows to opt-out as they don't want to change OVDI rules which were created for whales.

      Delete
    5. Press hard inside OVDI before formally opting out. While on the one hand the IRS asserts no discretion, but I hear that is some very compelling cases it gets resolved. Now, whether the IRS treats it as an opt out and moves quickly to an acceptable resolution or finds some leeway without opting out, I don't know. But, for extremely compelling cases, I understand the rigidity gets relaxed.

      Jack Townsend

      Delete
    6. Jack

      When you say that there may be some discretion in compelling cases, does that mean that the IRS may generate a closing statement prior to opt out ? Or that one has to submit a request to opt out, and indicate a disagreement with the specific part of the penalty in the opt out letter, and the IRS accepts this reduction ?

      This may seem like a mere procedural issue (and likely you can't answer it if you only have anecdotal evidence), and there may be very little difference between the 2 cases other than the fact that you are willing to opt out does probably convince the IRS that you are not concerned about a full audit (regardless of whether one is initiated or not).

      Delete
  37. "Anonymous May 3, 2012 08:46 AM",

    if it did not generate income for all the years covered in OVDI, you can exclude it. The account is considered tax non-compliance if it has one year earning. Worse, if that account over the years total gain and loss is negative, but there is one year positive, it is included in penalty.

    If it is PFIC (like mutual fund/stock), the gain and loss is not in normal capital gain/loss -- it is done by each year, and calculated in US dollars. So it may appear a loss in offshore currency, may still gain in US currency. So it is really hard to have such an account with no gain (in any of these years)

    ReplyDelete
    Replies
    1. is this still true if you checked No on the Schedule B. I thought this clause is more for people that checked Yes, reported income but only left out the FBAR unfilled.

      Delete
    2. IJ - i would correct your assertion on PFIC stock - the tax payer can either use the mark to market election ("OVDI" method) or the default method. If the PFIC stock was not sold and no dividend was received on PFIC, there is no tax non-compliance if the tax payer chooses to use the default method. In that case, the PFICs can be excluded from the penalty base. PFIC's create a problem only when there is either a distribution or a sale. You cannot compare PFIC to RRSP. In my view, The RRSP issue has arisen because Canadians did not file for deferment of tax on income and while the IRS is allowing people to do a late deferral technically there is a tax non-compliance. That's why IRS is un-sure about including it in penalty base. I think in the end the IRS will yield because these are innocent ommissions and hopefully you will see relief shortly....

      Delete
    3. I opened account in 2008 , this is a kind of time deposit and it got matured in 2011, all the interest + Principal got credited in my savings account.. I have reported all taxes for that amount in 2011 return...so per my understanding there is no tax non compliance and there should be no penalty. Although when you look at the time deposit account statement it shows interest credited which is a kind of blocked interest was paid only at the time of maturity in 2011. Does it make any difference

      Delete
    4. It only gets excluded with certain if you are in OVDI and there is no US tax noncompliance. From your description, you may have an argument that the tax compliance year was 2011, but if you want certainty on that issue, you will have to discuss with an accountant and negotiate with the OVDI agent.

      If you are not in OVDI (either because you opted out or never joined), then there is no certainty that the foreign account will not be considered for FBAR penalty purposes even if there is no US tax noncompliance. I think that will be the result, but I think the IRS only gives assurance on that issue if you are in OVDI and accept the penalty regime offered in OVDI (i.e., without opting out).

      Still, on audit (either on opt out or otherwise), even though there is no assurance of a mitigated penalty if indeed the income is pushed to 2011 (this is an assumption which might not be correct), then I would think the FBAR penalty would be light or waived altogether.

      Jack Townsend

      Delete
    5. Thanks Jack ... I am in OVDI and want to understand if the amount can be excluded from OVDI penalty calculation sheet.

