Yet another FBAR minnow to the guillotine

by Phil Hodgen on November 6, 2012

I have permission to post this anonymously.

With regards to the US Government/IRS/FBAR/OVDI witchhunt/shakedown, I fit the mantle of victimhood at the hands of our so-called government for the people, of the people and by the people to a T.

Whether stupidly or not, I came forth this last March, because I did not disclose two or three of my [Country] savings accounts (I’ve lived in [Country] for almost 20 years) over my covered years (2003-2010).

I got a letter from the OVDI people in [recent month], to ask me to submit 1040X’s, submitted FBAR’s and their paperwork. The latter is essentially asking me to provide the rope to hang myself.

Tallying the results? I owe [under $200] in aggregate back taxes to the IRS, yet will very likely end up paying the 27.5% FBAR penalty of around $80-$90,000.

There isn’t much more I can say about the unfairness of all this. I am still reeling emotionally. My friend asked me to please control my anger, so I am doing it to keep this civil.

If there is a class action suit against the US Government, I would like to consider joining.

NB.  Not our client.  I don’t know his real name.  The email is edited to disguise identifying facts.  Why?  Here’s my correspondent’s first followup email to me:

I am reluctant to use my real name at this time for fear of retribution.  If they want to use any info I am to provide, as trailers for a witch-hunt, I am sure they will find things to make my life miserably – no matter how trivial or irrelevant to their supposedly mission of uncovering money laundering or unpaid tax [under a couple of hundred] dollars. 

Then the second follow-up email:

I further changed it to say “under $200″ rather than an exact figure.  I am that paranoid.

The paranoia is justified.  A government speaker at the California State Bar Tax Section’s annual meeting said that Criminal Investigations is following up any inquiries they can to see if the taxpayer entered the Voluntary Disclosure Program.  If not, expect a letter from Criminal Investigations. 

From Tax Notes Today, 2012 TNT 215-1:

The IRS Criminal Investigation division monitors the information it receives under the Service’s offshore voluntary disclosure initiatives to ensure that taxpayers who inquire about the programs follow through, a CI official said November 3.

Rebecca Sparkman, CI director (operations policy and support), said that CI checks to ensure that taxpayers who undergo a pre-clearance check for acceptance into the voluntary disclosure programs follow through with disclosure. “Those [taxpayers] are suspect, and we are looking at those who decided not to continue to come through. Will it be Criminal Investigation? I don’t know; it could be a civil audit,” she said at the annual meeting of the California Tax Bar and California Tax Policy Conference in Coronado, Calif.

Sparkman warned that taxpayers who make only partial disclosures or don’t supply all the information about their offshore activity to the IRS will face severe consequences. “When [the taxpayer] is not truthful, yes, CI will come back in,” and the taxpayer may be criminally liable, she said, adding that the same is true if badges of fraud or lies are uncovered during an examination.

“I really believe that we are at the beginning of our work in the international offshore area,” Sparkman said, adding that the information received from the IRS’s offshore voluntary disclosure programs is fueling investigations into new banks and countries.

The government is not your friend.  In any way whatsoever.  If there is a lesson the world should have learned since the whole Voluntary Disclosure Debacle started in 2009, it is that ordinary people should stay the f— away from it.  The IRS, in its enthusiastic embrace of procedural due process (if we process everyone through the system in the same way, we are being fair) will impose equal penalties on the grandmother living on Social Security and the multimillionaire tax evader.  Because equality matters.  

That’s what Anatole France first told us:

The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.

Related from Scott Adams, the creator of Dilbert:

It has come to my attention that many of my readers in the United States believe they have the right to privacy because of something in the Constitution. That is an unsupportable view. A more accurate view is that the government divides the details of your life into two categories:

1. Stuff they don’t care about.
2. Stuff they can find out if they have a reason.

Read his whole blog post, titled The Privacy Illusion.

Happy Election Day.

(We are hiring.  If you’re looking for an international tax lawyer job, give us a call.) 

Reader comments (8)

  • Just Me says Nov 7, 2012 9:14 am

    The processing FBAR Factory just presses on, doesn’t it? Once that conveyor belt is turned on, it just doesn’t stop until all minnows are ground up as fish fertilizer.

    Not knowing all the details of how or why this minnow got caught in this net not designed for him, I do hope he can set aside fear enough to consider ‘opting out’ of the OVDI.

    Fear is his greatest enemy for a better result.

