Monday, September 15, 2014

More on the Warner Sentencing Appeal (9/15/14)

Readers will recall the Ty Warner saga -- the wealthiest guy yet caught playing the offshore evasion game.  My key prior blogs on this saga are listed at the end of this blog.

I was speaking today with someone writing on the Warner saga.  I cited to him the role of sentencing in tax crimes, citing the opening commentary to Chapter Two, Part T.1, of the Sentencing Guidelines, here, and the Fourth Circuit case of United States v. Engle, 592 F.3d 495 (4th Cir. 2009), here.  So, I offer them to the readers:

Chapter Two Part T of the Sentencing Guidelines opens as follows:
Introductory Commentary 
The criminal tax laws are designed to protect the public interest in preserving the integrity of the nation's tax system.  Criminal tax prosecutions serve to punish the violator and promote respect for the tax laws.  Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying these guidelines.  Recognition that the sentence for a criminal tax case will be commensurate with the gravity of the offense should act as a deterrent to would-be violators.
Now, on the Engle case.  I have previously blogged on the Engle case and will just link to that discussion here.  Fourth Circuit Cites S.G. Tax Sentencing Policy in Reversing Sentencing Variance (1/16/10), here.  For  present purposes, just know that the Fourth Circuit took the rare step -- rare under the Booker regime -- of reversing and remanding a sentence.

As in Warner, Engle was a government appeal from a Booker sentencing variance.  According to the Fourth Circuit opinion, Engle evaded tax of more than $600,000 (the opinion says that the total with penalties and interest exceeded $2 million, but penalties and interest are not considered tax loss for sentencing purposes).  With the benefit of his guilty plea, Engle's total offense level was 17; so the Guidelines sentencing range was 24-30 months. (This was after a reduction of his Criminal History from II to I.)

Engle's sentencing saga is a story in itself, I won't get into the details here, but the Government wanted a sentence in  the advisory guidelines range.  The sentencing judge, however, was concerned that any sentence of incarceration would prevent Engle from continuing his business and thus prevent him from paying the unpaid tax, penalties and interest.  The sentencing judge thought that permitting Engle to work and pay those amounts would meet the deterrent needs for sentencing.   So, the sentencing judge sentenced to "fours years probation, 18 months house arrest on electronic monitoring with work release, and he will be permitted to make trips to China as demanded by his employer."  The Government appealed.

Based in significant part on the policy in the Introductory Comment quoted above, the Court of Appeals reversed and remanded for resentencing.  On remand, the sentencing judge sentenced Engle to 60 months incarceration.  See Criminal Case No. 3:04cr55-FDW-DCK-1, Doc. No. 43: Amended Judgment), as referenced in Engle v. United States, 2014 U.S. Dist. LEXIS 8298 (WD NC 2014) (a Section 2255 proceeding).  According to the Court of Appeals' opinion, Engle's Guideline range was 24-30 months, so it would appear that the sentence was an upward variance, rare in tax cases.

It is often hard to compare sentencing factors from one defendant to another.  However, to the extent one can compare Warner and Engle, I offer the following observations:  (i) if Engle's  original sentencing deserved reversal and remand, then so should Warner's; and (ii) if there is a remand, Warner might be concerned about a sentence in the Guidelines range -- which was 46-57 months.  See the plea agreement quoted and linked in a prior blog:  Ty Warner, Beanie Babies Creator, Pleads Guilty (Federal Tax Crimes Blog 10/2/13; Updated 10/5/13), here.

Key previous blog entries in chronological order:

  • Whopping FBAR Penalty in Criminal Plea; Beanie Baby Creator Gets Beaned With No Free Pass (Federal Tax Crimes Blog 9/18/13), here.
  • Ty Warner, Beanie Babies Creator, Pleads Guilty (Federal Tax Crimes Blog 10/2/13; Updated 10/5/13), here.
  • The Beanie Baby Man, The Tax Evader Adult Man, Ty Warner, Gets Probation! (Federal Tax Crimes Blog 1/14/14; Updated 1/18/14), here.
  • Wow! Ty Warner is Not Quite the Innocent Abroad (Federal Tax Crimes Blog 2/24/14), here.
  • When is Booker Variance Too Much? Per DOJ, Certainly in the Ty Warner Case (Federal Tax Crimes Blog 5/12/14), here.
  • Booker Variances are More Common in Tax Crimes. Why? And Do They Disproportionately Benefit the Rich? (Federal Tax Crimes Blog 5/16/14), here.
  • Sentencing Tales Told in Spreadsheets (Federal Tax Crimes Blog 6/28/14), here.
  • Ty Warner Appellee Brief on Sentencing Appeal (Federal Tax Crimes Blog 7/28/14), here.