      Delete
    6. Yes, but as I have said before, I would not just exclude it without any explanation. The way I do it is to include on the penalty worksheet the account and amount as a line item as if it were includable (with the amount being the same and reported on the FBAR) and immediately below the line back it out with a negative number with an explanation (such as U.S. tax compliant account). Then when the annual columns are totaled in the spreadsheet the positve and negative numbers will not affect the total.

      Jack

      Delete
    7. A time deposit has to be treated as OID, so under US tax rules interest is accrued per year, and if you did not report it, there definitely has been tax non compliance. So the IRS will include it in penalty base (very likely). This would be the case even if interest credited was not shown in your statement.

      Delete
    8. Thanks Jack !
      how to report the accounts on FBAR for which ,there are amounts in the account but the current cash surrender ( withdrawal value) is zero for example provident fund in india ( retiral funds). the interest earned is also blocked, can only be withdrawn after 15 years. what value shall we take current cash withdrawal value or actual amount which is not available. As the interest is blocked I don't think there is any tax non compliance ...

      Delete
    9. Jack - based on facts presented I dont think the Anon May 3, 2012 06:42pm is correct about there being no tax "non-compliance". Interest on time deposits is taxed every year based on accrual basis as per OID method. Otherwise it results in tax rate shifting e.g. if the tax rates declined between 2008 and 2011 - anon would result in paying lower taxes. Indian's in the US are especially in this boat and increasingly upon audit the IRS can determine that the time deposit accrued interest every year and not just on maturity. So I am not sure that the person's assertion is correct.

      Delete
    10. "Anonymous May 4, 2012 08:54 AM",

      Good points ! Although I did have a CD (two years in Scotiabank which tracking TSE Index for two years, I would get up to 20% return if the index went up 20% or higher, but would lose zero if the index went down. In my case, it was the time between dotcom bubble. So I did not get any return. I did not exclude it from the base because it did not matter as the peak was on the other year.

      Anyway, there could be some CD -- the earning is based on market -- and it could be only determined on the day of maturity

      Delete
    11. Following up on "Anonymous May 3, 2012 4:10 PM"
      Even if the bank did not generate an NR-4 for the interim years, will the interest need to be computed and reported? Worse, what if total interest earned in 3 years is reported as earned for the year (2011) on an NR-4?

      Thanks.

      Delete
  38. how to report the accounts for which ,there are amounts in the account but the current cash surrender ( withdrawal value) is zero for example provident fund in india ( retiral funds). the interest earned is also blocked, can only be withdrawn after 15 years. what value shall we take current cash withdrawal value or actual amount which is not available.

    ReplyDelete
    Replies
    1. You do get an yearly statement or have some idea what its worth, right ? You say there is interest earned, so you should know how much that is. Just report that amount.

      I doubt the IRS will accept that you have an account (unless the sum involved is very small) where you can't make an estimate of what the account is worth to you, even if you can't cash it right now. After all, most people know or have some idea (even if rough) of how much money they have in an account.

      Delete
  39. An article by Scott Michel, a DC attorney on foreign reporting requirements and initiatives.
    Link

    I think Mr. Michel somewhat misstates one issue though. He says


    Opting out enables the IRS to conduct a full audit, and if the taxpayer can satisfy the IRS that their conduct was not willful, lesser penalties
    might be imposed (for example, the non-willful FBAR penalty).


    It is not up to the taxpayer to satisfy the IRS, it is up to the IRS to establish willfulness. Anything the taxpayer can present in defense of non-wilfulness is useful, but ultimately, the IRS has to prove willfulness.

    ReplyDelete
    Replies
    1. That is correct. Scott Michel generally gets it right, but like all of us, can miss the mark sometimes.

      Thanks for the cite to the article. I will post it when I get a chance.

