Tuesday, June 26, 2012

IRS Announces Penalty Mitigation for Super Minnow US Taxpayers Living Abroad; RRSP (6/26/12)

See the announcement below, but first some links to further explain the relief:

See the IRS web page - New Filing Compliance Procedures for Non-Resident U.S. Taxpayers, here.  I include IR-2012-65 below which is a more general statement.

Per the website, more details will be forthcoming.


1.  There are lots of open issues (see the comments that are already coming in with those open issues), but the trend is in the right direction.  And, in my view many classes of persons outside the current relief provisions are not distinguishable in terms of their U.S. tax compliance / noncompliance.  Hopefully, the IRS will give comparable relief to them.

2.  The most interesting is that the program is the grading of penalty potential according to compliance risk (emphasis supplied):
Description of proposed new procedure:While more details will be forthcoming, taxpayers utilizing the new procedure will be required to file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent FBARs for the past six years.  All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission.  For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions.  Submissions that present higher compliance risk are not eligible for the procedure and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.
Note, that this procedure is not part of the OVDP (I will return to this below).  Higher levels of risk do not qualify for the program and will be subject to audit (similar to opting out).  Note that taxpayers will a low compliance risk level, there will be no penalty.  Now, there's the key -- what exactly does low compliance risk mean, and would not most minnows fall in this category?  Perhaps there will be additional guidance on this.
3.  Then the web site says:
Other considerations:
Taxpayers who are in a situation where they are concerned about the risk of criminal prosecution should be advised that this new procedure does not provide protection from criminal prosecution if the IRS and Department of Justice determine that the taxpayer’s particular circumstances warrant such prosecution.  Taxpayers concerned about criminal prosecution because of their particular circumstances should be aware of and consult their legal advisers about the Offshore Voluntary Disclosure Program (OVDP), announced on January 9, 2012, which offers another means by which taxpayers with undisclosed offshore accounts may become compliant.  For additional information about the OVDP,  see www.irs.gov.  It should be noted, however, that once a taxpayer makes a submission under the new procedure described in this document, OVDP is no longer available. 

So, since this new procedure is not part of OVDP, the taxpayer is not given reasonable assurance that he or she will not be criminally prosecuted.  Stated otherwise, the taxpayer at material risk of criminal prosecution should open the kimono through OVDP 2012. For taxpayers with that risk, filing under this new procedure hoping they won't be caught will be risky if they are caught; they cannot thereafter join OVDP.  I suppose this is to encourage taxpayers to self select and join only if they have no realistic criminal tax risk.


Issue Number:    IR-2012-65
Inside This Issue
IRS Announces Efforts to Help U.S. Citizens Overseas, Including Dual Citizens and Those with Foreign Retirement Plans

WASHINGTON — The Internal Revenue Service today announced a plan to help U.S. citizens residing overseas, including dual citizens, catch up with tax filing obligations and provide assistance for people with foreign retirement plan issues.

"Today we are announcing a series of common-sense steps to help U.S. citizens abroad get current with their tax obligations and resolve pension issues," said IRS Commissioner Doug Shulman.
Shulman announced the IRS will provide a new option to help some U.S. citizens and others residing abroad who haven’t been filing tax returns and provide them a chance to catch up with their tax filing obligations if they owe little or no back taxes. The new procedure will go into effect on Sept. 1, 2012.

The IRS is aware that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs).  Some of these taxpayers have recently become aware of their filing requirements and want to comply with the law.

To help these taxpayers, the IRS offered the new procedures that will allow taxpayers who are low compliance risks to get current with their tax requirements without facing penalties or additional enforcement action. These people generally will have simple tax returns and owe $1,500 or less in tax for any of the covered years.

The IRS also announced that the new procedures will allow resolution of certain issues related to certain foreign retirement plans (such as Canadian Registered Retirement Savings Plans).  In some circumstances, tax treaties allow for income deferral under U.S. tax law, but only if an election is made on a timely basis.  The streamlined procedures will be made available to resolve low compliance risk situations even though this election was not made on a timely basis.

Taxpayers using the new procedures announced today will be required to file delinquent tax returns along with appropriate related information returns for the past three years, and to file delinquent FBARs for the past six years. Submissions from taxpayers that present higher compliance risk will be subject to a more thorough review and potentially subject to an audit, which could cover more than three tax years.

The IRS also announced its offshore voluntary disclosure programs have exceeded the $5 billion mark, released new details regarding the voluntary disclosure program announced in January and closed a loophole used by some U.S. citizens.  See IR-2012-64 for more details


I have not had time to review and, if I can, I will post some comments.  In the meantime, I hope readers will offer their comments as well.


  1. I haven't been able to pull up the new procedures as it keeps timing out.  Were you able to get them?  If so, any way you could perhaps email them to me?

  2. Is this not applicable for minnows in US? And the $1500 limit is for all covered years summed together or not more than $1500 for each of the covered year? My total for all covered years is 2K but in lieu penalty is 30K which is stopping me to join the program.

  3. I would just like to say that although the IRS says this special relief will only hold for taxpayers residing abroad, those who reside in the US, meet other conditions for relief (small amounts of tax due), low compliance risk (no/few other bad facts), and have legitimate reasons for foreign accounts (such as immigrants to the US) should also petition for some relief under these conditions.

    ij, you can make an argument for your RRSP relief again (assuming they don't give it automatically). Even if they reject you on purely technical grounds (you didn't live abroad), you can opt out and use this as an argument on opt out.

  4. Just wonder this new RRSP policy would only be applied to US expats (most likely in Canada) or to all US taxpayers (including US residents)

  5. What does this program for no / small tax liability taxpayers mean for similarly positioned person who are in the 2011 OVDI (i.e., didn't qualify for FAQ 17 due to FTC)?

  6.  Try calling your examiner and see what he says. 

  7. I hope this would apply to US immigrants as well. I would quality and would definitely join if they extend the elligibility to US immigrants.
    Could someone who has contact at the IRS clarify this point?


    can this announcement make any non-resident US taxpayer who stupidly entered
    OVDI happy?

    I have two areas of concern: "Discrimination against current non-resident US Taxpayer
    OVDI participants by IR-2012-65" and "Compliance Risk Determination"



    the IRS is finally taking a realistic view of law abiding non-resident US taxpayers, the
    “New Filing Compliance Procedures” appear to be another bumbling, poorly thought
    out attempt of the powers that be in the IRS to address a group that has
    suffered unjustly in the first two OVD programs.
    new procedure document states that details of the procedures are not yet finalized.  Here are issues which need to be addressed
    for the IRS to finally do non-US resident taxpayers justice:


    How will non-resident US taxpayers currently in OVDI be
    handled?  Can they opt out and provide the
    last 3 years of tax returns, plus 6 years of FBARs and avoid “in lieu of” penalties?  Where are these procedures?

    rewards those who did not follow the instructions that were available in 2010-thru
    Sept 2011.  Why should non-resident US taxpayers
    who followed the only instructions available at that time and entered OVDI be
    treated differently?  

    The IRS should not even try to argue that no non-resident US taxpayer would have entered OVDI unless they had been attempting to evade taxes.  Their
    data set has to shown them that most non-resident US taxpayers were likely paying
    taxes at a higher rate where they reside.  These people were likely recipients of bad
    advice, or rushed into a decision to enter the program as they wanted to follow the instructions.


    The definition of “Compliance risk determination” is extremely
    vague, which is probably a good idea.  However,
    the little bit that is listed is more upsetting that comforting.  The document states “Low risk will be
    predicated on simple returns with little or no US tax due”.  What if one has been residing outside of the US and at some point bought into a retirement plan which is considered a PFIC?  Suppose
    that person is not in Canada and has invested in a retirement savings plan that is not the subject of a tax
    treaty?  Suppose the PFIC is declared correctly to the IRS.  Usually
    these plans are tax-free in the country of residence so there are no passive
    taxes to credit against any possible US tax liability so often taxes are
    owed on these plans. Does this make the compliance risk greater?  Depending on how much the person previously
    has invested and the exchange rate of the USD, US tax could be 0 some years and
    3000 in others.   Why stress out someone trying to comply in this situation by making them think they will be audited just because they have a retirement plan?


    What about exchange rate fluctuations?  A few years ago, as a non-resident US taxpayer, my foreign salary was completely covered by the FEIE.  In spite
    of FEIE increases, the currency of my country of residence is strong.  I am nothing more than a middle class salary man
    earning the same salary as most university educated people in my country of residence, but in the
    last few years I have had to file Form 1116, which automatically triggers the
    AMT. Is this a compliance risk because the
    currency is strong and requires extra IRS forms so the US taxpayer is not taxed twice?  This should be a factor excepted for compliance risk determination.


