March 17, 2010 - Phil Hodgen

Panel presentation at Loyola Law School

Yeah I’m back. Singapore – Indonesia – Mexico. BamBamBam. Now I’m home and catching up, including catching up on the blog. I missed it.

First things first. I was on the phone with D. today (in South America) who nicely kicked my butt and said to post some videos. So that will be starting up again soon. Thanks D.

D. was calling about the whole FBAR mess. He’s in that boat. A normal person, paperwork footfault, minimal damage to the U.S. Treasury. Our Fearless Leaders aren’t going to pay people to build Escalades nobody wants to buy balance the budget on D.’s taxes.

Coincidentally I was on a panel yesterday at the Loyola Law School in Los Angeles. The session title? Reporting Foreign Bank and Financial Accounts (FBAR): What You Need to Know. Others on the panel were Stephen Turanchik (at Paul, Hastings etc. etc.), Paul Sczudlo (late of Loeb & Loeb, now has his own practice YAY PAUL! but no website yet), and Ed Robbins (of Hochman, Salkin etc. etc.). Moderator, organizer, and ringleader = Thomas Giordano-Lascari of Valensi, Rose & Magaram.

The panel was originally Ed Robbins plus me plus two people from the government. But when the Proposed Regulations for the FBAR were published the IRS issued a nationwide banhammer on any speaking gigs such as this. That’s why Thomas brought in Stephen and Paul. Yeah I know. Ed and I are entertaining. Also fetching in our spring frocks. But 90 minutes of the two of us would have been a bit much.

Nothing new to report here. The collective wisdom and experience of the four of us consists of:

  • WTF is going on?
  • The Proposed Regulations are murky.
  • The Swiss situation really looks like the U.S. is caught in the Alpine rope-a-dope. (Ed Robbins is the source for the rope-a-dope phrase. Why, he asks, did the pinstripe dudes — the State Department — step in and sidetrack the UBS litigation last year? Good question).
  • Civil cases continue to dribble along slowly.
  • Heeding the preacher’s call from the pulpit and Coming to Jesus now isn’t exactly a good idea. Necessarily. As a rule. I went through the options ranging from “continue to hide” to “Come to Jesus” and while I have some opinions about it there’s nothing certain.

For the sake of the Oxford Union debating rules, I took the side of the argument that says the FBAR enforcement we have seen in the last year is an unmitigated failure by any standard except the enhancement of the careers of certain federal employees. I take that position based on a simple fraction. Its numerator is the number of people who have done the voluntary compliance for undisclosed foreign accounts. The denominator is the number of people who should do it.

Here’s Ed Robbins’s denominator in the fraction. Let’s suppose UBS had 10% of the worldwide private client business for U.S. customers. They told us that they had 52,000 customers. So there are 520,000 U.S. persons out there in the wide world who are potentially in the undisclosed foreign account boat.

The nominator in the fraction is 14,700.

Do the fraction 14,700 divided by 520,000. That’s 2.8%. The total take for the IRS in the amnesty sweepstakes was about 3% of the pool of potential players in the game.

Here’s my take on the denominator (not discussed in the panel presentation). Figure there about 38,000,000 immigrants living in the United States. Let’s say 5% of those retain sufficient ties to their home countries so they still have accounts there in excess of $10,000. That’s 1,900,000 people. In my experience this is pretty common, especially for immigrants from India, Asia, and the Middle East. They have families there and it is easy to remit funds to their families this way.

What about Americans living abroad? Let’s say 6,000,000 because I’m too lazy to look for better statistics. For these people who are living a normal life abroad, how many have accounts where they live with balances above $10,000? Shall we say 50%? Here’s another 3,000,000 people.

My denominator is 1,900,000 + 3,000,000 = 4.9 million. My fraction is 14,700/4.9 million or 0.3%.

This number is consistent with my experience of hearing person after person heave a sigh and say “Forget it!” when facing the prospect of cleaning up a delinquent FBAR situation.

But I digress. 🙂

Take-away points from the panel presentation for those of you hanging out and wondering what to do:

Ed’s perspective as an ex-prosecutor on how easy it is to prove tax evasion for offshore bank account cases was scary. It’s a slam dunk and it is no wonder there are a bunch of Federal prosecutors salivating.
One of the audience members (a real, normal person, not a lawyer/accountant) approached me after the session and commented on how he was floored by the fact that there was so much unknown and ambiguity in this arena. Yep.
Differences of opinion on what to do now if you haven’t ahem come to Jesus, so to speak. The IRS and its jihad have made it harder, not easier.

My piece of priceless wisdom for the crowd, and for those of you out here. Remember, you heard it here first. Patented, registered trademark, nonskid, reversible, and shiny: the FBAR debacle is the new deferred compensation debacle. The IRS churned out gallons of sludge to regulate deferred compensation plans, creating massive and unnecessary complexity. They’re in the process of doing the same in the offshore tax compliance world. For those of you who utter “409A” as an epithet, you know what I’m talking about.

Last points. (This is kind of a rant, isn’t it?)

  • Parkinson famously said “An official wants to multiply subordinates, not rivals”. Great book by the way.
  • If a government bureaucracy solves a problem, then the reason for the bureaucracy goes away. For any government regulator, there is an incentive to nurture the problem, make it fester, make it grow. God forbid that the government make it trivially easy to comply with the disclosure regulations, clean up your messes, and pay your taxes. What would they do with their days?

I have to stop writing about this stuff. We have a TON of people as clients who are in this boat and it bugs me no end that they run risks of getting screwed. But there’s work to be done and more to the point (hint, hint, I wonder what’s happening to the economy) we are booming with inbound real estate investment work.

Good to be back from the travels and I’ll get MarsEdit reinstalled properly and hammer out more blog posts.

Stay in touch. You know where to find me. Twitter, for one: @philiphodgen. (Hi @coryjohn7, who was actually in the audience at Loyola yesterday).

Voluntary Disclosure