Steve Mopsick – On the “coming into compliance dilemma”

Check this out. My question for all is this:

How on the basis of these facts, specifically not knowing about Mr. FBAR in the past, could this be construed to be “willful non-compliance”? Are you saying that the IRS might just make a decision to treat this as willful.? It doesn’t seem to me that in this letter you have:

“now admitted in writing that you are in willful non-compliance with your federal income tax and FBAR filing obligations for the past six years.”

Isn’t the test for willfulness: “The intentional disregard of a known legal duty?” If you don’t know of the duty, how can the disregard be intentional?

This would seem to me to be a very unlikely response from the IRS. If they do respond this way, the outcome is clear:

The word will get out and nobody will ever attempt to bring themselves into compliance again.

Love you hear all your thoughts on this.

Thank you Mr. Mopsick for a very thought provoking post!


100 thoughts on “Steve Mopsick – On the “coming into compliance dilemma”

  1. I think one of the real problems and Steven might have more knowledge of this is FBAR and the Bank Secrecy Act have turned out to be one of the governments stronger weapons against “hardcore” tax cheats than the actual Internal Revenue Code. I suspect much of the “tax loss” to the Treasury from hardcore tax cheats occurred in years prior to 2003 when the stock market was roaring. However, it is much more difficult for the government to use the IRC(Title 26) to go back to in time(pre 2000) to tax these unreported gains from the dot com bubble era than its is to use FBAR/BSA to “tax” the unreported account balances that in many(if not all) cases continue to hold these unreported proceeds from the late 1990s boom. (For example under OVDI anything before 2003 is off the table giving people residing IN the US who should be making license plates and had huge unreported capital gains from the dot com bubble a very good deal).

  2. I actually was reading this while you were doing this posting. 🙂
    This is an interesting solution for no previous filing, don’t want to renounce, types BUT be sure to read the final paragraph before you say, “Eureka!”
    It’s my hunch that minnows might actually get away with this strategy simply because the IRS would go mad trying (or be mad for trying) to come down hard on people who owe little or no tax.

  3. I’m glad that renounce posted an issue from Steven’s site. Thanks Steven for working with the us. Thanks renounce for posting and bring to our attention!

  4. If one accepts the facts as stated in the hypothetical letter to the IRS, it is evident that the prior noncompliance was NOT willful. Of course, I acknowledge that the IRS may jump to an irrational conclusion.

    A separate question is what a good tax advisor would or should say to a client in this situation. One disagreement that Steve and I have had in another forum concerns the quiet disclosure approach. Steve has indicated that his firm’s policy is NOT to assist clients with quiet disclosures. My view is that if the client understands the risks involved, there is no valid reason not to assist a client with a quiet disclosure where the facts indicate it may be to the client’s advantage. For a client who lives outside the US and owes relatively little in the way of back taxes, a quiet disclosure may (repeat MAY) well be desirable.

  5. I guess one advantage to renounciation in THEORY is for purposes of FBAR/BSA you start running the clock on the statute of limitations for past compliance without having problems with compliance going forward(By doing the full Ostrich on the otherhand you don’t just have the problem of the current year’s filing requirement but also any years past within the statute of limitations). I would not make a decision as drastic as renouncing just for this reason.but what I said I do believe to be legally correct and something to keep in mind.

  6. To this date I still don ‘t know how to deal with the FBARs. And I think nobody does.

  7. @all

    The only thing that is clear about coming into compliance is that it is very unclear.

    On January 9, 2012 the IRS promised procedures for dual citizens to come into compliance. The IRS has still not issued those procedures.

    I just don’t understand. We have a situation of tens of thousands of people who want to come into compliance and the IRS won’t even issue those procedures.

    It’s as though, for the IRS, the only value of people coming into compliance, is that it offers up yet another opportunity to penalize people.

    In early winter I wrote a post to the effect that “The IRS is the single biggest obstacle to coming into compliance”. It is still true.

    Perhaps either Mr. Mopsick or Mr. Miller (or any other lawyer) could tell us what they the IRS seems to delight in keeping it all a big secret. As is evidenced by the comments to this post,not even the lawyers can agree on the route to go. Let, the taxpayers are subject to life altering penalties.

    Remember also, that when it comes to Mr. FBAR, the only valuable FBAR is the unfiled FBAR.

    Here is the true value and purpose of an FBAR:

    Finally, if you are waiting to file your very first FBAR, you might find this interesting:

  8. There is a saying about being careful not to ascribe to vindictiveness what can be attributed to incompetence. In the case of the IRS, I suspect that they are too swamped and understaffed to get the directives out for the minnows whose returns will take up time and yield very little.

  9. @ladyhawk, They also say, “Fool me once, shame on you. Fool me twice, shame on me.”

    The United States have passed these laws to punish people who put money offshore. How can we not ascribe to malice when that is the purpose of the legislation? Our money is offshore. Therefore the IRS is just interpreting the legislation in a way that targets us.

    I should also add that keeping things nebulous is a great way to encourage the lambs to enter the OVDI, a fairy land where constitutional rights no longer apply and benevolent government offers to take only a fraction of your total wealth rather than 300% of it and throw you in jail for 5 years for every stinking foreign account that you have.

  10. I got another IRS notice today for 2010 for around $65, even though I’d paid a four figure sum for that year and thought it was finally cleared up. It is accrued interest from the check being delayed. I’ve given up on my accounting firm dealing with it, especially as they could easily charge me to ring IRS so have decided to just deal with it, myself.

    Getting my mother to write out the check for me. Just want it sorted out…but wouldn’t be surprised if I eventually receive yet another bill for perhaps 11 cents for interest. It’s almost laughable.

  11. Fear is the word for Americans Abroad. And confusion. More the better so that nobody can comply. And stiff penalties. A trap.

  12. @ Renouncecitizenship, Steve characterized the quiet disclosure as “sneaky” and, in at least some circumstances, deceptive and dishonest. He also expressed concern that the IRS Office of Professional Responsibility (OPR) might consider an attorney assisting a client with quiet disclosure to have done something akin to making false or misleading statements. These are points on which Steve and I strongly disagree.