  1. Jack I have a question for you. Why are you saying the Service does not have a lot of facts in the
    SDOP certification ? Of course they have less than in OVDP but still
    enough to cross reference that all required FBARs have now been filed
    and the original 1040s have been amended and Forms 3520, 3520-A, 5471,
    5472, 8938, 926, and 8621 if applicable have been added . That is enough
    information imo. to come to the same conclusion they would if they had 8
    years in front of them. The quality of the information is the same with
    RC arguments just not the amount of years.
    Why would the IRS not
    check the max. amounts on the FBARs first before they grant the
    certification to make sure that not a bigger fish is slipping through !
    What I was told yesterday is that total max. balances above $250K are not just being waved through.

  2. If after all the facts have been flushed out and nothing else appears on the radar as you described here with FTCs I would not enter SDOP but do a QQD for the last 3 years and take your chances with an audit which is not very likely with $100K max. balance and de minimis tax liability of $300 per year.

  3. The Form 872 is only valid if the IRS counter signed on a date within the statute of limitations. If the statute had already passed by the time the IRS signed the Form 872, then it is not valid.

    One possible adverse consequence of that is that, if you paid in the tax, accuracy related penalty and interest for the 8 year period, you may not be able to get it back if the IRS posted it to a year that is now closed. There is a refund statute of limitations -- 2 years from the date of payment. A valid Form 872 extends the refund statute of limitations as well as the assessment statute of limitations.

    Jack Townsend

  4. My examiner ( Mr. Bully) did send one 906, 2 years after my submission, but it was totally incorrect and I refused to consider signing it until it was correct. Since that time it has been 6 months and another 906 has not been forthcoming. My case is straight forward, no nominees, no entities, no money moved from the US to Cayman, an immigrant from a country with no tax reporting, so no understanding of US tax system. I did have PFICS but these were purchased 10 years ago when I was not living in the US and did not have a green card. I sold them all and moved all the PFIC money a year after getting my US residence . If I did not have big numbers, they would just pass me by. In fact if I had just done nothing and applied to the streamlined in June when it was announced, I would have been totally tax compliant and reporting compliant. Because I was good and came forward in 2011, I was hammered with 8 years of amended tax returns, 20% accuracy penalties, huge legal and accounting fees. I should have just done nothing and had no repercussions, like so many others that just played the waiting game. All my accounts were closed 4 years ago, so no chance of being reported by a Cayman bank. The people that truly wanted to get into compliance and came in early have been treated very poorly compared to anyone coming in after June 2014. I keep asking if there is a law firm out there that would take on a class action suit against the IRS on behalf of people that came in earlier. Supposedly there are 46,000 people that joined OVDP programs and paid in over 5 billion in penalties ( not taxes). I would think a good law firm, could make a killing with those numbers.

  5. Jack,now you have to recognize a few facts. The government estimated an annual tax loss of $100b a year for overseas accounts. It turns out that when investigated this number was totally made up. Despite decimating the Swiss banking system they have gotten $6b and this involves balance penalties that are 100s of times greater than the tax owed. We also know that the people who paid the most were people with small balances. Do you smell a rat here? It’s all lies.
    America has made it’s tax rules so complex that anybody with a foreign account is likely to be non-compliant. They have special punishing tax rates, punishing penalties, interest on all this stuff and special rules for foreign accounts. Immigrants to the US have foreign accounts. People who leave the US have foreign accounts. People who have relatives abroad can end up with foreign accounts.
    Here’s is how to explain this to Homelanders:
    Did you know that YOUR U.S. government claims the right to:
    1. Force foreign banks to seek out everybody in the world living outside the U.S. who was born in the U.S.
    2. Under threats of penalties and economic sanction, identify all of
    their income and assets which were earned outside the U.S. and exist
    outside the U.S.
    3. Claim that all the income and assets outside the U.S. must be
    compliant with U.S. tax laws that apply to Homelanders because that
    person happened to be born in the U.S.
    4. Claim that because they were born in the U.S. that the U.S. can
    regulate their behavior in terms of: where they can work, who they can
    marry, countries they may do business with.
    5. Because that person, who neither lives in the U.S., nor has income
    in the U.S., is not compliant with U.S. laws make them pay 50% of the
    assets to the IRS.
    Close by asking the Homelander:
    “Do you now understand the answer to the question:
    Why does the whole world hate the USA? (It’s not because of the freedom that you don’t have anyway.)
    Do you realize that by the time the “Hopey Changey Guy” ends his
    presidency, the U.S. will be hated with greater intensity and by more
    countries than it ever has before?

    That’s the FATCA of the matter!

  6. Thanks Jack. Yep, I figured state on row#1 "see attached sheet for 2013 accounts". (But do put the yr end total into the table).

    When one has many small CD's, the number of accounts increase in number. (although still well under 25). I hope just because one itemized it and it appears like a big list, the IRS agent won't freak out.