    What if one uses a CPA to prepare the return because of the
    above?  Does that mean the return is not

    What about overseas residents whose countries do not have the same tax year and this may require amendments.  Is this a compliance risk?  If it is, say yes, if it is not, say it.

    Without addressing these issues, even though IR-2012-65 looks positive on the surface, Commissioner Shulman will
    have failed in the one attempt he has made during his tenure to get things right for non-resident US taxpayers.

  9. Anon,  Thanks..  I have not yet heard from my examiner on how to treat my RRSP.  I think/hope  they will have to treat all RRSP the same regardless residency.   

  10. Well, this is interesting, and I would encourage you to read more what the IRS is saying here...


    I am still digesting it, but at first blush, it seems to me that they are creating a process to finally separate Minnows and Whales at the front end, so to speak, and not run everyone through the OVDI to the back end Opt Out.

    I draw that initial conclusion from this...

    "While more details will be forthcoming, taxpayers utilizing the new procedure will be required to file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent FBARs for the past six years.  All submissions will be reviewed, but, as discussed below, the intensity of review will vary according to the level of compliance risk presented by the submission.  For those taxpayers presenting low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions.  Submissions that present higher compliance risk are not eligible for the procedure and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program." 

    There is certainly more to read and digest, and wait for final process, but this might, and I stress MIGHT deal with many of the frustrations and complaints we have had with the OVDI.  Time will tell, and still too early to jump to conclusions.  I think we have a new unit of measure in the making now, the MCU.   Minnow Complaint Unit = 3 years of bureaucratic time it takes to correct an errant OVDI policy.  :)

    One disappointing note.  On the surface it does not seem to apply to Minnow resident immigrants, although the same issues of 'low compliance risk factors" apply, and I hope that is something that will be corrected, or better spelled out in the instructions yet to come.  

    Also, hopefully they will clarify that 'accidental Americans" that are still subject to a 5% tax inside the OVDI should not be joining the OVDI in the first place.  In fact, maybe they will be more specific about those that should NOT join the OVDI instead of leaving it up to certain class of practitioners to frighten everyone into the program because of the implied FBAR penalty threats.

    Let's hope this is the beginning of a more rationale approach to compliance.   Time will tell. 

  11. anon5percent,
      I would think IRS will kick out those expats who entered OVDI but are now considered as low non-compliance risk and process them in this new procedure.  And if not, then those should choose opt-out if they indeed fall into this low non-compliance risk

  12.  This is the language used: "less than $1,500 in tax due in each of the years"

  13. Probably not. With all the noise of renouncing citizenship by overseas americans probably gave way to this...  Less than 6k in fed taxes over ovdi 8 yrs with inleu potentially over 50k but might have to bite the bullet soon.
    I read it as 1.5k per year max. No promise of protection from criminal prosecution.

  14. I'm completely underwhelmed by this announcement. When I see announcements like this I feel blessed not to live in the US any more, or be subject to its awful government and its poor imitation of the rule of the law.

    It's a blatant attempt by the IRS to address their "Canadian Problem" and carve-out of a specific class of taxpayer that is causing them aggravation and generating excessive ill will towards the US govt and IRS. Of course it doesn't address the wider injustice being perpetrated against a whole raft of people (e.g. immigrants). Yet again (as with the 2011 OVDI FAQs) they've drawn more arbitrary lines in the sand which create winners and losers, and confuse people even more about what they may be eligible for, or at risk of. The new arbitrary lines (must be non-resident, must have < $1,500/year tax due) are an attempt to obfuscate the real underlying causes of non-compliance, and the mitigating factors that should be used for granting relief. That is; the US government created a regulatory framework that inevitably ensnares millions of people based on their legitimate circumstances, then completely fails to
    a) inform people of their obligation; or
    b) allow them to discover the obligation; or
    c) address past filing mistakes without being financially destroyed.
    Everyone except a narrowly-defined set of bad actors should get a pass because of these true causes of FBAR non-compliance.

    I disagree with the notion that this announcement is a "step in the right direction". As with earlier attempts to carve-out specific classes of taxpayer, it makes the IRS look even worse than they did before. It highlights the flawed-by-design nature of the whole programme, and shows them to be capricious in the extreme. I'm a fan of the expression that you should never attribute anything to malice that can be attributed to stupidity. The IRS looks less stupid, and more malicious every time they do something like this.

    The one ray of hope it is that Shulman is stepping down in 3 months. His successor has the choice of attaching the OVDI millstone around their own neck and continuing where Shulman left off, or putting a stake though the heart of this monster. If they have more than two brain cells to rub together they'll swiftly give everyone a pass, and (rightfully) pin the blame for the necessitated policy reversal on his predecessor as the architect of the awful Programme. Otherwise he/she is going to start their tenure with a klausterfokken that somebody else created, and he/she now owns.


  15. My comments mirror similar concerns. I entered OVDI to become compliant. My lawyer submitted a private letter ruling request to cover my RRSP'S ( did this last fall, no reply from IRS).
    I submitted 8 years of returns and 6years of FBAR's. My return was "complex" in that I have a corporation and Trust for tax planning purposes. I owe $141.00 in 2003 because of the minimum tax.
    Will I qualify for this program with no FBAR penalties ? Will I be disqualified because my return is complex, even though I owe a trivial amount of tax?
    This is a step in the right direction, but more clarity for thoses awaiting OVDI is needed.

  16. This new procedure is only for US expats not for US residents.  I can see the reason why US expats are better treated because,

    1. US expats caught up this problem because of citizenship taxation which is rather unique for US expats.  Residency taxation is very common in most countries.   

    2. They were not aware of their filing obligation (based common sense), and they did not file return at all.  Residents filed the return (and even claimed certain credit) but omitted their offshore income.

    However, this new definition of low risk non-compliance ($1500/year tax due) seems a good argument for those who choose to opt-out.   Most immigrant minnows do not hide money offshore for tax evasion -- that $1500/year cheating tax at the risk of 10 and even 100 times more penalty does not make sense.

  17.  Ij, the reason expats are better treated than immigrants in this announcement is simple

    1) The IRS cannot really do much to expats who don't have significant US income or assets (and those it would likely classify as high compliance risk). Immigrants are within US grasp (unless they choose to leave).

    2) Political Pressure from foreign countries such as Canada and likely from the Secretary of State as well. The State Department must be horrified at the thought of turning a lot of very pro American expats abroad into very anti-American ex citizens.

    But I agree that this is an excellent argument for immigrants on opt out.

    I also see that the new FAQ clarifies that even people in OVDI can defer RRSP. Good for you, although you should still consider opt out for other accounts.

    Also, people with other foreign country retirement accounts should still consider opt out and try and get those excluded under opt out.

  18. Hello all:
    For what its worth I can tell a story that I am afraid will be quite common and illustrates the mess the IRS is creating for expats.

    I am a U.S. attorney, but not a tax specialist.  I got pulled into this mess when I got a call from an old college friend who has been living in the U.K. since 1975.  He learned about 7 years ago that he was required to file U.S. tax returns.  At that time he went ahead a filed about 10 years of past 1040's and FIBARs and has continued in good faith to file returns on his own.  By his calculations he did not owe taxes and the IRS has not yet raised any questions.
    He has fallen into a trap that I imagine is fairly common among people in his situation.  He has invested money in foreign mutual funds within an Individual Savings Account that is tax free in the U.K.  He had no idea that not only is the ISA  taxable under U.S. law, but that he may suffer significant adverse tax consequences by investing in foreign mutual funds.  From my preliminary discussions, it appears likely that he has not properly filed in the U.S., although he made a good faith effort to do so.
    He is by no means rich so I have agreed to help him out pro-bono.  I figure that if I were billing, it would easily cost him in the tens of thousands of dollars to sort out this mess.  I told him the first thing we need to do is enter all his ISA transactions into a financial accounting program and start the arduous task of trying to get some handle on his potential tax liability, which could be huge or negligible--time will tell.  Heck, if I were billing, I would probably be charging him a good deal just to get up to speed on the relevant IRS forms.  If the picture is bad, I'll probably need to refer him on to a specialist.
    I suspect that there are an enormous number of expats who are in roughly the same situation or worse.  Does the IRS have any idea of the can of worms it has opened? After I get a better picture of situation, I'll take a look at this new tax initiative.  I don't think he falls within its black letter provisions, but perhaps I can fit him in.  I hope that this "move in the right direction" portends more generous offers in the future after the IRS figures out the problems that expats face.
    As an aside, he mentioned that the mayor of London, who is a wealthy man, was born in the U.S. to U.K. parents and returned to the U.K. as a young child.  I wonder if he has any idea of the dual citizenship filing requirements that the IRS could impose on him and his potential U.S. tax liability?

