Why is the Quiet Disclosure, (QD) so controversial between Practitioners?

I am admittedly way behind in reading the many recent good posts and comments here at Isaac Brock. I also have had a couple subjects I have wanted to weigh in on, and create new posts, but for the past couple weeks my time has been seriously constrained.  However, this morning a previous post by  caught my attention.  It was entitled Steve Mopsick – On the “coming into compliance dilemma”.  I have been thinking about it all day, and why it is that this QD dilemma is so difficult for so many benign Minnows with the conflicting advice being provided by practitioners.

I thought I would provide some thoughts I have had, especially as it relates to the comments that Michael J. Miller posted.  Now I know, I am getting into dangerous territory when I am seen to be taking sides with one good attorney over another. I certainly have no legal expertise or special knowledge that qualifies me to make comments on matters such as this. So, I am sure what I have to say is probably misguided, or wrong in some manner or another, but it is how I see this problem. It is just my novice and naive opinion.  Take it for what it is worth.

 QD advantages for benign Minnows

If any of you have been reading Jack Townsend’s blog recently, and hopefully you have, Jack seems to be in Michael Miller’s camp about QDs and the risks vs benefits associated with going this route. In theory, if I understand Jack correctly, he says a QD audit examination for the Minnow with benign facts and with IRM discretion applied should not be materially different than an ‘Opt Out’ examination for the benign Minnow with the same discretion applied. In fact, because of this discretion, the penalties outside the OVDI for these benign offenders should be less then the “in lieu of” penalties inside it.

However, the QD does have one significant advantage over the OVDI, IRS advice/protestations aside. It does not require one to spend countless LCUs in an extremely inefficient 2 year process and pay thousands of dollars to a practitioner for advice and help just to get to an Opt Out point where normal IRM discretion should apply in the first place.

Practitioner responsibility.

It does seem to me, on a non legal common sense basis, that a practitioner has a first responsibility to their client and not the IRS!  They should present all the various options available for compliance and the risks associated with each, depending on their client’s facts. This doesn’t necessarily mean that they have to covertly compel the client to choose the IRS favorite route over another to reach a compliance objective. I don’t see it as an attorney’s obligation to tell the client they have to join the OVDI, as the only approved route for offshore compliance.

The fact that you have to examine the various options speaks VOLUMES to the stupidity of the OVDI design. The choice for compliance should be a simple straight forward one, not the convoluted, anxiety ridden, perverse and expensive process that it is now. It should be just as easy to become offshore compliant, as it for you to become tax compliant before you become Treasury Secretary!

Taking a side

I thought Michael Miller’s comments about the QD were right on point as related to the article Steven Mopsick cited. With all due respect to Steve, that article looked to me as if it was dictated and written by an IRS ghost writer by the name of Randall P. Andreozzi. I wonder if the IRS commissioned him to write it, or is he a past IRS attorney writing from a perspective that he has a predisposed inclination to support? To me “the tell” were these sentences that indicated this was not just an ordinary unbiased scholarly writer, who was pointing out the OVDI conundrums.

“People will not respond to such a program unless they are sufficiently frightened by or concerned about the consequences of remaining in the weeds. As a result, the government must generate interest in voluntary foreign account disclosure through well-publicized prosecutions and penalties to establish to the public that the risk is clear and it is present.”

That told me all I need to know about the author and where his sympathies and bias lay!  I can understand why Steven, 30 years working for the IRS might have similar opinions, and I don’t hold that against him. If I had been there that long, I might self identify with that perspective. Frankly there was some aspects of the alternate way Steven has suggested to Expats about a possible different approach to compliance that I think it merits consideration. In some ways it is a QD with a microphone! Kinda a halfway house to Voluntary Disclosure. Will it work? Don’t know, and haven’t yet formed an opinion, but it has me mulling it over.

Mission Impossible

When I consider these past 3 years of IRS offshore jihad, for the life of me, I do not understand why the IRS continues to assert / imply with their FAQs, that all those who are FBAR and offshore income non compliant must just join the OVDI. Surely, in the bowels of the beast, the IRS must have one non intellectually challenged analyst who has done projections of the 25-40 million “non compliant” offenders around the world. They must realistically know they would be totally incapable of handling the all these applicants should they decide to follow the OVDI procedures the IRS has created. They could not do it. It is impossible! They do not have the budget resources for the 10s of thousands of examiners necessary to handle the additional workload that their insanely complicated, inefficient and tediously redundant program requires.

Additionally they know, that millions of benignly non compliant Minnows would actually get a better deal outside the program, in an Opt Out, using normal IRM discretion should they be audited. However, since they can not possibly process them all inside the OVDI to the Opt Out point, for the above stated reasons, they are totally disingenuous in their assertions that such Minnows should not do a QD as a route to compliance. Hell, they should be begging them all to do QDs, so they can just pick and choose who they want to audit as a much better way to screen for the egregious failures, while allowing the Minnows reasonable cause escape from the draconian penalties.  Let’s face it, just amending and filing back returns and FBARs plus paying some taxes and interest penalties with the associated LCU cost and professional fees is penalty enough for the new found need to be compliant!  Why does the IRS want to pile on?

It’s the Penalty Money!

I have come to the conclusion that someone has callously came up with projection of how many they can actually force into the OVDI through their threats of more serious penalties outside the program, and can therefore take them for more penalty money then would otherwise be possible given the IRS resource constrictions and IRM penalty reducing discretion in normal audit processes.

This is not about improved compliance, Commission Shulman’s assertions not withstanding. This is about the best (worst actually) way to produce maximum penalty revenue, pure and simple.

Looking Back

What is obvious to me now, is that going back to when the 2009 OVDP was designed, it was intended for the egregious homeland Whale. It was conceived as “easy money” that could be generated off the UBS client lists about to be exposed, without having to go through lengthy DOJ criminal prosecutions. It then evolved over time to create technical adjustments with lesser penalties for more benign non compliance, as they realized their nets were filling up with Minnows for which the program was never intended. They started to lower the penalty levels and threshold amounts for certain financial conditions, going all the way down to the most “innocent of innocent”, the non resident accidental American who didn’t even know they were American!

Under the program, should this poor non resident fool join the OVDI, they would “only” have to pay a 5% penalty of their entire “offshore” assets for the privilege of now being compliant to an obligation they did not know, could not have known, was required! Say what? Read that again.

FAQ 52.2 states: Taxpayers who are foreign residents and who were unaware they were U.S. citizens,…. is entitled to the reduced 5% offshore penalty.

Why would the IRS insist that a person like this have to join the OVDI process in the first place, and then grant them an “entitlement” of a reduced 5% penalty for a condition by their own definitions has a “reasonable cause” exception to any penalties outside the OVDI program using IRM discretion? For this they are supposed to be thankful and forever grateful for the benevolence of the IRS and the leniency of the 5% OVDI penalty entitlement? Geez, lucky them!

What Should the Penalty Be?

So let me see if I get this right. The IRS uses hyperbolic threats with DOJ press releases of criminal prosecutions, and produces examples of severe penalties in their FAQs, to frighten even these most innocent non resident accidental American Minnow into joining the OVDI, so they can extract a 5% tribute for the new found knowledge of U.S. Citizenship and its bizarre taxation and reporting requirements? That sure is a new definition of an “entitlement” in the perverse world of IRS logic. 5% is 5 basis points too high! They should pay nothing, nada, zilch, zero! Instead, the IRS says, “5% please, thank you very much!” It is stunning when you think about it, and let it fully sink in what they are doing!!  I hadn’t really focused on it until Moby pointed it out to me. He is right! It is beyond stunning, it is bizarre! It is the “smoking gun” that apparently shows their OVDP program has now morphed  beyond good intentions to ferret out homeland Whales to premeditated and deliberate actions to fleece the most innocent of Expats abroad. I just don’t know how any attorney can defend these actions, and with a straight face blindly follow IRS OVDI guidelines and not advise clients about other compliance routes with this glaring example staring us in the face.

In the case of these non resident accidental Americans who didn’t know they were American, they would surely get a “go and sin no more letter” and no penalties at applied at all if they were audited under “reasonable cause” provisions of the IRM. Now, why would an attorney advise this type of client to enter the OVDI and pay 5%, when this is obviously not appropriate in the first place? If audited, after doing a QD, this Minnow should get the same IRM “reasonable cause” discretion as in an Opt Out or normal examination. In my non legal opinion, it would almost be criminal for an attorney not to provide consideration of the QD, as an alternate route to compliance.

To be truthful, I would wonder why this non resident accidental American would now want to complicate their life with this new compliance regime. The preferred IRS OVDI alternative is actually another form of an Exit tax piled on top of the accidental American who surely would want to renounce their citizenship, if they only they could jump through this newly discovered expensive hoop!

Dystopian Program

So it has come to this.  The IRS has created an Orwellian monster in this OVDI program that penalizes the most innocent of innocent, threatens them if they don’t to do an OVDI, presents examples of terrible penalties that can apply outside program, knowing full well, that such a person would never be levied those penalties if they Opted Out, or if they were audited after doing a QD.

It is just morally bankrupt for the IRS to continue to imply that “all” must chose the OVDI route, or threaten attorneys with circular 230 sanctions for advising alternative compliance paths for benign Minnows. Frankly, the cost to the government to process all of them, and the cost in LCUs and practitioner fees to the Minnow just to get to a point as much as 2 years later where they can Opt Out to receive a lesser penalty under IRM discretion than applies inside the program and equal to a QD audit examination represents “Stupidity on Steroids” and is beyond belief.

Why didn’t they redesign the OVDI?

So why, one may ask, didn’t they pause and reconsider what they were doing, as the OVDP nets begin to fill up with Minnows? They should have said, “Whoa!, we need to redesign our OVDP to let these Minnows have a safe harbor escape at the front end, rather than continue a back end Opt Out process.  We need to concentrate our limited resources on the Whales.”

However, they don’t think that way.  Their mindset is different than yours and mine, and I would say they are not normal rationale operators. They are lost in a technical and legal maze of such complexity that they are trapped in their own Gordian Knot.  So it is probably not so amazing that the IRS did just the opposite, by consciously eliminating the FAQ 35 discretionary relief half way through the OVDP. Instead, in its place, they have instituted at the lowest level a 5% penalty to be sure they extracted some pain from those that could not have known they were non compliant in the first place!

They obviously don’t get it, or worse, do get it, and don’t care.  This is the equivalent of financial water boarding for Minnows.

This is just a callous attempt to raise revenue on the backs of the most innocent and vulnerable! They just want the money.

In the meantime, millons/billions of dollars are lost to fraudulent anonymous Corporate shell games, that they and  Congress don’t have the time to bother with while they continue their offshore Minnow to fertilizer conversions.

Or, maybe, it is just a Big conspiracy with Senator Carl Levin, using little known FBAR penalties and the 2010 Hire Act FATCA provisions to provide full employment for life for their all their examiners! This was job creation after all. (I joke, I think?)

In conclusion, what this tells me, is that the IRS, once it is set upon a course of complete irrationality related to world wide citizenship tax compliance, is like a drone heading for a GPS waypoint. It is locked in, and incapable discerning there are innocent women and children inside that compound it is targeting.  And just like the FAQ 35 withdrawl, they remove any discretionary control levers from the hands of the remote operator to assure that the mission remains on auto pilot and can not be recalled. It is frustrating to watch, even now that I am no longer being targeted myself.

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169 thoughts on “Why is the Quiet Disclosure, (QD) so controversial between Practitioners?

  1. @Just Me

    Thank you for this exceptional post.

    Randall P. Andreozzi is a former IRS attorney.

    http://www.aftaxlaw.com/Professionals/RandyAndreozzi/tabid/69/Default.aspx

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

    I wrote some comments on his article here:
    http://isaacbrocksociety.com/2012/05/21/steve-mospick-on-the-coming-into-compliance-dillema/#comment-19824

    There is absolutely no doubt that the IRS is using OVDI as a way to raise money pure and simple. It is so immoral that it makes me ashamed to be a U.S. citizen. But, what makes me more ashamed is that, I honestly believe that the IRS doesn’t see OVDI as immoral. That is the bigger problem in the scheme of things. In fact, I have come to see OVDI as nothing more than an:

    “FBAR Fundraiser”

    On the issue of practitioner responsibility. You say that:

    “It does seem to me, that a practitioner has a first responsibility to their client and not the IRS! They should present all the various options available for compliance and the risks associated with each, depending on their client’s facts. This doesn’t necessarily mean that they have to covertly compel the client to choose the IRS favorite route over another to reach a compliance objective. I don’t see it as an attorney’s obligation to tell the client they have to join the OVDI, as the only approved route for offshore compliance.”

    You are absolutely right. Some lawyers have admitted that they feared being accused of “Circular 230” violations if they did NOT advise clients to go into OVDI. Really? So, OVDI lawyer – let me get this straight: You are advising a client to enter OVDI, because you are believe that if you don’t, that you are in violation of IRS rules of conduct. What about the ABA rules of professional responsibility? Don’t they require you to disclose all legal options to the client? Don’t they require you to represent the interests of the client? If a client comes to you, who do you think you are representing? The client, the IRS or yourself?

    Let me put it this way:

    Any person with a license to practise law, who does not educate and counsel the client in terms of all legal options is NOT ACTING AS A LAWYER SHOULD!

    The first post I wrote for the Isaac Brock Society was on this very point – that is specifically whether the “cross border professionals” could be trusted.

    Next in your post you write that:

    “Frankly there was some aspects of the alternate way Steven has suggested to Expats about a possible different approach to compliance that I think it merits consideration. In some ways it is a QD with a microphone! Kinda a halfway house to Voluntary Disclosure. Will it work? Don’t know, and haven’t yet formed an opinion, but it has me mulling it over.”

    Yes, I think that Steven’s approach makes a lot of sense. It seems to me that: “QD with a microphone” is:

    – consistent with the Dec 11 FS
    – really not much different from “traditional voluntary disclosure”

    Note to IRS: For God’s sake, people want to be in compliance and want to clean up past problems. Why interfere with this?

    If you accept that a lawyer has ethical obligations to the client which include:

    – determining the client’s facts,
    – researching the law,
    – advising the client on whatever existing legal options may be available,
    – allowing the client to decide which legal option he wants to pursue
    – then assisting the client in pursuing the chosen legal option

    then

    a lawyer who fails to do this may be guilty of professional negligence.

    It would be very interesting to have some lawyers comment on what they see as their ethical obligations to the client.

  2. I think the point about a lawyer’s responsibility to his client to advise on QDs is spot on. Set forth below, word for word, is a post I made precisely to this effect in another forum.

    Ethical Representation of Clients With Foreign Account Problems
    This is a spinoff question from the thread titled Another FBAR Conviction. Another advisor indicated that his firm’s policy is not to assist clients with so-called quiet disclosures (QDs), at least in connection with foreign assets. As I understand it, they acknowledge that taxpayers have every right to make QDs, but they fear the the Office of Professional Responsibility (OPR) would impose some form of discipline, e.g., because sending in returns “quietly,” hoping no one will notice, seems a bit “sneaky.”

    Putting aside the question of whether OPR could justifiably punish tax advisors merely for assisting clients in taking permissible actions they have every lawful right to take, there’s a huge ethical problem here.

    My view is that, if a tax advisor (for reasons relating to the tax advisor’s own self-interest) is unwilling to advise his clients of all permissible, legal options that may benefit the client (such a QD), he can’t properly and ethically advise that client.

    I would be very interested in knowing what others think. Thanks in advance for any input.

  3. OVDI is a sucker’s game. More to the point I’m not wasting hours of my time filling in forms to prove to the US government I owe them zero tax.

    The US has an awful history of wasting its time and resources on profitless ventures (Prohibition, the Drug War, Citzenship-based taxation, the Vietnam War, Gulf Wars, McCarthyism, and the Cuban Trade Embargo). All these could have been handled in a better way for both the US and the countries / persons involved.

    Indeed Winston Churchill, whose mother was American, once said “Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.”

    And he’s right. The US will never admit it’s wrong until all the collateral damage has been done. In terms of citizenship-based taxation, they are now running out of possibilities (FBAR, FATCA, Expatriot Act etc). Senator there must be something rotten in the US at its core if people choose renunication these days.

  4. @renounceuscitizenship

    If I had been more diligent in my reading recently I would have seen your comments, and probably figured the subject had been covered well enough and gone to bed at 3am instead of laboring over this subject which was bother all day yesterday. I appreciate you drawing your attention to them again, as it makes me think that maybe I am not so far off in my thinking, which seems to be to be common sense. But I know common sense has no legal standing!