  7. ..."All my accounts were closed 4 years ago, so no chance of being reported by a Cayman bank"...... that is a very important fact you mention here btw. and again I am puzzled that your practitioner advised you to join OVDP in 2012.... I would have understood if it were 2009 but at the time when you came forward there were other options being discussed, advised and practiced. Since it has already been 6 month I assume that in the very near future they will send you another 906 or threaten you to be thrown out of OVDP. Keep in mind the interest compounding clock is still running @ around 4.5% p.a. in your case.
    Btw. when you receive the Form-906 and penalty calculation sheet 4549-A
    there is no obligation to sign it when you want to opt out and go through the regular tax audit process.

  8. I do not know what your end game or strategy is my dear West Indian immigrant and how much your practitioner has shared some details about that with you besides "you will win in the end"..... but I like to point out 2 instances where you could have involved TAS (Form 911) and asked for a TAO but stopped your tax lawyers clock.
    1. received an incomplete or incorrect 906....
    2. over 6 months elapsed since last correspondence with regards to 906

  9. Just a clarification, in the opt outs, the IRS can do an income tax audit and an FBAR audit. However, by submitting 8 years of amended returns, in effect, the taxpayer and his/her team have already done the income tax audit for those years. So, in all of my opt outs, the audit has been a limited focus FBAR audit. The agents have interviewed the taxpayer and the return preparer. Total interview time for both is usually less than one hour but can go a little beyond that. The agent does request certain files from the preparer -- such as the tax organizer to see if and how the taxpayer answered the organizer question about foreign accounts.

    Jack Townsend

  10. We had a number of CDs. We listed each separately on the attached spreadsheet.

    Jack Townsend

  11. .... but it is not uncommon that in over 50% of the cases especially with expats involved that no tax organizer even exists. With the exception of the big cases agents do not call expats at home to question them during a phone interview.

  12. Jack, did you ever get any feedback on the attempt to "withdraw" prior to July 1 (as opposed to opt out) and then go directly to streamlined? Anyone else?

  13. Yes I can see now where your question is coming from. In most cases expats have some form of US legal representation through 2848 and the examiner through conference call via practitioner will speak/interview with the expat. But for the the expats that use TAS or exercise pro se legal representation this does not apply and it is done in writing.

  14. were they kicked out or allowed to continue in OVDP?

  15. Allowed to continue if they chose. As I said a viable option for some of these is to either do QD and GF and let the IRS waste its time on audits.

    Jack Townsend

  16. hear,hear well said Jack ...."What a waste of everyone's resources". I agree but I call it stupidity on steroids.

  17. Hi Anon, congrats on being accepted.

    Would you be willing to explain how the total amount on which penalties applied was calculated? Some insights that would be helpful relate to how the year with the highest amount was determined (non income producing account included in the total even if not penalized or not, for ex.) You mention having several accounts, so I imagine not all the accounts had their highest balance on the same date in any given year (did you have to figure out the date that had the highest amount across all accounts?). Other things that would help: Did you have to treat each account separately? Which exchange rate was used?, did you have a lot of back and forth with the IRS before they accepted your calculation? Any details you can provide would be great.

    Thanks a lot

  18. Jack I have been reading your blog for over 4 years now but it is interesting to notice that during those years I can only remember where 1 or 2 readers made comments about their audits. Why is that ? You have talked so many times about all the threats and possible consequences with regards to offshore accounts and the different compliance options but the only threat there is and was is the AUDIT RESULT !

    Never assume that an audit is final merely because an IRS auditor has made a deficiency determination.

    I have found that IRS appeals officers are much more knowledgeable about complex tax issues than rank and file auditors and are encouraged to settle cases rather than have them go to trial.

  19. Jack I have read your comment about you possibly filing a refund suit in your local district court if

    the pre-litigation administrative phase turns out to be not successful. Could you please tell me approx. how much I would need to budget for such a litigation in a district court, I know you charge $700/h but to what does this translate in the end approx. if I choose you for my representation in my FBAR refund suit ?

  20. Badger,

    Costs of litigation are very difficult to predict because the other side may have an agenda that is intended to or has the consequence of escalating the work that needs to get done and hence the fees.

    I would say, however, that the particular case I have should -- that a fuzz word -- not require much pretrial work. There are at most perhaps 5 potential witnesses and very few exhibits (although some of the exhibits would have many pages, specifically the bank account statements),

    So, depending upon how reasonable DOJ Tax is in conducting the pre-trial phase, I can see the case being tried for as low as $35,000. Almost invariably when I say it can be tried that low, DOJ Tax will decide it wants to do things which escalate time and cost, so perhaps $50,000.

    I suspect that, if I tried the case in the Court of Federal Claims, it would be less than that. But, the advantage of a jury in this case will be great. So the extra costs that a jury trial inevitably require will be cost-justified.

    At the end of the day, the issue in my case is credibility. My client is extremely credible. At the end of the day, all the IRS has is suspicions which it imagines is willful blindness (since they know they can't prove specific intent).

    So, in more complex fact patterns, you might expect more costs, but since certain basis costs are incurred in the most simple cases, the costs of more complex cases does not rise in direct correlation to more complexity.