  19. Anon,
       Thanks, and good points...  

        Once RRSP is off the base, my in lieu of penalty rate will drop to 12.5%. So it is a good news for me.

         While I have good reason/facts to opt-out considering my tax due was small amount,  could be even much less if I take some foreign tax credit, but it will take longer time to have this closure.   I have already paid the in  lieu penalty of 8.5K in my first package submission.    So, it would be a process of taking money back.   

       Right now, I am more in favor to have this done inside OVDI... but when the 906 comes, I might have 2nd thought.   This would be a point of no return of my 8.5K bloody earn money.

  20. Excellent Comment Moby...

    I think there will be more questions raised, as the broader outlines of this program become visible. I fear the IRS is again, using those very technical guidelines they like to use in the FAQs, to re-draw  the “ compliance failure box” too narrowly and may create more problems than it solves.I think, they think, they are "lancing the boil" of OVDI outrage by providing this selective relief, and actually they may be spreading the infection, but we shall see. This alternate noisy disclosure, or so it seems to me, still doesn't address the QD issues that various good attorneys disagree on. bit.ly/Lfgo76 What is the poor Indian immigrant do who has failed to report their joint family accounts back in their homeland?   PS… The Canadian voluntary disclosure program doesn’t need endless FAQs and technical adjustments, but the IRS just can’t learn from anyone else, apparently. KISS doesn't exist for them. http://www.cra-arc.gc.ca/gncy/nvstgtns/vdp-eng.html 

  21. Anon,  here is what IRS penalty on non-willful FBAR violation 

    Level I penalty If the maximum aggregate balance for all accounts to which the violations relate did not exceed $50,000 at any time during the year, Level I – NW applies to all violations. Determine the maximum balance at any time during the calendar year for each account. Add the individual maximum balances to find the maximum aggregate balance.$500 for each violation, not to exceed an aggregate penalty of $5,000 for all violations (assuming this is not for each bank account)Mine is 68K at peak, so I won't be enjoying $500 per year of 6 years (would be $3000)Level II penalty

     If Level I-NW does not apply and if the maximum balance of the account to which the violations relate at any time during the calendar year did not exceed $250,000, Level II-NW applies to that account.  $5,000 for each Level II-NW account violation, not to exceed 10% of the maximum balance in the account during the year Let's examine the formula of penalty between level I and level II,  basically it is 1% penalty per violation for under 50K peak, and 2% penalty per violation for peak value between 50K and 250K.   If per violation is based on per year (not per account), and FBAR SOL being 6 years,  then this translate to 6% (for under 50K) and 12%.(for over 50K and under 250K).Unless the penalty percentage between level I and level II are linearly interpolated,   my 68K peak balance will result 12% penalty and there is little difference compared to 12.5% of OVDI penalty.

  22. The mayor of London renounced his citizenship in 2006, so should be free and clear! :)

  23. I'm afraid as well that immigrants may not be treated fairly. Worst case, we can just go back if IRS tries to impose unjustified penalties for missing such small tax amounts due to lack of clarity. They will then even lose what federal and ss tax we pay which is approx 10K and all that we spend here which is 30K per year for living. OR they may just leave immigrants without hassle with warning letters. We dont know for sure whats in their plans. But what i know is, its really not good for the people in power to make life miserable for simple salaried folks staying away from family. In conscience i guess all knows that missing a small interest income and non disclosure of legitimate accounts is not a crime as its being projected. Till yesterday when i was not aware, i was a honest law abiding person for whom anyone will vouch for. But today, I'm in the group of criminals, wow. Weren't we better off without this knowledge then. Anyways, it is what it is.

    I advice you AnonLPR that atleast be in compliance for this year and send your disclosure if you have not done already. Past is past but dont do the mistake after you know about this. I know its a big risk but you will know in your heart that you did the right thing and you are honest.

  24.  ij, you did file 2010 timely, so you should be able to get that removed. Also, the mitigation guidelines are a ceiling. The conditions for mitigation are very easy to meet. You can get significantly lower penalties with a good story.

    Also, you can argue against the mutliple per account penalty too, since they say that there should only be one penalty per form except in the worst cases.

  25. Anon,  thanks again.  my peak at 68K (without RRSP) was in year 2005.  So excluding 2010 won't help much.  Do you mean one penalty per FBAR form ? that would be a good deal to have penalty between level 1 ($500) and level 2 ($5000)  -- I am thinking of opt-out, but I still want them to accept my RRSP election first.    Thanks again..

  26. Multiple smaller accounts (numbered CDs) will cause the percentages to far higher. If someone had numerous "accounts" (lets say 10) that are 10k each .. aggregate=100k
    FBAR non-wl level 2 penalty for that year would be 10k.
    Over say 6 years, thats 60k.
    Balances at the higher end of the thresholds will benefit from the celing of 5k per account.. or those with 1 account escape without too much penatly.

  27. I don't think that would happen.  60K penalty on 100K aggregated CD ?  That would be 60% penalty on peak balance --- more than a willful penalty in criminal case (often 50%).  I read level 2 penalty is 2% per year -- that would be 2K each year, and 6 years would be 12K.  That beats OVDI penalty of 27.5K.

    Further, if 250K balance is 2% penalty per year, 100K balance should be less than 2% penalty, I would say around 1.5% penalty should be applied.

  28.  I wish people wouldn't get so hung up over the thresholds and exact numbers for mitigation and get trapped in math calculations. Let me be clear.
    The mitigation guidelines are a ceiling !!. (Assuming good facts, of course. )

    Consider that just about anyone who is not a criminal, and has not had previous tax fraud or FBAR penalties/warnings can qualify. The better your facts are, the lower you should be able to get from there.

    And even in the criminal case, with large account sizes, where if you follow the manual strictly, even WITH mitigation, the IRS would be able to assess a 300% penalty, they have not gone beyond 50% total.

    Or in Just Me's case, as I recollect, the examiner came back with 107K AFTER mitigation, but he was able to get it reduced to 25K.

    So, consider the guidelines the ceiling and the better your facts are, the lower you should be able to get from there.

  29. To help these taxpayers, the IRS offered the new procedures that will allow taxpayers who are low compliance risks to get current with their tax requirements without facing penalties or additional enforcement action. These people generally will have simple tax returns and owe $1,500 or less in tax for any of the covered years.

    Is the "owe $1,500 or less in tax for any of the covered years" your final number owed, ie including your Foreign Income Inclusion and Personal Exemption?

    That means it should be including most minnows who have 0 tax obligations?

  30. Jack,

      In case of opting out now, would I go back to the normal SOL on FBAR (6 years) and tax (3 years ? If so, would they be 2011, 2010, 2009, 2008, 2007, 2006 for FBAR and 2011, 2010, 2009 for tax ?

      It seems to me that some folks with peak in earlier years would be less penalty on FBAR as it would be impose on yearly instead of the peak of these years.  Also some taxpayers have submitted FBAR in 2010 and 2011 in time, there would not be 6 years but 4 years, am I right ?

  31. Yes, you would go back to the normally applicable statute of limitations.

    You assume 3 years for income tax. Assuming civil fraud is not involved (you should not opt out if there is material risk of civil fraud), there are still two potential 6 year statutes of limitations.in Section 6501(e) -- one for a 25% omission and the new one for a $5,000+ omission for specified foreign financial accounts if the statute for the year was open on March 18, 2010. So watch the potential application of those 6 year income tax statutes. (You can see discussions of these 6 year statutes by clicking on 6501(e) in the link column.)

    Also, keep in mind that the statute of limitations starts running on the date of filing. The date of filing is the normal due date (generally 4/15) if the return is filed early and the actual filing date if filed on extension or is filed delinquent.

    You are right about the years for the FBAR if the taxpayer is compliant for one or two years. The years for when no FBAR was filed would have open statutes for 5 or 4 years, respectively.

    Jack Townsend

  32. You have it exactly right.  Every example they have in the FAQ are the max penalties for willful egregious behavior that even when they prosecute a person they are not applied that severely.  It is really disingenuous of the IRS to even put those examples in the FAQ, but they do it as a fear invoking tool, and it works. This is what "could" apply, but in the real world, it never does. 

    Just like you don't believe those promises of amazing returns if you buy Gold Coins from a hawker on TV, I would not believe these hyperbolic threats either. You have to take them all with more than a grain of salt.  You have heard the expression that "If it sounds too good to be true, it probably is!"   Well the reverse is also worth considering, "If it sounds too bad too be true, it probably is not!"  That is how I would view the FAQ examples. 

