8 thoughts on “After OVDI: What’s Next For Disclosures Of Foreign Bank Accounts?

  1. Hello, Is there an option to volunteer for OVDI, file delinquent FBARS without filing any amended returns. In such a case, if there is an audit, the FBAR penalty will not be applicable, is that correct ?

  2. Correcting my previous post: Hello, If I choose not to volunteer for OVDI, file delinquent FBARS without filing any amended returns. In such a case, if there is an audit, the FBAR penalty will not be applicable, is that correct ?

    1. Crag,

      Thanks for your comment. We can’t offer formal advice through the blawg; you should consult an advisor independently.

      If a taxpayer has properly reported his/her taxable income for the years in question, s/he can generally avoid penalties for failing to file FBARs by filing the delinquent FBARs. See FAQ 17: http://www.irs.gov/businesses/international/article/0,,id=235699,00.html. However, this is no guarantee that penalties would not apply. If a taxpayer files delinquent FBARs but has unreported income that is discovered in a subsequent audit, all bets are off. The taxpayer might still be able to argue that penalties should not apply on the basis of a “reasonable cause” defense, but that argument is heavily fact-dependent.

      The IRS has generally tried to discourage quiet disclosures precisely because they want people to come forward through these initiatives. See our other post FBAR Penalties: The IRS Lays Down The Law On Quiet Disclosures: https://taxblawg.net/2011/05/23/fbar-penalties-the-irs-lays-down-the-law-on-quiet-disclosures/

  3. Thanks for writing your post.

    I am trying to understand what the FBAR penalty language means. I visited the link you provided for penalties and read IRM (07-01-2008) which is really a breath of fresh air compared to the stories of IRS rigidity in dealing with people who signed up for OVDI 2011. I then went a bit further down to (07-01-2008) which is entitled “Non-Willfulness Penalty”. It says:

    “1. For violations occurring after October 22, 2004, a new penalty applies… (not to exceed $10,000, it is not mandatory as it only MAY be imposed, but for the first time it applies to the non-willful….)

    2. The penalty should not be imposed if:

    A. The violation was due to reasonable cause, and

    B. The balance in the account was properly reported on an FBAR. This means that the examiner must receive the delinquent FBARs from the nonfiler in order to avoid application of the non-willfulness penalty.

    This IRS IRM appears to me to mean if someone failed to file an FBAR when it was due but filed it when he realized that was what he was supposed to do, that would satisfy “B”, i.e. the examiner would then have the formerly delinquent FBAR in his hands. That someone would then only have to convince the examiner that he had “reasonable cause”, and he could then appeal any penalty saying the IRM says it “should not be imposed” on him.

    But, I go to the Senate report 108-192 which contains the history of the legislation change that added this penalty that could be applied even in the case of non-willful failure to file FBARs and I see different language:

    On page 109, under a heading “Explanation of Provision”, it says “the penalty may be waived if any income from the account was properly reported on the income tax return and there was reasonable cause for the failure to report” [in the context this last word refers to an FBAR].

    The Senate language talks about income tax returns. If the idea asserted in IRM, i.e. that “properly reporting” means the examiner just has to receive the delinquent FBARs from the nonfiler and the non-willfulness penalty can be avoided, is applied to tax returns also involved in the decision, the Senate language could mean if you file an amended return, pay the taxes, and remedy the no FBAR by flling one, if you can argue “reasonable cause” you are in the clear.

    The FBAR form itself says “If there is reasonable cause for the failure and the balance in the account is properly reported, no penalty will be imposed” which could mean what the IRM says, or what the Senate said it thought it passed, or:

    what is in USC 5321(a)(5)(B)(ii) which says “No penalty shall be imposed under subparagraph (A) with respect to any violation if—(I) such violation was due to reasonable cause, and
    (II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported”

    Which I can’t figure out. Moving along: In the case of the dual Canadian/American citizens living in Canada the IRS reportedly is saying “no penalties for late returns provided there are no taxes owed”. The discussion I’m hearing indicates most believe this means if there is tax owing to the IRS on the original or not filed tax return, even if amended and paid, there can be an FBAR penalty assessed.