    @Michael Millar. Thanks for your comments back because that is exactly the way I see it. As another attorney who I respect said to me in a private email, the basic reason some attorneys think they way they do, is

    that they are afraid of being tagged by the IRS police as bad practitioners by the OPR

    and that

    “Law tickets are more important than their clients. Sigh.”

    I do think, some well meaning folks toiling away within the IRS have clearly have been

    “captured by the Aliens,”

    and are now working hard to have more abductions in the practitioner community at large!

    @John…. The OVDI is not a suckers game for the criminally egegious homeland tax evader. It is a GREAT deal, with the get out of jail free card. It is just a perversion that the IRS creates a better benefit for the overt offender, than it does for the benign failure. The scales of justice tilt again in the wrong direction, but given past practices I guess we should not be surprised.

  5. It’s the money. Easy money. That’s why the IRS is pushing OVDI (I couldn’t find the following scene from Terminator II in English, but at the end, John Conners waves the money and says, “Easy money”!

  6. “FAQ 52.2 states: Taxpayers who are foreign residents and who were unaware they were U.S. citizens,…. is entitled to the reduced 5% offshore penalty.”
    As a Canadian who thinks and feels that I cast off my US shackles decades ago, I strongly feel that people like myself, and the Accidental Americans should not have to enter any OVD program, should not even have to worry about any of this crap. What I want (and I know I will never get) is a statement that those of us in this situation have no obligation to the IRS for anything, whether now or in the future. I don’t want a ‘low’ 5% penalty, I don’t want ‘amnesty’ as if I’m a criminal, I want recognition that since I have nothing to do with the US, I have no obligation of any sort to the US. I reiterate a common theme on this site, I just want to be left alone to live my life in my country of choice, without stressing over the IRS ruining my life. However, since this IS a ‘fundraising event’, that will never happen.

  7. @outraged FAQ 52 shows that the IRS is acting in bad faith. They opened up the program to people who shouldn’t at all be in it, and are willing, however, to take only 5%. This is frightening extortion. If you didn’t know you were even American, the problem is that the definition of a US person for tax purposes is problematic, not that you should owe even one red penny to the US treasury. It is unmitigated evil and extortion.

    I watch the entire series of the Sopranos. Even Tony Soprano was not infrequently more generous and forgiving than the IRS.

  8. @Petros. Absolutely.
    Extortion: “Illegal use of one’s official position or powers to obtain property, funds, or patronage.”
    “An excessive or exorbitant charge.”

  9. First it must be remembered that every single case is factually unique. Our firm has been advising people in this area for years and just like the OVDI program’s “one size fits” all approach does not work, there is no blanket rule which says a quiet disclosure is never appropriate.

    Yes, a lawyer’s first obligation is to vigorously defend his client and advise the client of all permissible approaches to a given problem, but that doesn’t mean the client’s papers are going forward with my name on them if he chooses a quiet disclosure. Why? Because the IRS has said not to do it this way and if your license to practice before the US Treasury depends on how well you follow the published rules, you don’t play fast and loose with those rules.

    And while the IRS is not above the law, and any practitioner is free to challenge the IRS in court, the sad truth for people who go down that road is, if you are spending your time and money taking the federal government to court, you have already lost before you even begin.

    There is one purpose for a quiet disclosure in the offshore arena, and one purpose only: to try to fool the government into thinking that everything is just hunky dory. It says in effect, “you don’t have to examine me, thank you. Just move on to someone else. I have already decided I am right so don’t waste any time on me.”

    A quiet disclosure is a deliberate attempt to deceive the government to avoid the possibility that someone with a statutory duty to do so, might want to take a closer look and see perhaps if your so-called quiet disclosure is incomplete in some way in its failure to address all of the tax issues in the year of the amendment or for years preceding the quiet disclosure or even issues in a future year.

    But there is a middle ground which I address in my upcoming July, 9, 2012 article on Tax Justice for Americans Abroad, to be published by Tax Analysts in Tax Notes Today : make a noisy disclosure under Part 9 of the IRS Manual which DOES NOT go through the cumbersome, expensive, maliciously compliant, overly complex OVDI program. Simply put, the taxpayer files his amended or delinquent returns with the appropriate Service Center along with a detailed cover letter from an attorney describing why the OVDI program was not designed to apply to this client’s facts and why the amendments and submissions bring the client in full compliance with the tax laws.

    Under this approach there is no ducking and weaving, no sleight of hand. If the lawyer is sure he’s got it right then “man up” and go through the front door and tell the Tax Man why he is right. Under this approach the client has a far greater likelihood of knowing sooner rather than later whether the Tax Man agrees with his lawyer’s analysis or whether the client is to spend the next three years worrying every time he goes to the mailbox whether his lawyer served him well or whether he pushed him down the wrong path.

  10. I think it’s a uniquely “IRS mindset” that something is impermissible solely because the IRS doesn’t like it.

    There is no rule against quiet disclosures. If the assertion is that such a rule exists merely because the IRS doesn’t like them, that’s (to use a technical term) way out there.

    I also strongly disagree with the statement that “the IRS has said not to do it this way.” The IRS has emphasized that, if one makes a QD, all of their options (civil and criminal) are on the table. And they seemingly have tried to intimidate people who probably have no business being in the program into joining for fear that the IRS will assert the worst, regardless of the true facts. But nowhere has the IRS ever said “not to do it this way.” And nowhere has the IRS articulated any rule that would be violated — by either a taxpayer or the taxpayer’s tax advisor — if a QD is made.

    If the assertion is that IRS preference constitutes a rule that taxpayers or their advisors must follow, I’m in utter shock that anyone could actually believe that.

  11. @Just Me, great post, as always. Man, you’re a good writer and analyst.

    @Steven, I like the approach you’re proposing. I am ready to sign up 🙂

    So what usually happens when bright ideas are proposed on Tax Notes? How long does it take before the IRS officially approves them and make the appropriate recommendations?

    The uncertainty is killing me. I want to make it right, but not through OVDI.

  12. @Justme, I think you’re spot on. At least I share the same thoughts and I thank you for taking the time to put them into words.

    It’s clear that the IRS is not interested in encouraging compliance as that would require an investment of resources for little return. It’s much easier and cheaper to pluck the low hanging fruit and look like you’re making a success of catching the bad guys. The average American seems to be satisfied with this because it feeds the American exceptionalism delusion that US citizenship is worth a premium. By some miracle, should citizenship based taxation be eliminated I suspect we’d be hearing from these same people how great America is for upholding freedom and liberty for all Americans.

    For the record, our lawyer offered several options before we entered OVDI:
    Do nothing, file for 2011 only and hope for the best, make a quiet disclosure, or enter OVDI.

  13. @ Steven:

    Re: QD; I am not sure what is meant by quiet disclosure. But I am aware of this: when I first read about FBAR in the 2010 Income Tax Information Booklet, the IRS said that if you’d never done a FBAR and you had accounts, that you should file back-dated FBARs with a letter of explanation, and that it was possible that instead of fines a person could get a letter of warning.

    The fact that the IRS actually encouraged people to do this, suggests that something at least akin to QD was actually encouraged? Or is this what is called noisy disclosure. I’ve been reading about this whole b.s. for about two years now, and even I am confused by the terminology. Here are my working definitions:

    (1) OVDI— go in the front door, and pay 27.5% extortion fines of your financial wealth, including the value of your principle residence (if it is abroad).

    (2) Go-forward disclosure–report your accounts from this point forward, forgetting about the past. This may lead to questions (hence an audit) about when these accounts originated and where the money came from.

    (3) Quiet Disclosure – filing going forward, and sending back dated FBARs–with a letter saying that you were heretofore unaware of the filing requirements. If the IRS doesn’t accept your reasons, then they have all the information that they need to assess up to 300% fines of your financial wealth.

    (4) The Petros Approach: Renounce your citizenship, tell the IRS to put their FBARs where the sun don’t shine, and live happily ever after, keeping your real estate and retirement funds fully intact. This approach works if you live in Canada or some other country which has promised not to collect taxes for the IRS from Canadian citizens and not to collect FBAR fines ever. It requires no legal fees and few filing fees if any. It may result in permanent exile because the United States is a barbaric country and a pariah among the nations.

    (5) Full-ostrich approach — just keep living your life as if this nightmare wasn’t even happening; don’t file taxes and don’t file FBARs. Or if you file your taxes, pretend that FBARs don’t exist. This option may be impossible with FATCA around the bend.

  14. @Petros

    So there was no mention of FBAR in the 2009 or prior tax information booklet.

    In a strict legal sense from the perspective of FBAR renouncing is a quite valid legal solution even from the sole perspective of US law. FBAR has a six year statute of limitations thus for someone lets say who renounced in 2011 and have had an FBAR due on June 30th 2010 the clock is ticking quite fast for the US government to do anything at this point nor do I think they would at this point(My sense is they would want to go after someone who they could nail for both current year and ALL past six years not someone for three years pre 2010). I also think it might be good idea for anyone who renounced in 2011 to take an automatic extension for the 2011 return and Form 8854 in advance of June 15th. Again run the FBAR statute of limitations clock out some more. Are they going to want to spend late 2012 and early 2013 dealing with FBAR issues from pre 2010 of people who are no longer US citizens and haven’t been citizens for almost two years.

  15. @Tim I was just mentinoning when I first heard about FBAR and how the instructions said to remedy the situation. Perhaps my understanding is incorrect: that the filing of late FBARs with a letter is what Steven calls a noisy disclosure and quiet disclosure is just simply to file without any cover letter?

  16. @ Just Me
    “If I had been more diligent in my reading recently I would have seen your comments …”

    This is a very prolific forum (mea culpa lately too) and it’s nearly impossible to read everything. I’ve taken to doing screen shots of the Recent Comments section just so I can keep track of where I left off. I’ve had the time recently to almost keep up here but with all your travels we knew you wouldn’t be able to, nor were you expected to, keep up. We just value each and every one of your contributions whenever you find time to graciously give them … and for heaven’s sake sleep is important too!

  17. @petros, I heard that a cover letter only draws more attention to your returns ..Who knows what’s best??? I think it is a gamble any way you look at it.

  18. @ saddened — draws more attention, and that is perhaps why , I think, Steven is calling this a “noisy” disclosure. But doing the late FBARs is noisy no matter what. They are going to see that their late, right? Or do they not even bother to read the envelopes. Sort of like how the Ark of the Covenant, crated, in Area 51, was still there in the last Indiana Jones movie. Your FBAR is just sitting somewhere in its original envelope unopened in with millions of other unopened envelopes. Who the knows what the government actually does with this crap?

  19. @all. Please see and read carefully, Internal Revenue Manual Part 9, (criminal investigations) specifically, section 9. 5. 11. 9 on Voluntary Disclosures which has been a Justice Department/IRS policy for decades, long before anyone ever dreamed up the so-called offshore voluntary disclosure initiatives. This section describes what a noisy disclosure is. Any time you file an amended or delinquent tax return with the IRS that includes a letter describing how and why you screwed up, “just found out” about something, or just woke up from a coma for the past 20 years, that is a noisy disclosure.

    @Petros, that Booklet you read in 2010 about FBARs was describing a noisy disclosure and it went on to state that “if you owed no tax” for the years you should have been filing FBARs you may qualify for simply a warning letter.

    @all: once again I find myself in the role of “contrarian” on the pages of the IBS society but here goes again: you can think and say all you want that the IRS just slaps penalties around haphazardly because it’s a slick way to attack the budget deficit but it is simply not true. As Billy Pilgrim said over and over again in Kurt Vonnegut, Jr.’s Slaughter House Five about the fire bombing of Dresden, “I was there! I saw it with my own eyes!!” The IRS doesn’t do that. It may be a mindless, muscle-bound bureaucracy but it NEVER adopts or pursues a policy just because it is a revenue raiser. They do that on Capitol Hill and perhaps at Treasury but not at the IRS. They may be bone-headed, insensitive, unfathomable, and impossible to deal with, but it’s entire corporate culture is based on how to carry out its mission of somehow trying to figure out what the hell Congress was trying to say when it enacts, what it calls “tax legislation. ”

    Here’s an example of a quiet disclosure: let’s say a taxpayer has been earning $100,000 a year for the past ten years from a card game he runs out his house which he never reported on his tax returns. He loves the game and has no intention of ever giving it up so he decides to just start including the $100,000 a year he makes from the game from now on into the future. Here’s another example of a quiet disclosure: the guy prepares amended returns for the past three years including the $100,000 per year as “other income” and files one of them with the Ogden Service Center, a week later he files another one at the Fresno SC, and a week after that he files the third one at the Austin SC. He does this because he couldn’t find anything in the Internal Revenue Code, the Regulations or the Manual in which the IRS has said not to do it this way. He also does it because he knows the IRS thinks amended returns are just fine and his tax advisor tells him there is no law which says your returns have to be filed at the same place every year. Also, the Petros Approach may be a fine idea for some folks who are not expecting any social security payments, annuities from the US, or other fixed and determinable regular payments from a US source, but for a dual national who is depending on a future income stream from the United States, renunciation or telling the IRS to go pound sand may not be the smartest thing to do once the anger and rage subsides.

    @Christophe: there is no direct connection between floating out bright ideas in Tax Notes and anyone at the IRS either reading them or suggesting that they be considered. There is a higher likelihood that my article about tax justice for Americans abroad may be the butt of a bunch of jokes by a group of IRS guys sitting around their desks with their feet up at lunch time.

    That said, for all its faults, this is still a free country and if I get pleasure out publishing an article telling the whole world that the IRS is wearing a funny looking hat I can do that and maybe someone outside the IRS who knows more big shots than I do will also read it and think perhaps I have a good idea.
     

  20. (5) Full-ostrich approach — just keep living your life as if this nightmare wasn’t even happening; don’t file taxes and don’t file FBARs. Or if you file your taxes, pretend that FBARs don’t exist. This option may be impossible with FATCA around the bend.

    WHY NOT? ASSUMING THAT THE BANKS WILL BE ALLOWED TO VIOLATE CANADIAN LAW, WHAT HAPPENS EVEN IF YOU ARE REPORTED TO THE IRS? (WHICH I DOUBT WILL EVER HAPPEN IN CANADA). WHAT IS THE DIFFERENCE BETWEEN WHAT PETROS DID AND THIS OPTION?

  21. Fatca guidelines indicate only an electronic search for US identity on accounts less than one million dollars.

  22. For Canadian Minnows (citizens and residents) who are slip sliding into the IRS maelstrom …

    When they throw complexities at you, why not fight them with simplicities? (Here, “kind” Sir IRSS is my 1040 and my best attempt at a FBAR and penalties you say? … I don’t think so!) You always have the border shield between them and you. The worse they can do is to turn your shield into their barrier and that’s a risk you might have to take. When you know you’re innocent, you shouldn’t have to accept their insistence that you are guilty just because you haven’t proven otherwise to their satisfaction. To take this even further, the least affected by having complexities thrown at it is a dishonest Whale because it has the size and resources to slough them off and an inch or two off its thick hide is barely noticeable; whereas honest and often unaware Minnows are easily drenched by complexities and take an inch or two off their thin hides and they are mortally wounded. Another advantage a Whale has is that if things get to be more punitive than it is willing to bear it can swim off to another ocean and live a happy life; whereas Minnows do not have the fin power or the finances to swim to another ocean and they face a miserable life with the IRSS sharks forever circling them BUT just remember, as long as the Canadian government doesn’t throw them to the sharks, they can only catch Minnows if they cross the border. And that net they “say” they set up to catch the Whales might just have so many tiny openings in it that a Minnow will successfully cross the border too … maybe … if it has to, I guess (borrowed that from Red Green — Canadians will get it). If a Minnow had to during a family emergency for instance take a run at the border and did get caught I know whose side Canadian public opinion and support would fall on. We’d be there to bail that poor Minnow out, for sure. We’d even clang our Tim Horton’s cups in protest against the bars of the border gates.

    This is all just my opinion, still subject to change, not applicable to every person’s situation, nothing legal (I don’t even know a lawyer). Hope I got all my disclaimer ducks in a row.