    Jack Townsend

  21. UStax,

    Good comments. That is true.

    I would caution that the historical role to serve as an independent settlement agent is compromised for FBAR audits. My appeals officer told me that he did not have control over the issue. So, all of my arguments for a more favorable result are simply being passed through the appeals officer to some unknown bureaucrat(s) in the system probably more aligned with examination than appeals. Kind of defeats the whole concept of the appeals function.

    Jack Townsend

  22. Jack, thank you for your estimate. Actually I had a figure of $50K already expected but here is were I get lost and I hope you as a professor of law can understand my pov. and concerns :
    1. in my case DOJ cannot prove specific intent.... we know Willful blindness goes by various labels, such as specific intent, willful ignorance, deliberate ignorance, conscious avoidance, etc. Willful blindness is not the equivalent of specific intent. At best they can show in my case mistakes were made, negligence, inadvertence, carelessness, or at best recklessness but not a deliberate conduct to avoid knowledge.
    2. you use the terms "consequence of escalating the work" , "depending upon how reasonable DOJ Tax is in conducting the pre-trial phase" , "DOJ Tax will decide it wants to do things which escalate time and cost"

    I did raise the issue before here that me the taxpayer should have the right in a FBAR refund suit to sue the DOJ Tax for compensation of my legal costs if I win the suit. This is where the system breaks down if I would be denied of such recourse.
    a) How can this be that if I -hypothetical speaking- could not afford $50K+ that I could not fight for my rights !
    b) How can this be that the system puts me at an unfair disadvantage from day 1 ?
    c) How can this be that the DOJ Tax has the power without consequences to inflict arbitrarily all these things mentioned under 2) on me ?
    d) How can this be that DOJ Tax has the power to blackmail me into pleas or unsatisfactory deals because I cannot afford further litigation costs ?
    What kind of legal system is this where only Warner or Zwerner who can afford expensive counseling achieve satisfactory outcomes !!

  23. Hi Jack,

    Thank you so much for this wonderful blog!

    Can you please share your thoughts on my case? I have multiple foreign accounts; however have been reporting only 1 in my US Tax return as other accounts are taxed in my country and didn't realize my obligation to report them

    Now I realized that the one account i have been reporting, i under reported for 3 years (2008, 2009 and 2010.. all other years are good) because of negligence. the total tax deficiency for 3 years is < $100

    i realize that for SDOP i only need to amend 2013, 2012 and 2011; however because of the under reporting of the prior years in my reported account, i am little worried.

    would the IRS look at the prior years?

    my highest balance is around 150K. Would SDOP be an issue? barring this one bad fact, all other facts are good.

    Thank you

  24. anon83,

    1. YOu say that you have been reporting the one account without checking yes. Did you report that one account and answer the question no?

    2. You said that you under reported for that account for 2 years, but later in that sentence you say that they were unreported years. Which is it?.

    3. Assuming it is reported but under-reported for those 2 years, the under-report amount seems de minimis is the tax deficiency for the 2 years is < $100.

    4. The problem is not likely to be the under-reported years (assuming #3 is correct), but the omitted altogether accounts.

    5. The IRS could look at prior years (including both reported accounts underported and unreported accounts). But, if the question is whether they would look to those years initially in the SDOP program, I doubt it. Something else would have to surface and become known to the IRS to make them want to inquire about prior years.

    6. A high balance of $150K which you would have to report on the 6 years of FBARs is not that high in the overall scheme of things. I doubt that that balance will, on its own, generate inquiry into your relief under SDOP.

    All of the foregoing is based solely on what you provide. You state cryptically that "all other facts are good." I don't know that, so you will assume the risk that all other facts -- or at least some other facts -- are not as good as you think. All of this is to say that, on the limited facts you present, I would think the IRS would be unlikely to dig into your SDOP submission and certification.


    Jack Townsend

  25. Thanks for the reply Jack..Appreciate it very much

    1) yes, i have been reporting my 1 account WITHOUT checking Yes to the question do you have a foreign account as I never understood the question.

    2) yes, i under reported the above account for 2 years i.e.2010 and 2009

    3) yes, Tax deficiency for the above 2 years that went unreported is < $100

    4) yes, I am adding the unreported accounts with the amendments. This would be the major change in the amendments.

    5) i am just worried if this would be considered a CIVIL TAX FRAUD as it would appear that i under reported the income consistently for more than 1 year (total interest for 2 years < $300.. total tax deficiency for 2 years = $70). I didn't report out of negligence as the bank sent me multiple 1099's and i forgot to add the 2nd 1099 for both years.

    My tax deficiency for 3 years (2013, 2012, 2011) combined is also very low.

    Thanks again!

  26. 1. Did you answer the question no or just leave it unanswered?

