Tuesday, July 16, 2013

Article on Real People Consequences of the Rigidity of OVDP/I (7/16/13)

Tax Notes has a great article on the plight of Marie Sapirie, The Personal Impact of Offshore Enforcement, 140 Tax Notes 187 (July 15, 2013), here.  I offer only the opening excerpts to grab readers' attention if interested in this area.
They often refer to themselves as minnows. They are -- or, in some cases, were -- Americans who reside abroad and who had undisclosed bank accounts in their local jurisdictions. In an attempt to become compliant, some found themselves entangled in the offshore voluntary disclosure programs (OVDPs) that were intended for larger and more culpable taxpayers. 
Some were U.S. taxpayers who intentionally hid money from the IRS in foreign bank accounts. Some continue to hide assets. But not everyone who entered the 2009 or 2012 OVDPs or the 2011 offshore voluntary disclosure initiative (OVDI) was intentionally concealing large sums and purposely evading tax. 
The stated objective of the offshore disclosure programs was to bring taxpayers "that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax" into compliance. However, the language in the FAQs for the programs appeared to apply generally to anyone with an undisclosed foreign account, regardless of circumstances. 
U.S. citizens who have moved abroad and have bank accounts there often may not fit the profile of a tax evader. This set of taxpayers typically faces unique and diverse filing and reporting challenges. Those who wish to be compliant frequently have limited access to professional assistance and have difficulty determining the appropriate tax treatment of specific foreign accounts. Since the UBS scandal opened the floodgates of offshore enforcement in 2008, those taxpayers have sometimes lived in fear of owing large, and perhaps financially devastating, penalties for unwitting compliance mistakes. Some taxpayers have legitimate reasons for owning foreign bank accounts, and their failure to declare them was merely negligent, as National Taxpayer Advocate Nina Olson has pointed out.
After that, the author presents some real world taxpayers who have journeyed through the process, often with many twists and turns, but usually with what appears effort and angst which, in my view, are not compelled by systemic revenue imperatives.  The IRS has appeared slow to correct as these glitches in the offshore initiatives began to present themselves.

I hope the IRS is listening / reading.  I also hope that readers encountering similar situations will find some hope and strategies for action.

P.S. I have not had time to read the article in sufficient detail to collect my thoughts and present more detailed analysis succinctly here.  I will be back later.


  1. Renouncing US citizenship has been a huge relief. It means no more threats of excessive fines, no more hours spent trying to comprehend and comply with complicated filing requirements, no more unknowns on retirement savings double-taxation, no longer any reason to pay $600+ to prepare taxes, no longer any need to segregate finances with NRA spouse, no more local bank rejections such as with mortgage refinancing, no more local job discrimination, no more local bank reporting, no more complications with exchange rates and investments, no threats of exit taxes, etc. and this for the next 50+ years! 11 years ago, I moved abroad to fleeing unemployment in the US during the dot.com crisis. I love America, Americans and I'll always have American ancestry and heritage, but US citizenship just doesn't make any sense anymore when not living in America. Maybe US citizenship should be something that one gains and loses anytime that one leaves or enters America, kind of like a fancy type of a visa!

  2. From the descriptions, Taxpayer 1 is very likely anon5percent, and taxpayer4 is JustMe. So denizens of this blog are well represented in the article.

  3. Thanks to Jack for providing the opportunity to tell these stories in a wider forum like Tax Notes.

    It is significant, I think, that they made the link to the story on their free web site, rather than behind a paywall, as it gets wider readership and distribution.

    Will it make a difference, probably not, but in a small way it does help focus attention to Nina Olson's most recent report to Congress that makes the point that IRS Offshore Voluntary Disclosure Programs Continue to Burden “Benign Actors” and Damage IRS Credibility http://1.usa.gov/1crfsZw

  4. Swiss Techie said, "Maybe US citizenship should be something that one gains and loses anytime that one leaves or enters America"
    That's what residence-based taxation is all about.

  5. Of the four cases described in the article, readers will recognize anon5percent (A/K/A/ not that Lisa) and Just Me.

    The article makes a good point that many of those with relatively good facts are scared of opting out because of the uncertainty.

    I believe that foreign residents are not the only ones who deserve relief. Many who reside in the US have legitimate reasons for foreign accounts (savings prior to immigration, inheritance from a parent overseas, keeping funds in the foreign country's currency for future retirement there.) One way to address this is the three-tier approach suggested by TAS. Another would be to calculate FBAR penalty as a percentage of previously unpaid tax.

  6. I want to add further to some of the comments below. The plight of immigrants who are in the millions in US. Most have financial accounts and real estate when they move to US. And worse, lot of them languish in US on non immigrant visas for years and so are forced to keep their assets back home.