  23. @Joe Smith

    The key thing I have taken away from all of Flaherty’s(Canada’s Finance Minister) communication to date is it is basically impossible for the US to collect tax and penalties on Canadian citizens with no income or ties to the US. Flaherty I think keeps saying this for a reason which is that is basically what this whole thing will come down to at the end of day. Don’t assume the US Congress is not capable of imposing tax law that is basically impossible for the IRS to implement. If you can’t actually collect tax in Canada on Canadian citizens FBAR, FATCA et all aren’t worth the paper they are written on. Generally the first rule of imposing taxes is to impose those you can collect. I do think we will hear more at some point in the future from both Governments although I would not assume it to be at all a final solution without legislative changes in the US(which I wouldn’t hold my breadth for)

  24. @ Steven, thanks for this explanation. I’m revising the definitions as follows:

    (1) OVDI— go in the front door, and pay 27.5% extortion fines of your financial wealth, including the value of your principle residence (if it is abroad).

    (2) Quiet Disclosure (a.k.a Go-forward disclosure)–report your accounts from this point forward, forgetting about the past delinquencies in filing of either FBAR or taxes. This avoids negative consequences of FATCA, but it may lead to questions (hence an audit) about when these accounts originated and where the money came from, and what income the account holder failed to declare in the past.

    (3) Noisy Disclosure – filing going forward, and sending back dated FBARs–with a letter saying that you were heretofore unaware of the filing requirements. If the IRS doesn’t accept your reasons, then they have all the information that they need to assess up to 300% fines of your financial wealth.

    (4) The Petros Approach: Renounce your citizenship, tell the IRS to put their FBARs where the sun don’t shine, and live happily ever after, keeping your real estate and retirement funds fully intact. This approach works if you live in Canada or some other country which has promised not to collect taxes for the IRS from Canadian citizens and not to collect FBAR fines ever. It requires no legal fees and few filing fees if any. It may result in permanent exile because the United States is a barbaric country and a pariah among the nations. This may also be problematic if one expects Social Security or other US source income.

    (5) Full-ostrich approach — just keep living your life as if this nightmare wasn’t even happening; don’t file taxes and don’t file FBARs. Or if you file your taxes, pretend that FBARs don’t exist. This option may be impossible with FATCA around the bend, and it could force the person to chose one of the other four options.

  25. No doubt this is a trap. The IRS knows that Amerians Abroad have Earned Income Exclusion and Tax Credits. So most of them would not have to pay any taxes after filling all these papers and reports. Then they created this trap: penalties for not filling the reports that they now know about. Even the IRS Tax Adviser knows this. Very unfair. Things that are done as a desperate way to collect money from innocent people. Tjhis is not the America I thought I knew.

  26. @ Joe, Tim The next thing would be to implement an arrest at the border approach. I.e., if the IRS receives the account information, they then assess penalties. If the person refuses to pay, then the IRS or appropriate agency issues an arrest at the border warrant. The person is held in a US prison until they pay every last farthing of what they owe. This would be (6) The Chuck Schumer Option.

  27. @Joe, Petros, et. al: I met with my branch manager at TD yesterday. She scoffs at the idea that FATCA will proceed in Canada. She thinks there are simply too many reasons why it can’t and shouldn’t be done in Canada. I hope she’s right–but I suspect she may be doing her own full ostrich–or maybe she’s just naive to still believe Canada won’t sell out to the Americans..

    She mentioned Financial Consumer Agency of Canada. (http://www.fcac-acfc.gc.ca/) Has anyone heard of them? I’m sure Tim has. Does anyone know if they could or would help us resist FATCA?

  28. @ Blaze, Things have changed since April 2011. I talked to my branch manager and I was informing her about FATCA. She’d never heard of it. My request was, “Please treat me as a Canadian and not as American. Can I have your assurance that you will no longer treat me as a Canadian?” She got back to me after speaking to legal. They responded that they would follow the bank act of Canada and would you please put your request in writing. I said that could lead to a paper trail showing that I was a wilful violator of FBAR. Now, I don’t care. The Canadian government has said “no” to FBAR fines (this was the announcement that made me come out in the open), so I am now arguably the world’s 3rd most famous renunciant, after Eduardo Saverin and Superman. I’ve said to the IRS a big Clint Eastwood, “Go ahead make my day!”

  29. @ Saddened, I have few masochistic tendencies. When I realized how dangerous filing in the US had become, I had already by several months, started the process of relinquishing my citizenship. I had been filing until 2009 taxes (which was 2010) when I first learned about FBAR. Then only after renouncing did I file late 2009, 10, and on the advice of Tim, I am waiting to the last moment to file 2011 with my 8854. Hopefully, I will not be a covered or specified expatriate, because while I agree with Joe, I still have family in the US. I won’t cross the border if they plan to arrest me though.

  30. ARE WE SAFE WITH LESS THAN ONE MILLION AND NOT CROSSING THE BORDER? sorry for sticking caps!

  31. @ Joe: What is your definition of safe? You mean, do the full ostrich, and cross the border? Then, along comes a FATCA, and low and behold your banks decide they want to continue investing their other clients money in the US so they sell the rest of us into slavery. Then you get a fine, you refuse to pay, they put out the arrest warrant. That’s the FULL SCHUMER option (Schumer for POTUS, anyone?).

    Is it safe to cross the border now? Sure and no. My neighbor’s family had a car accident. 30K for heli-evac. $140K hospital bill. His father-in-law was uninsured. Is that safe? For now, I think the tax issue is less worrisome than the car accident scenario. I’m just saying its probably best to be insured to the hilt if you decide you want to go to the US.

  32. @Petros: You say it best: “Get your ass and your assets out of US.” Now, there’s a great quote for the Economist, Bloomberg’s or Wall Street Journal. I wonder how Schumler and Casey would respond to that.

  33. @Petros, If I may: I think most people would define Quiet Disclosures as trying to correct past mistakes by sending amended returns, but without explanations, and past FBARs with or without a reasonable cause letter. That goes along with fling correctly from now on.

    The Go Forward approach as defined by Jack Townsend is filing correctly from now on, but not trying to address past mistakes (i.e not amending anything or sending delinquent FBARs). This is slightly different.

    By threatening people of harsh punishment if they try QD instead of going into OVDI, the IRS is I think loosing a lot of potential “easy money”, as it’s been mentioned before.

    Regarding OVDI penalties assessed to minnows, I am surprised we haven’t heard of a single case of lawsuits against tax preparers.

    @Steven: after having worked 30 years there, I thought you might know people and have some influence.
    The depressing thing is that they know about the issue, as it was raised by Nina Olson. Lawyers like Phil Hodgen have met with them and raised it as well. And yet nothing is done to adjust the program or provide better guidance.

  34. @Blaze

    I know all about the Financial Consumer Agency. They administer a big part of the law that doesn’t allow for compliance with FATCA and yes you might want to contact them.

  35. @Petros

    My feeling at the very least is sending in a whole bunch of returns(lets five full years) all at once probably brings attention to yourself whereas if you are only a year or two behind(and have been filing for many years) sending each one in one at a time somewhat staggered apart is a better strategy. Someone such as yourself has until July 15th plus whatever time you can get with an automatic extension. Take advantage of it. Don’t use E-File or anything that makes their job easier. Send it in snail mail. Make them work.

  36. @Petros

    My hunch is a lot of renounciants are sending in form 8854 with five years of back returns. While this strategy has been recommended by many I suspect it does generate a certain amount of attention. Someone just sending in 8854 with a 2011 return who has filed in the past generates far less attention. Basically if you send in five years of back returns you are admitting you haven’t been compliant for a long time notwithstanding the fact you aren’t a citizen anymore. If you just have a 2011 return and form 8854 they have to go back and check your previous returns which is “WORK” for them.

  37. @Tim: Thanks. Do you have any suggestions as to who I should write to at FCAC (name, position or department)?

    My Canada Post letter carrier must wonder what in the world is going on with all these letters coming to me from Ottawa. She tried to deliver an Express Post letter from Privacy Commissioner’s Office on Friday, but I was at TD (This is consuming my life!), so I will get it on Monday.

    Once I have that letter, I will post information on the Privacy Commissioner thread.

  38. @ Tim Yes. I recommended the same in an earlier post: http://isaacbrocksociety.com/2012/05/08/last-date-for-8854-filing-is-june-15-2012/ I almost sent my 2010, 2011 and 8854 together with another bit of information they requested for 2009. Finally, I decided the extra stamps to send the stuff separately was probably a much better idea. Then, the 8854 goes to Philadelphia not Austin, and so it made sense to send 2010 to Austin, as per normal, and the 2011 and 8854 to Philadelphia, and wait until June 15 at the earliest to send it.

    I think your idea of sending everything at a different times is an excellent idea too; interesting that Steven suggested sending tax filings to different addresses. Thanks Steven! That’s a brilliant suggestion!

    If they are going to make life hell for minnows then the least we can do is repay the favor: we should consider how we can stretch the resources of the IRS as thin as possible, and create the least amount of ease for them. Especially, we should never file electronically.

  39. @Blaze

    http://www.fcac-acfc.gc.ca/eng/resources/publications/banking/TSOpenBankAcc-eng.asp

    This is their Mailing Address below:

    Financial Consumer Agency of Canada
    427 Laurier Avenue West, 6th Floor
    Ottawa ON K1R 1B9

    http://www.fcac-acfc.gc.ca/eng/about/commissioner/index-eng.asp

    The 200,000 CAD penalty per violation in the link above is mentioned a lot in the FATCA comment letters the Canadian Bankers Association sent to the US Government.

    Your letter should be probably be directed to Ursula Menke who is the Commissioner of FCAC.

    http://www.fcac-acfc.gc.ca/eng/about/commissioner/commissionerBio-eng.asp

    The legal authorities of FCAC are different from that of the Privacy Commissioner’s so it might be a good idea to send something to Ms. Menke.

  40. @Tim, Others: One of the things I’ve learned recently from TD’s letter to DOT and IRS is that even if Canadian banks violate Canadian law to close the account of a Canadian citizen or resident who will not give consent for information to be forwarded to IRS, Access to Basic Banking Services requires them to reopen an account with proper ID (none of which includes a US or other foreign birth certificate).

    Tim, you probably already knew that from a legal aspect, but this was new and very interesting information to me.

  41. @Petros

    If Philadelphia is not a normal destination(and it doesn’t appear to be. Austin and Charlotte are the main places for overseas returns arriving by snail mail) I would definitely NOT send them a bunch of regular returns. It would be all too easy for them to decide anyone sending in a bunch of back returns with their 8854 to Philadelphia wasn’t compliant prior to renouncing and subject them to “special treatment”.(Not that I think at this point in time they are at all interested in renounciants). Now is there actually anything that says your final 2011 1040 has to be sent to Philadelphia with 8854 or could that be sent to Austin too. I am looking at the instructions for form 8854 right now and I actually have a feeling your 2011 1040 should be sent to Austin again and your 8854 should be sent to Philadelphia separately.

  42. @Petros: good job. Some refinements.

    (1) correct except add, ” try to opt out and argue reasonable cause. ” Also, you do not have to include your home in the 27.5% penalty base if it is not in a trust, corporation or other entity and it was not purchased with assets which are related in any way to tax avoidance.

    (2) correct except add the variations I added above earlier today about trying to trick the IRS computers by staggered filing of multiple returns and selective filing of amended returns.

    (3) correct except the FBARs are not back dated, they are dated as of the date of filing. Rather they are delinquent with a letter explaining why they are late. Also, once the IRS proposes anything close to 300% in penalties, Mopsick Tax Law represents the taxpayer pro bono all the way to the Supremes if necessary,

    (4) essentially correct except for the part about us being a barbaric and pariah nation. Rather, I would say we are a great nation made up of well-meaning, baseball loving, honest, hard working, freedom loving, God fearing, hepful of strangers, willing to “get invovled”, caring, decent people with the prettiest girls on the planet, with a government which doesn’t always get it right. 🙂

    (5) correct.

    Respectfully submitted,
    30 Year IRS Vet

  43. @ Steven, thanks.

    @ Christophe. I agree there is some confusion and perhaps we should have (a) and (b) definitions of Quiet disclosure.

    @Tim, the 8854 instruction say to send it together with your final tax return, and the due date is when that final tax return is due. (I read them a couple of weeks ago, and I am working from memory here).

  44. What Happened?!? Am I on the wrong website?!? Petros is actually thanking Steven and not challenging him on his American hype?!?

    Gotta Love Those Beach Boys!

  45. @Christophe: anything with a letter of explanation is a noisy disclosure and not a quiet disclosure. But God help you if you write something in bad faith, something false or misleading, or something with crack pot or “make my day” theories or screeds.

    Also, Phil and Nina haven’t given up! It takes time to get the U.S. government to change its position on something but it can be done. That’s why we still get to call ourselves a participatory democracy albeit a flawed one. Also,

    @ Petros: you remain in good humor which is most appreciated but fort the record, I was only recounting a common practice well-known from my law enforcement days with IRS and certainly not something anyone wants to “try at home.”

  46. Look. If I have less than 1,000,000 in bank accounts then only an electronic search will be done and I am not detectable by FACTA.

    If I do not enter the USA then I will not be identified as a US person by anyone who cares End of story.

    Why is it so difficult for people to see that?

    What am I missing?

  47. @Steven – thanks for taking the Legal Counsel role with the ACA. And thanks for dropping in here to keep in touch.

    @Petros – Grr.. I like the videos, but what a distraction! Maybe we need an “off topic” area that’s easily accessible. Me, being the natural clicker, watched the video and is so addicted that he clicks on the other related videos.

    @All – I hope someone that is contemplating being an American reads this thread and sees the unecessary complications with being a US Citizen. Like I keep saying, we need to prepare this sort of information for would-be Americans in PDF form in multiple languages. I’ll pay for the Spanish and Portuguese translations with my dime.

    @Senator Schumer – What I said may seem un-American, but really what I want is an America that is more compatible with 21st century ideals (facts really). People like you do nothing but ADD TO an extremely complex and vague set of rules. If anything, things need to be simplified. The first step would be to abolish extraterritorial taxation. It OBVIOUSLY isn’t working, and your agitations will only make it worse.

  48. @blaze, For the record, I’ve always been very happy when Steven has participated, perhaps especially when he disagrees with me, as well as the other contributions by Michael Miller and Roy Berg. Steven’s participation has been most interesting from the point of view of his insider knowledge of the IRS. I have really appreciated the debate, sometime apparently heated between Miller and Mopsick, because it instructs everyone who is struggling with what to do. We can see here two experienced lawyers disagreeing, and this will make the Isaac Brock blog a valuable resource.

    Now we could give Steven the boiled frog award for the pro-American comments, but what the heck. He’s come a long way towards really appreciating our side, he’s joined ACA, and he’s even writing articles that help bring Expats, the “benign” actors, closer to fairness.

    @Steven, as for the common practice of sending forms to different addresses–I’m playin’ with you. I know you weren’t recommending it. However, I think in my case, sending the 2010 tax to Austin, and 2011 with 8854 to Philadelphia is as per instructions. So eventually I decided that it might also help contribute to the confusion too. Win-win.

  49. @30 Year IRS Vet – You write “Also, you do not have to include your home in the 27.5% penalty base if it is not in a trust, corporation or other entity and it was not purchased with assets which are related in any way to tax avoidance.”

    This is only true if you didn’t move in the disclosure period covered by OVDI. If you did, and had the value of the house pass through your bank accounts however briefly, this becomes the highest value in the account over that period, and the penalty amount is calculated from that. So in effect the home can be in the penalty base.

    I was briefly considering OVDI last August before I realized that this would subject me to something like a C$23,000 fine, even at 5%, which led me pretty directly to a decision to renounce – I don’t need liabilities like that in my life.

  50. @Joe: It’s great for you that you do not need to travel to U.S. I have an elderly mother there in declining health. I will not allow the IRS to deny me the opportunity to spend time with her in her final years. She is no longer well enough to travel here.

    I know other Brockers have their own personal and family reasons (and some even have business reasons) for needing to travel to the US. While I appreciate you think I and others should just simplify our lives and not travel to US, for us it’s not that simple.

    However, after my mother’s death, I will happily refuse to ever again go to US.

  51. @Steven

    Thanks for the great commentary

    @Petros

    Re option 1: The OVDI FAQs at the very least imply (and I believe state) that it is only assets that are “non-compliant” that are included in the OVDI penalty base. “Non-compliant” assets are those that are either:

    1. purchased with money that was never taxed;

    2. generating income that is not being taxed

    Therefore, there are arguments to exclude from the penalty base: your principal residence, balances in checking accounts or any other non-interest bearing account, RRSPs, etc., and certainly most assets that are not income generating if the money used to buy them was “after tax” money.

    The FAQs define “non-compliant” assets in terms of tax (Title 26) non-compliance. I don’t non-compliance to mean FBAR (Title 31) non-compliance. I would be interested in getting Steven’s and Micheal’s thoughts on this.