  33.  I agree with what Researcher and Just Me say.  The OVD programs and opt outs from them are all based on a foundation built of fear. 

    Once you lose that fear and can step back and review reality, perspicacity comes into play.

    It is important to get over that fear threshold to be able to review the material facts in their proper light.

  34. Further thoughts on the new relief proposed:


    1) The
    IRS was very good at rolling people over from VD into OVDI, so why not
    offer OVDI participants the option of being rolled over into this new

    2) Voluntary
    Disclosure recipients rolled over into OVDI should automatically be
    offered this option as then they would be allowed to argue reasonable
    cause as they understood they could in VD. 
    They could then decide between this option and opting out if they
    feel their facts support a decision in either of these directions.

    3) The
    IRS has to stop punishing Americans Abroad for “going native”.   Just the concept of a simple return is
    an insult to Americans Abroad.  What
    kinds of people are likely to have simple returns?  The obvious answer is Americans working
    overseas temporarily and, possibly, some retirees.  Most of those who have chosen to truly take part
    in the society they are living in will have retirement plans, PFICs, possibly
    be self-employed, or need other forms that turn them into supposed “compliance
    risks”.  The IRS has a view of
    a non-resident US Taxpayer that is extremely limited.  This definition needs to be expanded and
    programs that make sense for this class of taxpayer need to be developed.

    4) For
    this new program, the IRS could develop a little checklist for itself that
    screens for and marks the following as non-complicated:a) PFIC
    forms calculated by a licensed CPA – using an experienced CPA in this
    area is relatively low riskb) Non-resident
    US Taxpayers who sold their homes in a foreign country, made a gain, but have no tax
    credits that can be applied as gains from the sale of a personal
    residence in their country is not taxed.  This should not be allowed to ruin the
    eligibility of these people for being considered simple.  The personal residence sale is a one
    time event and they may have owed substantial taxes, but this does not
    make them a compliance risk.  What
    if they have been super minnows in all other years? That should also be
    considered. c) Consider the effective tax rate and transparency of the tax system in the country where the Taxpayer lives as part of a low compliance risk.  A non-resident US taxpayer who has been paying taxes at an effective rate of over 50% in a transparent tax system is unlikely to present much risk. Note: transparency means that the Tax Agency in the foreign country knows everything about you financially as is the case in most of the Scandanavian countries. Tax data on individuals is even made publicly available!

    5) The IRS should not immediately assume that accounts in Isle
    of Man, Panama, Singapore, Switzerland or other assumed tax
    havens are all set up for tax evasion purposes.  A simple question about
    the historic ties to these places can be asked.  It may be that the person has lived in one of
    these places and is stuck with a retirement account there that cannot be
    liquidated.  To give a new example of how
    Americans Abroad may end up with an account in one of these places, the
    non-American company I work for set up a private retirement plan in the Isle of Man so those people working abroad for them would
    not lose any opportunities they had to save privately for retirement at
    beneficial rates. Many people claimed it was a great deal.  Some Americans may have joined this plan.

    So there is a lot of work the IRS needs to do before those September
    guidelines come out.

  35.  Jack

    The real issue for most minnows would be FBAR SOLs on opt out. It is a little unclear what years would remain open for the FBAR SOL on opt out from OVDI 2011. I've read your comments before, and I gather you think that the signed extension for Title 31 penalties (required for joining the program) would only come into force when signed by both parties (in this case, when the IRS countersigned it). So any years open at that time would remain open on opt out until the end of 2012 (the date on the extension).

    An alternate interpretation for someone who opts out before (say) June 30th 2012 may be --- you go back to normal FBAR SOL on opt out. The signed Title 31 extension was only valid within the program, and when you exit the program, the extension is invalid, since it was only signed as part of the 'contract' for joining the OVDI. Therefore, if you opted out in say March 2012, and the IRS did not get you to sign a new extension prior to June 30th 2012, 2005 will be closed too for FBAR penalties on July 1st 2012. This may be hairsplitting, but it doesn't seem like an unreasonable interpretation to me.

    In the end, the FBAR SOL may matter little if you settle on a specific dollar figure with the IRS, they would just allocate it across open years. Even     the maximum non-willful penalties can be high enough that the IRS can give a significant break in a settlement and get collect as much money in 6years as they would in 5.

  36. Layperson,

      Non-willful FBAR penalty level 1 (say 50K of balance) is $500/year, so if someone can get rid of 2005 and 2010 (most likely if they submitted package before end of June).  It is only 4 years.  So that will be total of $2000.   OVDI in lieu penalty would be 6250.  That would be $4000 less.

    I have a similar situation like this -- but my balance are 65K.  It would   be on level 2 non-willful penalty.  That is $5000/year --this is for less than 250K.  I don't think it is a fair penalty for 65K and 250K on the same level of $5000.  So it would be a mitigation on the number, so that would be 2% each year (5k/250k).  So I should have 2% penalty for each of these 4 years -- that would be $1300 each year, and total $5200.  So I would be better off than paying $9000 right now.

    I can see this is a fair approach under the IRM for both parties -- this 2% a year would be much better deal for those whose balance is over  75K which would be 25% of in lieu penalty.

  37. My fellow immigrants, 

    Here is what I think we (as immigrants) should consider opt-out with the following arguments.1.  Reasonable cause, this should work well for short time non-compliance like Moby.2.  For long time non-compliance, we can still use non-willful (negligence) if tax due is less than $1500/year. This is to compared US expats' new procedure with no penalty at all.  

    Do the math to find out what is likely penalty under non-willful, and if it is much less than the in lieu penalty, that should be considered.   

    My reading on IRM is 1% per year for balance under 50K and 2% per year for balance under 250K.  That will likely be much better deal than OVDI in lieu penalty which is a good deal for whales but not for us.

    Now we have IRS official definition of minnows  -- that is less than $1500/year tax due.  

    We also have TAS backing us for using "26 USC § 6662 - IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERPAYMENTS"  instead of the killing FBAR penalty.  

    I think thee new developments give us good mitigation power when opting-out.  

    For those who have high balance, you should discuss your tax lawyers, and most of us can finish this battle DYI.

  38. What is the best way to contact the IRS to see if they would include resident visa and green card holder in these new procedures?

  39.  ij,
    Where is the language in IRM for 2% per year for balance under $250K.
    The language I noticed is $5000/year or 10% of the aggregate balance if it is between $50K & $250K. It is also $500/year if the balance is < $50K which is equivalent to 1%.

    Are you making an assumption that will should be scaled from 1% to 10% if the aggregate amount is between $50K & $250K? If so this is just an assumption and not indicated in the IRM.

  40. Anon3419,

      Yes I read the same part of IRM.  If $500 penalty for balance under $50K and $5000 penalty for balance under $250K.   Any rational person would assume this is 1% (500/50000) and 2%(5k/250K) for level 1 and level 2 non-willful respectively.   Would it be a good argument for IRS to impose $5000 for someone with balance of $50,001 while $500 for someone with balance of $50,000.  Should this one dollar difference (otherwise same facts) make such a difference in FBAR penalty ?   We are talking about $4500 penalty for extra $1 !!!

      We know OVDI is rigid and the examiner has no discretion on penalty set by the FAQ.  But once out of OVDI, this is a rational mitigation process.   By the way,  IRS also knows this would go through DOJ and even to a court.  Can you see any judge would approve such a ridicules jump penalty ?  

  41. They would not, but you can certainly include yourself into this new procedure.  Your argument should be same "low risk non-compliance" and as an immigrant/visa holder/green card holder, you should not be expected to know more of FBAR than US expats.  

  42. What is short time non compliance? 5 years, 3 Years etc?

  43. Hi Jack, I'm an immigrant in visa here. I roughly calculated the taxes due after applying foreign income and I will only owe: 2007-2009: < $500, 2010 < $1000. And I'm a non resident but resident for tax purposes (which I recently found). I did forward compliance for 2011 after becoming aware of this rule. My balance is over 100K, so OVDI inlieu penalty was not attractive for me as this is not the case of evasion but just not knowing the rule as it would apply in my case. Do you think that this new process will apply to me? I've many accounts so even if Level II mitigation @5000 is applied on per year basis, it will still be high enough to crush me financially. Thats the reason i did not take route of opt out as well. Truly, i think i'm a case of warning letter but cannot trust IRS any more at all. Any suggestions.

