Dewees 3: Lessons about the “Oh My God Moment” and dealing with the problems of U.S. citizenship

cross posted from citizenshipsolutions

As I write this post, my mind goes back to one of my very first posts about U.S. compliance issues. This post was called “What you should consider before contacting a lawyer“. Since that time I have written hundreds of post describing the problems faced by Americans abroad.

More recently …

In Dewees 1, I explained the importance of the Canada U.S. tax treaty and how it provides “some protection” to Canadian citizens from U.S. tax debts.

In Dewees 2, I explained some of the characteristics of the OVDP program and how Mr. Dewees got caught in it.

In Dewees 3 (this post), I am suggesting some possible lessons that can be learned from the story of Donald Dewees.

Ten thoughts on U.S. taxation, non-compliance, Americans Abroad and the U.S. taxation of Americans abroad

Continue reading “Dewees 3: Lessons about the “Oh My God Moment” and dealing with the problems of U.S. citizenship”

Vulnerable Americans Abroad: Legal Weight of IRS Pubs, Info, FAQs = ZILCH!

An article by Virginia La Torre
Jeker JD, at the
angloinfo blog

This is an excellent post. It clarifies how one can determine what the IRS really can (and can’t) do and in particular, points out how the OVDP program is NOT rooted in law. This is important for those who do not/never did belong in OVDP in the first place. OVDP is for criminals. Simply failing to file with no tax due when one is unaware of the requirements does not equate to being a criminal. And don’t forget, once OVDP is entered, there is no “reasonable cause” option available. Instead, one commits to a penalty, pretending to be guilty when likely one is not.

Americans Abroad Most Vulnerable: Legal Weight of IRS Pubs, Info, FAQs = ZILCH! https://t.co/T3RXzSwvuW

Case in point: OVDP pic.twitter.com/TGg1JDLIxv

— V. La Torre Jeker JD (@VLJeker) August 17, 2017

What’s a taxpayer to do? As if the US tax rules are not confusing enough, it’s a sad situation when taxpayers cannot rely on information supplied by the Internal Revenue Service (IRS) in the most commonly accessed and user-friendly formats – such as IRS Publications, “Frequently Asked Questions” (FAQs), news releases, videos and the like. On May 18, 2017 IRS issued a memorandum to all of its examiners reminding them that FAQs and other items posted on the IRS website www.IRS.gov that have not been published in the Internal Revenue Bulletin (IRB) are not legal authority.

The five types of guidance published in the IRB are:

Treasury Regulations
IRS Revenue Rulings
IRS Revenue Procedures
IRS Notices, and
IRS Announcements

Be Careful What You Rely On! Case in Point: OVDP

A good example of how serious the problem of “unofficial” IRS guidance can be is evidenced by the IRS “Offshore Voluntary Disclosure Program” (OVDP), which was accused of IRS “bait and switch” tactics. Taxpayers with offshore assets and those living abroad are likely very familiar with the OVDP. Even with the critical importance of the OVDP and its monumental impact on thousands of taxpayers, the OVDP is governed only by a long series of FAQs (and much agency secrecy). Taxpayers must be reminded these FAQs are not binding authority, even though the FAQs themselves do not indicate any warning to taxpayers or their advisors of this fact.

More here

Searching for Uncle #FATCA: Where is he? What does he do? Why is he a danger to America? Can Congressman Meadows and Senator Paul save America?

Searching for Uncle #FATCA: Where is he? What does he do? Why is he a danger to America? Can Congressman Meadows and Senator Paul save America?

A Guest Post by
John Richardson

I sincerely look forward in my participation (i.e. testimonial) in defending the rights of 9 million Americans livin…https://t.co/F8YTsxNFuj

— Keith REDMOND (@Keith__REDMOND) September 27, 2016

Congressman Mark Meadows has recently introduced H.R. 5935 – a
bill to “Repeal FATCA”. The title is:

“H.R.5935 – To repeal the
violation of sovereign nations’ laws and privacy matters.”

The title provides strong clues of the motivation for the bill. I
received an email asking exactly how the Meadows Bill would “repeal
FATCA”. This post is an attempt to answer that particular question. In
order to understand how the Meadows Bill would repeal FATCA, one must
understand exactly what is the FATCA law that would be repealed.
(Note that a repeal of FATCA would leave the FATCA IGAs
intact.) I have previously written about the origins of Mr. FBAR. This
“Search For Uncle FATCA” – a search for what America
has become – is a companion post.

Part 3 – What does it mean to repeal FATCA and how exactly does
the Meadow Bill repeal FATCA? A section by section analysis

I apologize for the long post, but don’t have time to write a
shorter one …

I was asked to answer the question:

“What exactly would it mean to repeal FATCA?”

The short answer to the question is:

“We make FATCA go away by reversing all the changes to the Internal Revenue Code that collectively comprise FATCA.”

The real question becomes: “How do we reverse FATCA?”

The detailed answer is long and technical.
It includes (as appendixes) the complete text of Part V of the HIRE
Act (which created FATCA) and the complete text of H.R. 5935 – the Meadows Bill. I would not expect people to read the text of the legislation (it is overwhelming).

The Three Faces Of FATCA

Whether you support FATCA or oppose FATCA,
a broad understanding of the original FATCA legislation will help in
your “FATCA Discussions”. It will also help you understand that there
are actually “Three Faces To FATCA”. When you find
yourself in a “FATCA Chat” you should be clear on whether you are
talking about:

Face 1 – The part of FATCA that is aimed at
foreign financial institutions (Internal Revenue Code Sections
1471 – 1474 – Chapter 4)
Face 2 – The FATCA IGAs that have for all
practical purposes replaced “Chapter 4: Sections 1471 – 1474”
(the part of FATCA that applies to non-U.S. financial
institutions) of the Internal Revenue Code
Face 3 – The various amendments to the
Internal Revenue Code (particularly Section 6038D) which presume
that Americans abroad are tax evaders and (1) force disclosure
of much of their financial lives and (2) impose punitive
taxation (particularly in the case of “foreign trusts” and
penalties (form 8938) on them.