    If I am right on this, there could be situations where the “in lieu” of penalty could be less than the FBAR penalties. In other words, if there is no asset that is related to tax “non-compliance”, then the asset should not be part of the penalty base at all.

    In the case of FBAR, fines can be levied regardless of the tax compliance status of the account.

    This was an argument that was made in relation to the RRSP issue here:

    http://isaacbrocksociety.com/2012/01/12/canadian-rrsps-and-the-ovdi-penalty-base/

    Look at FAQ 35 to see what the IRS says about the penalty base.

  52. @renounce and @Halifax: Renounce has it right. Although I have yet to have a case where I had to argue that the proceeds of the sale of a personal residence should not be included in the penalty base, I would have no problem making that argument and I would expect the IRS to agree.

  53. If You’re Wondering Why China Just Unleashed A Slew Of Anti-American Headlines

    Peter, great link really. But shouldn’t we create another topic for this? Some of the points have merit, but others… not so. I would really like to discuss some of these matters, but not to hijack Steven’s interaction here. Feel free to move my comment, if you decide to create a post.

  54. @30 Year IRS Vet-
    “I would expect the IRS to agree.”

    Why? It seems pretty clear in the FAQ that the penalty is applied to a percentage of the highest value in the accounts under the period covered. If the taxpayer had the bad luck to have a real estate transaction in that period, then sucks to be him.

  55. @steven, what do you call an OVDI submission with a letter of explanation, a deafening disclosure? My lawyer warned against it, but in the end sanctioned it as he liked the tone and its “succinctness”.

  56. @Halifax: we don’t yet have enough data to get a read on how the IRS is handling facts like you presented above. That said, there is no way I would advise a client to just roll over if the agent presented me with a take it or leave it position on including the proceeds of a personal residence in the penalty base. I would litigate the issue as an IRS abuse of discretion if an opt out failed to produce a fair result. Remember there is a stream of cases heading for litigation from campers unhappy with the results of their opt outs but it is simply too early to tell what those litigating vehicles look like and how the IRS decides to treat its customers who refuse to give up the fight. Once these cases get to the open sunshine of District Court litigation, we will get a feel for how well the IRS is doing its penalty administration job.
    The IRS will be held to a standard of reasonableness in its administration of FBAR penalties by the federal courts. The IRS doesn’t get to say “you lose automatically because you had bad luck with the numbers for one of the 8 years. ”

    @bubblebust: not sure what you mean. If you are doing the OVDI program, part of the mandatory submission requirements is the inclusion of what the IRS called the Optional Letter when the program was first announced in 2009. The format is still on the IRS web site the last time I looked and includes a checklist of things to cover like disclose of the source of the funds, who you dealt with at the banks so CID can use it for leads in prosecuting foreign bankers who traveled to the US to encourage people to put money offshore, and a schedule showing 8 years of unreported income attributable to the offshore next egg. That said, it is always a good idea to be succinct in responding to questions from the IRS concerning illegal offshore banking but as a practical matter, in the world of OVDI voluntary disclosure practice, the IRS has every right to ask whatever it wants until it is satisfied simply because they are agreeing to give up their right to open you up to the slow torture of an exhausting multi-year year criminal investigation as well as the 75% civil fraud penalty. If you get too “succinct” with them they just might tell you all deals are off and you can plead the 5th if you want because you’re going down.

  57. @Broken, I agree with your assessment 100%. If, for example, you sold house 1 and bought house 2 during the VD period, temporarily increasing your account balance from $200K to $1,200,000, you can absolutely expect the IRS to treat your max balance for penalty purposes as $1,200,000. After all, that IS the max balance.

    If you wanted to avoid paying a percentage of the $1,200,000 in this scenario, you’d need to opt out. That’s a downside to seriously consider BEFORE (pardon the all caps) going in to the program, depending in large part on your (and your lawyer’s, assuming you have a lawyer) assessment of your criminal exposure. If there is real criminal exposure, then joining the program and opting out (if an opt out is determined to be beneficial in light of all risks involved) may make sense. If the facts suggest no material risk of criminal exposure, and IF I know I’d end up opting out anyway, I’d probably avoid the program like the plague.

    As a general rule, I find the idea of (1) paying fees to join the program, (2) paying fees to opt out and be audited (with the potential of paying fees for litigation that are themselves life-changing), (3) and assuring IRS scrutiny (which is otherwise uncertain) though such costly process, to be less than appetizing.

  58. @Michael

    This thread has mentioned two things and I think we need clarification on what we are talking about under OVDI:

    1. The principal residence itself -as a stand alone entity – not sold.

    2. Proceeds from the sale that may be in a bank account.

    Let’s go with the OVDI FAQs – FAQ 35 in particular which defines the penalty base in terms of non-compliant assets. A non-compliant asset is one that was purchased with money that was not taxed or untaxed interest/income from an asset whether the asset is compliant or not.

    1. Principal residence (and this is where Petros started) – as long as it was purchased with “after tax” money – the money used to purchase it was declared (and I suppose this argument is strongest for those who have been filing 1040s but not FBARs) – should not be included in the penalty base. The principal residence does not meet the test of non-compliance. This is what I was originally responding to.

    2. Say the house is sold during the OVDI penalty period. It would seem that there are two issues. At this point we are dealing not with the house but with the proceeds of the sale. There are three questions that need to be answered at this point:

    First, is there a taxable gain from the sale of the house – if so, then the proceeds, if not reported on a 1040, might not be tax compliant, in which case the proceeds might be part of the penalty base whether those proceeds are in a bank account or not.

    Second, were the proceeds used to earn income? For example, an interest bearing account. If so, then the question is whether the interest was reported. If so, then there is tax compliance.

    Third, if the proceeds were put in an interesting bearing account and the interest was not reported, then there is non-compliance and a problem.

    I don’t read the FAQs to mean that the balance of any bank account is to be included in the penalty base. The reason is that the mere fact of money existing in a bank account is not in itself evidence of non-compliance. For example, how if (after tax) money is briefly put into a non-interest bearing checking account, can the account be a non-compliant?

    Now, I realize that I am viewing the issue of non-compliance from the perspective of Title 26, but that is what the FAQs seemed to be based on. The OVDI penalty is “in lieu” of other penalties. It is not calculated the same way as other penalties. It focuses on assets that are non-compliant from a tax perspective. Therefore, I would argue that Title 31 non-compliance (not filing FBARs) is NOT what is contemplated in the OVDI penalty base, I acknowledge that this may be wrong. But it is my starting point. Look at it this way: if “non-compliance” includes FBAR non-compliance than each and every RRSP would be a non-compliant asset.

    Therefore, (and I looking forward to all comments on this point), I think it is a mistake to simply presume that any funds in a bank account during the OVDI period would be included in the penalty base.

    This is of course a completely academic point because only a criminal, or somebody who was following bad legal advice, or somebody who could demonstrate a clear financial justification , would enter OVDI.

    Looking forward to your thoughts on this point.

  59. @Everyone

    Here is a very “academic” question but one that is somewhat relevant to some people. Is there any reason under any circumstances to go into OVDI if all non compliance could be demonstrated to be pre 2003 or lets say even earlier as in pre 1995(which is disregarded under the program anyways). I am thinking in this situation of people of renounced/relinquished their citizenship back in I don’t know 1996 but weren’t filing prior and didn’t comply with the ten year expatriation tax regime. By this point in time the ten year “window” has clearly closed and they have now no longer been a US citizen for many years(FBAR wouldn’t seem to apply to anyone who isn’t a citizen). However, their is no statute of limitations for non filing in any particular year even if it was 25 years ago. Again very academic question but I am hoping were can develop some answers for a large segment of the Brock audience.

  60. @Renounce, I agree that if the house was purchased with after-tax funds, the gain (if any) is reported, and the proceeds go into a non-interest bearing account, neither the house nor the proceeds should be included. Having said that, I would imagine that, typically, the sales proceeds go into an interest-bearing account, so so much for that.

    Also, what if the funds used to purchase the house came from an interest-bearing account where the interest was not taxed? (That can’t be unusual.) Will the IRS take the view that the house (or, perhaps, the part of the house attributable to untaxed income from the account) is therefore a foreign asset related to noncompliance? One would hope not, but it’s difficult to know for certain.

  61. Whoa! Michael! Mike! Mr. Miller!! You want to do what now in @Halifax’s case? “Avoid the program like the plague” and do what!?? Stagger-file returns all over the country? Full ostrich ? Quietly disclose amended returns and delinquent FBARs ? Just not disclose the house sale at all on his returns because you have concluded that the IRS doesn’t need to know about it?

  62. Whoa! Steven. I’m sure you’re fully aware of all of the legal options for those who elect not to join the program. All of them involve full compliance going forward and none of them involve filing an inaccurate return.

    As you well know, he would be acting in an entirely permissible fashion if he, for example, (1) did nothing more than comply going forward, (2) accurately amended some number of old returns (and complied going forward) without entering the program (QD), or (3) made a “statemented” disclosure of the kind that you have described previously. Obviously, taking any of these approaches presupposes the he and his lawyer have carefully considered the likely/possible penalties (both criminal and civil) that could apply outside the program.

    He could, of course, do a voluntary disclosure and then opt out. That could be lucrative for his attorney, but might not be good for him.

  63. What I still do not understand is how one can use the term “statutory duty” in the case of a resident abroad, and especially in the case of someone with the citizenship of the country in which (s)he lives.

  64. Whoa! I’m loving the Steven-Michael exchange. It’s all good. It all helps. Thanks to both of you for being here.

  65. @Michael: Here is the hypothetical we are discussing based in part on @Halifax’s facts. The taxpayer inquires of a practitioner licensed to practice before the IRS under Circular 230, whether he should enter the IRS’s OVDI program but here is the problem:

    There was a sale of personal residence during one of the eight years which he would have to disclose to the IRS. If he goes through the program the proceeds from the sale of the house would be included in the bank statements required to be turned over to the IRS. This in turn, could possibly greatly increase the penalty base under the terms of the program. The house sale proceeds would be subject to the 27.5% tribute exacted by the IRS against the tax cheats the OVDI program was originally designed to bring back into the fold. @Halifax is not a tax cheat. He just doesn’t want any trouble from the IRS and simply wants to know what he should do.

    The practitioner reads IRS publication 523 “Selling Your Home” and reads that while the sale of the house may not be taxable at all or in full, it is still something that has to be reported to the IRS on form 1040 for the year of the sale, possibly on Form 8949 and Schedule D and the lawyer reads enough to know that he probably needs to have a qualified return preparer take a look at it and get back to him. The tax lawyer also knows that there is an issue about whether the value of a personal residence owned outright by the taxpayer has to be included in the penalty base in the event the client elects to do the OVDI program.

    Let’s say @Halifax, at the time of the sale, just assumed it wasn’t taxable and didn’t bother reporting it at all and the return preparer whom the practitioner consults, advises that there will be a small gain and she would recommend that an amended return might be a good idea.

    The tax lawyer advises @Halifax that he doesn’t have to go through the program because he has concluded that @Halifax should not have to submit the proceeds of the sale of the home to the 27.5% penalty. The lawyer says he can “just not worry about it” for now, and try to do a better job filing his returns prospectively. Alternatively, he can just “accurately amend some number of old returns (and comply going forward) without entering the program (QD) “.

    In my humble opinion, I think @Halifax would be getting some bad advice and I think the tax lawyer could be overlooking a few things which should give him pause here.

    Section 10.51(4) “Disreputable Conduct” of Circular 230, includes in the definition, the “(4) [g]iving [of] false or misleading information, or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof, or to any tribunal authorized to pass upon Federal tax matters,”

    As I said above,
    There is one purpose for a quiet disclosure in the offshore arena, and one purpose only: to try to fool the government into thinking that everything is just hunky dory. It says in effect, “you don’t have to examine me, thank you. Just move on to someone else. I have already decided I am right so don’t waste any time on me.” A quiet disclosure under some facts could be construed as a deliberate attempt to deceive the government to avoid the possibility that someone with a statutory duty to do so, might want to take a closer look and see perhaps if your so-called quiet disclosure is incomplete in some way in its failure to address all of the tax issues in the year of the amendment or for years preceding the quiet disclosure or even issues in a future year.”

    I would humbly suggest that a quiet disclosure under these facts would be precisely what the drafters of Circular 230 had in mind when they used the phrase, “participating in any way in the giving of false or misleading information.”

    The client has been advised that an amended return is probably in order. The tax lawyer knows that the client is at risk for the payment of 27.5% tribute if he enters the program. The tax lawyer knows the program has a published protocol for presenting an argument to the IRS that the 27.5% penalty should not be imposed under the appropriate circumstances.

    The tax lawyer also knows the IRS is on record for saying the proper conduct for a Circular 230 practitioner under facts exactly like this is to go through the program and use the opt out procedure. The tax lawyer has no evidence or any basis whatsoever to conclude that the opt out program doesn’t work. The tax lawyer also knows that there is substantial authority for the proposition that if there is no connection between the value of a personal residence and any tax noncompliance, the value of the home does not have to be included in the FBAR penalty asset base. The tax lawyer has no basis to conclude that opting out will not get the client relief from the 27.5% tribute.

    The tax lawyer knows that international compliance is the number one priority of the Commissioner’s current enforcement program. The tax lawyer has concluded that the penalty would be outrageously unfair in this situation so he advises the client to sneak in the back door and get something filed to increase his chances of slipping the return past a GS-5 technician at a Service Center instead of going through the front door and addressing the question head on with people who have been trained in this area and who know what the announced position of the IRS is on amending a return, using the opt out procedures, and applying the mitigation provisions of the IRM with regard to non-willful FBAR penalties.

    Also, how could this possibly be the best advice for the client? At best the client will spend the next three years in terror every time he goes to his mailbox to see if the caper worked or whether the IRS has concluded there is something fishy on that pier in Halifax and they think a chat is in order? Suppose just before the expiration of the three year statute of limitations the client is audited and the agent wants to see if there was any willful failure to file FBARs. I would much rather defeat that argument in an opt out setting than after a notice of audit following a quiet disclosure.

    Also, you can be sure that if the client wants to assert the “reliance on the advice of a professional” defense to the assertion of penalties, you are not going to win that argument with the IRS simply by saying so. The practitioner should expect the agent to ask the taxpayer and his representative to fully document the steps taken by the client and the practitioner to reach the conclusion that a “back door” opinion was the right way to go. The practitioner might find it a bit embarrassing to have to explain why he chose to not advise going through the program when he knew that if the home value was in no way connected to noncompliance in the past it wouldn’t have to be included in the asset base in any event.

    That said, Michael also suggested that I have recommended a “statemented,” disclosure. I have never used that word and I am not sure what it means but I think you mean just invent your own noisy disclosure and submit the amended returns with a good faith cover letter telling the IRS what is going on here. That is a noisy disclosure and should be permitted under part 9 of the Criminal Investigations section of the Internal Revenue Manual assuming the letter is complete, fully discloses all the facts, and there is an agreement to cooperate fully with the IRS.

    I would never say that a noisy disclosure which is not made through the program is just simply one of many options for the taxpayer under these facts. In my opinion, UNDER THESE FACTS, I do not see a quiet disclosure or prospective compliance as a proper option for the tax attorney. The attorney might suggest disengaging from the client but he would be well advised to put in writing why he could not advise a “back door” approach. The client should also be advised that if he goes ahead anyway and tries to sneak in the back door, he might have a harder time arguing against the assertion of penalties after an audit notice than he would had he made a noisy disclosure under the program or not.

    Respectfully submitted,
    30 Year IRS Vet

  66. I am a citizen of another nation. I live there. The US can believe whatever it wants but it has no jurisdiction over me. All of the above is tax accountant wanking.

  67. Steve, I don’t see any reasonable way one can equate a quiet disclosure with the provision of false or misleading information. To me, the argument that some false or misleading statements within an accurate amended return is absolutely absurd. I’ve heard it several times now, and it’s ridiculous every time. Filing an amended return says nothing more than “I made an error, and now I’m fixing it.”

    Perhaps you could elaborate on what the false or misleading statement actually is, and why it’s false or misleading. Allow me to examine your quoted language for what you choose to pretend the quiet disclosure says.

    “you don’t have to examine me, thank you. Just move on to someone else. I have already decided I am right so don’t waste any time on me.”

    Let’s go step by step.

    “you don’t have to examine me,”

    This is true. The IRS does not have to examine the taxpayer.

    “thank you.”

