Law-abiding expatriate faces a dilemma

by Phil Hodgen on March 14, 2011

This email is posted with permission from a correspondent. I don’t know this person. The email came from a throw-away account, without a name. When you read it, you will understand why.

Many thanks to my correspondent for this. I suspect he/she is expressing feelings held by many tens of thousands (if not more) ordinary Americans living abroad.

Please send your anonymous stories. I will post them for you. Perhaps when you tell your story you will help someone else.

I enjoy reading your posts on tax issues. We expats are such a fragmented group that our clout in Washington seems to be near zero and it is good to have someone like you hammering on FBAR issues.

I have lived abroad over 2/3 of the last three decades, including the last 7 years. I have filed an [IRS] return every single year and never have consciously avoided any US tax obligations. Over two decades ago, while living in an emerging market, I opened a brokerage account and my employer paid into a private pension account under my name.  Over the last 20 years, I have not put additional funds in or withdrawn any funds from either. In fact, due to acquisitions, mergers and bankruptcies, both these accounts have changed administrators several times.  I never received any statements and never followed them much.

Last year, after 30 years abroad, word of the FBAR reached me for the first time—because for the first time ever, my employer contracted a professional accounting firm to assist me with my tax return. 

Until now, my only brush with the law had been a 1986 speeding ticket.  Now, I understood that I have committed at least 20 felonies! I learned that non-US stocks as well as pension funds abroad should be declared every year!

I would have no problem paying the $10,000 that I estimate I saved by not paying the taxes I did not realize were due.  I also would not mind paying the $7,000 in penalties and interest for paying after the fact.

But due to the IRS’s world view, this does not seem possible.  I seem to be tossed into a sack with Americans who have never lived abroad but, with a full understanding that it was illegal, stashed funds abroad to avoid taxes.

I see I have three general strategies now. I can participate in the [IRS]’s new amnesty plan, I can make what is termed a “quiet disclosure” or I can work hard to bury the tracks of these funds.

I feel strongly opposed to the idea of tossing myself at the IRS’s feet as part of an amnesty program. Trouble is, I have no idea how much I paid for each stock or even  what year they were purchased in. Refiling my taxes for 8 years would be a nightmare because the administrator of my brokerage account changed four times and three of those firms no longer exist. None of them ever sent statements. I roughly know what I invested twenty years ago but have no records.

Aside from paying $130,000 or so in penalties (the 25% of the highest value clause), I would be plea bargaining on a crime I did not commit. The IRS never publicized FBAR forms or that stocks (I never heard of stocks being “securities” before) and pension funds should be reported—otherwise it would not have taken me 30 years to hear about this! I always understood that the issue was foreign bank accounts.  It is sad when your own government does not communicate well and then tries to penalize its taxpayers for this deficiency.

I also really hope to avoid having to cover my tracks because that makes me look like avoiding taxes was my plan 30 years ago, which is absurd.  Plus, now that I understand I should be declaring these two accounts, I really would like to. So maybe a quiet disclosure is my only route.

I have talked to several American expat friends and a few other colleagues that hold American as well as one other citizenship. Almost to a man, we all have violated [IRS] rules…mostly due to ignorance. The trouble is that by the time you hear about these filing requirements, you have violated the law several times…and then you either are forced to cover your tracks or pay penalties that are tremendously high compared to the “benefit” you received in ignorance.

I really do not know which route to take. All I know is that I wish the IRS had been doing a better job of communicating to Americans abroad in plain English over the last decades (for example, if they had said stocks instead of securities on their forms, I would have been declaring them all these years!).

The draconian penalties the [IRS] now is publicizing may well be justified to ferret out Baltimore dentists and Manhattan tycoons that opened Swiss bank accounts or shell corporations in the Caymans. But in the case of honest expatriates that committed “felonies” without realizing it, the IRS is only forcing us reluctantly underground.

Reader comments (10)

  • I would urge you (and others in your situation) not to make the mistake of thinking the only two choices are (1) continue to do what you’ve been (not) doing (which now becomes willful), and (2) make a formal voluntary disclosure to the IRS. One option that probably makes more and more sense for a great many people in your position is to start filing FBARs (and including the income on your 1040s) going forward, and leave it at that. The IRS could potentially audit and assert penalties, but even if they do (which they very well may not), they penalties that they can reasonably collect will in many cases be far less than the 25% (formerly, 20%) they expect with a formal voluntary disclosure.

  • Let me echo what Michael said. He’s exactly right. Especially, I want to emphasize that people take a very careful and skeptical look at the new VDP program (Michael’s choice number 2). This is not legal advice and I am not your lawyer, etc.

    The VDP #2 is a program that cannot help but fail.

    – The penalties are disproportionate for everyone except those egregiously guilty of tax evasion.

    – The expectation that all required paperwork for 2003-2010 can be completed and filed by the deadline is ludicrous.

    One wonders why the IRS would deliberately implement a plan so obviously intended to fail.

  • Mike/Phil,

    Do you think if filing FBARs going forward (from tax year 2010) would give IRS more hints/leads to start investigating the taxpayer?

    thanks.

  • Mike/Phil,

    I also wonder if your advice (filing FBARs going forward ) only applies to expat, or people in US as well?

    Also in what scenarios do you suggest your clients to participate the (new) OVDP?

    Thanks.

  • So if a person has a superannuation fund in Australia and becomes a US resident (before receiving the funds) they need to report this fund on form 3520A and form TD F 90-22.1?

  • Yes you have Form 3520-A and Form 3520 to consider, and Form TD F 90-22.1.

    Sorry. :-(

    Phil

  • Thank you, that is what I thought. Now it is obviously past the filing date for that form, is it possible to file it now with an explanation to show that it was not intentional)?

  • @patti,

    It is certainly possible to do late filings. Don’t jump willy-nilly until you understand the risks–the penalties that could be imposed.

    P

  • I have an account in country X in currency XC and my relative has an account in country Y in local currency YC. I need YC in country Y and my relative needs XC in country X. Can we do private swap? That is I transfer my money in country X to my relative’s account in country X and my relative transferred money in country Y to my account in county Y. What form do I have to file, if any?

  • @DK,

    That, I’m sorry to say, is a billable question. Takes brainpower and time. And a lot more facts. :-)

    Phil