    The tiered approach suggested by TAS is an excellent way to solve many of these problems. Another way would be to tier people based on asset value (< 100000, < 250000 etc) and have reasonable settlement options. Even people with high asset value should not be considered
    to be willful evaders as many have valid reasons to have these accounts.

  7. Jack,
    - Are both willful and non-willful FBAR penalties imposed and collected via a court? If so, if IRS imposes the non-willful FBAR penalty on benign actors, that would mean going to court and the records become public. This can be an issue for those in the immigration queue. For immigration purposes, either conviction or admitting to committing a crime of moral turpitude is enough to disbar one from becoming a permanent resident/citizen. And imposition of fines and penalties by a judge may be equivalent to admitting that one violated the underlying criminal statutes.
    - Have you seen any thresholds for non-willful and civil FBAR collection?

  8. Jack,
    Has IRS provided any new guidance on who is eligible and should to participate in OVDI 2012? You had a blog about Bank Leumi customers getting dismissed from OVDI after getting pre-clearance. Is that still the guideline?

  9. Anonymous,

    FBAR penalties are Treasury penalties which Treasury assesses. The IRS's substantial panoply of tax collection remedies are not available for Treasury assessments. Here is what I say in the current draft of my Federal Tax Crimes book (probably more than you wanted to know; but I do exclude the footnotes):

    The FBAR civil penalty statute of limitations is six years for the assessment. After timely assessment, Treasury has two enforced collection procedures. First, Treasury may sue for collection, provided it brings suit within two years of the later of date of assessment or the date the person was convicted of an FBAR violation. If Treasury obtains a judgment in that suit, Treasury will then have the judgment remedies applying to judgments generally. Second, under its general statutory authority to offset debts owed by a person to a Government agency against debts any Government agency owes that person, Treasury may offset against a person’s FBAR liability against payments the person is otherwise due from the federal government. For example, the Treasury can offset refunds due the taxpayer against the FBAR liability. This Government claim subject to right of offset has no statute of limitations, even if it has a statute of limitations for any other collection measure.


    As to thresholds before DOJ Tax will file suit, I have not seen any. I do think DOJ Tax will have some consider materiality -- which might be the same as perhaps sliding scale thresholds -- but I don't know what those materiality considerations are.

    Jack Townsend

  10. Also, I did not respond to your immigration question. The FBAR civil penalty -- even the FBAR willfulness penalty -- is not a criminal conviction. Nor is the IRS's determination of the penalty an admission by the taxpayer of even civil misconduct unless the taxpayer either agrees with it (even mere payment would not necessarily mean agreement) or Treasury obtains the judgment. Now, I would caution that if the willful penalty is agreed to or confirmed by judgment, then the taxpayer may be estopped in some way to argue that he did not act willfully. But I think that type of estoppel would only apply in a civil context and would not be preclusive of the issue in a criminal setting -- e.g., the Government could not take the judgment in the FBAR civil enforcement case and treat it as an admission in a criminal case for failure to file the FBAR(s) in question.

    Now, your question is about immigration. I don't have any thing other than a gut reaction on that. It is true that an immigration proceeding is not a criminal proceeding and, for that reason, might be viewed as a civil proceeding in which the taxpayer might be estopped. However, I would argue (unless there is some preclusive contrary authority) that it is a punitive proceeding and the Government should have to prove its case by actual evidence (i.e., prove willfulness by evidence and not estoppel).

    Of course, even if the Government does have to prove that in an immigration proceeding, the Government will likely have access to the FBAR penalty files (keep in mind that these files are Treasury files and thus not subject to Section 6103) and thus could be in an easier position to meet the requirement that it prove some deportable conduct.

    Finally, the mere fact of the assertion of the penalty so that it is entered in the database might cause the immigration authorities to pick up on the taxpayer's penalty if they were looking at the taxpayer for some other reason and give additional ammunition to proceed against the taxpayer.

    For this reason, and given the uncertainties of the immigration consequences, I encourage my clients with the issue to consult immigration counsel and, if still troubled about the issue, consider not opting out in which case they will not get an FBAR penalty but will get a miscellaneous / "in lieu of" IRS penalty that is not an admission of any misconduct (i.e., it does not admit willfulness or civil fraud) and is protected generally by Section 6103.