    I’m not sure if this is something that can be true or false. It’s a common polite phrase. To my knowledge, no one has every considered it false or misleading in any way.

    “Just move on to someone else. I have already decided I am right so don’t waste any time on me.”

    I have no idea why an accurate amended return says any of these silly things, but which one is false or misleading?

    Perhaps, what you mean to say is that the quiet disclosure, somehow, says something like “my unreported income has nothing to do with foreign accounts or other foreign assets.” To infer that from an accurate amended return that says nothing of the kind is, to my mind, rather outlandish.

    In any case, whatever the magical false or misleading information is, I’m particularly curious where it may be said to exist if the taxpayer simply complies going forward. Is it in the amended returns that aren’t filed? Does it live in the next return, which is fully compliant? Is it just floating in the air somewhere?

    Attached is an excellent article by Scott Michel and Mark Matthews, who are both heavyweights in this area. And Mark Matthews also happens to be the former Deputy Commissioner for Services and Enforcement at Internal Revenue Service.

    Both point out that, on the right facts, either the quiet disclosure or the “comply going forward” route can be appropriate.

  68. Holy Christmas, we’re making this complicated. The OVDI FAQ says:

    “Q: What is the objective of this initiative?

    A: The objective remains the same as the 2009 OVDP – to bring taxpayers that have used undisclosed foreign accounts and undisclosed foreign entities to avoid or evade tax into compliance with United States tax laws.”

    So: 1) This is an amnesty program for criminal tax evaders; 2a) if your undisclosed foreign accounts weren’t used to avoid US taxes but rather were for doing things like buying groceries and paying off the mortgage and 2b) you don’t owe any US taxes because of the redundant but comforting protections of the FEIE tax treaty and the THEN WHY WOULD YOU GO IN OVDI?

    Also FWIW if I’d gone into OVDI anyway I’d be in a 5% penalty bracket, being a citizen of Canada and resident since birth who pays all his Canadian taxes correctly and in full. (FAQ 52.3)

  69. Very interesting conversation. It seems the debate here is really why would a practitioner advise OVDI and opt-out vs quiet disclosure vs just go forward, for cases that they think are not criminal, but know that they’ll opt-out because of the huge in-lieu of penalty that the taxpayer will never agree to.

    @Steven, you seem to say that a taxpayer would be better positioned in an opt out audit than being audited because of a QD or just going forward. Why is that? Jack Townsend, on his blog says that the result of the audit should be the same in all 3 cases.

    In some cases, it might be worse on opt-out, because the taxpayer potentially owes more back taxes in the 8 years disclosure that he may owe in the 3 year statute of limitation. One might think the IRS will try to come up with the difference in FBAR penalties, that is if the taxpayer can even get the first 5 years of backtaxes that he paid when entering the program. There is also the risk that the FBAR penalties might be higher outside of the program, but a lot of people seem to think that the IRS will be reasonable and use discretion, because of the potential unconstitutional aspect of it. Also, for FBAR penalties, the IRS has to refer the case to DOJ for prosecution and for these cases, the practionner knows that there should be no ground for prosecution (otherwise, entering the program is a no-brainer).

    @Steven, I really think that the solution you proposed earlier that will be published in Tax Notes is the right one for these cases. Why haven’t you tried it yet? What would be the risk for the taxpayer, except being audited right away?

  70. I think all of us ordinary folk are absolutely doomed if Steven and Michael literally have to write novels to explain how to handle the sale of a house, after the fact, when someone is just trying to get tax compliant. At least I think that was what that was all about. We know the US tax code is complicated but being complicated to the point where it can blow your mind while sending you to the poor house is criminal, in my humble opinion. The debate is interesting though.

    I think a desperate US citizen/person living outside the USA might have good reason to request to enter a type of witness protection program and get a whole new identity which includes a birth certificate from the nation of residence. All nations wishing to defend their sovereignty should offer this service to anyone who is facing unreasonable threats of penury by the IRS. I’m only half kidding. It could come to that one day. After all, it is in any nation’s best interest to prevent money earned within its borders by its own residents from flowing into the coffers of the US government which could actually use that money to invade that nation if it deemed that nation unworthy of its own sovereignty.

  71. @ all.. Thanks for the participation and active discussion. I appreciated the tone and quality of the discourse. I just got back to Seattle and thought I would add some more thoughts, musings and rhetorical questions.

    @Phil McNamam Amusing comment.

    Yes, but wanking will only make you blind, or condemn you to eternal damnation if you care to believe some religious leaders, but the IRS does have “effective” jurisdiction over the world as evidenced just recently at the FATCA hearings where the world’s financial establishment bows down in patronizing praise of the IRS tax evasion efforts, just pleading as a beholden supplicant for minor adjustments here and there, and a little more time to be compliant, rather than tell them to go “wank off.” The IRS penalties and consequences actually do happen, as contrasted to the other wanker threats. 🙂

    @steve and Michael. Thanks for the debate and the many comments back and forth. You do disagree, but with the different point/counterpoint comments, I have gained a better insight into the issue, so thanks for the continuing education. I do appreciate it.

    I think we have some better clarity of definitions related to what each considers a QD, and with Petros and Renounces additions, the options for folks are better clarified. I can see why I would never make a good attorney, as the complexity of the issues make my head spin. It takes a lot of concentration for me to center on the relevant issues and it is interesting how you have navigate the backwater eddy currents of all the circulars, publications, and tax law references to understand the issues. I certainly see why reasonable attorneys can disagree.

    @Michael, That Scott Michael and Mark Matthews article is a good one. I have referenced it many times, it is on my required reading list onthe OVDI Drudgery.

    @Steve, I appreciate you being a contrarian, and providing the prosecutor point of view. Just to be clear, I don’t hold you personally responsible for current IRS actions or policy errors. You are not required to defend their every misguided action.

    I would like to clarify some things about your QD POV. If I understand you correctly then, in your mind it is the IRS offshore jihad that trips the “sneaky” breaker, so to speak.

    With what has been happening the last 3 years, in your opinion one is considered “sneaky” if you ignore the OVDI admonitions and take a normal amended return process (QD) to correct a tax filing error related to offshore accounts?

    If this jihad and focus wasn’t there, then “sneaky” wouldn’t apply?

    Does “sneaky” only apply to the intention of the taxpayer at the time of original compliance failure, i.e., taxpayer was willfully hiding or not reporting offshore accounts/income, but now wants to be compliant, just not go the OVDI route, so “sneaks” the QD in playing the audit lottery?

    ….or does it apply even for non willful compliance failure when at the recognition point you try to become compliant via another means rather than that the IRS preferred OVDI route where QD then becomes “sneaky”, in your opinion?

    Or, are all attempts to correct pass tax compliance errors related to offshore accounts regardless of reason without some kind of noisy VD disclosure process which you have described, “sneaky” in your mind?

    I am really trying to understand this and not be argumentative for argument sake. Let’s say if I just discovered that I had miscalculated or not reported a capital gain, and amended a return to correct this, would that only be “sneaky” if there was an IRS jihad against Capital Gain offenders occurring at the time, but not “sneaky” if there was no such focus?

    Frankly, I don’t see why amending a return is ever considered “sneaky” at all, as it certainly is not illegal to do one, and it does require a statement of why you are amending, (that is soft noise) That is a disclosure that can hardly be called “sneaky”, unless you lie, or just leave off the statement, but then you would have some real “sneaky” jeopardy.

    Is there a very narrow criteria allowed in some publication that I have never read of what returns you are allowed to amend without walking to the front door of the Criminal Division of the IRS and shouting “Here I am, please punish me, as I know my taxes and interest that I just paid on my amended returns certainly are not enough for you. Give me my additional punishment too?”

    The IRS and by extension, the tax legal system sure believes we all should demonstrate masochistic behavior, if that is the case. There is punishment (or threat of punishment) for both voluntary disclosure and non voluntary disclosure. It must be something in our Judeo-Christian culture that demands vengeance upon those that are making amends for past failures. Justice is not complete by just voluntarily paying up tax arrears until punishment is administered. Doesn’t matter if the confessions is quiet or noisy. The IRS wants punishment, or the opportunity to apply punishment as it sees fit. Maybe that is what pisses off the IRS about QDs and why you may consider them “sneaky”. While it still gets the tax revenue, which if you were a business you would be happy to have, but the lack of visibility of its return processing is so poor, that it can not see that it has collected past due tax money easily. So, it wants you to shout it out from the roof tops via a VD, so it has the opportunity to apply its punishment regime should it want to, and usually it does, or why else have an IRM with such detailed instructions on how to do it!

    I guess that is why the Catholic church always required that you had to do penance after confession, as while the lord did forgive, he always wanted a pound of flesh too just to teach you a lesson. So, the OVDI “in lieu of” penalty is the IRS equivalent of saying 12.5 Hail Marys and reciting the Rosary 27.5 times? (not so bad now as compared to medieval penance requirements) You are forgiven, and you won’t now be condemned to hell, but forgiveness without punishment and demonstrated penance, (a few Hail Mary’s or 27.5% of your assets) just isn’t satisfying enough for God or the IRS I guess. Given the punishment levels, I would say that God has progressed, and the IRS has regressed during our evolution to modernity!

    I think I like the Canadian process better where they are happy to have you come clean with no penalty at all. Just disclose, pay up taxes and interest, and go and sin no more. No need for the CRA to assess draconian medieval penance too. How civilized is that? No wonder the Canadians commenting here respect the CRA, and no wonder so many of us hate the IRS way of conducting business.

    Finally, coming back to your assertions that the IRS doesn’t do anything just for penalty collection purposes.

    Your quote…

    you can think and say all you want that the IRS just slaps penalties around haphazardly because it’s a slick way to attack the budget deficit but it is simply not true….The IRS doesn’t do that.

    You know, I really want to believe that. In fact for a long time I have been a defender of the IRS OVDP actions as just benignly misguided, and not intentionally malevolent. I do think it started that way, but it is not the way it is ending up.

    My views have changed when the circumstantial evidence began to pile up, and now we have multiple smoking guns and lots of evidence that this is more than about simple compliance.

    I have seen Shulman time after time refuse to do the right thing, from stone walling Nina Olson’s TAD to bragging in the multiple press releases about all the money they are bringing in at the same time failing to provide any meaningful statistics about their program or answer any legitimate questions about what portions of their revenue is tax collection and what portions is OVDI penalties or what portions are homeland participants and what portion have addresses overseas. They have turned down ACA FOIA requests.

    I have seen Shulman ignore my letters without any meaningful response to what are reasonable pleas for re-consideration of what they are doing.

    The need to appeal to the TAS to get any relief in my situation, and the recognition that my examiner just wanted me to pay up my penalties like her 25 other minnows did, spoke volumes to me what this program was all about. It was the penalty collection.

    She wasn’t going to do the right thing unless pushed hard from someone with greater authority outside her reporting structure. She was there to collect the maximum allowed, and if it wasn’t about the penalties as you assert, then why was FAQ 35 discretion removed mid stream from the OVDP and never returned? That was the first smoking gun that this was about the money, not measured justice and compliance.

    How do you explain their continued refusal to anything to make it easier for Minnows to become compliant by refusing to create a front end filtering process and insisting on a super inefficient back end Opt Out process. They have not moderated their FAQ threats that most certainly assure that they are extracting extra penalties by scaring minnows into staying inside the OVDI instead of Opting Out which is effectively taking additional penalties which in a normal examination process would never be collected.

    And finally, to the question no one from the IRS has been able to answer or adequately explain yet, (and frankly you are not responsible to answer for the IRS either, so I get that point.) Why are insisting that accidental Americans who did not know they are citizens have to join the OVDI program, so they can grant to them a entitlement of only having to pay a 5% tribute? WHY? How do you explain that, if this isn’t about penalty generation? That is another smoking gun of penalty collection intent.

    …Or, is this just an example of …,

    “a mindless, muscle-bound bureaucracy …that… may be bone-headed, insensitive, unfathomable, and impossible to deal with”

    as you say, that in action is just making a benign procedure or policy mistake and not recognizing it? Maybe. It is possible, I suppose. I recognize that stupid things do happen that are not necessarily willful activities, although the IRS is not so good at understanding that either, now are they?

    …Or, do all of these spent cartridges scattered about at the OVDI crime scene represent something else, a collective smoking gun of zealot behavior within a close knit upper management circle that is responsible for creating the OVDI and wants to generate revenues to curry favor with the Administration that they can trumpet about in self congratulatory press releases? Ego and Hubris are not constrained by reason and common sense, and something is seriously wrong here that is becoming more and more difficult to defend.

    I think it is the latter behavior that is destroying the reputation of the many good people that work within the beast, and probably want to exercise discretion and do the right thing when given the opportunity. You speak eloquently for them. I am sure many of them are…

    well-meaning, baseball loving, honest, hard working, freedom loving, God fearing, hepful of strangers, willing to “get invovled”, caring, decent people

    I too have met a lot of them, but there is something rotten in the leadership that allows this OVDI to continue as constructed in spite of the Tax Advocate admonitions and reports to Congress and the many good ideas that have been suggested as to alternate approaches for offshore compliance initiatives.

    If they can’t do right by accidental Americans who by their own words were

    Taxpayers who are foreign residents and who were unaware they were U.S. citizens

    without requiring them to join an OVDI, and then imply they are “sneaky” if they want to file a QD, then I have to say…”something is very rotten in Denmark”.

    As a side note… I wonder what Geithner did with his failures? Were they a QD that was just discovered when he was nominated as Treasury Secretary, but that was ok as there was no jihad going on regarding his particular class of tax failure? Or did he do a noisy QD, or even a VD and was then let out of all penalties due to Examiner discretion?

  72. @Phil McNamam. No jurisdiction? Depends on what country. To the best of my knowledge, under the Canada-US tax treaty Canada will collect outstanding taxes for the US from US persons who are not Canadian citizens.

  73. @justme. Wow, and thanks. I don’t hold much hope for the US, as I agree with you that it’s a leadership issue. Leaders can’t seem to get it together to do anything for the common good. Democracy must be really annoying for the people who really run things down there.
    Your judo-christian typo (or was it?) gave me a chuckle though.

  74. Well, we still don’t seem to have a firm answer to @Halifax’s question. Now we know why lawyers are so expensive.ubbl

    @bubblebustin and Phil: Correct CRA will collect taxes for IRS on a Canadian resident who is not a Canadian citizen. They will NOT, however, collect any penalties owing for failure to file FBARs for either Canadian citizens or residents.

    I believe both bubblebustin’ and @Halifax are Canadian citizens.

    @Michael, Steven: I don’t know Halifax’s situation, but if a Canadian citizen put the proceeds from the sale of a jointly owned home in an account of a Canadian spouse who has absolutely no connection to US, why would there been any need to report this in an FBAR in either a quiet of a noisy disclosure to IRS? Even under FATCA, there would be no requirement for the Canadian only spouse to be reported to IRS.

  75. @Halifax (referring to himself in the third person, like Miss Manners) is Canadian – now only Canadian.

    The money concerned can be not just a spouse’s, but also the bank’s. Suppose a couple buys a house in Canada for $400,000. Spouse 1 (Can/Am dual) puts in $100,000, Spouse 2 (Can only) puts in $100,000, they borrow $200,000, which flows through their joint account, which both of them have signing authority on. If Spouse 1 then enters OVDI at some point in the next eight years, the fine is a percentage of $400,000.

  76. Yes on the Canadian citizenship. I ❤ Canada. My husband just had knee replacement surgery, the most expensive part of the whole procedure was the parking at UBC hospital. Yes, we pay high taxes for this and many reasons, but at least for us we have seen the direct benefit of it and all Canadians enjoy a longer life expectancy because of universal health care. Come the end of 2012 Americans may just end up with huge tax increases and fewer benefits than they have now if Congress can't come together on a budget going forward. The fact that 900,000 soldiers are waiting 6 months or more to be considered for disability is an absolute disgrace and a sign that they're in a mess. And millions are being spent on presidential campaigns!

  77. @bubblebustin;re Canadian universal health care – that is why I don’t mind paying my taxes in full, in Canada – (rather than the potential of paying on top of that, to a distant government (US) who provides nothing in return). We pay taxes in full, in the non-UScountries where we live and work, we get good services – in the countries where we live and work. We don’t have to be afraid of being wiped out by the astronomical un-insured charges to treat an unavoidable ailment. We don’t have to spend hours, (or pay someone) to sort out invoices and disputes between the individual providers and the private insurers – a common occurrence.