    I do think there some hope for a more reasonable outcome and would encourage this minnow to read a couple other success stories here. It might provide some inspiration.

    Moby’s storyhttp://isaacbrocksociety.ca/2012/03/10/moby-opt-out-update/

    or ijs story

    http://isaacbrocksociety.ca/2012/09/16/a-minnow-opts-out-of-the-irss-ovdi-and-gets-the-correct-result-a-simple-warning-letter/

  • Chris says Nov 7, 2012 9:51 am

    Hi Phil,

    Can you please provide a little bit more details if you can get them: I am especially interested in what he means by “I came forth”. i.e. it is not clear whether the person entered OVDI, or if he just submitted the clearance without following through, then got contacted by a CI, or got contacted after disclosing the account normally as part of his tax return (what Jack Townsend would call a Go Forward). From his email, it seems that he has not sent the OVDI package to Austin.

    If he did not go through with OVDI, is he still required to provide 8 years of 1040X, or the normal 3 years of statute of limitation and 6 of FBARs?

    From what he wrote, he looks like he lives abroad, right?

    Earlier this year, you met with the IRS regarding RRSPs. Do you have any plans to meet again regarding the more general issue of immigrants, OVDI and FBARs to try to provide us with a path to compliance that would not ruin us, and try to explain the IRS that their current action steers people away from compliance.

    Thanks a lot for your involvement in this.

  • Phil Hodgen says Nov 7, 2012 7:13 pm

    Chris,

    All I know about the situation is what is in the post. I would assume that he entered the OVDI thinking the IRS is sane. I believe the FBAR penalty he is describing is the OVDI penalty.

    He lives abroad and has lived abroad for the last 20 years, I believe.

    I have no plans to meet the IRS on OVDI, FBARs, etc. Life is too short.

  • badger says Nov 8, 2012 10:03 am

    Phil, re “The IRS….will impose equal penalties on the grandmother living on Social Security and the multimillionaire tax evader. Because equality matters. ”

    In Canada, where more than 1,000,000. duals/US citizens ‘abroad’ live and pay taxes in full to the Canadian Revenue Agency, in a country with the most extensive reciprocal tax treaty with the US in the world; our very own personal US official – Ambassador David Jacobson, has repeatedly assured us that the US is not after “70 year old Canadian grannies”, and that the US and IRS are not “unreasonable” or “unsympathetic”
    http://canada.usembassy.gov/ambassador/news-and-speeches/18-october-2011-ambassador-jacobsons-remarks-to-the-canadian-club.html

    …”recent media coverage of an issue that has been around for about 100 years, since the United States imposed an income tax in 1913. From the beginning, my country has taxed the incomes of American Citizens no matter where they live, no matter where they earn their livings.

    This is different from the way Canada — and some other countries — do it.

    The good news, however, for US and dual citizens living here in Canada, is that you get a credit for taxes paid to a foreign country. And because tax rates in Canada are typically higher than the rates in the United States, most US and dual citizens living in Canada who pay their taxes to Canada don’t owe any tax to the United States though they do have to file a US return as all other American citizens do. (I might add for the record that someone some place might have an anomalous tax situation where they pay tax in Canada yet still owe tax in the United States. And I’m certainly not here to give anyone tax advice.)

    The situation, however, is different for American citizens living in some other countries, particularly the so-called tax havens. In those places with little or no income tax, Americans will owe tax to the US since their deduction for taxes owed to the Cayman Islands, for example, will be much lower than the taxes owed to the US.

    And given our budgetary problems, the United States wants to make sure we are paid all the taxes we are owed. American citizens shouldn’t be able to avoid their tax obligations by establishing a residence in a tax haven.

    There are two particular problems with the operation of these rules here in Canada. First, there are so many dual citizens, typically by birth, probably more than a million. So this issue is much more common here than in any other country in the world.

    Second, the penalties — at least in a theoretical sense — can be quite severe.

    So you could have a situation where some 70-year-old grandma:

    was born in the US;
    moved back to Canada as a young child;
    never earned any money in the US;
    has no assets in the US; and
    dutifully paid all of her taxes in Canada.

    She didn’t file a US return because she didn’t think she had to. And because she didn’t owe any US taxes. Nonetheless, grandma could be theoretically subject to serious penalties. To my knowledge we have never gone after a grandma in those circumstances.