    2. Noted.

    3. Noted.

    4. Noted.

    5. The amounts you have for the 1 underreported account would not alone cause a civil fraud problem. However, when coupled with the amounts from your other accounts which were not reported, there could be a problem. You don't say how much that is, but even then with your aggregate bank account amounts of $150K, I can't imagine that would be a problem because you could not have generated that much income from the accounts. So, I would not imagine that the IRS would spend much time on the SDOP.

    Under the program you are required to file 3 years of amended returns for "each of the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed." That means that, if you are on extension for your 2013 return, you will have to wait until after 10/15/14 to do the SDOP to cover only 2010-2013. Of course, 10/15/14 is only a few days away.

    Jack Townsend

  27. Thanks again Jack.

    1) Always answered No to Schedule B Foreign account question every year though reported the income of that one account as i got 1099 for that account

    5) the amount generated from the other unreported accounts were around 7K.. however I did get foreign credit to offset most of it.

    Although I filed for extension, I filed my 2013 end of May this year and did missed a few small things. Can I now file my amendment for 2013, 2012 and 2011 with SDOP or do I still have to wait till October 15th?

    Thank you

  28. I think you can file it now, but as I read the rule, if you file before 10/16/14, you will need to file amended returns from 2010 forward. You should read the language I quoted and reach your own conclusion on that.

  29. Thanks again Jack.. Very much appreciate you taking valuable your time to respond.

  30. SNL
    Your tone and thought process suggests you are with the IRS- that is the only possible explanation why you would think that people are engaging in 'tax' avoidance' and 'willful blindness' Your quotes here.
    Am I wrong- What's YOUR situation ?

    Shifting after tax savings from the US to a CD in a foreign country is not tax free unless the country has no income tax. India CD interest income is taxed at 31% - AUTOMATIC Tax Deducted at source so its not as though there is no tax being paid any where
    You think the 'immigrant' is sufficiently well equipped to engage in internet searches on US tax laws and feel comfortable he understands it? Give me a break

  31. The catch in reimbursement of legal costs is that it's done at an unrealistically low hourly rate, maybe 10-20% of what a good lawyer costs, and even less than you would pay for the kind of lawyer that has an office in a strip mall next to a bowling alley.
    On the other hand, keep in mind that legal costs are a double edged sword. The government has limited resources so they must pick their battles, it wouldnt make sense to spend a huge amount of their lawyers' time to pursu a $50K penalty when it means that it leaves them no time to pursue a 500K penalty against someone else.
    Also, although there is a lot of truth in the cliche that a dfendant who represents himself has a fool for a lawyer and a fool for a client, if you are reasonably articulate and are able to present your case without getting angry or combative, you have the option to consult with an expensive lawyer over strategy, have an inexpensive lawyer help you with procedure, and let the govt lawyers spend time in court. There are quite a few jailhouse lawyers (people who are incarcerated and fight their own legal battles) who do this.

  32. No, the interest on penalty starts running only once the penalty is assessed or you sign the 906 without making full penalty.

  33. Not clear if the OP was a US citizen/resident prior to residing in the Caymans. If not, then I see (in my opinion) no bad facts from being a Cayman resident (no different than residing anywhere else. This is far different that people with no family or residence in the Caymans "hiding" money there.

  34. My understanding of the FBAR has been that there is ONE "master" account in each bank, even if the account holds stocks, various currencies, CDs, etc.

  35. SNL is correct and was speaking about NRE accounts or FCNR accounts for NRIs . The interest income is tax free in India and no AUTOMATIC Tax Deducted at source.
    I agree with his statement about willful blindness with regards to such a tax avoidance strategy because without FATCA this would have gone on for a few more decades.

    Income from the following investments made by NRIs/PIOs out of convertible foreign exchange is totally exempt from tax:

    Deposits in under mentioned bank accounts 1. Non Resident External Rupee Account (NRE) 2. Foreign Currency Non Resident Account (FCNR)

    Units of Unit Trust of India and specified mutual funds, other specific securities, bonds and savings certificates (subject to conditions prescribed under the Income-tax laws and regulations).

    Dividend declared by Indian company.

    Long term capital gains arising from transfer of
    equity shares in a company and/or equity oriented schemes of Mutual
    Funds, which are subject to Securities Transaction Tax.

    It should be noted that the tax exemptions relating to NRE bank deposits will cease immediately upon the NRI/PIO becoming a resident in India whereas the interest on FCNR bank deposits will continue to be tax free as long as the NRI maintains the status of Resident but Not Ordinarily Resident or until maturity, whichever is earlier.

  36. I was not talking about the OVDP process - if you have noticed we came to the conclusion that he needs to opt out since he will most likely be denied transition and it is important to keep the compounding clock in your rear mirror when the Service uses delaying tactics.

  37. Jack and others - are you beginning to hear about people filing SDOPs? About a month or two ago there was significant concern over the non-willfulness certification. I know that not enough time has past for us to get concrete examples of IRS treatment. But are people more comfortable with the spirit of OVDP for blatant willfulness and SDOP for everyone else? Comments from an accountant a month or two ago was that nobody was really making any SDOP filing yet.

