Friday, October 4, 2013

To Opt Out or Not to Opt Out - That is the Question (10/4/13)

Robert W. Wood has this article on the subject at hand:  Should You Opt Out Of IRS Offshore Amnesty? (Forbes 10/4/13), here.

I don't think there is very much new in the article that has not been said on this blog (by me and readers in their comments).  Nevertheless, those considering opt outs should read the article, although with other available materials, in making their decisions.

Of course readers comments are welcome.


  1. Robert W. Wood cites the Taxpayer Advocate Report and states that average opt out time in the 2010 OVDI program is 176 days. One thing that is not considered in this figure is whose perspective it is reporting. I was 1025 days in the IRS system from when I first entered OVDI to the day my final refund check came back after I opted out. I was 556 days in the Taxpayer Advocate System and my case was officially with my IRS Revenue Agent who did the audit for approximately 180 days in total. I opted out about 70 days after my Revenue Agent started looking at my case.

  2. Jack , as you know there are more options than OVDI&P for expats living and working abroad who have not filed for various reasons - one of them because they have paid already their taxes to the country where they currently live . Please assume you are currently tax and FBAR compliant and you have submitted all missing 1040s and FBARs for the period in question and discovered that for 2006 and 2005 (the years you last filed in the US) there were minor errors in the return (1 year no additional tax due - the other < $50) . My question to you is if you should attempt to correct those errors (interest,dividends,capital loss) with a 1040X even the SOL has expired because you think that the disclosure period will be audited anyway and if I remember correctly after an audit starts no amended returns can be submitted. Thank you for your help.

  3. 1. You can submit amended returns after an audit has started.
    2. If indeed the 2005 & 2006 years are otherwise closed by the statute of limitations (either 3 or 6 year statute), you should not file amended returns. The years are closed.

    Hope this helps.

    Jack Townsend

  4. Thanks for sharing your experience.

    Jack Townsend

  5. thank you very much Jack for your reply ..... with regards to 1. do you have any link/reference or legal authority where I can read about it ?
    With regards to 2. the Service confirmed that 2006 is a closed year but I thought that during an audit the tax examiner has room to extend the audit beyond the disclosure period ?
    But if I can submit the amended returns after the audit has started than this should not be a problem and the examiner has to accept this.

  6. 1. No, I don't have any authority for it. But what I do is advise the agent that I intend to file an amended return. Sometimes they will ask you to submit the amended return to them. However, if it is a claim for refund, I suggest that you file the return and submit a copy to the agent. That way you can be sure that your refund claim is timely without further hassle (if the agent just holds onto it.)

    2. The agent can look at closed years. He just can't do anything with the information he may get regarding the closed years. And, for the reason that he can't do anything with the information, most agents will say why even bother looking at a closed year. Sometimes, if the agent is auditing year 5, he may want to see the year 4 tax return (even if a closed year), just to check for continuity on the year 5 tax return.

    Jack Townsend

  7. thank you Jack for your help,
    my last question is with regards to my own FBAR penalty analysis (worst case) and please correct me if I am wrong :
    1. not within OVDI/P
    2. civil FBAR audit
    3. 1 joint checking account
    4. max account value 2010 $251K
    5. account balance 12/31/2010 $20K
    6. account balance 6/30/2011 $51K
    7. based on Summary of IRS Normal FBAR Penalty Mitigation Guidelines for Violations Occurring after October 22, 2004 (4.26.16-2 dated 07.01.2008)
    The penalty is for each violation (one violation for every year of non-reporting) and for each person (in case of joint ownership of an account). Non-willful penalties Maximum amount of total of foreign bank accounts FBAR penalty
    Up to $50,000 $500 for each violation, maximum $5,000
    From $50,000 to $250,000 $5,000 for each violation, not to exceed 10% of balance in the account for the year
    More than $250,000 $10,000 for each violation, the statutory maximum for non-willful violations
    8. based on section 5321(a)(5) The amount [balance] in the account at the close of June 30th of the succeeding year is the amount to use in calculating the filing violation.”

    Within OVDP the IRS examiner would/could use for his penalty calculations the max. (highest) account value for each year - but for the normal civil FBAR audit the date of a filing violation is June 30th of the year following the calendar year for which the accounts are being reported.
    In my case there is a big difference between max value and 6/30 for each year in question.
    Lets assume my max account value for 2010 was $251K but the 6/30/2011 value was $51K.
    Using $51K - I would calculate using the mitigation guidelines : $5K X 2 (joint account) max. possible FBAR penalty for tax year 2010.
    But Jack, what does now ``not to exceed 10% of balance in the account for the year`` mean for this specific year ?
    Do they mean 10% of account balance for 12/31/2010 which would be in my case $2K X 2 (10% from $20K) ?
    Do you agree with my analysis ?