    To get our healthcare, we don’t have to deal with the IRS – as the designated enforcer for the health care program in the US – a ‘sick’ joke if ever there was one – http://www.accountingweb.com/topic/fitness/irs-gears-health-care-law-appeals

    and
    see: ‘IRS Already Gearing Up for Health-Care Crackdown’
    By Elizabeth MacDonald
    Published March 29, 2012
    “HOW THE HEALTH-REFORM PENALTY WORKS

    ………..If the IRS finds you have fallen short of the law, it would hit you with a penalty tied to your household income (which may be that of an individual or several family members). But this is more than just your paycheck earnings. Under the new health law, the IRS penalty would be based on “modified adjusted gross income,” not adjusted gross income that you normally report at the bottom of the first page of your tax form 1040, before you take deductions or personal exemptions.

    The modifications add back in things like non-taxable interest and excluded foreign income to this number.

    Next, to assess the fine, the IRS would take the total household income divided by the number of household members who must have insurance under the law. This raises questions of responsibility for your other household members to abide by the new health reform law.
    All of this could mean a heavier enforcement hand at the IRS.

    The IRS will need more training in privacy requirements, in order to avoid a drop in tax compliance, the TAO said, as taxpayers may feel they need to protect their confidential household income information for everyone who lives under the same roof.”………….
    from http://www.foxbusiness.com/investing/2012/03/29/irs-already-gearing-up-for-health-care-crackdown/#ixzz1wBGhcWJq

  78. @bubblebustin
    ‘And millions are being spent on presidential campaigns!’. Yes, the biggest disgrace. And what is most disheartening is that at the end of the day, whether they elect the same President or a new President, this mess they have created will still be here.

    They have yet to realize that ‘other empires’ ie Roman, were here alot longer but they eventually fell. The US that we were born into is long gone. I don’t hold out alot of hope that it will return.

  79. @Halifax: Great news. Good summary of Yours (Spouse 1), Mine (Spouse 2) and Ours (Bank) and how OVDI could penalize the flow-through money. I wouldn’t even be surprised if IRS tried to call that money laundering through offshore property holdings.

    @Michael and Steven: I’m going to present another scenario involving sale of a home and other assets.

    Maple and Leaf Canada are both Canadian citizens. Maple was born in Canada. Leaf was born in US to Canadian parents attending university there. His family returned when Leaf was six months old. He has never had a SSN or passport. His Canadian passport shows his US place of birth.

    Both have studied, worked, earned an income, saved, invested and paid taxes only in Canada. The honest, frugal, responsible couple had Registered (RESP) Education Savings Plans for their children, which were used to finance the children’s college and university educations. They have begun a new RESP for their first grandchild and plan to do so for any more grandchildren.

    Maple and Leaf also both have Registered Retirement Savings Plans (RRSPs, Tax-Free Savings Accounts (TFSAs) and a Registered Disability Savings Plan (RDSP) for their adult disabled son. Leaf is the RDSP trustee. All of these savings vehicles are encouraged through tax incentives by the government of Canada for its citizens and residents.

    Maple and Leaf purchased their home for $65,000 in the 1970s. In Toronto’s hot housing market, they recently sold the home for $980,000 ($104,000 over asking price!)

    Maple and Leaf purchased a condo for $520,000 leaving $460,000 for investment. Because they learned of the IRS issue last year just before the sale, they put the $980,000 in an account in Maple’s name only, paid the $520,00 for the condo from that account and left the remainder in an account in Maple’s name only.

    Leaf and Maple have no plan to report anything to IRS. They have also changed their usual vacations of two weeks golfing in South Carolina each spring to two weeks in Bermuda and two weeks in Arizona each winter to two weeks in Costa Rica.

    When they retire in two years, Maple and Leaf will use some of the money from sale of their home (now in Maple’s account) to buy a winter home in Costa Rica, (instead of in Arizona, where they had previously planned on spending winters after retirement).

    Why does Leaf have any need to do either Quiet Disclosure, Noisy Disclosure or OVDI? Maple and Leaf certainly won’t go to US again, CRA won’t out them to IRS (In fact, CRA neither knows nor cares about Leaf’s place of birth), their Canadian bank doesn’t know about Leaf’s US birthplace and there’s no expectation of IRS that the bank has an obligation to report on the home equity in Maple’s account.

  80. @All: in random order,misc. responses to the responses to my screed about quiet disclosures.

    @Blaze: Maple and Leaf’s Facts: of course they have nothing to fear from the IRS. I know many people all over the world with very, similar facts. They are yet another example of the consequences of not thinking through all the consequences of the Bank Secrecy Act (which gave us FBARs),and FATCA.

    Hopefully, and not too long from now, the government will get it right so that they can return here for vacations and continue to enjoy all the great things we have to offer the whole world.

    @Phil MAcNamam: points well-taken but this IS a problem for people with money, annuities, or recurring periodic payments from US sources. Remember in dealing with the IRS, there are essentially two separate functions, determining the tax and collecting the tax. The former can be delayed for many years. The latter can be swift and merciless.

    @Cristophe: the result in all three cases SHOULD BE the same. The difference is how you get there and how long it takes to get there.

    @JustMe: this isn’t so much about bowing down or masochism as it is about money plain and simple. TheFATCA hearing, except for Joe Green and the Democrats Abroad, was all about bankers and international money managers who above all, were there to protect their market shares and please their stockholders and the principals they represent. I don’t write the things I write out of any overriding duty to protect my old bosses at the IRS but rather after 30 years of working there, I have a pretty good idea of what the IRS will do under certain scenarios and how they will react to what THEY PERCEIVE to be the various challenges they are presented with in carrying out their Congressional mandate to enforce the Internal Revenue Code.

    I raise the ethical issue because it is there to think about, notwithstanding the protestations of some practitioners who take a “what me worry?” approach now matter what I say, and no matter how many times and different ways, the IRS says to don’t do it this way.

    You’re trying to get the IRS, of all the scary agencies of the United States government, to go your way on something. Why on earth would you start off with a chip on your shoulder when It is YOU coming to THEM, because you want them to fix something for you?

    If I take a position with the IRS it’s going to be one I can support under the law because it is correct. If my position is the correct one then I want to talk someone as soon as possible and tell them why I am right and I want an appointment with the IRS which I will patiently wait for after coming through the front door.

    The whole quiet vs noisy thing is really about what is the best way to represent your client and accomplish your objective of getting the fear of the IRS out of your client’s lives and make them go away. In the ten years I have been doing this stuff after leaving the IRS, I am happy to report that no matter how far off course the IRS seems to be when I start out, there is always a boss or a boss’s boss to talk to who has the smarts and power to fix something that should be fixed or at least give me a credible explanation as to why something is just not going to happen.

  81. @30 Year Vet: “Hopefully, and not too long from now, the government will get it right …”

    I admire your optimism, but speaking as a non-US citizen I think you’re wearing rose tinted glasses here. Sorry.

    The US govt not only has it so very wrong, but has exacerbated the wrongness in leaps and bounds over the past decade or so. I do not see any chance whatsoever of a reversal of policy. And that’s what it would take. A complete reversal. Not a messy “compromise” or some sort of minor “relief” for a limited range of circumstances.

    The game the US has been playing here is not Monopoly, but Jenga. With FATCA it has finally added the piece that causes the entire tower to collapse. And there’s no fixing that now. Too late.

    Renunciations are snowballing. Well educated immigrants avoid the US in favour of more welcoming nations. New businesses start up in other countries to compete directly with the US. And congress responds with outrages like HEART, FATCA, and now (God help us) Ex-PATRIOT. These aren’t the actions of a govt proposing to “get it right”.

  82. @Steve,

    So we do agree, it is “All about the Money” which includes penalties. 🙂 The OVDI is not about compliance as much as it is about collecting penalties, as that can be the only explanation for expecting an accidental American who did not know they were a citizen to pay 5% penalty.

  83. @Steven: Thank you for your reply. I’m with Watcher. We have been given no reason to believe anything will change. Instead, we are faced with increased threats and intimidation coming out of Washington. I cringe to think what “get it right” would mean to these bullies.

    It’s like when one spouse has affairs over and over. Finally, in danger of losing the marriage, the cheater says “It won’t happen again.” It’s too late. The damage is too deep. The other spouse has moved on. Still, the real cheater continues to stalk and harass.

    That’s what Maple and Leaf have done. They’ve moved on. Maple and Leaf are loosely based on a real couple. What I didn’t mention is that Maple and Leaf’s good friends, Canadian citizens Bob and Carol (he was born in the Netherlands, she was born in Canada) have traveled each year to South Carolina with Maple and Leaf. This year and in future years, Bob and Carol are instead going to Bermuda with their long-time friends and travel companions.

    Maple and Leaf’s annual trips to Arizona have been to visit her brother Ted (born in Canada) and his wife Alice (born in Ethiopia, but a long-time Canadian citizen) at the property they have rented five months each of the past six winters. This year, Ted and Alice went to Costa Rica to spend two weeks with Maple and Leaf.

    Ted and Alice have been increasingly concerned about Arizona’s immigration and gun laws. Last year, they learned about IRS convoluted “substantial presence” requirements for Canadian snowbirds. They have also faced intimidating questions at the Arizona bank where they had a small chequing account.

    So, Ted and Alice advised their Arizona landlord they won’t be returning next year or in future years. They will rent and spend money in Costa Rica instead. Of course, Ted and Alice’s Canadian adult children and their Canadian friends are delighted to have a new, more interesting place to visit each year.

    I’m the same. After my mother’s death, I will never again visit the US. This past year, I did not visit Ted and Alice (real people, fake names) in Arizona as I often do. I look forward to a trip to Costa Rica.

    Plus, I met with my bank on Friday. I ensured I have no remaining investments in US (“Get your ass and your assets out of US”–Petros). I also ensured my financial adviser is aware I never want US investments in my portfolio again. This is particularly important as in the next couple of years (like Maple and Leaf), I plan to sell my fully-paid for house, buy a condo and invest the difference (unfortunately, not nearly as much as Maple and Leaf!).

    While I was at the bank, I placed a copy of my 1973 citizenship certificate in my safety deposit box. Attached was a copy of the oath I signed at the time, which included: “I hereby renounce all allegiance and fidelity to any foreign sovereign or state of whom or of which I may at this time be a subject or citizen.”

    DOS and IRS can think what they like. I consider my pre-1986 citizenship certificate my divorce decree. My renunciation oath is my restraining order. Stay away from me. Likewise, I am happy to stay away from US.

    Steven and Michael, it’s great that you’re willing to share your knowledge and expertise, (even though your disagreements may confuse us even more!) Steven, it’s especially great that you’re assisting ACA with your input.

    In the past Steven, you have told us Washington is run by intelligent, highly-educated, moral, caring people. If that is the case, how did we get here?!? And why is it getting worse?!?

  84. @Steven
    I appreciate your contributions to Isaac Brock Society. However, like Blaze, I can not help but wonder how the US got to where it is today. And I don’t hold much hope that the “Maple & Leafs” will ever want to return.

  85. Totally unrelated to this thread, there is another reason why people hesitate to come to the US for vacation. Petros mentioned it in another post: heathcare costs in case something happens while they’re here. It is getting difficult to find travel insurance that would agree to pay for whatever it will cost in case of an accident in the US.
    Too bad, because there are beautiful places in this country.
    In particular, US National Parks are wonderful.

  86. @Christophe: Excellent point. That is especially a consideration for older people who are more likely to be concerned about health issues. Two years ago, Alice (from my example) had a fractured wrist while in Arizona and her private health plan balked at paying the high U.S. costs. They offered to fly her by air ambulance back to Canada. It was more economical than paying the American rates for health care.

  87. Our out of country medical covered the cost of removing a fish hook from my son’s leg while visiting the US. We were appalled to hear that the hospital charged $400, which our insurer covered, but then we got a call several months later from a collection agent that we still owed another $400. We thought we were getting scammed as we already paid the bill, but as it turned out, it was a bill from the attending doctor (separate from the hospital’s) that was erroneously sent to Vancouver, (we’re assuming Washington) because the clerk didn’t write “Canada” on the record! In the end the insurer was billed $800 for a fish hook in the leg (I would hope that the negotiated that down) What a scam.

  88. As an aside, I’m not sure I agree with the title of the thread. I think very few practitioners consider QDs controversial (putting aside the critical question of when a QD does or does not seem to be in the client’s interests).

    Although Steven clearly has issues with QDs, it’s my impression that, statistically speaking, his view as a bit of an outlier. I don’t believe I’ve ever heard anyone else (including the other tax tax advisors that participated in the discussion we all had in another forum) take the same position.

  89. Mr Miller, you say about OVDI:


    “Paying fees to opt out and be audited (with the potential of paying fees for litigation that are themselves life-changing), ”

    Based on your own personal experience, is the IRS actually doing this (harassing opt-outs, threatening litigation etc. etc.) ? Or is that a worst case/possible scenario ? if there isn’t much money they can get from tax audits (maybe a hundred dollars here or there in a missing expense receipt or something), especially from closed years, would they really do that ? I would assume that collecting an FBAR penalty is not easy for them and they run the risk of a judge tossing out penalties.

  90. @Michael J. Miller Point taken. I will leave it that some disagree, but I certainly do not know the number or percent. It has made for a good discussion, and appreciate your contribution.

  91. @watcher, “The game the US has been playing here is not Monopoly, but Jenga. With FATCA it has finally added the piece that causes the entire tower to collapse. And there’s no fixing that now. Too late.”

    This is a great analogy. Bad laws beget bad laws to the point where respect for the law is diminished, or in the case of citizenship based taxation the citizen seeks to remove himself from the equation. It’s not anti-American, it pro-freedom to do so.

    @Just me, a real amnesty would be to allow the IRS the discretion to reduce the penalty to “zero”. When a nation makes little in the way of effort in making its citizens aware of their obligations, make sudden changes the way they enforce their laws, and punishes those who wish to comply with the laws, I agree it’s not about encouraging compliance. Canada’s amnesty program is less of a “stick” approach, but then the CRA doesn’t have the debacle of citizenship based taxation to try to enforce. What average citizen would continue to waste those kinds of resources year after year with little if nothing in return other than more and more threats? The only thing that will keep me in the game is hope that big change will come. I keep waiting for some.

  92. It seems to me that a lot of this debate is purely academic, because it doesn’t seem that anyone here is planning a genuinely “quiet” QD. Most who have not gone the OVDI route are sending reasonable cause letters along with their new or amended returns and FBARs.

    I’d like to see more debate about the pros and cons of noisy disclousre vs the other methods. Even Mr Mopsick advocates ND – if the letter is prepared by a lawyer. For one thing, I am wondering if having a lawyer write your letter is signalling to the IRS that you have something to be afraid of. After all, if you’ve done nothing criminal, why would you even think of hiring a lawyer?

  93. @Mr. Michael Miller: ” There you go again.” As an attorney, I thought we were supposed to choose our words carefully. Let me see if I have this right. My views on quiet disclosures make me an “outlier” because two other lawyers who contributed to a discussion on Linked In a few weeks ago agreed with you. That becomes a “statistical” sampling which proves me an “outlier.” I gave you about a dozen reasons two days ago why you were off base and the most you could comeback with was! you couldn’t understand how giving the IRS just half the story could ever be construed by anyone as misleading ” in any way.” Then after over a hundred comments In just three days you announce that you don’t like the topic any more. Huh? I rest my case. I think we’re done here.
    Respectfully submitted,
    30 Year IRS Vet

  94. @ bubblebustin I wrote about what a true amnesty is. The IRS already has discretion to have zero penalties: (1) they may choose not to investigate a disclosure; (2) they may choose to penalize zero even after an audit (this is based on the IRM). This is not the amnesty we are seeking, because obviously they already have a great deal of discretion and they are choosing instead to extort money from people.

  95. @Howard,Steven,Petros I was told to file back 5 years, and DO NOT SEND A COVER LETTER. This is from a Lawyer/Account. Now my son is now filing (Accidental American) and has been told the same. This makes me very nervous not sending a Letter to explain, but what to do?? I have to have trust in him (Lawyer/Account..but I am very afraid of the outcome. Of course his assistant says they have had no problems going at this way, she said we have been doing it this way for a year now and no problems. I thought it is probably still too early. I am sure it will take longer than a year for the Hammer to come down on all of us..they are so backed up..What are your thoughts.. My son is still in the process and has not mailed his returns yet. LETTER OR NOT?? This is the Million Dollar Question??????

  96. @Steven, have you tried the “noisy disclosure through the front door” that you’re suggesting is not sneaky? Why waste resources and money on both the customer and the IRS side when everyone knows the case is not criminal and it’s going to end up in an opt-out. Have you not done it because the IRS did not say it was a acceptable way to fix past mistakes? What is the risk for the taxpayer?