    Steve also cited the article linked below as having, in his words, “an excellent discussion on the issues surrounding quiet disclosures.” I provided an extremely harsh (but, in my view, well deserved) critique of numerous points raised in the article, and that concluded our discussion on the topic.

  13. @Michael J. Miller
    I can’t help but wonder if in the case of a minnow, the IRS would just be happy to have the individual filing their tax returns and thus not penalize them under quiet disclosure.
    I have three American born friends (all have been in Canada between 12 and 42 years – none have become Canadian as yet) – all three decided as of last year to just start filing US returns going forward. They also filed FBARs. All would most definitely be ‘minnows’. They filed their 2010 returns and now their 2011 returns. They have not heard anything from the IRS.

  14. Fear, confusion, absurdity (5% of bubblebustin and husband’s combined income to prepare tax returns). Part of it is economic and time discrimination of people outside the US, all of us, in complying with all this for little or no $$$ owing to the U.S.

    Why are we second-class citizens in our own countries, unable to benefit from our countries’ various tax-protected savings plans, for example, in Canada, RDSPs, TFSAs, RESPs, mutual funds?

    Who is to carry out reporting and tax returns for us and at what cost when we are not able to for some dementia related condition as we age?

    Who is to do this for my (developmentally delayed) son as the US says I cannot renounce on his behalf?

    Why does the estate that I have worked diligently for and will leave my children, and my son especially, have to be lessened with the expense of reporting costs year after year — with little or no $$$ owing to the US?

    Why would it make any sense for what I leave in my estate to be lessened by the cost for an executor to continue this absurd yearly exercise?

    Why will we, year after year, be saddled with the continuing stress of this, the waste of valuable hours of our life, with little or no $$$ owing to the US?

    Why are some of us subjected to the absurdity and some (and I agree they should NOT be affected) remain unaffected by this because of absolutely still not knowing or choosing to ignore (which I will do with my son)?

    How much longer shall we be called traitors, tax evaders, made second-class citizens in our own countries of choice, barred from the country of our birth in many cases?

    How much longer will the US continue to shoot themselves in the foot with citizenship-based taxation, both economically and their own PR rating in the world?

    How much longer before the US realizes it is not the greatest, entitled, exceptional country most have been led to believe. In fact, it can no longer be defined by its democracy. It must be defined by entrapment of people both within and without its boundaries. Proper education, instead of continual blind patriotism brainwashing, might be a better tool for the strength of the USA.

    And, while I’m asking, why must we continue to pay for the unending wars and support of the USA’s Military Industrial Complex?


  15. Don’t forget what Phil Hodgen wrote after his busy day of meetings in DC (I especially like the poo-flinging part):
    “If the government wants to impose FBAR penalties on you, they have the burden of proof. And it would be an act of spectacularly poor judgment if the government picked out your FBAR filing and filed a Federal court case to tag you with FBAR penalties.
    Diplomatic hilarity would ensue. Trust me. Even the ever-polite Canadian politicians would be inclined to fling poo at the IRS.”

  16. @Michael, I almost wonder if he is the proverbial wolf in sheep’s clothing??

    It’s occuring to me that I have been far too open about my personal situation and that I could be laying myself open to whistle blowers, especially as he would have argued that I should have entered OVDI. I almost feel I should have all my posts deleted. He almost sounds like an apoligist at best and a mole at worst.

  17. @Calgary, I completely agree that it’s wrong how we cannot make use of tax-protected savings and investments, and especially mutual funds. Triple whammy for me and all done completely unintentionally. But could be a poster child for all they care. I’m thus a second-class British citizen. Oh God, please spare me…:'(

  18. Re: Steven Mopsick
    I may have got a different impression than some here about Steven’s latest article. I kind of thought he was giving a solution with a bit of a wink-wink because he couldn’t out and out say do this, knowing that strictly by the book it isn’t what the IRS “says” it wants. I’ll admit I’m not good with reading between the lines though.

  19. @all –

    My understanding of the term “quiet disclosure” is that it refers to people who have actual tax deficencies and try to solve their problems by sliding amended returns in quietly, hoping they won’t be noticed. People who didn’t file at all out of ignorance, but don’t owe any taxes, are in a different and less dangerous situation, given that the penalty for an unfiled return is a percentage of taxes due. .

  20. @A Broken Man, up until last year, it never even occured to me that I would have tax deficiencies to the US because I permanently moved to Britain shortly after finishing university back in the late 80s, having married a Londoner. My understanding was that tax treaties prevented double taxation and as I was already filing with the UK, didn’t think it was necessary to file more than a nominal return for which I claimed the FEIE. For simplicity’s sake, and to avoid having to use an accountant, believed this was sufficient.

    Had no idea about the saving clause that allowed for double taxation for US persons, nor that tax-protected savings and investment plans perfectly legal where I live were not recognized by the IRS. At the time, was happy to add to my US-based brokerage account but then the Patriot Act meant I’d no longer be allowed to add to my mutual funds there with a foreign address, plus IRA’s were off-limits as a non-resident.

    The worst thing was that I mainly invested in mutual funds in the UK because it seemed safer to spread my risk instead of buying individual stocks, as I’m not wealthy and had lost money in BP and bank stocks. Had had simply no awareness of all the arcane PFIC taxation rules, nor the requirement to file FBARS.

    If I had sought out a US-compliant adviser and accountant from the start instead of being a DIY investor and filer, I probably wouldn’t have even owed any US tax, nor would I be living in chronic fear of life-altering penalties. I will always regret this but resent being made out to be sneaky for wanting to avoid being turned into fish fertiliser, especially when my omissions and lack of compliance had been unintentional. I feel morally innocent, especially as I am honestly trying to put everything right in spite of huge cost and stress.

  21. We know that basically, with a few exceptions, Americans Abroad would pay no US taxes because of the Earned Income Exclusion and the Tax Credits. So the only way to get money from them is to start a program (FBARS) that they would not know about and then penalizing them for not complying. Even the IRS Tax Advocate knows and protested against this trap.

  22. @Thatisme, I agree that they may indeed consider the most valuable FBAR an unfiled FBAR. However, I still believe they will mainly focus on enforcing penalties through the new Fatca 8938 form because it will be easier to enforce than Fbar which would require a court case.