      Jack Townsend

      Delete
  40. Question to Jack Townsend - I have prepared my package with documents from 2005 to 2010 with 1) Amended returns 2) Original returns 3) FBAR 4) Reasonable cause for failing to file FBAR 5) 3 checks totalling $500 for taxes and penalties for 2005, 2006 and 2007 and 6) A letter begging for pardon. I want to mail the whole package to IRS keeping my case outside of the OVDI program. Where should I mail this package? I already mailed amended returns for 2008, 2009 and 2010. But including all the amended returns to this package to be sent to IRS outside of the OVDI program. Thanks in advance.

    ReplyDelete
    Replies
    1. There is no place to send a single package outside OVDI. What you are suggesting is some modified version of a quiet disclosure. You would file amended returns with the appropriate service center and delinquent FBARs with the Detroit service center (see instructions for both types of filings). You should include, if possible, the tax and interest with the income tax filing. I would not recommend any explanation other than is required for the 1040X. As to the delinquent FBARs, the instructions direct that you provide an explanation that, hopefully will be a fair statement of the facts stated in the best light for you.

      At the amounts you seem to be talking about, it is quite possible that the IRS will not follow through.

      I do caution you to make sure that your amended returns and delinquent FBARs as fair, correct and complete.

      Jack Townsend

      Delete
    2. "Anonymous May 9, 2012 4:24 PM", and Jack please comment as well.

      SOL for IRS to assess your tax is back to three years if the omission is under 25% of your total income --which may be the case for your 2005, 2006 and 2007. So you basically make IRS to break the SOL to go back more than three years --- would IRS need your consent (as we did inside OVDI) ?

      If so, this might not be so quiet disclosure -- and IRS may come back to ask you to sign consent form -- and then it would lead to your amend FBAR disclosure which are related to tax non-compliance.

      Anyway, just a technical question/concern -- but I do wish you a good luck.

      Delete
    3. There is another exception to the 3 year statute related to omitted foreign account income. See Special Statute of Limitations Rules Regarding $5,000 Omissions from Foreign Accounts (4/9/12), here -- http://federaltaxcrimes.blogspot.com/2012/04/special-statute-of-limitations-rules.html

      I did not follow the rest of your comment.

      Jack Townsend

      Delete
    4. Thank you very much Mr. Townsend for your quick answer. What I understood from your reply is that I can send the amended returns for 2005, 2006 and 2007 to the appropriate service center and all delinquent FBARs from 2005 to 2010 to the Detroit service center. Please confirm if my understanding is correct. Just wanted to mention that in my case there is no chance for criminal prosecution and my total taxes and penalties for foreign interest income due for 2005, 2006 and 2007 will be less than $500. Thanks again Mr. Townsend.

      Delete
    5. The understanding is correct as to where to mail.

      Jack Townsend

      Delete
  41. I have a couple of questions and I am hoping somebody here can answer them for me:

    (1) I have already submitted the OVDI package back in December' 2011. Now I find that I might have to make some changes to my package based on some new information (not confirmed yet). Basically my tax liability will remain the same (no changes to the 1040x forms), but may need to modify a few FBAR forms.
    Question - Do I resend only the specific modified paperwork OR do I need to resend the whole package again? If it is the former - will they be able to associate the modified forms with originally sent stuff? OR should I just wait for the examiner to contact me and then send in the modifications? I am thinking sending in the amendments now will make the whole thing messy.

    (2) I did not send in the OVDI Penalty amount (determined by me) with the package. Somebody mentioned that IRS could charge interest on the OVDI "in lieu" penalty? Is that right? Gives me the shudders even thinking about it.

    ReplyDelete
    Replies
    1. Answers

      (1) No clear guidance on this. You could send the modified / new information now or, alternatively, you might write a letter saying that you are prepared to send in the information subject to their instructions as to timing and whether a complete new package needs to be sent. The latter would probably result in no action until the assigned agent contacts you or your representative and you could send it in then.

      (2) The in lieu of penalty (like the FBAR penalty) does not draw interest until it is assessed. You are not supposed to send it in until the end of the process when you agree to the calculation of the in lieu of penalty and a Form 906 is signed.