  8. Since I am not your attorney, I can't provide you advice.

    I will note the following:

    1. In reference to your point 8, 31 USC 5321(a)(5)(ii) pegs the FBAR penalty (up to $10,000 per violation) to the "the balance in the account at the time of the violation," which is June 30 of the year (the filing date that is missed). But the only FBAR penalty that applies to an "amount" is the willful penalty. The nonwillful penalty itself is imposed on the violation not the amount. That penalty is up to $10,000. See 5321(a)(5)(B)(i). There is no mention of amount in the statute.

    2. As a proxy in determining the penalty, the IRS has provided that it can mitigate the $10,000 penalty based on the IRM mitigation guidelines which do reference an amount. When determining the mitigation guidelilnes based on amount, the Guidelines refer to the "olations 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." Since the guidelines mitigate the penalty permitted by statute, they can set the terms of the mitigation.

    3. As to your question about the "not to exceed 10% of balance in the account for the year" my understanding is that they are referring to the high balance for the year.

    4. So, if your analysis is different, than I do not agree with it.

    5. Keep in mind that the mitigation guidelines are not required to be applied. The provision says that the examiner may determine "A penalty under these guidelines is not appropriate, or A lesser amount than the guidelines would otherwise provide is appropriate." The person representing you should make a pitch for less than the mitigation guidelines and marshaling the evidence in support of that pitch

    6. I suggest that you discuss this issue with your tax advisor. If you would like a referral to someone in your area who does this type of work, you might check the attorneys listed in the right hand column or contact me by email advising me where you live. I probably can get someone close enough for you to have the preferred in person visit to discusss these issues.


    Jack Townsend

  9. I am representing myself but thank you very much for your opinion though I respectfully disagree with it. I am aware of the fact that non wilful applies to violations and not amounts BUT the question into which Level (I,II,III) you fall gets determined by when the violation occurs which carries an amount (account balance) with it which puts you than either in Level I,II or III. I disagree also about high balance for the year when you are dicussing civil cases outside of OVDI and OVDP.
    My reference :
    When does an FBAR violation occur—June 30 (i.e., the deadline for filing the FBAR)? December 31 (i.e., the last day of the calendar year)? Neither the law nor the regulations specifically address this issue, but other IRS documents reveal the government’s position. For example, an infamous IRS internal legal memorandum (ILM 200603026) states the following:

    “The decision to base the FBAR penalty on the highest balance in an account during the year was a policy decision made during the development of the FBAR mitigation guidelines. Section 5321(a)(5), however, limits the amount of the penalty to [a articular amount] or the balance in the account at the time of the violation which, for failure to report accounts, is June 30 of the succeeding year.”
    This conclusion is also confirmed in the IRM, which states the following about when an FBAR violation occurs: “The date of a filing violation is June 30th of the year following the calendar year for which the accounts are being reported. This date is the last possible day for filing the FBAR so that the close of the day with no FBAR represents the first time that a violation has occurred. The amount [balance] in the account at the close of June 30th is the amount to use in calculating the filing violation.”

  10. My husband and I have made our submission to OVDI 22 months ago after falling victim to the IRS's offshore terror campaign. Haven't hear a word back, other than from Treasury who refunded our PLR fee and informed us that our RRSP's would be dealt with within OVDI. The silence is deafening. Question: How risky would it be to include 3 years of taxes within OVDI in the required 5 years of tax certification for renunciation under these circumstances?

  11. With due respect sir, I think you are misreading the IRM nonwillful penalty mitigation guidelines. Those guidelines very explicitly use the high amount during the year. And I think you misread ILM 200603026 which I read as referring to the willfulness penalty when it is based on the high amount in the account (which is what the statute commands for the willful penalty). In contrast to the willful penalty, the statute does not command any reference to the amount in the account for the nonwillful penalty. As an act within its discretion, the IRS has mitigation guidelines for the nonwillful penalty that refer to the amount in the account during the year (not on June 30). As an act of discretion that is not foreclosed by the statute, I think those guidelines will determine what the IRS will do. But, keep in mind as I said before that the IRS can go less than the guidelines would indicate. But you will not be able to insist upon that upon your reading of the statute with which the IRS does not agree (I don't either for what it is worth). You may get there by arguing a host of factors that support a lesser nonwillful penalty.

    If it is important to you to avoid the mitigation guideline penalties as they are written, I strongly urge that you engage a knowledgeable advocate.


    Jack Townsend

  12. thank you Jack but think about , that my learning curve did start at 0 over 1 year ago and I think I am at 80-90% now. I feel very confident about the facts and circumstances of my case. There is a considerable grey zone/discretion towards the examiner or IRS appeals. I know what to expect and what to fight for. With due respect Jack, but I really do not need a knowledgeable advocate who charges me $700/h to maneuver around. The cost/benefit analysis would really forbid this move.