  38. I have not heard enough anecdotal evidence of successful SDOPs to reach any conclusion for what the IRS is doing. Keep in mind that the IRS does not notify the taxpayer that his SDOP has been accepted, so the IRS could theoretically review and reject anytime within the statute of limitations periods.

    Jack Townsend

  39. Thanks Jack. Understand that it will be some time before we hear about evidence of successful SDOPs, more likely we only hear about the audit cases. My question is really, is anyone filing SDOPs or are people still concerned about the certification. In which case, I don't know of any other option except OVDP or QD - both not optimal for most people.

  40. Anon
    You sound like you are with the IRS too and a racist to boot. I don't know see where I have written anything about a uneducated or broke immigrants - this is your OWN prejudices being revealed - seems like there is a lot of anger in you
    I have'nt heard either you or SNL say you are NOT with the IRS- what's your problem- willfully blind? conscious avoidance ? or are you peeping toms that don't like getting called out?

    The US tax system is complex- only the IRS would dream of arguing other wise. This has nothing to do with Indian immigrants - it has to do with detailed knowledge general knowledge of the US tax code and reporting requirements - this includes anyone who has a foreign account - US born or not.
    Go do the Google analytics search yourself- until ~ 2010 almost nothing comes up FBAR searches. The fact that of the approx 15million people who are eligible to file an FBAR less than 700K do so , shows that there is NOT good knowledge of reporting requirements. Do you think over 95% of the US population is dishonest ?
    Trying to nit pick about one particular type of account or CD further shows your mindset- You don't know what you are talking about-you think people have nothing better to do than think of ways to avoid tax? Its a waste of time and energy to get you to consider something other than your own pre-set ideas

  41. Anon, thank you for the links, I did not know such loophole did exist for NRIs. The concept of deliberate conduct at least to avoid knowledge is a slippery one but I can see why here the examiner might go for willful blind and assess the penalties accordingly.

  42. SNL you raise some good points but keep in mind specific intend is hard to proove. We need more guidance from the IRS what is willful blindness but as it stands now The test is, did you know in your stomach that you were supposed to be telling the government about these accounts?

  43. Jack - Any idea on how many domestic SDOP's are expected this year? Your best guess??

    I agree with Tostreamlineornot.. most people would fall between OVPD and QD, though I would like to lean towards the later for most people..most, especially immigrants don't have any evil intentions; it just happens and things get lost.. how do we decide? most of us don't have any fear of criminal prosecution (as no hidden accounts, no secret code, no secret meetings with bankers etc. and everything is done openly except of checking that damn box in 1040 as most couldn't figure it out), so should we do SDOP?

  44. 1. Don't know how many SDOPs are expected and really don't have a guess that would be anything other than speculation.

    2. If you feel that you qualify for SDOP, it is a rather cost effective way to be reasonably sure the past is behind you. Not that you are curing a culpability problem, because if you are culpable you do not qualify for SDOP. But, if you are not culpable, joining SDOP may be a better alternative than QD and GF with all it their uncertainties going into the future.

    Jack Townsend

  45. Thank you Jack.

    What happens if SDOP Certification is denied based on some borderline issues for a minnow < 200K . tax deficiency around 5K over last 10 years? how worse can it get than OVDI?

  46. I would expect that SDOP certification would be denied only after an audit of some sort. Then, of course, one would get the audit result which depends upon all the facts. Conceivably, the audit result in the right case could be better than the certification, but I would think that the IRS would not deny certification if that were the case.

    Jack Townsend

  47. Thanks Jack for giving hope.. hopefully it would work out for folks like me and IRS would deal with us fairly and overlook our small faults.. everyone wants to get into compliance and its also guaranteed future income for IRS

  48. Jack,

    I owe the IRS about $600 in taxes for 2012 and a similar amount for 2011, as part of SDOP, and have a quick question. Would I owe the IRS interest + a failure to pay penalty (on the $600 due), when I submit the SDOP amended returns for 2012 and 2011? Of course, I did pay whatever taxes I owed (excluding those on overseas income), when I filed my 2012 and 2011 taxes.

    I am surprised that for people who owe tax, the IRS does not have an official calculator that tells you the interest and penalty that is due.

    Thanks, svtr

  49. svfr,

    You say you filed your 2011 and 2012 returns, I presume timely. So, when you file amended return, there will be no failure to pay penalty in this case. The only penalty could be the accuracy related or civil fraud penalty. The accuracy related penalty is waived in SDOP. The civil fraud penalty does not apply if you were not willful. So you will owe the additional tax and interest on the additional tax.

    I agree that the IRS should have a calculator. The practitioners I know have a commercially provided calculator, called TaxInterest, it gets to the right number (or pretty close) in most cases.

    Keep in mind that, even with a calculator, the calculation is probably not going to be exact. The IRS will make the calculation and true up the matter (i.e., refund any overpaid interest or bill for any underpaid interest).