  97. “@Christophe
    May 27, 2012 at 11:54 pm

    Very interesting conversation. It seems the debate here is really why would a practitioner advise OVDI and opt-out vs quiet disclosure vs just go forward, for cases that they think are not criminal, but know that they’ll opt-out because of the huge in-lieu of penalty that the taxpayer will never agree to.”

    @Christophe

    I think that is part of the issue, but not the real debate here. The real debate is what kind of obligation does the lawyer have to the client to objectively explain and analyze all compliance options.

    Here is the problem as I see it:

    Some lawyers are interpreting circular 230 (part of he rules for practicing before the IRS) to mean that they should stream people into OVDI. I believe that this conflicts with a lawyer’s duty to the client. A lawyer’s duty to a client is a “fiduciary” duty. This means that the lawyer must have total loyalty to the client (obviously within the law). A lawyer’s loyalty to the client clearly is the primary consideration and should override most any other consideration. (Obviously the lawyer cannot condone or facilitate illegal behavior.) A lawyer is a professional who provides counseling in the law.

    Bear in mind the following:

    – the client is not required by law to enter OVDI
    – the client is not required by law to amend tax returns
    – there is no law that says that a client cannot make a quiet disclosure
    – a client who now has knowledge of his tax and FBAR requirements must (at the very least) comply on a “going forward” basis

    My thoughts on this:

    In my opinion, a lawyer who feels that his Circular 230 obligations to the IRS should override his fiduciary obligation to his client, should NOT encourage the client to enter OVDI. The lawyer should simply say that under the circumstances he (lawyer) cannot meet his required fiduciary obligation to the client and NOT act for the client at all. But the reason communicated to the client is NOT that the client must enter OVDI. The reason is that the lawyer cannot meet his ethical obligations to the client which include exploring all legal options.

    Would be interested in people’s thoughts on this aspect of this discussion.

    I would also be interested in our resident lawyers answering the following question:

    What is your ethical obligation to the client who consults you to help with tax compliance issues? If you believe that Circular 230 is the dominant consideration, please explain why it should override the fiduciary obligation to the client.

  98. @saddened

    I suspect that the answer to your question depends on what the past tax returns and FBARs would reveal.

    It is clear that his is NOT a “one size fits all” approach.

    What do you see as the harm in including a letter?

  99. @renounceus, I don’t see any harm, I was just told that it brings more attention to it, but too me never filing (this is for Accidental American Son) and all of a sudden all these returns start coming in, I would think you would have to have a reason for not previous filing.. But the Lawyer says NO Letter. It just makes me nervous when I see everyone talking about a cover letter and my Lawyer is saying not to send one.. I am just really concerned.

  100. @saddened123
    As your son is an accidental american and he has never filed, I do not understand why he is filing now. I assume he does not have an american place of birth. If such is the case, would he not be better to just not file tax returns? Or is his choice to remain a dual citizen?

  101. @Christophe, great points, I agree completely, as you might well have suspected from my prior posts. In my view, if a tax advisor honestly believes (for whatever reason) that Circular 230 precludes him from providing his client with complete guidance as to all legal options, based on the interests of the client (as opposed to the lawyer), then the correct answer is that the attorney simply ought not practice in the area. Advising a client in a way that either conceals a permissible course of action, or discourages that course of action for reasons having nothing to do with the interests of the client, ought never be an option.

  102. @saddened

    Well, they either audit or they don’t. If they audit, then the same issues will be raised with or without the letter.

    I have a suggestion for you – interesting what others think of this.

    You are very worried and nervous (as are all of us). Why don’t you sit down and write a reasonable cause letter yourself. Include in the letter your worry about whether or not to send the letter with all of the filings and the reason that you are not – specifically that the lawyer is saying “No letter”. Get the letter notarized and make a copy of it. Then take the original and send it “registered mail” to yourself (remember that you have a copy of what it says). The fact of being registered and notarized will prove when you wrote and what your state of mind was at two points:

    1. At the time that you were originally supposed to file the returns and FBARs – i.e. (I am assuming) you didn’t know about the requirements;

    2. At the time of filing the past returns you did NOT send a reasonable cause/letter of explanation because the lawyer told you not to.

    This would (I think) help you demonstrate down the road (if this becomes necessary) that your failure to send a reasonable cause/letter of explanation was based on advice from your lawyer.

    Now!!!!!!! This is not legal advice. It is a suggestion to help you deal with the emotional strain that all of this is putting on you.

    For reasons that may or not be valid, I have the impression that you don’t have much if any tax owing anyway, making this (I would think) less of an issue.

    But, listen – get this dealt with now! All of us have far too much of lives invested in this!

    Also, I am going to echo something that I heard the Treasury Department is advising:

    You might want to consider renouncing your U.S. citizenship.

    Renounce! Be Free of this crap!

    Hope this helps.

  103. @amr, I think that, collectively, there is still relatively little experience with opt-outs, so it’s largely a lot of guesswork. If I recall correctly, I was referring to the possibility suggested by Steven Mopsick that he would litigate a particular issue if, after putting a client into the program and then opting out, the IRS were to act unreasonably.

    I did have one client in the 2009 program for whom I opted out. (She was placed in the program before I got there. Putting her in was silly.) After receiving a few harrising calls from the IRS agent [the same agent — whether or not he actually processed my opt-out letter, I don’t know], he ultimately agreed to reduce the FBAR/miscellaneous penalty from $140,000 or so to $40,000. What this says about how reasonable the IRS is or is not, I don’t know.

    In any case … yes it is extremely difficult for the IRS to collect FBAR penalties. The IRS can technically “assess” the penalty, but the collection mechanisms that apply for purposes of tax liabilities and related penalites do not apply. With very limited exceptions, this requires the Department of Justice to bring a lawsuit in District Court. In the case of a “minnow” where the IRS is insisting on penalties that seem patently ridiculous (putting aside the key factual question of what is or is not ridiculous in a given case), I don’t see the Justice Department wasting its time.

  104. @tiger, He probably should have not filed but on the advise of the Lawyer and me (out of fear) he is now having his returns done.He is planning on renouncing, but he probably should have done that first and then filed. We have been so confused and upset about this whole ordeal. I felt and my son as well that in order to have any peace down the road we must renounce and not have to wonder if in 5-10 years it be even worse. We don’t want to be worried day after day. Just get rid of US Citizenship all together. I am sick of it, I can’t sleep or even think half the time..

  105. @Michael: In the case of Canadian citizens and residents, taking a person to court would be absolutely futile. US Courts have no jurisdiction in Canada. CRA has said it will not collect FBAR penalties for either residents or citizens. They will also not collect any tax liability for IRS for on a Canadian citizen even if the citizen is also a US citizen.

    I know some people are still afraid IRS will prosecute them criminally or level civil fines against them for failure to file FBARs or pay FBAR penalties (which right now are phantom penalties because no penalties have yet been determined).

    If CRA won’t collect, I’m virtually certain Canada would not extradite a bona fide Canadian citizen or resident to stand trial on such a ludicrous matter in a foreign country–especially if the person is a minnow.

    I don’t know what the practices and policies of other countries are, so I can only speak to the situation in Canada.

  106. @renounce, Sounds like a good idea!! You better believe we are going to renounce, I can’t take this anymore.I am still waiting for Canadian Citizenship. I am not renouncing for tax purposes but to have my life back and not have to worry day and night.It would be nice to sleep more than a few hours at night, and not be so nervous that my stomach stays in knots all day. I can’t take this stress much longer.RENOUNCE AND BE FREE!!!

  107. @Saddened: Once you become a Canadian citizen, you can actually relinquish rather than renounce if you take the oath to Canada and the Queen with the voluntary intention of expatriating. It sounds to me like that would be your intent. You then would not have to pay the $450 fee and should be able to do it in one meeting.

    Once you have your Canadian citizenship (why is CIC taking so long?!?), I would suggest you immediately contact US Consulate for an appointment. This would show that it was fully your intent to relinquish. If you don’t get a quick appointment, I would suggest you send a registered letter and an e-mail to Consulate advising them that you had relinquished on becoming a Canadian citizen. This would then give you some documentation of your intent. I don’t know if IRS would be forced to accept that as proof that your reported your relinquishment to DOS, but it’s worth a try.

    Your son, however, will not be able to relinquish because he is Canadian citizen by having been born in Canada. He has never taken an Oath to Canada, so renunciation is the only option for him–other than just ignoring the issue altogether, (which is personally what I would do in his situation).

    Great advice from Recalcitrant to send a registered letter to yourself. I hope doing this might help to quell some of your anxiety over this.

  108. @Saddened –

    I agree with all the people who think your son should ignore the issue. However, if he wants to pursue a relinquishment, there’s a possibility that he could use his first passport application as an adult as an expatriating act.

  109. @Saddened –

    Me again –

    FWIW your son will have to assert a claim to US citizenship, get a passport and SSN and all the rest of it*, in order to renounce it – it does seem like an exercise in awakening a paperwork monster that will devour an enormous amount of time and money before it’s eventually slain.

    * In principle, if he’s of the appropriate age, this may include draft registration

  110. Pingback: Compliance counseling – What’s a poor lawyer to do? Circular 230 vs. the fiduciary duty to the client « Freedom from the tyranny of U.S. citizenship-based taxation for U.S. and dual citizens outside the U.S.

  111. Pingback: Compliance counseling is like a box of chocolates – “You never know what your gonna get” – Circular 230 vs. the fiduciary duty to the client | The Isaac Brock Society

  112. @Broken Man: I just told Saddened off line that the crown and title for World Champion Worry Wart used to be held by my mother, but they have recently been been passed to Saddened.

    I haven’t mentioned the selective service (draft) issue to Saddened about her son. Fortunately, he is over the age for registration (I think he’s 28 or 29), but this piece of news may make Saddened the Universe Queen of Worry Warts.

    @Saddened: Stay cool. Don’t panic.

  113. @all, How I can I ignore it now.. The accountant is almost finished with his returns, I still have to pay for his returns. He just got his SSN about a month ago just for filing. I was told by another Brocker that he did not need to get a Passport to renounce.

  114. @petros, I missed your Jimmy Carter Redux where you lay it out quite clearly your thoughts on what a true amnesty should be.
    @steven, the letter I wrote and included in our OVDI submission was for reasonable cause. It was my intention to make it clear that we entered OVDI as the most immediate way to become tax compliant, but also emphasized that we until then had been completely unaware of our obligation to file US tax returns. It seems the more you have to lose were the IRS to penalize in the fullest extent, the more you’re inclined to enter OVDI. There are other factors too, like just wanting to be, for want of a better word, “upstanding”. After Nina Olsen’s report to congress we realized that in our objective to become compliant we had been denied the IRM’s more discretionary approach and contacted TAS. Our agent told us that the IRS is in fact negotiating within the guidelines of the IRM within OVDI, which we were really surprised about because of what we thought was the IRS’s desire to keep the integrity of the OVD programs in tact. So it would seem that there is a filtering process going on within OVDI, maybe for the sake of expediency? I’m nervous, when lawyers who are experts on the subject are arguing about which course of action to take, what’s a minnow to do besides morph into an ostrich?

  115. To my fellow Canadians (on paper or not):

    Why not a toe in the water approach for non-filers? Start with 2011 and send in your Mr. FUBAR and Mrs. 1040 forms. Send no letter. Wait and see what Sir IRSS does. If he does nothing then continue on filing and try to rearrange your finances to at least reduce the amount of paperwork you have to do each year. You can also work toward your ultimate tax freedom by acquiring Canadian citizenship (if you don’t already have it) and the precious CLN.

    If Sir IRSS sends you a letter saying where the heck did you come from and I demand to see previous returns from you then write him back and say, so sorry, you only became aware of Mr. and Mrs. recently and here “kind” Sir IRSS are more forms for 2008, 2009 and 2010. Now chances are 2011 and those three previous years will all come to naught for the purposes of tax collection because you will owe nothing or next to nothing to Sir IRSS. If Sir IRSS gets cranky and says bad tax slave I am going to collect penalties from you, big penalties, you can “respectively” write him back and say that the Canadian government does not take kindly to the USA extracting wealth from our country in this manner and it will have nothing to do with acting as a collection agency for Sir IRSS. You can add that you did your best for Mr. and Mrs. and that you really think that that should be the end of it. Just keep assuming Sir IRSS will be reasonable, even though you know he probably won’t be. Sir IRSS might insist that there is no excuse for ignorance, but ignorance is as ignorance does, and it’s absurd to say there is no excuse for something that just is.

    And of course, this is where things can get messier because Sir IRSS may make threats of not allowing you entry into the USA to spend your tourist dollars or visit granny, taking you to court (not going to happen – court is across the border), snatching your first born child, holding your granny as hostage, perhaps a drone attack?, etc. But stand firm because all of this will take time and while letters are going back and forth between you and Sir IRSS you can be quietly acquiring Canadian citizenship (if needed) and then quietly renouncing your US citizenship. You will then be able to cross that border with a Canadian passport and a CLN in your hand and I really don’t think there is much they can do to you at that point. I think my approach would be to do my best with Mr. FUBAR and Mrs. 1040 and not hire experts to help because the experts are perhaps too efficient and the idea is to string things out until you have a CLN in your hand. If things still look dicey regarding that border crossing you can always do a legal name change I suppose. Snail mail can be a many splendid thing in this case and I’ve heard that Mr. IRSS is adverse to e-mail. Phones have those little thingies called talk to my voice mail and I can see you are someone I don’t really want to talk to by your caller ID.

    Now if that American citizenship is just too precious to give up then by all means pay the penalties and tell yourself that it was worth it even at twice the cost. This is, of course, just my toonies worth and you know all the disclaimers which amount to you may have to take all this with a grain of salt. It’s just my opinion and I know I have a tendency to over simplify things. I couldn’t really follow the Steven-Michael discussion because it made my head hurt.

  116. @blaze,
    Unfortunately, there are probably many others in the running for that title – ‘Universe Queen of Worry Warts’ – a contest no-one knew we’d entered regarding our US status as a credible threat to wellbeing.

    and @saddened;
    You’ve got at least one serious rival!
    I don’t want to win the silver cup – even a seasoned champion worrier (like me) could never have imagined up this state of affairs – it’s so fantastical in scale. On the other hand, it has displaced other worries – and moved them way down on my list.
    : )

  117. @Badger: I don’t know if it will help Saddened to know she has rivals–It may give her something else to worry about. Then again, anything we can do to get her mind off IRS is a good thing.

    Tiger quietly and happily conceded her rights to the crown last night. Tiger can be Miss Congeniality instead.

  118. @blaze, I’ve got an extensive list of alternate and credible threats to well-being if anyone needs a diversion from this one.

    Congrats on your new title @tiger!

  119. @blaze and all. You know when 911 happened one of the first things I thought was how this event and the US’s reaction to it is going to overshadow everything else we as members of this planet should be concerning ourselves with, the environment, poverty and the multitude of plagues we face. This was a horrible atrocity against the US and I stand behind the US in preventing anything like this from happening again but I am tired of how it has become a premise for so many oppressive and aggressive policies against the other members of this planet, which in turn are not helpful in its efforts to deter acts of aggression from the outside. America, you aren’t the only people on Earth!
    Some of you may find this funny:
    Aliens out in space were looking down on Earth. One said, “It seems the dominant life forms have developed satellite-based weapons.”
    The second asked, “Are they an emerging intelligence?”
    “I don’t think so”, the first responded, “They have their weapons pointed at themselves!”

  120. @Badger, I will gladly hand over the title to you,but then that would mean you are the Queen Worrier and I wouldn’t want you to be, because it is a horrible thing. I wish it would just go away.

  121. @bubblebustin

    Regarding your “a real amnesty would be to allow the IRS the discretion to reduce the penalty to “zero”.

    I agree with Petros, they already have that discretion!! They had the discretion to create the OVDP and OVDI in the first place, and they have the discretion not to apply penalties. Congress, as far as I know, never says they “shall apply” this or that penalty in relation to taxes. They leave it in the world of “Mays”.

    So, they had the discretion, and they just blotched the mission because short term penalty revenues trumped long term compliance goals.

    Look at that $4.4 billion collected as Shulman reported in his Press Release(s), as their political “chest thumping” equivalent of AGIs London Financial Division’s big bonuses on the short term gains from selling Credit Default Swaps (CDS) that later blew up and Treasury bailed out. The brokers that sold them, kept their bonuses for their short term profits on sales, and the U.S. Treasury was left with the mess and the bill. The IRS keeps its “bragging points” and we are left with the damage.