  13. I agree with you if there are no criminal facts but obviously there are all sorts of tax lawyers out there and I wonder if they even care or understand why their reputation is so bad.
    Normally they are supposed to be part of the solution but if they are part of the problem than you are absolutely right in withdrawing their POA and firing them.
    You should not feel bad in doing so (see Not that LIsa and a few others from IBS) if they use the POA to run down your trust account "pretending" it was a necessary task in their representation but in reality you were paying for their learning curve and no value was added.
    It all comes down to trust - if you have lost the trust in your advocate - end the relationship !

  14. Not sure I understand your question. If you joined OVDI didn't you include amended returns plus payment of income taxes, penalty of 20% of taxes, plus interest for the past eight years?
    That would normally be the case.
    As I understand it, when you renounce you are certifying that you've paid the taxes penalties and interest referred to above. The FBAR penalty (if any) is NOT part of tax law and your certification does not cover this.
    I am not a lawyer so this is not legal advice.
    Also, I wouldn't worry about the 22 months. You know what the 27.5% penalty would be. As the saying goes, while there's life there's hope. The longer they make you wait the greater the chances that there will be more information to help you decide whether to opt out, or some action from the TAS to have a three-tier penalty system instead of the one size fits all.

  15. @Anonymous I see your point. Yes, taxes have been paid, although we hope to have penalties abated as my husband and I have never filed US taxes prior to entering OVDI. We qualify for the reduced 5% FBAR penalty, but will probably end up opting out due to reasonable cause. When you opt out aren't you really going back to square one as far as certifying tax compliance goes, like hitting the 'do over' button?

  16. Yes you are going back pretty much to square one - I hope you did not pay a tax lawyer to guide you from OVDI into opt-out ?
    Btw. this specific reduced 5% penalty only applies within OVDI.
    After opt-out comes civil tax and FBAR audit for the open years.

  17. 22 months since entering OVDI and not had a word from the IRS, none! We have been in touch with TAS who told us to contact them after we've heard from the IRS. BTW, there's no SOL for taxpayers who've never filed before. There's also no doubt in my mind that we will not have to pay FBAR penalties upon opt-out.

  18. "BTW, there's no SOL for taxpayers who've never filed before".... yes this is correct with regards to your tax audit but for your FBAR audit the SOL has run out for 2006 - this would be a closed year (hypothetically).
    In cases (not yours) where max. balances have reached a certain level the IRS will still send you Form 872 to extend the statue. Stay in touch with TAS and away from tax lawyers.

  19. honeebadger asked, "When you opt out aren't you really going back to square one as far as certifying tax compliance goes"

    You are going back to square one as far as the auditing of tax returns goes. But I believe (again I am not a lawyer) that certifying tax compliance means that you have filed returns to the best of your knowledge and ability and have paid all income tax due. The audit may or may not result in more or less tax being dues, however once you've filed and paid you are compliant.

  20. From my opt out experience (certainly not a representative population), the "audits" on opt out have been limited to interviewing the taxpayer and the preparer and, in some cases, getting copies of the preparer's files. The IRS has not yet spent substantive time auditing the amended or delinquent returns and delinquent FBARs. In the cases I handled, that would be a waste of time because my accountants preparer very good amended returns.

    Jack Townsend

  21. Jack I assume you were describing your experience with clients living and working in the US . But how does the IRS handle the audit process for expats living and working in africa, asia or europe ?
    I have heard that they are not allowed to call overseas for a phone interview. Is it just IDRs ?

  22. No, they can do a telephonic interview with the taxpayer anywhere in the world. The IRS has interviewed one of my clients being audited (regular audit generated by UBS disclosures without client joining the OVDP).

    I don't recall right now the mechanics of how we did that call. It would have had to be a conference call because it was 4-way. I don't recall if we set up the conference or the IRS set up the conference. That is just mechanics, however.

    Jack Townsend

  23. o.k. thank you - I assume that was pre-announced and can you share what kind of questions they asked ?

  24. Most of the questions were directed at the client's specific fact situation, so I cannot talk about that.

    The more general types of questions that would apply to most or all taxpayers are: (i) knowledge of the requirement to report worldwide income; (ii) knowledge of the Schedule B foreign account question,; (iii) communications with the preparer, including questions about any organizer they prepared for the preparer and questions therein about income and foreign accounts; and (iv) knowledge about the FBAR. In these audit interviews (including opt out audit interviews), there are general questions about the foregoing with agents then drilling down with more specific questions based upon the taxpayer's responses to the general questions

    That's about all I can provide.

    Jack Townsend

  25. UStax, Jack's response pretty much covers what the questions relate to. I recall seeing an article (months ago?) probably referred to on this site that went into more detail, so maybe you can find it. In your specific case, if you have any skeletons in your closet it would be a good idea to discuss them with your lawyer prior to the optout decision. Then again, things you fear may be skeletons in your closet may really not be.


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