  44. I have been here over 12 years -- so I think I am a long time..  Moby has only 2 years -- so it is really short.   Anytime between that would be your own decision.  By the way, anyone can always argue for reasonable cause, but it works better if the non-compliance is shorter.

  45. Check out Phil Hodgen's blogs. There are some helpful instruction on how to calculate PFIC tax using the default method. Its nasty, I have several small UK ISA's I opened before immigrating to US 1995.  If you hold them a long time the interest charges are huge, potentially eating up all the gains. Just don't know  how this will pan out in OVDI and opting out, which is what I am planning to do. I wonder if there is an SOL can be used to stop the interest calculation going back say 20 years on form 8621?

  46. http://online.wsj.com/article/SB10001424052702303624004577337832098253526.html 

    Other crucial tweaks also favor Uncle Sam. The most important is that the statute of limitations doesn't begin to run until a return is filed. So an unfiled return from, say, 1990 is still fair game.That rule applies to certain forms as well, even if the rest of the return is filed. Typically the forms report activities on which Uncle Sam wants to keep close tabs. They include Form 5471 for Controlled Foreign Corporations; Form 3520 for Foreign Trusts and Gifts; Form 8621 for Passive Foreign Investment Companies; and Form 8886 for Reportable Transactions.

    I guess I should not opt-out as my PFIC issue 2005/2006.

  47. The default PFIC calculation only kicks in when you sell the investment.  If there is an accumulation type of investment and in fact you received no income from the investment, could this be used as an argument for excluding the PFIC from the penalty calculation within OVDI?  One of the FAQ's says if there is no unreported income then the account can be excluded, so if there was no income to report.........
    You still have to pay the 20% penalty on the annual growth using the MTM method though, but that is a lot less than the 25% of total balance. 
    Not a CPA or Legal expert by the way......so forgive me if I am wrong. Just trying to navigate through the same problems myself.

  48. Reuters has run a story by Amy Feldman called "New IRS rules for disclosure of foreign assets"  here  

    Amy has written other stories on the IRS VD program and is a journalist who understands the issues better than most.  She also wrote a piece some time back called "Taxpayers with overseas accounts seethe at penalties" which is linked in the story she has written yesterday.

    I thought I would take an opportunity to comment, and highlight the fact, that these new programs still Do NOT provide relief for the minnow immigrant.  I ended my comment with these words...

    "The BIG question for me is this,  where is some reasonable relief for the minnow new immigrants who had no idea that they were entering an offshore tax trap when they got their visas? The State Department does not tell them anything of their FBAR obligations in the “Welcome to America” package they get. They are still waiting for someone in the media to understand their dilemma on how to become compliant with all the Fwhat? forms! (FBAR and FATCA) without losing a BIG chunk of their hides and home country family assets. Theirs is a BIG untold story."

    For you immigrants who ask Jack questions and lament your plight here, I would take this opportunity to comment on this article and tell your story.  It might help shape the narrative of Amy's stories to come.  You have to be willing to be a little more public if you want visibility on what is happening to you. I can't make you do it, but I really encourage you to do so.   All I can do, is from time to time, to point out  your struggles, and I hope more of you will follow that example.  If you don't comment on these types of media stories when the opportunity represents itself, who will?   Nothing ventured, nothing gained!  


  49. Here are the FBAR penalty guidelines from IRM - plenty of discretion to examiners; notice item # 4 the key here is penalties vs. warning letter. Item # 5, why examiner discretion is needed as the penalties (both willful and non can greatly ex an ampunt that is reasonable.Also note first few lines of item # 6.
    1. The IRS has been delegated authority to assess FBAR civil penalties. 2. There are civil penalties for negligence, pattern of negligence, non-willful, and willful violations. 3. Whenever there is an FBAR violation, the examiner will either issue the FBAR warning letter, Letter 3800, or determine a penalty. See IRM 4.26.17 for the Letter 3800procedures . 4. Penalties should be asserted only to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising their discretion, examiners should consider whether the issuance of a warning letter and the securing of delinquent FBARs, rather than the assertion of a penalty, will achieve the desired result of improving compliance in the future. 5. FBAR civil penalties have varying upper limits, but no floor. The examiner has discretion in determining the amount of the penalty, if any. Examiner discretion is necessary because the total amount of penalties that can be applied under the statute can greatly exceed an amount that would be appropriate in view of the violation. 6. Examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted. Because FBAR penalties do not have a set amount, IRS has developed penalty mitigation guidelines to assist examiners in the exercise of their discretion in applying these penalties. The mitigation guidelines are only intended as an aid for the examiner in determining an appropriate penalty amount. The examiner must still consider whether a warning letter or a penalty amount that is less than what would be called for under the mitigation guidelines would be more appropriate given the facts and circumstances of a particular case. For example, if an individual failed to report the existence of five small foreign accounts with a combined balance of $20,000 for all five accounts but the income from each account was properly reported and the taxpayer made no effort to conceal the existence of the account, it may be more appropriate to issue a warning letter rather than assert penalties under the mitigation guidelines. 7. FBAR penalties are determined per account, not per unfiled FBAR, for each person required to file. Penalties apply for each year of each violation. As noted above, however, examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted. 8. There may be multiple FBAR civil penalty assessments arising from one account. FBAR civil penalties can apply to each person with a financial interest in, or signature or other authority over, the foreign financial account. Thus there may be multiple penalty assessments if there is more than one account owner or if a person other than the account owner has signature or other authority over the foreign account. Each person can be liable for the full amount of the penalty.

  50. Dear immigrants to America....  There is also an opportunity for you to tell your story and request some "common sense" relief out of Shulman at this Bloomberg story.  I have added a comment similar as the Reuters one, and it is in moderation.  
    http://www.bloomberg.com/news/2012-06-26/irs-says-offshore-tax-disclosures-have-yielded-5-billion.html#disqus_thread  Come on, my friends, I don't want to scold you, but you need to be less fearful of posting anonymously on news stories that present an opportunity.  I am not aware of one story anywhere in the US press in the past 3 years that highlights your plight. I know there is pain and fear out there, and would like to see it get some coverage.I see many of you asking Jack questions, but you need to also be willing to put something into the news comment streams when the the occasion arises, and this is one of them.  I am sure very very few journalist are even aware of your plight, as you struggle to find sane ways to come into compliance.  I will continue to point it out, as I comment everywhere I can, but need a few others too!   Nothing venture, nothing gained.  There is a glimmer of hope that the IRS is finally recognizing that there should be some "common sense" answers to something they have refused to acknowledge up until now, so build on that!BTW, ACA has put out their press release for US Expats that are interested.http://www.aca.ch/taxrelief.pdf Also Steven Mopsick, ala 30 year IRS vet has commented too, at Isaac Brock. http://bit.ly/OSZboHAlso, Moody's Tax out of Canada had this too say...http://bit.ly/MEC9gGand this from the Vancouver Sun...http://bit.ly/LxmJZL

  51. Hi Just Me, I put my immigrant comments on the Bloomberg story.  Reading about you and Moby and Ij on this blog has helped me stay sane in all this madness (:

  52. If the IRS is serious about enforcing the 42 year old law in spirit, they should encourage all tax payers (including non-immigrant visa holders (H1/L1 etc) and greencard holders living in US into the program and not drive them away. IRS should immidieatly release guidelines
    suspending the 27.5% FBAR penality on the highest account value in 8 years and increase the awareness, and I bet 99% of the honest tax payers will be in compliance and the real tax
    evaders will have difficulty to hide their money. I believe, U.S treasury will amass more than $5 Billion that IRS has been able to collect from 33000 taxpayers,if more tax payers are
    encouraged into compliance. In a time when U.S economy needs revenues, spending huge IRS budgets for such disclosure drives is inefficient and worthless use of tax payers money. Instead U.S
    Treasury should look at steps that can bring 99% of people into compliance, with very little expenditure. Encouraging individual tax payers to disclose foreign accounts without penalty is in
    the best interest of both tax payers and IRS.

  53. Just an update,

       I got a call from my new examiner (she replaced my previous one who left the position). She seems very pleasant and nice.  She told me "good news for you and your case should be closed in weeks and RRPS is off the penalty base"   She asked me to submitted f8891 which I had done already in my first package.

       I did raise the possibility of opting-out,  she responded me with "you certainly have that option and you will go through a full audit process".    There is no word of any indication of FBAR penalty at all,  and she also added "I would like to have this 906 sign in two weeks and it would be done".

      She also mentioned that she had cases with much less money than mine and also with a lot money money (millions).  Some just want to get it current with penalty.  Again, she told me I would have  the option to opting-out once I get my 906.

      I also raised foreign tax credit that I have never claimed.  She suggested me use f1116 and to send them back to her.  