      Jack Townsend

      Delete
  42. Hi Jack -

    I could not find a suitable blog post to put this question under. It seems that the BSA now permits e-filing of FBARs which provides an instant acknowledgement of the FBAR filing. Is it a reliable method to file FBARs? Have your clients filed FBARs using e-filing? Thanks in advance for any advise.

    ReplyDelete
    Replies
    1. I continue to file manually for one reason. I refuse to be the data input clerk for them. If they want the information, I want them to have the cost of input, as my recalcitrant little protest against "the FBAR system." :)

      Delete
  43. i filled my 2011 fbar using e-filling. it is rather easy to deal with except the password security requirement is ridiculous, i reset my password at least 5 times.

    i don;t know how fast it gets into the system, i got an acknowledgement email 1-2 days later and called the hotline 2-3 weeks later and they said they see it in the system

    ReplyDelete
  44. Just a comment on the original topic. If the IRS misapplies a payment that was clearly labeled for a certain year and then sends all kinds of incorrect notices, it's an honest mistake. If someone fails to file a form he didn't know about, he risks a penalty of 50% of the highest account value for each of the past 6 years. Excuse the rant.

    ReplyDelete
  45. Hi Jack

    I got a 4549-A form and for one particular year, the numbers are different from the 1040X. It appears that a deduction (unrelated to offshore) was ignored and tax recomputed. I already amended state based on my 1040X. (1) Is it normal for IRS to just recompute and send the adjustment form without asking for further details or asking to re-amend (2) Would non-offshore income need an amend outside OVDI (3) Can I just accept this, pay up and amend the state again.

    Thanks, UM.

    ReplyDelete
  46. (1) I don't know that there is a normal, but I would discuss it with the agent to see why he or she left it off;
    (2) I am not sure what you are asking here.
    (3) I would suspect that you could further amend the state to make it consistent with the federal result.

    The lesson here for others is not to amend the state until the federal is finalized.

    Best,

    Jack

    ReplyDelete
  47. Hi Jack

    Thanks for your response. Unfortunately the agent is out of office.
    How firm is the 14-day response time requirement to respond to the 906? In my case, the examiner has been out of office thru the 14 days by which to sign it and I am in a dilemma whether to wait past the due date and get it corrected or just sign.

    Thanks, UM.

    ReplyDelete
  48. I would suggest writing a letter to the agent in response with your contact number. That way you have a paper trail in the unlikely instance the IRS were to insist on a 14 day response time.

    ReplyDelete
  49. The latest OVDI blooper is that OVDI participants who have
    not had an agent assigned yet are receiving notices from IRS Service Centers
    that they did not file a Form 1040 tax return for 2010. OVDI participants had to submit 2010 as part
    of their OVDI package.





    This creates extra billing hours for lawyers who have to deal
    with this ridiculous notice and lots of work for those handling their own
    cases.





    For those who are doing their own work, it seems a good
    approach is to fill out the form sent with the notice and send it back with a
    copy of the 2010 tax return. One should
    also include a letter explaining that they are in OVDI. To avoid collection problems, if taxes were
    owed and payments have been posted to 2007, the taxpayer should mention this. If the taxpayer originally directed how the
    payments were to be credited, a copy of this should also be included.





    Finally, it is recommended to also write OVDI about
    the mistake and send a copy of the notice to them, plus a copy of the response
    sent to the IRS Service Center.





    My accountant tells me that he has seen a bunch of
    these. Has anyone else had this
    problem? How did you handle it?

    ReplyDelete
  50. There was confusion about filing 2010 form 1040, whether it was to be part of the OVDI package, or to be sent to the service center, as I had extended my return. I ended up filing the return with the service center, and sending a copy of it with the package. So, hopefully, covered this time.

    ReplyDelete
  51. if a person enters the program today it will take 2-3 years for irs to process his file, will they add interest(for back taxes) for these 2-3 years that he has to wait for IRS to process his file?