    Can you offer your thoughts?

  4. I wonder if this is a case good enough to convince a court on “reasonable cause” for not filing an FBAR:

    I discovered that when the Senate passed the law adding the possible penalty that could be assessed even if a taxpayer’s failure to file an FBAR was non-willful, they, on page 108 mentioned a report given to Congress by the Treasury Secretary who said, as directed by the Patriot Act, he was increasing efforts to find FBAR violators, but at the same time he was going to continue and increase educational outreach. He had 4 points in his conclusion – 2 concerned increased efforts at detection and 2 were increased education. Clearly, the intent was to try to make sure taxpayers knew they had to file FBARs, so that as Treasury ramped up the enforcement and penalties, it would be harder for people to say the Secretary was being unfair.

    Now take someone who is a 2009 immigrant to the US who had no idea about FBAR as he was a foreigner living in a foreign country up until he arrived. He thought his small income earned on his bank account left in his home country was not taxable in the US and he did not know about FBAR. The pamphlet USCIS hands all incoming immigrants at the border when they are cleared to enter says nothing about FBARs. It tells him to file tax returns. He does. He used TurboTax software to fill out his tax returns for 2009 and 2010. TurboTax failed to ask him if he had a foreign bank account and it did not tell him he had to file an FBAR or report the tiny income from the account,

    Now, given the publicity he’s heard, he knows he made mistakes in complying with the Bank Secrecy Act and US tax law and he wants to rectify them.

    He’s hearing that he might as well sign up for a program designed for offshore tax evaders to encourage them to come in from the cold and confess their crimes to avoid possible criminal prosecution – the OVDI that gives the “break” the IRS is offering. He’s told the IRS expects him to sign off on a 27.5% penalty assessed on his foreign assets, in addition to any settlement on back taxes and interest and penalties owed to the IRS. They’re giving him a break, they say.

    Imagine how that someone might feel if he read that the Secretary of the Treasury said in 2003 to Congress that part of his educational outreach was going to be to “outreach to… income tax software developers to deliver and reinforce the messages”, that FBAR compliance was necessary. The Secretary promised to “work with income tax software developers to add a pop-up message to taxpayers and practitioners who use the tax software programs” to tell them they needed to file FBARs. He said the kind of thing the IRS was also going to do so that taxpayers would be informed about FBAR so, presumably, no one could tell the Secretary later that as he roasted the noncompliant that they did not know, was, for example, “the IRS could insert an applicable short message in the tax packages that every taxpayer uses to complete their tax returns”.

    TurboTax does not ask the question, i.e. do you have a foreign bank account. It does not inform users they need to file FBARs. It does not inform users that income earned on assets in foreign countries needs to be reported to the IRS. If you know you have to report that income, you can click on links in the software and you will be told yes you need to report. The IRS Circular 230 says “due diligence” on the part of tax preparers regarding FBAR is to ask the question, not leave an obscure link leading to a popup box that you need to scroll down in before you get anything warning you about FBAR or reporting foreign interest. And in 26 CFR 301.7701-15 there is a section describing who a tax preparer is:

    “10.3(c) Mechanical or clerical assistance. A person who furnishes to a taxpayer or other tax return preparer sufficient information and advice so that completion of the return or claim for refund is largely a mechanical or clerical matter is considered a tax return preparer, even though that person does not actually place or review placement of information on the return or claim for refund”

    The software developers who wrote TurboTax are tax preparers and it seems they used a mechanical device, a computer running their program, and they failed to ask the question, which leaves them liable to be found by the IRS, in the case of taxpayer noncompliance discovered, to be complicit.

    And of course, the Secretary did not “insert an applicable short message in the tax packages that every taxpayer uses to complete their tax returns”. He put a message in one year about donations to Haiti, but he didn’t bother to live up to his promise to Congress that they should up the ante on the penalties allowed for in the law, because he was going to make sure the taxpayers knew they should obey.

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