    If they were not accepting reasonable cause then we would be hearing about people getting hit with FBAR fines. But so far, they seem to be focussing on criminals and only hitting minnows via the misc. fbar penalties in the OVDI programmes.

    Though this could of course change, especially after it becomes mandatory to file fbars directly online. But I still think they will use 8938 more for clobbering since it’s directly via the IRS as a title 26 penalty vs the fbar’s title 31 penalty which would require Fincen to pursue through the courts, as I understand it, so would more likely be reserved for egregarious offences.

  23. Just in case anyone finds it interesting, here are the comments I posted (in a different forum) with respect to the article that Steve cited to me (link in one of my prior posts above). I’m curious what folks here may think on the various points raised.

    Personally, I think the article is ridiculous. Full of information that is misleading at best.
    Here are just a few excerpts with some commentary thereafter:

    While [QD is] tempting, especially since amended returns are appropriate under the law, the IRS made plain in 2009 and 2011 guidance that this strategy is not in a taxpayer’s best interest.

    What does it mean to say that amended returns are “appropriate.” Some will tell you otherwise, but the Supreme Court has held that there is no obligation to file an amended return. The choice of the word appropriate was probably used to mislead the reader into thinking it’s a requirement, while allowing the author plausible deniability, since the term “required” was not actually used. Also, the 2009 and 2011 guidance does not make plain that the strategy is not in a taxpayer’s best interest. It makes plain that the IRS may not like it, and that all of their options are on the table. Whether it may or may not be in a taxpayer’s best interest varies from case to case; and it’s our job to advise on this point. This “observation” seems particularly shameful, since it’s designed to herd the taxpayer into a formal voluntary disclosure under the pretext that a QD would never be advisable.

    In its published Questions and Answers of May 6, 2009, the IRS clearly stated that quiet disclosures do not satisfy the reporting requirements.

    What does this mean? Well advised taxpayers understand the difference between a QD and a VD. And they understand the risk that the QD may generate an audit. But then again, it may not. And the taxpayer is still entitled to present all the reasons for why he (1) didn’t commit a crime; (2) didn’t commit fraud; (3) didn’t willfully failure to file the FBAR; and (4) had reasonable cause. The nefarious suggestion seems to be that, by making a QD, the taxpayer is now purposively breaching some new obligation. Clearly false.

    More recently, on June 1, 2011, IRS representatives revealed that the Service is opening examinations against taxpayers who have submitted quiet disclosures. The government has developed a process by which to “filter” these submissions to facilitate proper processing either civilly or criminally.

    Obviously the iRS is looking at QDs. They’d like to find every single person who does a QD for offshore income. What portion they find remains to be seen. All part of what should be considered in the cost-benefit analysis. If, for example, you have great facts and should be better off outside the program, even with an audit, why wouldn’t you also like to enjoy the possibility (even if it were as low as, say, 20%) of not being audited.
    As noted previously, the civil and criminal penalties for FBAR violations depend primarily on the intent of the taxpayer. If a taxpayer is aware of the disclosure programs and the FBAR reporting requirements, and implements a quiet disclosure so as to play the “audit lottery” and avoid the penalty regimes, such a strategy might well be interpreted by a judge or jury as negligent, reckless, or perhaps willful.

    This statement is outrageous. The implication is that the taxpayer is doing something wrong (i.e., negligent, reckless, or perhaps willful) by electing a QD. Again, the author should be ashamed. All that matters is the taxpayer’s state of mind when he filed or failed to file the applicable return or other form. The IRS may, perhaps, tend to presume everyone with an offshore account (or everyone with an offshore account who does a QD) to be willful, but that’s very different than what’s written.

    It is also important to note that quiet disclosures are inherently deficient in other respects. For example, disclosures made on amended income tax returns report income, taxes, and interest, but nothing else. Amended returns do not show accuracy-related penalties or relevant information required on the FBAR form (such as the highest balance of a foreign bank account in the subject tax year).

    If the point is that an amended return is not an FBAR, well …. sure. That’s not really a point worth making. They’re still perfectly permissible (and sometimes desirable). Again, the suggestion is that they’re nefarious or improper in some way.

    In summary, a poor article intended to herd taxpayers into the program. Whether the author honestly believes everyone should be in the program, or simply wants to make as much profit off of these people as possible isn’t for me to say. I do have a hunch.

  24. @Michael, I’m guessing that he either is personally sympathetic but also trying to make a living by officially sticking with the program or is being a wolf in sheep’s clothing. Luring us to be open (like I have been) but on the lookout for people he might want to bring to the IRS’s attention.

    While I want to believe he is on our side, I’m no longer completely sure. I don’t have anything to hide as such but have perhaps been to open. You just never know…

    After all, I would still assume that these tax attorneys benefit from the status quo and the fertilizer mills…:P

  25. @Michael – here in general is what I think of your comments:

    and I have a few to add or my own.

    Let me begin by saying:

    “You can take the man out of the IRS, but you can’t take the IRS out of the man.”

    At least one of the authors of this article (check his firm site) is a former IRS lawyer. There is a saying in the movie The Godfather that:

    You keep your friends close and your enemies closer.

    (Now, I am talking to you Mr. Mopsick – I don’t believe that all former IRS lawyers are somehow the enemy of the public. I mean only that it is important that one reads anything by any lawyer who has worked with the IRS. Let me add, that I thank you for your enormous contributions to the Isaac Brock Society.)

    Therefore, whether good or bad the article has a lot of value. You can, to a large extent, glean some insight into how the IRS views the program and the people in it.

    The first thing that strikes me is that most of the discussion assumes that everybody in the program deserves to be in the program because they are somehow a “tax cheat”. It is as though the article “assumes the righteousness of OVDI”.

    I agree with all of your comments in your analysis. That said, this particular comment of yours very helpful:

    “The implication is that the taxpayer is doing something wrong (i.e., negligent, reckless, or perhaps willful) by electing a QD. Again, the author should be ashamed. All that matters is the taxpayer’s state of mind when he filed or failed to file the applicable return or other form. The IRS may, perhaps, tend to presume everyone with an offshore account (or everyone with an offshore account who does a QD) to be willful, but that’s very different than what’s written.”