      Back over a year ago, I was rush into OVDI and did not think of foreign tax credit at all, I did not care losing money with only hope to get RRSP off the penalty.   Canada did impose 10% withhold prior 2008 in interest earning for non-residents and 15% withhold on dividend    
    even as of today.  I also paid capital gain etc...   It would reduce a lot my tax due to IRS if I claim these credit, and may pave my way opting-out (I would look more innocent if less tax due).

      For now, I do incline to have this closure and 12.5% penalty is a sweet deal compared to 25%.    

      I don't see myself fitting reasonable cause given so many years of non-compliance (as a US resident).   But I have strong case for being negligence (a good argument is that I did not claim Schedule M tax credit in 2009 tax year).   Even with non-willful penalty, I could face 2% on 110K for 4 years (I have to put RRSP back for FBAR violation once opting out, and it would be a fair game as RRSP also has FBAR reporting requirement), if taking 2010 (filed FBAR in time)  off and 2005 off (SOL), I would have 2% penalty on 100K for 4 years.  That would be 8K -- so not much less than my OVDI penalty now.

      Of course, opting-out will serve a good purpose, that is I can test the water for other minnows.   Remember, we had not talked about opting-out before Moby shared his story.

      Anyway, my fellow ovdi participants,  please forgive me for chickening out if I do end up signing 906.  I have been advocating opting-out for sometime, and I do not mean to mislead you all.   


  54.  I  he SOL on the return does runs even if  form 8621 is not filed, and I think there may not even be a requirement to file form 8621 unless you have an 'excess' distribution.

  55. I agree with Just Me. Unless we make an attempt to communicate our plight i do not see a way to get out of this logjam. Even so, i am not sure if it would do any good but i agree with you about " nothing ventured, nothing gained". So atleast let us make an attempt to have our voices heard. I did comment on the column

  56. I urge you to continue to make comments on this blog. I am told that the IRS and others in the policy loop do read the blog.

    As before, I do encourage readers to consider the audience they want to reach and craft their comments to reach the audience. Well thought through comments are more likely to be considered and, if persuasively, considered favorably.


    Jack Townsend

  57. ij, why would reasonable cause apply because you had more years of non-compliance. If you didn't know, you didn't know, whether you lived here 2 years or 10 years. They only started to make noise about this 3 years ago. I don't know why people think that the length of time we lived here makes a difference. The amnesty they are offering to US citizen living abroad doesn't mention anything regarding the amount of time they lived in a foreign country.
    Also, why would RRSP be not included in the program, but included outside?
    In any case, if you think the penalty might be similar, why not risk no penalty at all?
    Since you're going at it without a lawyer, it doesn't seem like you have much to risk and that would give us another indication of how they're treating people on opt-out.
    In any case, please let us know what you end up deciding.

  58. I agree with the anon above. Most of us became aware of this FBAR in the past 2 or 3 years. your length of stay should be immaterial. i think you should argue for zero penalty. however i think you may be weighing the LCU for the audit vs paying 8k and moving on.

  59. Well, let me explain why the length of non-compliance time matters.   The issue is not only FBAR, it is also reporting offshore income problem.   It looks worse for residents (including immigrants) with many years of non-reporting offshore income.   Reporting global income is a common sense in  many developed countries (Canada, Japan and most Europe).  It is hard to make an excuse for immigrants to argue "non-discover able" common sense for many years.   

    The whole FBAR enforcement is about collecting offshore income tax, and IRS is using FBAR to crack down offshore tax evaders. As for RRSP, it is FBAR required.  OVDI gives exemption on penalty, but it may be a game the IRS wants to play when I choose to opt-out.   I am still considering opting-out as I don't see myself as part of 

    It is an insult to me that I would cheat on such a small amount tax (in my case 2-3K).   

    In case I choose opt-out, I would argue for reasonable cause for my RRSP failure, and negligence on my non-RRSP failure.  So that would make penalty on between $500-$1000 a year on FBAR, which would save me  $3000-$4000.  

    I think that would be a more reasonable penalty. 

  60. You're pretty much fully audited when you go through OVDI. You have disclosed EVERYRTHING. It seems unlikely that they'll spend much more time on reauditing Opt outs, possibly by different agents. That would be a total loss of time. But again, they haven't really shown that they were using time wisely. So yes, the process would take longer, but it seems that they have all the information to make a decision as soon as the taxpayer chooses to opt out. That's why I think the process is all about bluff. They made you a deal inside the program and threaten you with bigger penalties outside, when in fact, you could get a better deal outside, and they can decide what they would give you outside right away, as they have all the facts.

    Also, ij, don't they have to take you to court if you opt out to collect FBAR penalties? That's what some lawyers said, and in the case of minnows, it is unlikely they'll lose time on that, to get what 5k of FBAR penalties? Maybe Jack could telll us more about the opt out process, and the procedure that the IRS must follow to assess FBAR penalties. Is there automatically a trial and the defendent has to plead if the IRS want to asses FBAR penalties?

  61. They can impose penalty based on IRM, but to collect the money, they may have to take the case to the court.  I agree they have all the bank record and they can check if my returns (amended) accurate or not.  Just like PFIC, their calculation is $500 more than mine.  So I accept theirs.  By no means I tried to make it low.  I am no-pro but I do give them all the docs.

    I am 50% vs 50% on opting out at this point

  62. As far as the process goes, here is my rough understanding (some of the steps are fuzzy and may be out of sequence and some may be just rubber stamps)

    0) IRS threatens taxpayer that they could be subject to a ludicrous (and clearly unconstitutional) penalty of 100K/account/year for opting out.
    1) Taxpayer opts out, writes RC letter. 
    2) Examiner writes up report, submits to an opt out committee of IRS managers.
    3) Committee decides whether an opt out audit is warranted or not. They may also decide whether the RC is accepted or not.
    4) If an audit is required, the examiner conducts it. If a penalty is to be assessed, the examiner and manager decide penalty amount, and clear it with the IRS Chief Counsel's office (and I actually think this step is not a rubber stamp, the Counsel actually evaluates the case in detail).
    5) At this point, I think there is some scope for negotiation of penalties with the examiner.
    6) If agreement is not reached, the case can go to IRS Appeals for a pre-assessment conference.
    7) If a settlement is still not reached, then the penalty is assessed.
    8) A post-assessment conference with IRS Appeals can be held (although its not clear to me if this is only for appealing collection).

    I think most minnows should be able to reach a reasonably fair settlement by step 5 if not earlier.

    After step 8, its not completely clear if DoJ Tax has to take the taxpayer to court to collect FBAR penalties. They can do that up to 2 years after assessment, but its unclear whether they can turn the penalty over to Treasury for collection even without the lawsuit. I personally think that the penalty doesn't exist until either the taxpayer actually agrees to pay it or a court certifies it. So I think the court step may be a necessity, but we may not know for sure until there are some real cases.

    The taxpayer can always file a lawsuit in any case to challenge the assessment.

  63. In the event that a person has not filed 3520A or form 709, relating to gifts to foreign trusts or foreign individuals, and more than 6 years have passed, can the IRS come back and assess penalties for failure to file assuming no gift tax was due on the transfer.

    Also, how would the IRS look at a situation where a US citizen overseas had given a gift and not filed 709 or 3520A (no tax was due) more than 6 years ago, but under the current scheme files returns for 3 years. Would they come back and assess penalties if they come to know about the failure to file.

  64. Is FBAR required to be filed if a person has an overseas mortgage (loan) account but does not have a "bank" account and the foreign mortgage payment is made out of direct transfers from a US bank.

    ALso, are FBARs required to be filed if the person is a guarantor to a foreign loan overseas.


  65. I read various blogs here but could not find the answer, so here is my quetion. Apologies if this has been answered earlier. If a person comes to know of FBAR and foreign account disclosure requirements, is there an affirmative duty to amend and file prior year returns or can the person comply going dfforward. that is, is the person obliged to correct past errors even though they were not aware of them when the returns were filed. Or guilt is proved only if the person was aware of the pobligation when the return was filed and the person is not guilty if the person was not aware and upon becoming aware chose not to amend prior periods.