    Jack Townsend

  11. Marie's article is sad to me. We are in the OVDP out of "fear". We failed to file FBARS, and disclose 2 bank accounts with 20 & 50 dollars in them as well as a 401K equivalent. The interest earned for 8 years on one account is $12.84! I hardly think we are "hiding and offshore account"! We simply did not know and were never told by several accountants over the last 10 years. We were told we are tuna caught in the net of trying to catch the sharks. This will certainly have a huge impact on our finances (paying the attorney). The sad thing is after reading Marie's article, if we are even doing the right thing. We were also told that by going through the OVDP, we will get a release letter and they can never come back for these issues. It is also sad that is it all fear based. You read things like "They may increase the penalties" or "They may discontinue the program". We entered the program out of fear that we could end up paying huge penalties if we "didn't come clean". It is near to impossible to get answers and I have read and been told "Don't phone the IRS and if you do make sure it is anonymous! Really? I hope people keep talking about this. Personally 2 accounts with less than $50 and a 401K equivalent (which is fine we just never did the 8891 to defer the earnings) I HARDLY think we are "hiding and offshore account". Oh and our 1040X will be "0" for all but one year! It is a horrible feeling knowing that you are pretty much accused of doing something wrong. I don't believe people in our situation should have to pay thousands of dollars to get this rectified. In our case there is nothing to amend it is really just filing the forms (which by the was is near to impossible to get instructions on some of the forms they want filled out). We have talked about this with friends in both countries and many have said they didn't know either. Thank you Jack, I have learned more from this site than anywhere else.

  12. MM, I feel for you. This certainly an unintended consequence (that is to say, I hope the IRS did not intend the consequence!). The IRS's fault has been to fail to respond openly and compassionately for those who did not do really bad things. Often taxpayers can get that result by opting out, but not without great expenditure to time, energy, angst, costs (if attorneys and/or preparers are engaged), and fear. I think the IRS could have done better than that.

    That does not help you.

    I am glad that you learned from my offerings on the blog. I wish I could have done more.

    Jack Townsend

  13. MM, only you can weigh the likelihood of a just and fair result if you opt out versus the time and expense involved. This is extremely difficult since there is very little information available as to what happens on opt outs (what the guidelines are and how they are applied) and whether there is a lot of consistency or whether much depends on luck, of who the agent is handling your case. I am in OVDI and have spoken to attorneys who have handled many OVDI cases but very few optouts, and have spoken to a caseworker at TAS as well, but am still in the dark as to whether or not I should opt out. I have little confidence that there is fairness, consistency, or objective standards. I feel like I'm on a TV game show where I get either what's behind curtain "A" (no penalty) or curtain "B" (50% penalty) if I opt out. So I'm really torn as to what to do.

    One thing I have definitely done is speak to the agent handling the certification, speak to a TAS caseworker familiar with OVDI (had to call a couple of times to find someone who even had a clue that I faced paying 27.5% of my foreign accounts, which happens to be 27.5% of pretty much everything I own.) I also wrote a one-page letter to Nina Olson briefly detailing my situation. She's been trying hard to change the one size fits all approach and at least I wanted to give her one more example of someone who is not a "bad actor." I don't know whether she'll succeed. It's been years since she's been quite public in her strong criticism of the OVDI's one-size fits all approach, and the IRS is certainly aware of this by now.

    I too am extremely thankful to Jack. I only wish before getting into OVDI I had gotten a second opinion from him about whether I should have joined or considered a quiet disclosure or forward compliance. Like many others I too tried to do the right thing (even though there was almost no chance of the IRS discovering my accounts on its own, I wanted to fix past noncompliance) but am being punished for coming forward.

  14. Anonymous, Your case reminds me of my own circumstances. And I really feel for you- it does not seem fair to have to roll the dice on 50% of all your assets- and over what? Some relatively minor amount of unpaid Tax, since reapaid with penalty and interest
    As to the IRS being aware of the strong criticism of the 'One size fits all policy', I see no evidence of this. I have talked to the agent handling my OVDI as well as the agent's supervisor. Neither have I heard of the GAO report that references the Tax payer Advocates Service's report, and neither were interested in hearing about it or learning more
    They seem to be living in a bubble and talking to them felt like talking to robots. Even though I explained my circumstances at length- and its clear I dont deserve a 25% penalty- I got the feeling that they simply want to follow the fixed guidelines, and in nfact. ,make me jump though hoops to establish any fact.
    Its is possible the agents handling Opt outs have been briefed on the TAS reports, but I can assure you the agents and management handling the actual OVDI filings have not.
    I called the TAS and they advised they could not get involved unless a process or system in the IRS had broken down. Could you share on what gorunds the TAS took your case ?

  15. To HonestAbe94, this is the same Anonymous.

    I did speak to a TAS advocate familiar with OVDI, who was kind enough to have a long phone conversation with me. The TAS did NOT "take on my case" but informed me that they would only help, as you said, if a system or process broke down. Inside the program this would only mean, for example, if they miscalculated the penalty and refused to correct it. Otherwise, I would need to opt out, let the IRS come up with a penalty, and only then would/could the TAS get involved regarding the penalty.

    I would have liked to get some inkling of whether I should opt out, but wasn't able to. There are still some minor issues to take care of before I am forced to sign the 906 or opt out.


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