    Now, here is my interpretation of this “you shouldn’t do a quiet disclosure stuff”. The presumption against “quite disclosure” seems to come from the following:

    “A single question dominated the Offshore Voluntary Compliance Update panel during the American Bar Association Section of Taxation meeting in Washington on May 8. Practitioners wanted to know what special treatment, if any, the IRS would afford taxpayers who declined to enter the government’s special voluntary disclosure program (VDP) and instead filed amended returns revealing previously unreported income from offshore accounts.

    The answer was not what those in the packed room wanted to hear. These “quiet disclosures” will not place affected taxpayers on terms equivalent to those who came clean about their offshore activities under the VDP. That means harsh civil and criminal penalties could await those who engaged in quiet disclosure.

    But disclosure is disclosure, complained many attendees. Not so, responded IRS officials Ronald Schultz, senior adviser to the deputy commissioner (services and enforcement), Tax-Exempt and Government Entities Division, and Rick Raven, deputy chief of the Criminal Investigation division.

    The message was clear: Taxpayers are either in VDP or they’re not. There are no shades of gray. Raven reminded the audience that the inquiry concerned taxpayers who knew about VDP and had ample opportunity to participate in the program, but consciously chose to ignore it. The IRS will not let them slip in through the back door via an amended return.”

    Note that this comes from a meeting of the “Offshore Voluntary Compliance Update” sponsored by the ABA. One must remember that OVDI was conceived as way for criminals to come clean. Therefore, I would think that this warning about quiet disclosures should be understood in the context of possible criminal activity. How it could be understood in the context of some accidental American living in Canada is beyond me. But, again the author of this article is presuming criminality.

    The point is this: If you are not a criminal then you better have a very good financial justification for entering OVDI!

    As I was reading the article I felt like I was reading something out of Orwell’s 1984. Almost as though OVDI is nothing more than a normal way of life. Why not put every U.S. person outside the U.S. in the program? Why not treat Mr. Shulman as “Big Brother”?

    Where I do find the article helpful, is that it (assuming that this is to be believed) provides a good overview of the OVDI process itself. In particular, the reminder that an OVDI “opt-out” should not be thought of as traditional voluntary disclosure, is good. For that reason alone it is worth reading.

    Finally, it is clear that the author thinks one of two things – either:

    1. OVDI is the only compliance option; or

    2. He wants to convince everybody to enter OVDI.

    Either option is as bad as the other.

    Finally, Mr. Miller – thanks very much for your comments and your willingness to bring some sanity to the anxiety at the Isaac Brock Society! And once again: Thank you Mr. Mopsick for your very tangible assistance in helping U.S. citizens living abroad. I just share Mr. Miller’ view that the article he is referring to:

    is dangerous!

  26. @monalisa
    ‘or is being a wolf in sheep’s clothing’.

    I choose to believe Steven is NOT a ‘wolf in sheep’s clothing’. He was, after all, the lawyer on this site, that suggested to many of us, who had ‘relinquished’ decades ago, that we would be silly to now come forward. I believe the expression he used was that the IRS would say “Come on and make my day”, if we were to start filing tax returns. Doesn’t sound like a ‘wolf in sheep’s clothing’ to me. Just my opinion.

  27. Hello All: I do have an article under review now with a major tax publication in Washington, D.C. on the issue of compliance by Americans abroad but the editors have asked that I not publish it on my own blog or anyone elses until they publish it first. Once they do, I would be honored to see it reproduced on the pages of the Isaac Brock Society. I think that puts us out a few more weeks. Sorry for the delay.
    There is no ulterior motive here and I have no intention of outing anyone to the IRS. I am simply raising issues. As far as who’s side I am on, I am clearly on record for being against citizenship based taxation when it works the injustice which is unfolding for many Americans living abroad. That said, as an attorney I am ever mindful of not counseling anyone to do anything which might be perceived as an invitation to violate the law.
    What I wrote in my recent blog should be obvious. Common sense and good judgment should predict the result in the facts I have outlined. Nevertheless, in my hypothetical, if you write the IRS a letter acknowleding that you now understand your obligation under the tax laws and tell the IRS you have no intention of correcting something on an open statute of limitations which was on its face contrary to law, THE IRS COULD ARGUE that you are in willful violation of a known legal duty to correct something which is easily correctable.
    As far as quiet disclosures are concerned, I don’t advise anyone to do anything with the IRS which I cannot defend by going through the front door. Not the side door or the back door, but the front door.
    Mr. Miller, I appreciate the emotion and passion you bring to the debate but in my humble opinion, “me thinks you doth protest too much!”
    Respectfully submitted.
    30 Year IRS Vet

  28. Sorry, but I believe some of you are being unfair about Mr. Mopsick. He has only tried to help and the subject obviously interests him. Saying things we may not agree with or like to hear does not make him a “wolf”. The IRS forms, policies and programs are so unclear and open for interpretation that the viwepoints of a former IRS lawyer are invaluable, even if we don’t agree with them. Let’s not punish the messenger. 🙂

  29. @rodgrod @all
    Well said, rodgrod.
    My personal opinion is that it has been great having both Steven and Michael posting on this site. They both have much to add.

  30. @all
    @Mr. Mopsick
    @Mr. Miller

    We are enormously lucky that both of these lawyers are talking time of their busy lives to share their views on an important issue – an issue where there is no agreement. Mr. Miller and Mr. Mopsick are disagreeing on the issue of “quiet disclosures”. I bet there is even a third option or fourth opinion out there.

    We are getting the benefit of some very expensive legal advice, with no strings attached. We are also getting the benefit of why they think this way!

    Please, let’s do all we can to keep the discussion going!

    Thanks again to all!

  31. Steve, I could ARGUE that I’m the starting power forward for the Lakers, but since I’m 5’5″ and not particularly athletic, it would not be a particularly credible or rational argument. Similarly, if I had a foreign account problem and elected to comply going forward without amending my prior returns, the IRS could ARGUE that I was in violation of a “known legal duty to correct something which is easily correctable” but that would be silly, because the US Supreme Court has held that there is no duty to file an amended return. If you’d like the citation, just let me know.