    If you are concerned, you might do a rough and ready calculation and pay a bit more so that you will have overpaid and the IRS can refund.

    Jack Townsend

  50. I agree, I'll just pay a bit more and then the IRS can refund. Thanks for the clarification!

  51. svtr - Can you please share with us how you are calculating the interest?

    say I owe total tax due of $1000 for (2013 + 2012 + 2011), approximately how much would be the Interest for 3 years combined?

  52. The key to calculating interest is to have an assumed payment date. If I have that, I can give you a factor as to the interest (i.e., assumed a due tax for the tax of 4/15/10 for the U.S. return and tax payment due date3 and a payment date of, say, 10/15/14, I can provide you a factor (multiply the tax due times the factor to get the interest to 10/15/14). But, again, it will not be a perfect calculation, but the IRS will true it up (send bill if interest is underpaid or refund if interest is overpaid (I recommend a slight overpayment)).

    So, if you will give me the years involved and the assumed due date, I will put the information into my handy-dandy interest calculated (TaxInterest) and give you the factors.

    Jack Townsend

  53. You can do a ballpark figure pretty quickly. Since the IRS will calculate the exact number all you really need/want is to come in close so the interest stops running. Example: Payment for year 2010 due 4/15/2011. As of Oct. 15, 2014 it will be 3.5 years. 3.5 times 3% annual interest is 10.5%. The interest rate varies, but was recently 3%.
    For the payment due 4/15/2012 it would be 2.5 years at 3% or 7.5% and so on.

    Bottom line, on $1,000 tax over 3 years, send'em $100 extra for interest and you'll get a refund.

  54. Carter,

    Sorry for the late reply. Jack has answered your question, but I'll tell you what I did. For both 2011 and 2012, I filed my taxes on 4/15. Assuming that my payment reaches the IRS no later than 10/15/14, I used a compound interest calculator (just Google it), made sure the interest is compounded daily (365 times/year), and got the calculator to tell me the interest I owed for 1.5 years (from 4/15/13) and 2.5 years (from 4/15/12).


  55. Jack,
    Circling back to subject of this post - the IRS internal guideline. It was interim (dated Aug 13) and had stuff redacted etc giving indication that it was draft. Have had a change to check more to see if anything more "final" has been released? I am wondering if you and other practitioners have greater access to check into / receive updates on such documents. Thanks!

  56. I am not aware of any more recent release.

    Jack Townsend

  57. Jack/Others,
    I had done an extension for 2013 back in April. I under paid and now additionally owe $1750. Interest and late payment on that works out to approximately 30 + 55, $85. (assuming Oct 15 payoff date)

    Where exactly in 1040 should I include this additional amount? Line 77 doesn't seem appropriate. The tax software didn't do it for me.

    Or can I just wait for them to bill me? If they do send me a bill, is that considered an audit in anyway? Just want to steer clear of any audit however trivial...

  58. RajNIL,

    I do not prepare returns and do not know the answer to the question. But, I suspect that the solution would be to just send in a payment including the amount you calculate and, when the Service Center makes the assessment, it will have the payment to apply against it.

    Still, I hope someone else will respond who has dealt with the issue successfully before.

    Jack Townsend

  59. I've had a CPA prepare my amended returns and in addition to including interest in the payment, he typed "Interest $XXX" in the margin of the form near where the total tax was shown. This is a nice extra but not necessary. As Jack said, the overpayment will be applied to interest due.

  60. Jack

    I was just told from my German bank that I have to file my dividends and interest in the US.
    My husband and I have filed jointly and timely for 20 years. We lived in Germany until 2011, and I am a legal resident of the US since 2011. We are also required to file a W9. My bank told me that they need that form to not flag my account. Is this correct?

    I have a savings and a brokerage account in Germany. In the brokerage account I hold two stock and one bond. One stock preforms very good. I pay a 15% tax at source to US for this stock and also a little german tax. The other stock is not taxable in Germany because I had it for a long time. The third one is a bond. I receive little from those to two. My savings account earned about $ 130 - 180 in interest a year. I did not to have pay taxes on that because I had a exemption order for capital gain in Germany. I am struggling to find the right procedure we fall into. All procedure the IRA seem to offer have a high penalty, which I think are in our case exorbitant. I want to initiate the right steps and pay all applicable taxes and late fee, but not be punished overly. Could you or someone else guide me in the right direction?

  61. liiggi,

    You need to visit with a professional separately. The issue and importance is larger than can be handled here on the limited input you give.

    You might check out the attorneys I mention at the top right of the blog and give one or more a call to discuss your situation.

    Jack Townsend

  62. Agree with Jack. When considering various options, including quiet disclosure, keep in mind that those of us who joined OVDI with the best intentions and expected to be able to opt out are getting punished way out of proportion. This is not advice on what to do. Just be careful of lawyers who say OVDI is for all.

