Discussion:OVDI

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Discussion Forum Index --> Tax Questions --> OVDI

Sissy (talk|edits) said:

15 December 2011
I have a client who has amended 8 years of tax returns and paid the tax due on amended returns. Now he is facing the penalties for not filing FBAR and has called me to see if he can now "opt out" of the program and take his chances on getting penalties reduced. Does anyone have any experience with this? How to proceed? thanks!

Marcilio (talk|edits) said:

15 December 2011
You can't opt out. What you can do is write a letter for abatement of the penalty based on reasonable cause. Not filing for 8 years makes it difficult to establish that TP is responsible and prudent, but that is the task at hand.

You can go to www.finCEN.gov (I don't know how to link to website) to read the law. Be sure to have plenty of time on your hands.

Perhaps Lizzit, Guya, or others can chime in.

JonF (talk|edits) said:

15 December 2011
If the client is a long time expat who owes no or little tax, the IRS issued some relief so you could write a letter indicating how the client matches these conditions: See this release [1]. Even if the client doesn't quite match all conditions, relief could still be requested.

If the client is not covered by these conditions ( for instance, not an expat and/or significant tax due), then the opt out process for someone who joined OVDI is described here[2]


The IRM has some details on how an FBAR audit could proceed [3] and on FBAR penalty appeals (this section was added only recently) [4]

Lizzit (talk|edits) said:

16 December 2011
If you're in the 2011 OVDI programme, you have AUTOMATIC penalties which can not be reduced. If you exit the OVDI programme, you have a SHOT, but not a guarentee, that all penalties will be waived under Reasonable Cause. Your "shot" is pretty much a full pardon IF your client had some Reasonable Cause of some amount. Your "shot" is less certain if the dude is: (a) a criminal (drug lord, arms dealer, money launderer, human trafficker, etc.) or (b) your client was glibly out-and-out lying when he said he had no offshore accounts in those previous years.

Proving a glib facile lie is pretty tough! For example, if he had an import-export business from another country, then it seems pretty obvious that he had a foreign account, right? Wrong. There's a dozen ways he can run one and pay bills in that other country without having an offshore account. What if he lives offshore? Isn't it pretty obvious then? Yes, but that the "accidental American" reasonable cause.

I'm guessing something close to 99% of the reasons that are INDICATIVE of a possible lie aren't PROOF of a lie, and thus, Reasonable Cause could be argued (and won!) in many cases where you inside of yourself are thinking, "Oh, come on, for the love of Pete, is the IRS really going to buy this?" Most importantly in defence of failure to file FBARs: Not having done so is not proof of a lie, it's proof of an omission (which is not the same thing). So, you argue reasonable cause for the omission, of which there is shedloads.

My requests all contain brief and limited facts and circumstances combined with a dozen or more clever little arguments boiling down to "how's a taxapayer supposed to know about all this crazy sh*t?" They close with a huge mea culpa and an "I promise not to do it again".

Barring criminal behavior, it's well worth doing. I'd be happy to review your mea culpa letter (which MUST accompany the FBARs) if you like.

Dhtax (talk|edits) said:

16 December 2011
It's not clear from the first question whether the client is in the OVDI program. If they are, I don't think the following applies, but if they aren't or can opt out:

There are big penalties for not filing FBARs, but according to the IRS rep I questioned specifically several times at a recent seminar on this topic, there is NO penalty for late filing, including for past years. So my guess is that if your client hasn't already been assessed penalties, you should file all past FBARs. I don't see how they can give you a non-filing penalty if you file them, even if late. Lizzit: what do you think?

Guya (talk|edits) said:

16 December 2011
If one has reasonable cause for filing late the IRS can cancel penalties. FBARs were due by June 30th, no extensions are permitted.

If the client had reasonable cause then he would not have gone into the OVDI so logic says he cannot have reasonable cause. The penalties are calculated by the tax adviser on entering the program; so presumably - Sissy - you have already figured out the penalties and told the client what they will be and what positions you took where the FAQs are unclear?

JonF (talk|edits) said:

16 December 2011
It seems from the topic and the reference to 8 years of returns that the client is in the OVDI program.

It is simply not correct that there are NO penalties for late filing FBARs. Otherwise most tax evaders would simply late file FBARs the moment the IRS sent an audit notice. There are a number of people (a doctor with large accounts in HSBC India this year, for instance) who late filed FBARs, but are still being assessed huge penalties. The statute is pretty clear -- the penalty can be waived if there is reasonable cause AND FBARs are filed. Its an AND, not OR.

The IRS/DoJ has also been using the Schedule B question about foreign accounts as an 'indicator' (obviously not proof) of intent to hide. Last year, DOJ tried to use the Schedule B question as an indicator of willfulness in a court case (they lost the case on complicated grounds), but note that willfulness is a much higher standard for the DoJ/IRS to prove, whereas for the smaller non willful penalty, all they have to do is to deny reasonable cause, and the burden shifts back to the taxpayer. In short, someone most definitely does not need to be a '(drug lord, arms dealer, money launderer, human trafficker, etc.)' to be denied reasonable cause.