    I’m glad you appreciate the “emotion and passion” that I bring to the table. I acknowledge yours as well. I wish you would call me Mike or Michael, notwithstanding that we are in heated disagreement on a number of key points. As for the protesting too much, I could say the same of you.

  32. I am happy Steve is blogging here. It may have taken him a while to figure out that “citizenship-based taxation” is unfair. But the fact that he did, puts him far ahead of most Homelanders.

  33. And, lets not forget about the 3520 and 3520A for TFSAs and all sorts of other perfectly-legal-and-government-approved-and-registered-where-we -actually-live savings, which no-one knew about either. And the myriad of other arcane forms – with their multiple layers of liability and punishment – on perfectly legal and disclosed-where-we-actually-work,live-and-earn-savings. There is a lot of discussion of FBARs, but the 3520 is a monster too.

    It would be good to hear an explanation of why TFSAs, RRSPs, and the equivalent in Europe or the UK, etc. cannot automatically be treated as IRAs, and the US equivalent. Draconian laws should be able to withstand close scrutiny and offer a detailed and robust rationale – even if ill-conceived.

  34. The case I was thinking of, or at least one such case, is Broadhead v. Commissioner, TC Memo 1955-328 (excerpt quoted below). In this case, the IRS made an argument of the kind that Steve suggests (e.g., failure to amend makes the original error willful), and this argument was rejected. [My recollection is that the Supreme Court has also confirmed the absence of a duty to file amended returns, but since I’m too lazy to look for other cases, I’ll offer the following as my authority (or at least some of it).]

    “Faced with proof that petitioner was not aware of the accounting error giving rise to the understatement of lumber sales until after the return was filed, respondent now says that petitioner ‘willfully and deliberately attempted to evade and defeat his income taxes when he refused to file the amended return after being advised to do so by his accountant.’

    The respondent had the burden of proof under the issue. He established no more than the cause of the understatement; lack of knowledge by petitioner of the bookkeeping error until after the return was filed; the preparation of an amended return by the accountant of petitioner, and that petitioner never filed the amended return, even though advised to do so by his accountant. Petitioner was not required by statute to file an amended return, and if one had been tendered for filing, respondent could have declined to accept.”

  35. @Mr Mopsick, thank you for replying and reassuring us of your opinions and intentions. I’m sorry if I come across as paranoid but I also sense that you can appreciate that I can find the inevitable ambiguity of legal argument confusing and frustrating at a time that I feel vulnerable about my situation (as others also do). I also appreciate your participation here, as well as Michael’s.

    It’s important that we try to work towards a positive outcome for all concerned, including America’s long-term benefit (which I believe tax reform could help). The vast majority here want to be decent and do the right thing but naturally with the least damage to themselves.

  36. Why no mention of the Dec fact sheet? It has no mention of any VDI, and instructs a “noisy” disclosure (i.e., with a reasonable cause letter) with 6 years of returns. I know I bring this up often but it seems that it’s often overlooked in these kinds of dicsussions. True, the fact sheet doesn’t specifically address those who have filed in the past and now need to ammend (due to schedule b/FBAR issues), but it certainly doesn’t rule that out…

  37. @Howard

    I agree totally with you – in my opinion the December 11 FS should be the starting point for U.S. and dual citizens in Canada. Now, it is the starting point, and one would want to behave rationally and carefully, but it is the only thing I have seen from the IRS that does not focus on penalties, but focuses more on compliance.

    Here is a link to some very lengthy commentary that I wrote on it at the time:

    But, one caveat – the December 11 FS does seem to aimed at very simple situations.

    I don’t believe that I have ever seen Steven comment on this Dec. 2011 FS – would love to know how he understands it. Love a comment from on it as well.

  38. @Howard and Renounce, my accountant seems to think that the IRS will have regarded amended returns with schedule B would often be generally lumped in with non-filers. Many others may also have assumed that it had been sufficient to report passive income to on one’s resident government’s tax return, especially if extensive i.formation sharing agreements are already in place.

  39. @Steven

    Thanks. During the summer and fall of 2011, leading up to the FS, the practitioners and media were certainly not talking about the possibility of “reasonable cause”. In fact, many lawyers were advising clients to enter OVDI even if they had the facts that may well have supported reasonable cause. Anything short of OVDI was being treated as a possible problematic “quiet disclosure”. So, although the Dec FS does nothing more than repeat the existing law – it is at least an admission from the IRS that they will apply the existing law in relation to “reasonable cause”. That was a help – at least it seems to me.

    So, to lead with a presumption of the Dec 11 FS is to lead with a presumption of “reasonable cause.”

  40. I reiterate the thanks to Mr Mopstick and Mr. Miller. It is great to have professionals’ opinions on these issues on this web site.
    I still don’t understand what benefit the IRS gets to try to funnel everyone into the voluntary disclosure program. I do believe a lot of people are honest and want to get right with the IRS. But the in-lieu of penalty of the program is too much to swallow for a small non willfull mistake.
    I wanted to amend my returns for the small amount I owed, but the statements from the IRS that they’ll specifically track those and that I’ll possibly face harsh penalties just to make it right made me choose to just be compliant forward.
    I think the IRS is loosing a lot of money from people who would have decided to amend returns, and but instead are not doing it because of the threats.
    I would have loved to go to my IRS office, pay what I owed and put that in my past. Unfortunately, that is not an option, and I will have to live the fear of what might happen in case of an audit for some years.

  41. @Christophe, please keep in mind you can (and, legally, of course, you must) still comply properly going forward, even if if you do not file any amended returns or late FBARs. Some may, perhaps, tell you that you must file amended returns but that’s simply not true. A well-informed tax return preparer (if you need one) would gladly assist you going forward regardless of what you do, or don’t do, about past years.

    Granted, proper filing going forward itself can potentially draw attention, but probably far less than filing amended returns. And if, for whatever reason, the IRS audits you at some point down the road, you’ll be able to say: “Look, like a lot of people, I went for a long time without knowing the rules. Once I found out, I followed them — and, by the way, I have reasonable cause [hopefully] for the prior noncompliance.” Sounds a lot better than “I originally didn’t know the rules, but once I found out I converted my historically inadvertent noncompliance into willfill noncompliance.”