    But there has been a lot of press about this lately and people are worried that we will come after them.

    When I read all of this I was concerned. So last week I called the Commissioner of the United States Internal Revenue Service to see what we could do. I explained the problem to him.

    The result is that both he and I are sympathetic to the concerns. We are going to work together to see if we can’t find a way to accommodate grandma — and others — here in Canada. But we have to figure out a way to do it without letting the person who is trying to evade taxes in the Cayman Islands off the hook.

    My message on this one is to sit tight. We are not unreasonable. We are not unsympathetic. We are not irresponsible.”

    Also: http://m.theglobeandmail.com/globe-investor/personal-finance/ottawa-seeks-leniency-for-canadians-in-us-tax-hunt/article557952/?service=mobile

    Ambassador Jacobson (lawyer, friend, appointee, and major fundraiser to President Obama) was dishing out a big plate of h——-t to the Canadian government, media and to those of us living and/or born abroad. The most charitable way to characterize it would be to say that he was being disingenuous.

    Now he adamantly refuses to respond to our legitimate attempts to contact him on the issue – following up on his assurances given a year ago. Apparently US citizens in Canada have no right to the US Ambassador’s assistance as long as what we want is for him to address those baseless and glib statments.
    http://isaacbrocksociety.ca/2012/11/02/us-ambassador-to-canada-david-jacobson-we-are-not-irresponsible/comment-page-3/#comment-85448

    The IRS has stated that it is not willing to make any country based exceptions for Canada to FATCA either – despite the Ambassador’s description of Canada as a higher tax jurisdiction, and NOT a tax haven.

    Ambassador Jacobson says ‘in theory the penalties can be quite severe’. And since the IRS won’t commit to anything clear, we’re paying thousand and tens of thousands to tax lawyers and accountants to prevent the application of those ‘theoretical’ severe penalties. So, we’re losing tens of thousands in fees, or to the IRS or to both – on our legal post-tax savings – and for most of us – with zero US tax owed – and in households with non-US family members and joint accounts. And that’s the story for those of us who are lucky citizens/permanent residents in a country like Canada that the US Ambassador says has a relationship that is extremely important to the US to keep sweet: “I am here to tell you that the United States is unbelievably lucky to have Canada as our neighbor.”

  • badger says Nov 8, 2012 11:00 am

    Here is an updated letter from Canada’s Finance Minister Flaherty responding to letters sent to him on these crossborder IRS issues.:
    http://isaacbrocksociety.ca/2012/11/08/letter-from-flaherty/

  • badger says Nov 8, 2012 7:23 pm

    The US Government is still hotly pursuing the 70 year old Canadian grandmothers – despite what Ambassador Jacobson says:
    http://www.fin.gc.ca/treaties-conventions/notices/unitedstates-etatsunis-eng.asp

  • badger says Nov 10, 2012 4:29 pm

    Further to the unwarranted persecution of FBAR minnows and the IRS committed to generating revenue – by slyly levying penalties snatched from grandmothers abroad who owe the US no taxes:
    Canadian grandmothers (and grandfathers) and their families better start contacting their Canadian government representatives and to stop FATCA – the Canadian government is in talks with the US to assist the US IRS and Treasury to snoop into and lay claim to your Canadian accounts. Apparently, Canadian politicians are in talks re handing over information on the Canadian post-tax savings of Canadian grannies.
    See; “Negotiation of an Information Exchange Agreement with the United States

    November 8, 2012

    “Negotiations are being held between Canada and the United States on an agreement to improve cross-border tax compliance through enhanced information exchange under the Canada-United States Tax Convention, including information exchange in support of the provisions enacted by the United States commonly known as the Foreign Account Tax Compliance Act (FATCA). ”
    See: http://www.fin.gc.ca/treaties-conventions/notices/unitedstates-etatsunis-eng.asp

  • Not a US "goodwill ambassador", abroad says Dec 7, 2012 8:04 pm

    Re “Scott Adams, the creator of Dilbert: “It has come to my attention that many of my readers in the United States believe they have the right to privacy because of something in the Constitution. That is an unsupportable view…..”

    The Canadian Civil Liberties Association has taken an interest in FATCA and the US extraterritorial threats to privacy, Charter and Constitutional rights of citizens and permanent residents in Canada.
    http://ccla.org/2012/12/04/ccla-registers-privacy-concerns-over-ongoing-canada-u-s-information-exchange-negotiations/