    The goal of IRS actions is supposed to be to increase compliance, but however, as we have seen, it seems to take second fiddle to short term penalty collection, as contrasted to a longer term mission of better compliance from a tax and enforcement system that is deemed fair and just.

    The unintended and exactly opposite impact of the OVDI type programs is that it blows up on the IRS, just like CDS’s blew up on AIG. It creates a whole new community of tax resisters that weren’t there before. It creates extremely negative PR. It pushes folks to renounce their citizenship. It recreates even more stupid legislation, i.e., Ex-Patriot Act, and destroys the IRS reputation, respect and credibility. It does create more fear, but it is hard to see a positive in that! Although the IRS hubris mongers might love it.

    However, in the meantime the OVDI designers got the political benefit (bonus equivalent) of the program. They received the accolades from those “inside the beltway” who believe the proclaimed success of this misguided program. They then moved on to Bigger and Better things, going out the revolving door, while someone else (like a Nina Olson) is left to try clean up the mess and repair the damage, or worse still just add to it (if we get a temporary commissioner like Steven T. Miller.)

    The type of IRS action that we have seen the last 3 years is always a negative for what is supposed to be a voluntary compliance income tax program. They did not have to create an OVDP to give UBS cheats a chance to come clean and pay set penalties. They could have pursued DOJ prosecution actions using existing statutes without creating a “one size fits all” penalty regime which did not include discretion while threatening everyone else that they had to join. Normal and lawful QDs were highly discouraged! However, in their victory flush over UBS, they were not thinking rationally and long term. They wanted the money and the success now, during this administration!

    They could have said, “OK, guys, we have cracked open the Swiss secrecy door, and if we get you, we will throw the book at you UBS types, but if you voluntary disclose, no penalties are going to be levied. Just pay up your taxes and your interest penalties, and bygones will be bygones.”? They have that discretion! Now, in my opinion, that would have really increased compliance.

    However, this is truly just about the money with compliance just a passing thought, a throw away line on a press release. The OVDP was seen as an easy (albeit bureaucratic) way to extract penalties without spending lawyer and court time actually prosecuting the laws already on the books. They naively thought that providing so called certainty as to penalties (because we must punish, as it is our culture’s way of doing things) would improve compliance. However, in fact, due to the large number of minnows in the sea (which they did not consider) it may be driving more taxpayers underground or totally out of the system via renunciations. And, they have created a huge negative marketing campaign that will continue to have negative consequences for years and years to come!

    I reckon it is about time for another Shulman proclamation, as his days in office are numbered. He will be trumpeting all his successes making the IRS the envy of the world. He will tell us he has collected $XX more Billions for the U.S. taxpayer from those offshore cheats, as he walks out the door to a lucrative practice advising victims of his wonderful programs. Mark my words! This offshore victory will dutifully be reported by our journalist scribes without one question! I could write the Reuter’s story now and just mail it in, and save them the time.

  122. @ Just Me
    I think you just rewrote Aesop’s Fable of the Sun and the Wind. Canada (other reasonable countries too) is the Sun 🙂 and the USA is the Wind :(. We know who wins this. We know it will take awhile to win though.

  123. @Saddened: Good for you for seizing the title, but being willing to hand it over to Badger when you finally stop worrying.

    Look everyone, Saddened’s new gravatar is a crown. She really has earned it–but she has a lot of competition trying to unseat her from the throne of Universal Queen of Worry Warts.

    @bubblebustin: “With Congress, every time they make a joke it’s a law, and every time they make a law it’s a joke.” (Will Rogers)

    No one is laughing at their jokes.

  124. @justme, please continue to get carried away-you manage to put into words what many of us are feeling. If it’s not appreciated (as I’m sure there’s few to speak of) they have the option of driving on!

  125. @bubblebustin, sorry but did your agent tell you that it might be possible to obtain benefits within the OVDI program without opting out ? Did you have to talk to the TAS to get that concession ?

  126. @amr our TAS agent said that they were negotiating within OVDI and that we may be able to get our cap gain tax penalty eliminated with the first time penalty abatement under the IRM, there was no discussion about benefits and we did not discuss opt-out. She said that she could not open proceedings yet as we have not gotten a response from OVDI (and still haven’t).

  127. @Michael

    Are you, Steven or any other practitioner of your acquaintance aware of any case now pending in any US court where the Justice Department is seeking to enforce a civil fine for a FBAR violation?

    Are you aware of any such past case that has ever been tried to a verdict?

    Were such a case to be filed would the DoJ be bound by a “quantum” previously proposed and challenged administratively or would the court be free to assess a civil fine in its own discretion.

    Since both the constitutional validity of the law as well as the quantum of punishment will depend on the gravamen of the offense in relationship to the punishment sought would this not open the door to wide-ranging civil discovery requests directed against the plaintiff by the defendant concerning the past, present and future law enforcement and/or regulatory utility (or futility) of the FBAR itself?

    Would such discovery possibilities not also be available to a defendant faced with a criminal FBAR charge?

    If after nearly 8 years of the enhanced FBAR penalty regime and nearly 3 years of OVDI no such civil case has ever been filed, one is compelled to ask:

    Why?

    Why has no practitioner yet advised or encouraged their client to “call” the government by refusing to pay any FBAR fine or refuse to plea bargain (at least until after discovery is completed) thus daring Schulman & Co. to bring such a civil enforcement action?

    Forget Steven Mopsick’s offer of pro bono assistance to anyone faced with a 300% FBAR penalty. I am ready to offer my assistance pro bono to anyone faced with a FBAR collection suit for ANY amount who is prepared to get it on with the DoJ.

    It is time to bring this shameful FBAR farce to an end and either expose the naked venality and lawlessness of Shulman’s revenue enhancement through extortion policy for what it is or go down fighting.

    Renounce?

    I have not yet begun to fight.

  128. Are you, Steven or any other practitioner of your acquaintance aware of any case now pending in any US court where the Justice Department is seeking to enforce a civil fine for a FBAR violation?

    Yes. there is a case currently pending US vs Williams. The Justice Department actually lost the case in trial court and is now appealing. Williams was an acknowledged felon and tax evader.


    Why has no practitioner yet advised or encouraged their client to “call” the government by refusing to pay any FBAR fine or refuse to plea bargain (at least until after discovery is completed) thus daring Schulman & Co. to bring such a civil enforcement action?

    Most clients aren’t interested in long fights, and want to get on with their lives. A practitioner would likely not serve clients well by urging quixotic fights on weak grounds.

    Personally, I think the constitutional arguments are generally quite weak EXCEPT an Eight Amendment argument if excessive fines are invoked. So far that may be why the government has not gone beyond 50% of max account balance.

    Now, for the right client, I think a practitioner might suggest a fight. The government has generally picked its fights carefully, against people who are clearly willful tax evaders. For someone with reasonably good facts, I don’t think the government would bring a case, largely because their burden of proof is quite high.

    A practitioner’s duty is to suggest the best possible solution given the facts of the situation (that is consistent with the law). In most cases, a quixotic fight will not be a solution, and I doubt the government will pick one either. HOWEVER, the best solution can be VD (for people with serious criminal risk), or QD or going forward comply. Practitioners can differ on which is best for which client, but I am astonished that Steven would not even consider QD for clients. Of course, if you make a noisy disclosure and the IRS does not hear it, does it become a QD 🙂 ?

  129. @ plodder, The Constitutional arguments are weak. Why? Because the Constitution isn’t worth the paper its printed on any more. The courts have interpreted the laws without understanding the meaning of Constitution much to the detriment of the rights of the People. When that happens to the degree it is happening today, a new revolution is inevitable, because free people will not stand for their rights being systematically trampled upon. Or have Americans become passive slaves of the IRS? I guess so.

    The reason they are weak, is because the US government doesn’t have to worry about people fighting them. Conrad Black tried it and was mostly successful even up to the level of the Supreme Court. Look where it got him: millions of dollars poorer and a few years in prison. The justice system in the United States is broken.

    On historical grounds, the FBAR law, FATCA, 8938, extra-territorial taxation etc. violate the 4th, 5th, 6th (if ever goes to trial), 8th and 9th amendment rights. They also violate the Declaration of Universal Human Rights. The arguments for this, just getting started, are on the side bar. No one, absolutely no one, has said that these arguments are WRONG. Some have said, however, just say that there is no chance of winning in court unless you have millions to spare on a court challenge.

    Consider that extra-territorial taxation without representation was at the heart of the abuses which caused the American colonies to revolt against the King, and then you get an idea of how angry the expat community is over these issues. We have no representation, and our wealth is being systematically attacked by the IRS. Many of us, including myself, have given up our birthright to live in the United States just to escape the clutches of the evil monster, the IRS (sorry Steven, the IRS is an evil monster keeping poor expats awake at night in fear and trepidation). This is Hope and Change, Obama’s America. But the Republicans offer us no hope either. Boehner’s support of the Ex Patriot Act is shameful. He is a disgrace.

  130. Petros

    Some of the ‘whales’ have millions of dollars, indeed one (a Russian American billionaire) has billions. He didn’t really fight in court either, although he did recently sue UBS (and the case was dismissed). In any case, I was responding to a question asking why practitioners aren’t urging their clients to challenge the government and refuse to plea bargain. In most cases, I would guess the evidence against them is overwhelming, and they (or their lawyers) don’t think the constitutional arguments would stand up, even if they spent millions. Lawyers would probably benefit from long legal battles with the government, after all.

  131. @ plodder Thanks. Well this is a case of appearance rather than substance. A violation of a whales’ rights doesn’t appear egregious because the whale had mens rea. But we expats have no mens rea, and therefore, perhaps IRS and Justice would have carefully to avoid prosecuting us lest they have this big stick that they use to bash the whales taken away from them because the unconstitutionality becomes clear when applied to a minnow.

  132. Pingback: The conscience of a lawyer and “The FBAR Fundraiser” « Freedom from the tyranny of U.S. citizenship-based taxation for U.S. and dual citizens outside the U.S.

  133. @plodder
    I believe you might be new to posting on Isaac Brock. Welcome, always interesting reading to see the opinions of our new posters. Thanks.

  134. Just definitions for the non lawyers amongst us… (save you the google search)

    mens rea
    As an element of criminal responsibility, a guilty mind; a guilty or wrongful purpose; a criminal intent. Guilty knowledge and wilfulness. A fundamental principle of Criminal Law is that a crime consists of both a mental and a physical element.

  135. The fight I would like to make would be to argue the legitimacy of the IRS assessing me a capital gain and associated penalties on the sale of my principal residence in Canada, something tax exempt for 1st class Canadians, not for the 2nd class dual citizen. But then it would have to be pro bono, as I am not going to use any more of our precious retirement savings on this matter. My MP, John Weston, suggested that Article 25 of the treaty may eliminate this tax, but our US tax lawyer disagrees (wow, two lawyers who disagree with each other!) I can’t help but feel the treaty let us down, but then how many US persons-who care to inform the IRS about it- have profited by more than $250,000 on the sale of their principal residence in Canada except recently, and after the laws changed in 1997?

  136. @Plodder

    Your remarks are well taken and all too true.

    The lawyer owes his first duty to the client rather than the “cause” and, as is almost always the case, the client with his ass in a crack is clearly focussed on extracting both cheeks with the least pain possible.

    And, as any lawyer ought to know, Constitutional challenges are rarely successful. All laws and statutes are written in the shadow of the Constitution and are constantly being scrutinized. The Bank Secrecy Act that originally authorized FBARs has already survived a (rather weak) constitutional challenge as a complete body of legislation which, although it does not rule out a subsequent challenge of a particular element, makes that challenge that much more difficult.

    That said, sooner or later someone – either the DoJ or an unhappy taxpayer – is going to make a misjudgment and the right case for testing FBAR’s legitimacy with motions for pretrial discovery flying back and forth will be the result. When it happens, I want to be there.

    I believe that full discovery – civil or criminal -is what Treasury is most concerned about avoiding.

    I think Treasury knows that FBAR’s very right to exist depends upon what was probably a “pro forma” finding of law enforcement utility made by the Sec. of the Treasury in 1972. Upon what evidence or logic that finding was originally made remains a mystery that FOIA and/or discovery and/or a trip to the dustier shelves of a first class law library might reveal.

    But, even if the government could defeat a substantive due process challenge to the very legitimacy of the existence of the FBAR, the effort in doing so would, in my view, expose a 40+ year history of near complete uselessness of FBAR data framed by a nearly unblemished record of law enforcement or regulatory indifference in enforcing FBAR filing obligations during that same period.

    The coincidence of sudden law enforcement interest in FBAR following the grotesquely inflated penalties introduced by the JOBS Act in 2004 and the subsequent suggestion by TIGTA in early 2005 that FBAR offered what it euphemistically described as “compliance opportunities” whose value could be measured in heavy coin will be too obvious; especially when viewed in the light of the Service’s failed 2003 OVDI and its subsequent behavior in the 2009 and subsequent VD initiatives.

    That exposure would make it embarassingly clear that any civil penalty for an FBAR failure to file that exceeded a parking ticket would be disproportionate to the offense under an 8th Amendment analysis. That, in turn, would pull the plug on the Service’s use of FBAR to provide “leverage” where the threat of criminal sanctions would not inhibit a QD.

    In short, it would put an end to the continuing fraud that the OVDI programs have come to represent and, hopefully, will encourage the powers that be at the Service to put an end to this OVDI nonsense and get back to the good ol’ QD that the Service – and its Knechte – are trying so hard to discourage.

    One last observation – and I am not being entirely facetious here: money garnered in the course of an OVDI gets added as a “notch” on the handle of the Director’s shootin’ iron.

    In contrast, money flowing in from QDs doesn’t get any publicity and because it cannot be easily ascribed to a particular Director’s “initiative”, the Director can’t use it to pad the statistical evidence of his “triumph”.

    Silly as it may sound, the IRS’s attempt to discourage QDs may be due, at least in part, to the bureaucratic imperative to “keep score”.

  137. @Todu, I share your cynicism. I also believe that the IRS will shift from the FBAR to the ‘son of FuBAR’ 8938 as its main means of extracting civil penalties for lack of compliance. As it’s directly under title 26, it will be far easier for the IRS to fine people.

  138. @todundsteuer ‘…IRS’s attempt to discourage QDs may be due, at least in part, to the bureaucratic imperative to “keep score”.’ …to the detriment of citizen and taxpayer.
    “When governments fear the people, there is liberty. When the people fear the government, there is tyranny.”
    -Thomas Jefferson.

  139. @Mona

    I agree.

    But the service still has the problem of lack of 3rd party reporting of foreign accounts or assets. FuBAR, and son-of-FuBARs and the entire panoply of information returns (3520, 5471, 926, etc. ad nauseum) depend almost entirely on 1st party reporting which, for “revenue enhancement” purposes, makes them useless to the government as soon as they are filed.

    Detection of non-filers and “revenue enhancement” through Son-of-FuBAR et al. is the problem FATCAT is supposed to solve.

    But, except for Form 8938, FATCAT is a long way from becoming a reality and even if widely implemented it will almost certainly fail to detect anyone but masses of innocents abroad or the occasional unlucky/lazy tax evader.

    Which is pretty much where we are today except that masses of innocents @ $10K per asset and no need to get the Service’s expensive and precious few carbon-based units involved in collection will likely be a good deal more remunerative than this whole OVDI circus.

  140. @Todundsteuer

    Mate, from my perspective and limited expertise, you hit the nail on the head with this analysis. Never underestimate the perverse incentives that motivate bureaucrats to notch up Faux victories on their score card terms.

    It has long been my frustration, that no analytical or real data driven analysis has done on these OVDIs, except for the two worthless stats that Commissioner Shulman likes to trumpet about. 33,000 tax cheats come clean, and $4.4 billion of revenues collected. Tells you nothing of substance, but it is their claim to victory. They get to define success. With a non questioning media, those become his notches of success and am sure will be on his next resume’.

    I have commented on this before at… http://bit.ly/JrOnHH

    btw…. Thanks to you and @Plodder for your contributions to the discussion.

  141. @justme, not coinciding with the end of the Mayan calendar? But I do think that the cosmic collision will happen before we get a response to our OVDI submission.

  142. @UncleTell,

    You have, but I think it should be mandatory every now and then to re-post it when we all get so serious about these issues. 🙂

  143. @UncleTell…
    It has been a long time since I have seen that one. Thanks for the afternoon diversion!

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