    I hope you will at least consider this option.

  42. @Mr Miller, I wish I had just started complying going forward instead of risking unwanted attention from the amending, but my accountant believed it was safer in my situation to correct the earlier years…I had to trust her judgment.

  43. @Michael, thanks for your answer. Yes, I filed my 2011 taxes properly, declaring the account on the 1040B, declared the interests, and sent my FBAR. I am good for this year and will be from now on.

  44. @monalisa1776, I hope there’s no misunderstanding. I’m absolutely in no position to have any view on whether just complying going forward is better than amending past returns in your case, Christophe’s case, or any other case where I’m not fully versed in all of the facts. I just wanted to make sure, for what it’s worth, that Christophe was aware of all the options to be considered. I hope it works out as painlessly as possible, for all of you.

  45. If audited, would the IRS consider actions towards bringing that account below 10k or closing it all together something that would make me guilty of hiding stuff?
    Would it limit my exposure (not next year, when I would have to declare it again), but the year after to just close it?
    I would prefer keeping it as it is useful when traveling and visiting family, but I definitely don’t need $18k there. It doesn’t make sense for me to keep that much and pay $100 in additional taxes every year. I already closed the savings accounts that were generating interest and moved the money into the checking that is interest free.

  46. @Christophe, I’m curious what Steve Mopsick thinks about this. He has ideas about what’s “sneaky” or dishonest that are very different than mine. My view is that it’s perfectly permissible to reduce the (aggregate) balance of one’s foreign accounts to not more than $10K if one prefers not to file FBARs, and there’s nothing wrong with that. Whether the reason for wishing not to be required to file FBARs is inconvenience, expense, or possible audit risk (e.g., due to issues for past years) strikes me as not relevant to anything.

  47. Why in the world shouldn’t Christophe have every right to do what he wants with his money?!? Why does he have to explain to IRS what he did with $8,000 of his own money which was earned in his home country before he immigrated to US?

    That doesn’t sound sneaky to me. That sounds like someone enjoying what they have saved for.

    Thatisme is correct. No one is sneakier than IRS. Don’t tell anyone about FBARs. then nail them for atrocious penalties because they didn’t file them.

  48. @Michael, and @to all, I hate how I will have to live with all this uncertainty over what had been an inadvertant ommission.

    By the way, I googled Fatca in UK and saw that there are literally HUNDREDs of listings for Fatca compliance jobs. This fatca stuff is for real.

  49. “Don’t tell anyone about FBARs. then nail them for atrocious penalties because they didn’t file them.” This explains everything. I never thought that a government agency of the USA would ever resort to this sneaky trap.

  50. And of course, less clear the IRS remain in their trapping (” I hate how I will have to live with all this uncertainty over what had been an inadvertant ommission.”) more business they will promote for US CPAs and Tax Lawyers. Not that I don’t appreciate Mr. Mopsick being around. I do.

  51. Forgot… and how much the IRS will collect at the expenses of innocent people. Is this American?

  52. People have to think twice now about becoming an alien resident or a dual citizen. I wonder if they know this. At the same time someone is trying in the US Congress to facilitate to immigration of highly skilled persons to the USA. Are they going to warn them about what will happen to them if they ever move out ot the Country? It seems that the USA wants to have the cake and eat it at the time. Another trap.

  53. @Christophe

    I agree with you that the IRS makes it very difficult for people to come into compliance.

    Here is a typical conversation between a person who wanted to be in compliance and a lawyer that took place in the summer and fall of 2011:

    Taxpayer: Hello, I have just discovered that I should have been filing U.S. returns and these FBAR things. I simply didn’t know about this and I want to be in compliance.

    Lawyer: Well, if you have no outstanding tax owing, then you can just file the FBARs and attach a letter explaining why they are late.

    Taxpayer: But, I don’t know if I have any outstanding tax issues.

    Lawyer: Well, you can’t just file the FBARs then. You must go into this OVDI thing.

    Taxpayer: What? The law specifically requires me to file FBARs and to file 1040s. Why don’t I just do this?

    Lawyer: No, the IRS would consider that to be a quiet disclosure and the IRS doesn’t want that?

    Taxpayer: What’s a “quiet disclosure”.

    Lawyer: It’s when you file amended returns which show unreported income and that you owe tax. If you do that, without telling the IRS, that’s quiet.

    Taxpayer: But, I really want to pay my back taxes and file my FBARs.

    Lawyer: No, absolutely not. You must notify the IRS and the only way to do that is with this OVDI program.

    Taxpayer: But OVDI stands for “Offshore VOLUNTARY Disclosure”. It’s not the law, It’s just a program. I don’t think I should pay penalties. I am not a criminal. I just didn’t know about this stuff. I desperately want to comply with Title 26 and Title 31 obligations. Furthermore, I was told that I do not even have a legal duty to correct past mistakes. Wouldn’t the IRS commend me for cleaning up my past mistakes even though I am not required to by law?

    Lawyer: No. No quiet disclosures. You must notify the IRS by entering OVDI and pay them penalties.

    Taxpayer: How much are the penalties.

    Lawyer: 25% of your net worth plus you have to pay the back taxes and interest.

    Taxpayer: In other words, I collapse my retirement fund, because I didn’t know about my FBARs.

    Lawyer: That’s right.

    Time out: Notice that the “Dynamic Duo” of the IRS and Lawyer is creating a situation that obstructs the taxpayer from trying to clean up past problems.The taxpayer wants to comply and the Lawyer says NO. The IRS discourages fixing up past compliance issues with this “quiet disclosure BS”.

    Now at this point the taxpayer will do one of four things:

    1. Enter OVDI
    2. Quiet disclosure or December 11 FS style
    3. Comply going forward
    4. Never file again.

    I would bet that there are a lot more people taking option 4 than one might think. The IRS has created a situation where it is too difficult to comply and the penalties for mistakes are life altering.

    It’s quite obvious that most people did NOT enter OVDI. There is simply no way to do it.

    It’s very clear that the IRS is far more interested in penalties than in going forward compliance.