    When does the interest stop accumulating? On the day he sends his docs for step 3 and include his payment?

    ReplyDelete
  52. Early in the process, the OVDP participant sends in the amended income tax returns with payment of tax, 20% penalty and interest. Assuming the taxpayer calculated it correctly, no more interest accrues on the income tax, income tax penalty or interest (because fully paid). The big payment is usually the "in lieu of" penalty that is not assessed at the end of the OVDP process. That penalty does not draw interest until it is assessed. So, the longer the process drags out, the better -- at least from an interest perspective.

    Jack Townsend

    ReplyDelete
  53. Mr Townsend,

    I was cleared for OVDI, done with step 1

    After I was cleared I closed my bank account and the bank sent me a check.

    I would like to deposit the check so I can pay my back taxes, interest, and 20% accuracy

    I have 30 more days to do step 2(letter and attachment)

    If I deposit the check now the IRS could be notified by my local bank, in this case can they disqualify me claiming they knew about the account before I mailed them my letter and attachments for step 2??

    thank you

    ReplyDelete
  54. I suggest that you discuss that issue with your lawyer who will know all of the facts.

    Now, addressing a hypothetical in which the facts stated are all of the relevant facts, the mere return of the money to the U.S. should not be a disqualifier, even if the bank were to file an SAR.

    Again, I suspect that there are other facts that should be considered and urge that you consult with your lawyer.

    Also, one issue is why did you not have the bank wire transfer the funds? And how exactly did the check get to the U.S. And, did you comply with all laws in getting the check into the U.S. But on the bare facts you state, there should not be a problem. Ask your lawyer for assurance that you can rely upon.

    Jack Townsend

    ReplyDelete
  55. If the IRS takes 1-2 years to assign OVDI case to an agent, and in the mean time the tax payers gets bombarded with collection notices from individual service centers, I am thinking why not send separate amended returns and checks to each individual service center? Attach a copy of all that (and copies of all checks for all years) with the OVDI second package. When the agent gets assigned, he/she will see that and realize the taxes are paid to individual service centers rather than at the OVDI center. What is wrong with this approach?

    or

    Will the agent say "sorry! too bad! I need you to pay all taxes again in a single check now. to OVDI center, and good luck dealing with individual service centers to get your money back"

    ReplyDelete
  56. I actually did what you are talking about for two of the five years involved in my 2009 disclosure. We already had an agent assigned but he could not stop the notices. He agreed to make adjustments in the final closing agreement figures for the two years we paid directly to the service centers. We had this confirmed in a memo prior to sending the payments in and in the end the adjustments were made.

    ReplyDelete
  57. Hi Anon123, Things have changed a lot since the 2009 program. I have had collections started on me twice during my time in the 2011 program. The first time the OVDI Hotline was able to stop them, but only for 9 weeks. When they started again, I had been assigned an agent and the agent was able to stop the collections for 14 weeks. It was not a major exercise. It just took a call to the agent. The collections will likely start again before my case is closed, but I have learned it is nothing to freak out about and this is now a known problem that can be managed.

    ReplyDelete
  58. @disqus_erVUiiWv3u:disqus ,



    Glad to see you again -- I know it is hard to leave this blog after being through OVDI -- I just want to say a big hello to you -- and wish you good health! I don't post as much as I used to --but I still often come back to visit to see my old buddies!

    ReplyDelete
  59. Thank you ij. Me too. It really is sad to read some of the posts. I guess we did good getting out in just two years or so and you with no fbar penalty and me with just 20%. To all those suffering in the program: stay strong!

    ReplyDelete
  60. Hi anon5percent. That is good to hear. Back when, they proceeded to the point of threatening federal tax liens. That could destroy your credit if you are a business person. No one seemed to have an answer even though you were fully cooperating in voluntary disclosure. Its good to hear there is a remedy for this added stress. Hope your opt out goes well and ends soon.

    ReplyDelete
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    ReplyDelete

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