  66. Just Me: I tried postin
    Here is how the disclosure programs work (OVDI, OVDP).  Please take a moment to read and relate to the plight of honest folks who have foreign sourced income, all legally earned, but who for whatever reasons omitted to report it - ignorance, or otherwise.  The penalty structure between US generated and foreign sourced incomes in theis scenario is - I dont know what to say, I will let the readers decide after reading this post.
    IRS needs to be fair and level the penalties for US persons with respect to US sourced and foreign sourced income.  For example, (and assuming both sources of income are legitimate and legally generated), how will IRS treat a case of omission of bank interest income from a bank account in the US if the tax payer falied to report it (assume - 1099 got misplaced in the mail)?  IRS would, ask for the taxes on this income and assess interest on tax payable, plus an accuracy penalty - that's it.  I letter will be mailed to you and you pay up - its over.
    Now, if this interest income (however small) arises from a foreign bank account, and the US tax payer omits reporting it and doesn't file an informational return called FBAR, the only way to fix this mistake is - pay the tax on this interest income, plus an interest on this tax,  and an accuracy penalty (same compared to US bank account scenario) PLUS 27.5% OF THE HIGHEST BANK BALANCE in that foreign bank account! Imagine losing close to a third of you bank balance for an error or an honest oversight, or lack of knowledge to file an informational return called FBAR?
    Now, is this fair treatment of US immigrants, citizens or expats who are caught in this situation?  This is a fundamental violation of rights of US taxpayers- as disproportional penalties are being applied based on the source of income (foreign vs. US sourced) - regardless of the fact that this income is all legitimate, legal and earned the hard way - with sweat and blood.
    Imagine the uproar if IRS starts applying same penalty structure to taxpayers who missed reporting their US bank account interest - and asks for a 27.5% penalty of the highest bank balance in that account? 
    We urge the IRS to really consider a fair and just way to deal with tax non-compliance for tax payers with foreign but legally sourced income consistent with how they would treat it if that same income arose in the US.
    For illegally sourced income and where tax payers have made elaborate arrangements to avoid taxes - those need to be dealt with appropriately.
    g this entry at Bloomberg - the site is down.  So going to post here instead for now - or maybe I am not doing something right at Bloomberg site:

  67. You ask questions that require a lot of nuance -- beyond what can be given in a blog format;. I will try, however, to hit the high points.

    First, generally as to tax returns, there is no duty to amend tax returns. There may be prudential reasons to do so, often related to some form of voluntary disclosure; but there is no legal requirement to do so. And, as since returns are required, one could argue that failing to timely file does not relieve a taxpayer of the legal duty to file. However, the failure to timely file is itself a criminal act and subject to various penalties, and filing a delinquent return does not technically avoid the criminal or civil penalties. On the other hand, there is no separate criminal act for each day after the due date that one does not file a return; in this sense, therefore there is no separate legal duty to file a delinquent return.

    How this plays out in the foreign account arena is that, if the taxpayer were not aware of the obligation to report income from the foreign bank account when he or she filed his or her original return, there is no obligation to amend because the original return was not fraudulent. A taxpayer might want to amend to mitigate the criminal investigation / prosecution potential or to avoid civil penalties, but there is no obligation to amend.

    Similarly, by extrapolation from the tax context, if one did not know of the obligation to file the FBAR and therefore did not file the FBAR, then one has not committed a criminal act by failing to file and is not guilty of a crime for each day after the original due date that he or she fails to file a delinquent FBAR. There may be prudential reasons to file a delinquent FBAR, but there is no legal compulsion to do so in the sense that failing to file a delinquent FBAR is not a separate crime.

    So, if the original filings or failures to file were without the type of knowledge -- willfulness -- required for criminal tax and FBAR prosecutions, then the person is guilty of no crime and need not file amended returns or delinquent FBARs.

    The issue is a good bit more complex, but the foregoing is a start to thinking it through.

    I hope this helps.


  68. That is really helpful Jack. In the scenario that a 1040 is filed but a supplemental form such as 709 was not filed for that year (no gift tax liability), does this toll the statute of limitations, i.e. SOL does not begin to run, if the taxpayer did not know of the obligation to file 709.

  69. Jack, we were so foolish to jump into OVDI simply to correct our past errors.

  70. AB, very thoughtful analysis. The US is a destination of many many high skilled professionals with a whole past life in their home country. They certainly have bank accounts in their home country. When coming to the US, some of them are well advised about US tax laws, some of them are definitely not. For the latter, it's just not fair that their hard-earned money in their home country becomes such a liability in their lives. These people should just be allowed to come forward once they figure out where they stand. I also encourage US immigrants to post wherever they can to call attention for their situation. 

  71.  I tried posting the following on Bloomberg but was unable to, so am posting it here:

    This story is slanted using language such as "hiding money" and so on.

    The distinction needs to be made between: a)  those creating a phony
    shell company overseas and wiring money to it to take a fake tax
    deduction or business expense, and b) those who had money that
    originated abroad, such as house sale before immigrating to US,
    gifts/inheritance from foreign relatives, foreign pension plan from
    working abroad etc. and who basically had the money in an account
    earning interest that they did not report.

    Those in the first category are willful and are getting a sweet deal by
    paying only 27.5% of their foreign accounts.  Those in the second group
    are getting a raw deal by being made to pay a penalty based on
    principal, not on a small amount of unreported earnings.

    Instead of threatening the second group with draconian penalties, the
    IRS should encourage them to pay past due taxes (with interest and
    penalty of 20% of tax due) but no penalty on not filing the obscure FBAR
    form.  The second group is trying to fix mistakes and the IRS should encourage them, not threaten them.

    As it is, 33,000 accounts is a tiny fraction of the probably couple of
    million of accoutns held by foreign born citizens or those who worked

  72. Interestingly in Canada the Canada Revenue Agency does "Newcomers to Canada" seminars like the one I linked too below. If you are at all curious where Mississauga is its is a BIG suburb of Toronto.


  73. Immigrant,
    Glad you took the time to read and comment.  I view the work that Jack, Just Me, Moby, Sally and IJ are doing as a great service to the society and also this blog and similar ones are a great communication tool with IRS, policy makers and their staff who visit and read through these.  I hope they learn what ails the OVDP, OVDI programs and how to fix these policy flaws.
    For me, after reading a lot on OVDP, OVDI and now the new program (as I am a participant in OVDI), the basic issue emerging is disparate treatment that is given inside the disclosure programs for U.S. vs. foreign sourced income (assuming both incomes sources are legal & legitimate).  This is troubling, and I am not sure which constitutional rights of US citizens, expats and US person are being violated here, are they?
    The key issue is: If the same tax non compliance occurred of a US taxpayer, for US sourced income vs. foreign income (again, legally earned, all legitimate) the cost for correcting foreign sourced income non-compliance is life altering.  Is this just and fair?
    IRS  and our law makers owe to the American people a fair treatment to correct tax-non compliance regardless of  the source of their global income, US or foreign (again, legally derived).  Nina Olsen’s (National Taxpayer Advocate) proposals seem much more reasonable from what I have read so far from any in the Government.
    I hope folks on this and other blogs continue to make efforts to highlight with specific example this disparate treatment between the two sources of income – US and Foreign – again assuming both are legally earned and derived.

  74. AB,

      As far as tax is concerned both domestic and offshore tax penalty is pretty much the same.  They are all under title 26.

     However FBAR is under title 31 but is enforced by IRS, that is the reason offshore income penalty is worse.   It may not be relevant to tax at all.

     You certainly have made a good point and this will be an argument when you opt-out.

     OVDI is simply to put FBAR under title 26 (in lieu penalty).  That may lead people to see the discrimination against offshore income. 

  75. Just Me,
    Thanks for postinng at these blogs.  Please feel free to post our comments from this blog as sometimes we are not able to post.  You are really helping thousands of minnows navigate this ocean (OVDI and OVDP).  This is how the Arab spring started - social media and the power of internet.  Thanks again.

  76. I received a question from someone who is an expat (US Citizen overseas). Under this proposed regulation, would filing 3 years of tax returns and 8 years of FBAR clear any prior history of non-compliance, including those of supplemental tax forms. The person was concerned and wanted to take advantage of the proposed rule, but had gifted assets in excess of $13K in periods that are more than 3 years ago but less than 6 and wanted to know if doing the above would mean that the history is cleansed.

  77. You covered the SOL issue in one of your blogs where you stated that absence outside US tolls the SOL. Does the tolling apply to FBAR cases also, or does tolling due to absence from US apply only to "regular" tax issues.

  78. I read IR-2012-65 and I have a question. Does it only apply to U.S. taxpyers living abroad in regards to RRSPs. It appears to me that if a U.S. taxpyer living in the U.S. who has been filing and paying his taxes but did not know about the deferral election for his RRSP and he had not been reporting the accounts on Form TD F 90-22.1, he could also participate in this program. Is this correct.