    There is one very good argument for cleaning up the past five years – you can sign off that you are tax compliant when you renounce.

    At the end of the day, the certain losers are the IRS.


  54. @Renounce: Christophe won’t be renouncing. He is in US on a green card with an American wife and American born children. He wants to be able to remain in US with his American family. I think he may want to become a citizen in the future and he is worried how his savings in his home country may affect his green card, and citizenship potential.

    I know Christophe has said previously he has had many sleepless nights over this. He wants to do the right thing, but worries the right thing is going to land him in trouble now or in the future.

  55. With me it was traumatic. In 2010 I learned, by chance, about the FBARS. Went to a Tax Lawyer who scared the hell out of me saying how much I will have to pay in penalties and also how he would have to defend me criminally. He asked for a deposit on his account of 15,000 dollars. Then I went to an Expat CPA and he was less threatening. Yes, I had to file the FBARS since 2003 with a letter to the Treasury. Then the other CPA advised me that since I sent the FBARS for 2009 and 2010 i did not need to go in the voluntary disclosure program. Then, in a panic, all the way from a country where there is no IRS representative) I consulted others CPAs and Tax Lawyers (total around 5,000 dollars) and to this date I am not sure what I MUST do. In my whole life living and working in the USA for decades and living abroad for decades, I never was in a situation where I had to consult so many experts and still don’t know what to do. I am still not sleeping at night. I am trusting my present CPA, EA. But never sure. This indeed is not an American to be treated. I guess the proper wording: it is not FAIR.

  56. @markpinetree
    You are so correct. It is not fair. The IRS talks about ‘reasonable cause’. When professional lawyers, accountants give conflicting advice, how on earth is any average person able to understand what is the right thing to do. Isn’t that fact alone, reasonable cause.

  57. After living and working so long in the USA I was used to have things like this clarified with a phone call. I used to praise the USA for this. I would give examples of this efficiency to my friends in my country of origin where I am living now. I no longer can do this. The USA suddenly has changed for me and I believe for a lot of Americans Living Abroad. As I said before I have nothing against the IRS going after tax cheaters… but to trap us and place us in this category? I really can not believe this is happening. To be truthful a small part of me still believes that the IRS will not penalize the way the are threatening us. I just can’t believe.

  58. I just read one of Jack Townsend’s recent comments about the OVDI program. Jack is a measured guy, and not given to hyperbole, but this comment regarding the IRS OVDI represented a level of frustration I have not seen expressed before, so I tweeted it. You might want to have a read… Actually the entire thread has some good comments about Opting Out for benign Minnows.

    and here is another…

  59. Just to try to clear things uP;
    My impression of a Quiet Discosure is filing an amended return confessing to having MORE income than the original, without explaining to the IRS.
    It is NOT the same as filing past returns or complying going forward, without explanation.
    However, the IRS can and will do as it wishes and demand 6 impossible things before breakfast.
    There is no clear direction for any of us. Ask 5 lawyers or accountants what to do and you’ll get 5 opinions and 20 options.
    Do your best and hope. Great way to live your life, eh?

  60. I think that what was new in the Dec FS was that the IRS was showing that benign minnows should NOT go into VDI – confirming that there is another option. So I think that makes it a little better than ‘useless’ when a minnow is being told by lawyers and CPAs that VDI is the only way…

    For what it’s worth, I’ve been told by two enrolled agents who specialize in expat taxes (one in Europe and one in the US), that I should file amended returns, FBARs, and brief reasonable cause letter. There was no mention of other options like going forward. I understand the reasons for that option (mainly not calling attention to yourself, correct?), but as others have also commented, it seems that if you are audited (say for a sudden FBAR showing $200k when before you reported nothing), it seems you’d be in a less favorable position regarding wilfulness, good faith etc.

  61. @monalisa1776

    Can you clarify you post of May 24, 2012 at 1:54 pm? Did you mean that the IRS regards amended/schd b returns as if you are a non-filer? Is that a good thing or a bad thing?

  62. @all. On the day my husband and I decided to enter OVDI I asked my lawyer: It seems to me that in the past many like us wanting to become tax compliant have been given a pass on penalties. What’s changed? He said “the OVDI Q & A”. Within two days of making our submission, the IRS came out with the statement that they would consider the nebulous “reasonable cause” in determining whether penalties apply, and that they would not penalize on late filings if no tax is due. In NTA Nina Olson’s 2011 report to congress, we realized that we and our lawyer had been led to believe that the less punitive measures of the Internal Revenue Manual were no longer available, when in fact they are. We owe tax and thus a penalty, but our conversation with TAS gave us hope that we can an eliminate it with the IRM’s first time penalty abatement. We have sent payment for the tax and penalty, but not for the FBAR penalty (for funds resulting in the tax due on the sale of our principal residence in Canada-exempt to 1st class Canadians and residents). I will “fling poo” (using Phil Hodgen’s words) before that happens, as my husband and I are poster children for reasonable cause, having lived in Canada since 12 and my husband only a US citizen through his father and neither of us having ever worked in the US.
    As Just Me said, there should be a filter at the beginning of the extraction process that separates the minnows from the whales, not during in the form of opt-out. OVD programs are designed for whales and the IRS doesn’t provide enough options, information or incentives for the non-compliant taxpayer to make a decision based on anything other than fear.

  63. @Howard, it is only my accountant’s opinion but she believes that in some cases amended returns for schedule B will be treated leniently in a similar way to expats who hadn’t realised they had to file.

    I personally feel that a nonfiler would appear more innocent than someone who’d not reported passive income though. But hopefully the IRS understands that I believed it was sufficient to declare it on the British tax return.

    I suspect that they consider us all negligent at the very least and dishonest at worst. But I also believe they have to prioritize who to target, which could largely explain their bullying tactics with minnows, so we’re blugeoned into compliance. Scare tactics can work wonders when you have limited resources.

    But I wouldn’t put it past them to randomly audit expat minnows too to show they mean business…this is what I’d do in Shulmsn’s position;I’d focus on the rich, of course, but also remind people that the law applied to everyone by doing random audits to keep everyone on their toes.

    Consequently, my amended returns were anally correct.