  63. I have heard an interesting fact from my lawyer regarding the acceptance of penalties different than the 27.5% penalty while not having to opt out. One the FAQs says that the IRS will not fine you more inside the OVDP, than the maximum you would get fined outside the OVDP. In my case I had a 5 million dollar home in the Cayman Islands that was driving my 27.5% penalty through the ceiling. I know if I opt out that amount cannot have FBAR penalties assessed against it. However I don't want to opt out if I don't have to. My lawyer says she has been successful using the FAQ and offering the IRS the maximum amount they would get outside the OVDP. She says that in 50% of the offers the IRS has accepted it and closed the case within the OVDP. To do this my lawyer has said I have to accept the 75% tax fraud penalty for 8 years of returns and the maximum willful FBAR penalty for every open FBAR years. The FBAR penalty alone would be 400,000, but that is lot better than 27.5% of 5 million dollar home or $1,375,000. I have already paid the 20% accuracy on my back taxes, so adding the fraud penalty is adding another 55%, because they can't stack fraud and accuracy.

    My question to Jack or any other person is have they seen the IRS do this. My first impression was that there was no negotiation of any kind within the OVDP. Take it or leave it. First I am nervous about offering to pay the max willful FBAR and fraud penalty, because if they turn down my offer they may take this as an admission, and hammer me when I have to opt out. Secondly why should I attempt this when very few people ,if any ,get hit with the fraud penalty when they opt out, and very few people pay the FBAR penalty for multiple years. My lawyer says I will eat more money up fighting the IRS in opt out and it could take another year or more of my life away from me. Also if I opt out I have a protective order filed so I have claim on the taxes , interest and accuracy penalty I paid for years that were closed when I entered the OVDP. My lawyer says it has been her experience that the IRS will not return the money and I would have to take them to tax court which could take years to resolve and a lot of legal expense.

  64. Blackseal1234,

    I have not encountered the situation where the maximum income tax and FBAR penalties would be less than the inside OVDP penalty. Your phenomenon is driven by the home in relation to the financial account(s). I just haven't seen that.

    But, I can see the attorney's logic is arguing that the case should be closed without further ado if the taxpayer pays the maximum income tax (with civil fraud penalty) and maximum FBAR penalty for the open years (8 for income tax and 6 or 8 for FBAR). (I say 8 for FBAR because if you submitted the waiver you may have waived the 2 earlier years statute of limitations defense.)

    At any rate, I don't understand why you would get hammered more on opt out than you are willing to offer them to resolve it without opting out. Presumably, I suppose, for income tax purposes, the IRS could get years beyond the 8 year period in OVDP, but I would suspect that it is not likely to do so on opt out. So, from a practical perspective, it is likely that what you are offering them to close in OVDP penalty structure is the maximum they could get on opt out.

    So, why not just opt out without any admission and see what happens. That is not without risk, but the risk can only be assessed in the context of all of your facts. Your lawyer should be situated to help you with that risk assessment.

    Jack Townsend

  65. Thanks Jack. I followed your advice from a much earlier blog about filing protective orders for the refund of taxes, interest and penalties I paid in the OVDP for years that were closed. It was good advice to all readers, and something my lawyer would have missed if I did not bring it to her attention. The protective orders were filed a week before the 2 year expiry of all my payments with amended returns under the OVDP. The IRS has acknowledged receipt, but they are awaiting my action . I told them I would proceed only if my case could not be resolved within the OVDP. My OVDP agent is not aware of the protective orders because they go to a different area of the iRS . If had to opt out I would be pursuing the refund for all closed years. The amount is significant about $150,000, so it might be worth pursuing as a refund.My lawyer has said she has been trying for more than 1 year to get refunds for other clients, and that the IRS is just not responsive and they are not likely to give any refunds unless ordered by the court to do so. Is this your experience or have you had your request for refunds of taxes paid on closed years simply recognized as tax law and returned to the taxpayer without the need of litigation.? I ask because I am not sure I have the stomach for a long drawn out battle with the IRS, for money that I have already paid into the OVDP. There is no fraud involved which would allow the IRS to keep things open. Additionally the IRS has made no assessment of tax for the closed years, I simply did the calculations and paid in the amount with qualified amended returns. I imagine a lot of opt outs will be interested in the process, time and success of protective orders.

  66. Your case is a mess on so many levels. After 2.5 years and $150K of fees she (I hope it is not C.C.) starts suddenly worrying about your LCUs and costs. Wow, but that is lawyer logic at its best. It seems to me that by offering this "deal" to you her earlier "you will win in the end" statement or prediction is no longer valid and in her view you seem not to have a credible NW case.

  67. I got refunds of all taxes, interest and penalties of about USD 40k when I opted out. Most of it was not a problem to get refunded, although about 10% of it was delayed for several months for reasons that no one could explain. The Taxpayer Advocate Service helped me resolve that refund issue.

  68. Thanks ANON5percent, I am heading in that direction.


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