One could have 'reasonable cause' and mistakenly joined the OVDI. I posted some links to the process of opt out earlier.

All of this presupposes some tax deficiency -- if there is none, reasonable cause should normally not be an issue. Otherwise, there is a considerable amount of uncertainty (as most lawyers with offshore account cases admit), it all depends on the facts in the client's case. Opt outs from the 2009 program (and early withdrawals from the 2011 program) are being processed now, so practitioners should soon have some good data on how strict the IRS is being (unlike the past, where FBAR penalties even for  big time evaders were very rare) on opt-outs.

Dhtax (talk|edits) said:

16 December 2011
Guya, I know the FBAR says "no extensions" but that apparently does not mean that you can't file late, because there are no penalties for late filing. I know that sounds absurd, but I was at an IRS seminar on this topic, and the speaker said "file late, there are no penalties", and I pressed him on the point and he said that applied not only to current year but to prior year filings. I had been telling my clients who missed the deadline to not file, thinking that a late filing with "no extensions" would provoke a non-filing penalty, but this fellow -- who was in the international compliance office -- said otherwise. Anyone else? Lizzit?

JonF (talk|edits) said:

16 December 2011
The IRS was accepting late FBARs earlier this year if the only issue was that FBARs were not filed, but all income was reported and all taxes paid. The deadline for that was supposedly the end of the OVDI period, but to my knowledge they are still happily taking FBAR in such cases. That may have been what the official was referring to.

Dhtax (talk|edits) said:

16 December 2011
Only if "all income was reported and taxes paid"? That would rule out non-filers, no?

Well, maybe this is a case of weasel words or "IRS speaks with forked tongue." My impression from the answer I was given was that if the FBARs were filed, no late penalty would be imposed, and that implied that no non-filing penalty would be imposed -- ie, even if there were penalties for incorrect returns or under-reported income, at least the FBAR non-filing penalties would not be imposed. But maybe I should have asked him that more directly . . . it's like trying to get a straight answer out of a politician: they answer your question, but the answer doesn't really mean what you think it means. I wouldn't be surprised if this did not apply if the IRS had already started proceedings.

But let's look at a real (typical) case: What would you advise the client?

Case: Client is US citizen resident in Canada for 20+ years; hasn't filed US taxes in many years, or FBARs ever. Earned income is under the exclusion limit each year and he has minimal investment income (bank interest), so for the years he was employed he would not have owed tax on his earned income, and he thought that therefore he did not have to file. However he has a Canadian retirement account with value over US$10K, and he retired two years ago. Should he file his back FBARs?

Since he did not file in the years he was employed, he didn't file the form electing to have his Canadian pension treated like a US pension, so he should have been reporting the gain in investment value every year, which may or may not have incurred tax. I don't know if the IRS will accept that election if he files his back returns now. And since he retired he's supposed to be reporting his pension income which is not subject to the exclusion, altho he may or may not owe tax since it's taxed in Canada. What should he do? And is he going to be subject to non-filing penalties if he now files the prior year FBARs?

(Just to add another dose of reality: Client is now living on a modest pension; went to a lawyer who advertised on the internet that they specialized in FBAR issues, and was told it would cost him US$10-12K in legal fees, plus back taxes and penalties, if any, to clear up his situation. Just to add to the confusion, the US Ambassador to Canada gets on the TV and says, in effect, to the several million USers living in Canada, "Don't worry, the IRS isn't really going to pursue this as long as you weren't evading taxes . . ." -- whatever that means.)

JonF (talk|edits) said:

16 December 2011
The IRS issued this 3-4 days ago, saying that for someone in the circumstances you describe (expat, no returns, little to no tax due), there would be no penalties. So the client can file past FBARs and form 8891 without any penalties.

Dhtax (talk|edits) said:

16 December 2011
Very interesting, but it basically re-states what has been said before, doesn't clarify certain situations, and doesn't correspond to what the IRS rep told me. Many expats reading that document still wouldn't know where they stand or how much they risk being fined if they come into compliance. To be specific:

--It talks about dual citizens, but many expats are just permanent residents of their new country;

--It still looks like all past tax returns will need to be prepared to show that no tax was due; that can be a complicated and expensive process. And what exactly does "little" tax owed mean?

--This says that late filed FBARs must be accompanied by a "reasonable cause" letter. OK, my guy didn't say that, but it's probably worth doing.

--This also says that the IRS has some discretion in assessing penalties, which is nice to see in writing. It's especially nice to see that they will take into consideration that the bank accounts (or pensions) were not set up to evade taxes, but as part of normal life as an expat. Until now I've only heard "we have to follow the rules" followed by a "wink and nod", "well, we have very few resources and have to concentrate on high priority cases."