  79. correct, and if you have only RRSP and you are US resident, it will be no penalty after you send a request for extension for election and amend f8891

  80. The IRS seems to be have a hard time deciding what an acceptable minimum amount of tax owed is. In the new compliance procedures, $1500 is mentioned. However, on the IRS page, "Options available to Help Taxpayers with Offshore Interests", for the same situation, the IRS mentions $1000 (see the third box). In the original Fact Sheet, FS-2011-13, $2100 was mentioned, but this was updated on June 13 and that figure disappeared after having set the standard for the previous 6 months.

    The Taxpayer Advocate has mentioned $5000 as a possible minimum amount of tax owed without requiring major examination.

    What this goes to illustrate is that attempts to fit compliance of US taxpayers resident abroad into one box are nearly impossible. A broader approach without restrictions would save lots of IRS man hours and promote tax morale.

    Three exceptions come to mind that show the difficulty of finding a minimum amount for "simple, low risk" compliant returns.

    1) In some foreign countries, taxpayers are allowed to sell their house and not pay any taxes on the gain if it is immediately reinvested into a new principle residence. Not so in the US. For this reason, large amounts of taxes may be owed as no offsetting taxes are available. It creates the situation where a US person abroad person may owe nothing to the US for many years as they pay high taxes where they are resident, but suddenly, due to the sale of a house, large amounts, more than $1500, may be owed to the IRS. This person has been compliant in the country of residence and wants to compliant in the US. Is it really worth it to subject the person to more examination because more than USD 1500 is owed in one or two years due to an incompability between tax systems?

    2) What about those who have a mandatory, government regulated foreign retirement plan that may invest in a mutual fund? In some countries, the taxpayer has no choice about participating in the plan and how the money is invested. Depending on exchange rates, in some years nothing may be owed and in other years large amounts may be owed in phantom gains. This can even occur when the taxpayer has a loss in his or her currency of operation.

    3) What about those US persons abroad who live in Dubai? There is no income tax in Dubai, meaning there are no offsetting tax credits. An educated person in an average white collar job may owe more than USD 1500 per year. Why discourage a previously non compliant person from complying by subjecting them to audits just because more than USD 1500 is owed?

    It is clear that the IRS cannot agree within itself what a minimum amount is for a "simple, low risk" compliance. There are many, many exceptions that can be cited. The reality shows that a broader approach is needed for US persons residing abroad who want to come into compliance with US taxes.

  81. Perfectly stated. This new "initiative" is not aimed at providing more fairness for anyone. Its function is purely cosmetic -- to provide the appearance of having taken TAS recommendations on board, without actually altering anything substantive at all.

  82. Even a major accounting firm has recognized that IR-2012-65 potentially discriminates against 2011 OVDI participants who are resident abroad. See the comments in:


    The countdown is on. The IRS has one week to provide the procedures as promised in IR-2012-65.

    Given the abysmal record of IRS treatment of US persons abroad who try to become compliant, does anybody really think the IRS will rectify this injustice toward 2011 OVDI participants?

    Most OVDI participants resident abroad have had their documents disappear into IRS Never Never Land. It is probably too much to hope that the IRS can develop procedures for conversion from OVDI to IR-2012-65 terms. Such a program could save the IRS thousands of man hours.

    Even if a conversion program is created, is the IRS capable of logistically finding the OVDI information in the boxes that were sent to Austin and dealing with the fact that payments have been posted to 2007? If the IRS is thorough this time in thinking through its policies towards all US persons resident abroad, this could be possible.

    We will know in a week.

  83. Here is some info that may give non-US residents who are in OVDI some hope. I am blessed with a Congressperson who has taken a true interest in my case and been proactive. My congressional representative has made contact with other Congresspeople as well as both The Treasury Department and the IRS concerning the need for a conversion program from OVDI to the the new terms and conditions.

    I would like to report what was told to me by my Congressperson on August 30.

    My Congressperson (actually the Legislative Aide specializing in tax matters) spoke to the IRS on August 30. It was reported to the Aide that the IRS hopes to have the new information online on August 31, but it could be delayed until early next week because of the Labor Day weekend. While details could not be released, it was confirmed that the $1500 and 3 year terms as in IR-2012-65 are in line with what they plan to announce.

    What is a bit confusing is that the Aide told me they kept referring to it as an update to the 2012 OVDP. This does not make any sense to me. We will see if this is a mistake that the Legislative Aide made or if the IRS will do the update in OVDP 2012 terms.

    My Congressperson's Aide was also told that most people who entered the OVDP/OVDI programs have the ability to be retroactively transferred to a more beneficial program. The Aide was told that the IRS is very aware that those who entered the programs at an earlier date should not be at a disadvantage against the later programs. The only issue is whether a person has signed a closing agreement as that would be a binding contract on prior terms.

    Nothing was said about how this transfer would be done. We are waiting to see what the IRS will really do.

    I encourage contacting Congressional representatives. I now know that mine and several others, as well as the TAS are monitoring the actions of the IRS with respect to the OVD programs.

  84. @anon5percent:disqus , thanks for the contacts you've made. Have you also suggested that they should include immigrants living in the US in this procedures? Any chance that this might happen or we're totally out of luck because we live in the US?

  85. All right, the IRS has published the new procedures:
    Here are the highlights:
    - Persons qualifying for, submitting under the new "Streamlined Filing Procedure," and presenting a low compliance risk will not have to pay penalties or face follow-up review by the IRS. - To qualify, you must be a non-resident US taxpayer who has lived outside of the US since January 1, 2009 and has not filed a US return since.- To participate, taxpayers must file three years of tax returns and information returns along with six years of "FBARs." Tax and interest must be paid at the time of filing. A valid Taxpayer Identification Number or Social Security Number is required.- The determination of compliance risk is based on a large number of factors and the answers to a special questionnaire required as part of the submission.- Generally, amended returns will not be accepted in this program. Where they are, the amended returns will be considered "high risk" and subject to increased scrutiny.- Retroactive relief for deferral on Canadian retirement plans is available.- The Streamlined Filing Procedure does not protect against the risk of criminal prosecution.
    Do I read it right? Does that target only recent emigrants (people who moved since January 1 2009), but not people who moved abroad before?
    If that is the case, this is VERY disapointing. For the accidental american, or long term emigrants, OVDP is still the only official way to become compliant.
    Even if immigrants were included, with that rule, it would likely apply only to visa holders, as most immigrants start with a Visa prior to getting their green card.
    Disapointing.... VERY disapointing.

  86. Yes. I have mentioned new immigrants, although the focus has been on US Persons resident overseas.

  87. Yes, I have mentioned immigrants living in the US, although the focus has been on US Persons residing outside of the US.

  88. The new procedures are out. They exclude OVDI 2011 participants as OVDI participants have filed tax returns in 2010 as part of OVDI and are likely US compliant in 2011. OVDI participants are kept in the program even if they have simple returns. Conversion procedures are a moot point.

    It seems the IRS gave lip service to my Representative from Congress when it came to conversion procedures. It will be interesting to see the response when the Aide learns what it feels like to be duped by the IRS.

  89. Don't think the representative would care much about immigrants or frankly anyone would because a person without US citizenship cannot vote and therefore there is nothing gained fighting for the rights of the immigrant minnows under any of these programs. The super minnow and RRSP regulations are fair and square targeted to help Canadian-Americans which makes sense because Canada is a big trading partner of the US and it serves US national interest to keep ties friendly with Canada. Who really cares if some immigrant from India or Egypt or wherever gets swept up under these programs - all animals are equal but some animals are more equal than the others.

  90. Formerly Proud AmericanSeptember 3, 2012 at 12:35 PM

    From reading the (incredibly complex language of the) comments here, it is plain to see that the US / IRS is trying desperately to fit square pegs into round holes.

    The fundamental problem is that the US is unfairly and illogically taxing people who are not living in the USA. They have their own lives in other countries where they live (legally) with other tax systems. For the IRS to try to account for the taxation legislation and practice in 200 or so foreign countries will obviously become a nightmare.
    The proper solution to this mess is to stop the absurd (and pretty much unique) US practice of taxing people who aren't in the USA, aren't going back to the USA and in some cases have never even set foot in the USA. The outrageous penalties on simple non-reporting of legally earned money which has already been fully taxed are a telltale sign that someone in the USA (and perhaps many someones) have fallen off their rockers completely!
    Institute residence-based taxation, just like every other country on the planet!
    Leave foreigners, expats, immigrants, foreign retirement plans and every foreign bank in the world out of it!
    The alternative is to become the hated, distrusted government that good people everywhere want nothing to do with! It used to be that people WANTED to become Americans. Now they want to be anything but! Doesn't anyone back in Washington think anymore?

    P.S. "Taxation without representation." Has anyone heard that one before?


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