  64. I would guess the IRS will have been rather annoyed with me but when they saw I had so many PFICs with only a couple hundred pounds in them, should realise I’d created my complicated situation unintentionally. After all, a tax evader would have been tidier and cleverer.

  65. Pingback: Why is the Quiet Disclosure, (QD) so controversial between Practitioners? | The Isaac Brock Society

  66. @monalisa1776

    Thanks for the clarification. I’ve been told similar things – hope they’re true! I’m waiting for some final statements from long-closed accounts before I can submit my amended returns, then at least that stage of stress will be over…. Godd luck to us both (and to everyone here)!

  67. The bottom line is this, I am here at 3.45 AM. Can’t sleep. Waiting for my US CPA to do my return. She keeps postponing and don’t answer my e-mails.Do I need this?…

  68. I heard today from someone else in OVDI that her lawyer told her the IRS is holding onto the Canadian OVDI files in Austin and are not being forwarded to field agents for assessment and talks are underway as to how to handle them. However, other non-Canadian files are being processed.
    As much as I would like to see concessions made, I don’t know what grounds the US would have in treating Canadians differently. Could any of the experts out there think of any?

  69. @bubblebustin…

    I saw a similar Anon comment, or maybe the same one, on Jack Townsend’s blog, but was too much of heresy for me to give it credulance. If I hear Jack or a well know lawyer say it, then maybe I will believe something is afoot, but hard to give much hope to an Anon comment. Whatever the IRS does, I don’t see how they just carve out Canada, unless they think it will take the steam out of Isaac Brock Society, and that will end the pseudo protest. 🙂

  70. Well, I have heard rumors, but who knows. They should be worried about all the Tax refund fraud, and not wasting their time worrying bout us.

  71. Yes, they’re loosing a lot of money with the identity theft tax refunds fraud. Also, there are some articles saying they should pay a lot more attention to the illigal immigrants filing with an IRS tax number who claims multiple child tax credits.

  72. @Howard, it’s been 11 months since my amended returns and delinquent FBARs were filed and so far, so good (apart from some minor ping pong over my 2010 payment).

    But of course it’s still early days because the statutes of limitations could be six years in my case due to the degree of previously under-reported passive income along with the FBARs. And as they probably won’t submit my 2011 tax return till the late autumn (due to extension because my main accountant is not well), my SOLs for 2011 won’t even start running for another six months. It will thus be July 2016 at the earliest that I can feel safe.

    @Markinpinetree, I sympathize with how frustrated and stressed out you’re feeling…I still have no idea when they’re going to complete my 2011 return, nor do I have any idea how much they’re going to charge me. It could be anywhere between $2,500 and even $10,000 because they know they have me over a barrel. I’m guessing it will be approximately halfway between the two ranges though slightly towards the upper half…Just can’t wait to get this regrettable predicament behind me.

  73. @Monalisa1776, is this possible for an expat to use programs like Turbotax to file their US taxes? Or the program is just not suited for expats because it does not ask all the information needed and file additional forms needed? I was just wondering….

  74. @Christopher, as far as I’m aware, expats could use their most premier version but don’t think it can cope with complicated PFIC taxation calculations or foreign grantor trust forms such as 3520. I plan to stick with my accountant at least till my examination window is closed, which would be 2016 for the 2015 tax year at the earliest.

    I would guess that they would only offer to represent a current rather than former client. I thus believe they will use my vulnerability to charge a premium for their services but believe I’ll subsequently be in a much stronger position to barter or find a less expensive accountant afterwards.

    My situation will be simpler going forward because I will have gotten out of mutual funds and my personal pension consolidated into my employer’s scheme which looks more acceptable to the IRS.

    I’m guessing accounting fees of $5000-7500 for 2011; $3000-4000 till the SOLs have run, then $1500-3000 after that unless I wanted to by then start filing via turbo tax, myself. Part of the cost will be because of 8938 and relying on 1116 rather than 2555.

    I’m not happy about any of this ‘tax on tax’ but feel increasingly resigned to having to budget for it, thus no early retirement for me.

  75. No two ways about this. Americans Abroad from now on need to have a US CPA EA and most likely an US Tax Lawyer. I guess that after a few years it will be easier and repetitious. Let me venture to say (hope) that the IRS is going to be fair with us if they see that we are not trying to hide anything. I can’t believe otherwise.

  76. About my comment ‘I heard today from someone else in OVDI that her lawyer told her the IRS is holding onto the Canadian OVDI files in Austin and are not being forwarded to field agents for assessment and talks are underway as to how to handle them. However, other non-Canadian files are being processed.’
    I posed the same question to my lawyer and was told today that he has heard the same rumour, not directly, and he’s guessing ‘it’s true’.

  77. @Thatisme, actually I don’t believe most will need a tax lawyer unless they’re in a fairly murky situation. Agree that most will need an enrolled agent CPA and perhaps a US qualified financial planner to help them file and report everything correctly as well as move out of non-compliant investments and into more user-friendly types of holdings.

    This is what’s costing me so much but am assuming that even from next year that my accounting bill will be much less and especially once I’m safely thru the statutes of limitations. Will hopefully be able to by then rely on turbotax while perhaps paying my accountant to check it over…thus a more affordable compromise.

  78. Welll, as things sink in…this is what I see. The IRS has created at least two new profession (or especialization). Americans Abroad Tax Lawyers and CPAs EAs. At least at this time we will need them. Eventually FACTA will setlle in and we will have to deal with it. Better not wait for it. Most likely – if there are enough interest – TurboTax and others will cater to us with programs that will work for us. And I can’t believe that the IRS will not use good judgement before messing people’s lives. It may seem strange, but I do trust them. I would be more careful with the lawyers because their earn a living – justly and honestly – from litigation…

  79. “If the people cannot trust their government to do the job for which it exists – to protect them and to promote their common welfare – all else is lost.” (Barack Obama).

    That about sums it up, doesn’t it?

  80. @Just Me Yes… Let me admit that probably there is a wishful thinking on my part. Helps me to sleep.

  81. @Thatisme… I understand the need for sleep aids! 🙂 Just don’t let them delude into complacency!

Comments are closed.