Look, I'm not trying to argue with other professionals' interpretations; I'm complaining that the rules are either so unclear or so selectively enforced that we professionals don't know what to tell our clients. The rules and penalties were designed for high income/wealth tax evaders. Telling low income expats that they risk huge fines is not exactly going to encourage them to get into compliance; but we can't ethically tell them to count on selective enforcement. I've run into situations where I've explained the rules to a prospective client with the result that the client went to another preparer and just didn't tell them all the facts because they didn't want to take the risk that when they prepared all those back returns they might be subject to penalties.

Lizzit (talk|edits) said:

17 December 2011
You're all freakin' bug nutty if trying to get a clear answer here. You. Ain't. Gonna. Get. One.

1) Any time you have one of these dudes, just file. Have a lawyer lined up to defend your clients in the remote but heart-stopping possible penalty assessment. Be sure to buy him or her drinks once or twice a year and keep in his or her good graces.

2) DHTax, The penalty technically applies to all late returns. It isn't being enforced.

3) Guya, Regarding your "logic" that no one would go into OVDI if they had Reasonable Cause, you're forgetting stateside cultural attitudes. Most stateside preparers recommend paying income tax penalties because most of the time their clients have crappola reasons for the errors. Culturally, they're in the habit of paying them. They're used to parking fines, speeding tickets, IRS penalties, etc. It's not something most people fight. Most stateside lawyers and tax people were recommended OVDI for what you and I would consider non-OVDI (i.e., Reasonable Cause) cases. That's because they didn't know how RC works for FBARs, and what constitutes RC for FBARs. The new IRS page clarifies some RC reasons that work for FBARs which don't normally fly stateside for normal stateside income tax problems. More people will now come forward and their stateside accountants and stateside lawyers are more likely to fight for RC.

Sissy now knows she can fight this and will probably win. You go girl!

NoVATaxes (talk|edits) said:

17 December 2011
I had someone walked in, told me he's in the 2011 OVDI, and needed help with the paperwork. He's got a US account in his native country, has always filed on time and reported all interests earned through the years (he got 1099'ed), but never did know about the FBAR requirement. A friend told him he had to join the 2011 OVDI. I told him to do the FBARs but get out of the OVDI. The case screams of reasonable cause.

Guya (talk|edits) said:

17 December 2011
I have, by today, acted for several hundred clients in the 2009 and 2011 voluntary disclosures. All of the ones we have closed from 2009 have closed with penalties that were a tiny, tiny percentage of the amounts requested by the IRS. Many ended up with zero penalties. Some ended up with IRS refunds they were not expecting.

The 2009 VDP and 2011 OVDI required specialist help. A practitioner who has only done 1 or 2 would not be acting in the best interest of a client.

Unless this is a core business of a tax adviser it should not be the business of any adviser, but is best referred to a specialist who undertands the nuances of these programs.

Remember that only 30,000 people participated overall in the 2009 VDP and 2011 OVDI - but the IRS raised $2.7 billion from these 30,000 brave souls. These are not games, these can be serious criminal matters which need serious advice from those experienced in both US law and IRS/FINCEN/DoJ practice.

Reasonable cause once again can best be argued by those who understand internal IRS process in handling this difficult subject - remember IRS practice may not follow statute so a clear knowledge of both is necessary.

JonF (talk|edits) said:

19 December 2011
NoVaTaxes -- if all income is reported and all taxes paid, there was absolutely no reason to join OVDI, it was even mentioned in their FAQ. There isn't even any need to argue 'reasonable cause', just point to particular FAQ line. In fact, their penalty spreadsheet value would come to zero, even in OVDI since there were no assets/accounts with unreported income. And no tax penalties.

Most stateside lawyers and tax people were recommended OVDI for what you and I would consider non-OVDI (i.e., Reasonable Cause) cases. That's because they didn't know how RC works for FBARs, and what constitutes RC for FBARs.

Most stateside lawyers with some experience in this area are not that ignorant. US based clients who have been filing tax returns (and not answering the Schedule B question properly) generally have weaker grounds for claiming reasonable cause (excluding pure signatory authority or unusual types of accounts like life insurance policies with cash value). Clients whose risk profile is higher than that of expats (and who have more assets in the US) are in a different situation from many expats. The basic point is that there is considerably uncertainty regarding how/if the IRS will proceed -- especially given that this law was rarely enforced in the path. There is even considerable legal uncertainty over what constitutes 'willfulness' (a court case last year muddied the waters further).

Dhtax -- I doubt it matters if someone is a dual citizen or a permanent resident of another country abroad. IRS guidance is unlikely to cover all situations, so the idea is to see how 'close' a client is to the safe harbor. I agree that the prospect of draconian penalties do drive some people (especially those with tenuous links to the US) 'underground'.

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