Question: What does the Meadows bill do actually do?

Answer: It gets rid of Face 1 and Face 3 but leaves Face 2 (The FATCA IGAs intact). This is an important point. Because the FATCA IGAs were never authorized by FATCA, the repeal of FATCA would leave the FATCA IGAs intact!

The full text of Meadows Bill is here. You will see that it reverses (section by section) the HIRE Act amendments to the Internal Revenue Code that created FATCA. It converts the Internal Revenue Code (at least in terms of FATCA provisions) to what it was before FATCA.

But, to appreciate the Meadows Bill, we must first understand FATCA in its original incarnation.

In the beginning, Congress created …

In order to understand the Meadows Bill, you must understand the legislative origins of FATCA – specifically the HIRE Act which is found here:

https://www.gpo.gov/fdsys/pkg/PLAW-111publ147/html/PLAW-111publ147.htm

All legislation must have an “Offset Provision” (which
explains how to pay for the new law). (Almost all legislation
affecting Americans abroad is found in “Revenue Offset Provisions”.
The effect is to force a politically powerless group to pay for a
powerful majority. On this point, See the following submission made to
the Senate Finance Committee in 2015.

richardsonkish-revenue-raising-measures-april-14-2015-international-tax-1-1)

In this case the “Offset Provision” (which created FATCA) is Title 5 of
the HIRE Act. The “Offset Provisions” are summarized as follows. I have
added IN BOLD what the significance of this is. Please note that
Subtitle A is the “Income Taxes” section of the Internal Revenue Code.
Remember that FATCA contains two specific targets. Target 1 is
“foreign financial institutions“. Target 2 is
“Americans abroad” (and a few Homeland Americans) who
have accounts (mostly for legitimate reasons) at Foreign Financial
Institutions.

Explaining the FATCA legislation …

What follows is an explanation of what the “FATCA legislation really is.
It will explain how FATCA has two specific targets: (1) Foreign
Financial Institutions and (2) The “U.S. Persons” who make use of their
services.

At the end of the post I have included:

Appendix A – The Actual Text Of The “Offset Provision
in the HIRE Act which created FATCA

Appendix B – The Actual Text Of The Meadows Bill (which
in effect repeals the sections of the HIRE Act which created FATCA)

Explanation of what the FATCA legislation really is …

A Summary of the changes made to the Internal Revenue Code by
the HIRE Act

I have included links to the exact sections of the Internal Revenue Code
after the HIRE Act amendments. To see a discussion of
the pre-HIRE Act Internal Revenue Code, see Part B (the exact text of
the HIRE Act). This demonstrates how FATCA Targets:

non-U.S. financial institutions (FATCA Face 1); and
Americans abroad (FATCA Face 3).

Summary of the FATCA provisions in the HIRE Act

(NOTE THAT I HAVE ADDED MY COMMENTARY IN CAPITAL LETTERS.)

TITLE V–OFFSET PROVISIONS

Subtitle A (SUBTITLE A IS THE INCOME TAX SECTION OF THE INTERNAL REVENUE
CODE) –Foreign Account Tax Compliance

Part I–Increased Disclosure of Beneficial Owners–
AIMED AT FOREIGN FINANCIAL INSTITUTIONS

Sec. 501. Reporting on certain foreign accounts.

THIS CREATES CHAPTER 4 (SECTIONS 1471 – 1474) THAT ARE THE SECTIONS
AIMED AT FOREIGN FINANCIAL INSTITUTIONS. IT IS WHAT MOST PEOPLE
UNDERSTAND FATCA TO BE. SEE WHERE CHAPTER 4 APPEARS HERE:

It’s right there. It’s Chapter 4. That said, Chapter 4 of the Internal
Revenue Code has been rendered largely irrelevant by the FATCA IGAs.
However, here is what Chapter 4 looks like:

Sec. 502. Repeal of certain foreign exceptions to registered bond
requirements

Part II–Under Reporting With Respect to Foreign Assets –
AIMED SQUARELY AT AMERICANS ABROAD – INCREASES THE OVERALL
REPORTING REQUIREMENTS FOR U.S. PERSONS, CREATES FORM 8938 AND IMPOSES
PENALTIES ON NORMAL DAY-TO-DAY-LIVING

Sec. 511. Disclosure of information with respect to foreign financial
assets. – CREATES INTERNAL REV CODE 6038D WHICH RESULTS IN FORM 8938.
INTERNAL REVENUE CODE S. 6038D READS AS FOLLOWS:

26 U.S. Code § 6038D – Information
with respect to foreign financial assets

(a) In general Any individual who, during any taxable year, holds any
interest in a specified foreign financial asset shall attach to such
person’s return of tax imposed by subtitle A for such taxable year the
information described in subsection (c) with respect to each such asset
if the aggregate value of all such assets exceeds $50,000 (or such
higher dollar amount as the Secretary may prescribe).

(b) Specified foreign financial assets For purposes of this section, the
term “specified foreign financial asset” means—

(1)any financial account (as defined in section 1471(d)(2)) maintained by a
foreign financial institution (as defined in section 1471(d)(4)), and

(2) any of the following assets which are not held in an account
maintained by a financial institution (as defined in section 1471(d)(5))—

(A)any stock or security issued by a person other than a United States person,

(B) any financial instrument or contract held for investment that has an
issuer or counterparty which is other than a United States person, and

(C) any interest in a foreign entity (as defined in section 1473).

(c) Required information The information described in this subsection
with respect to any asset is:

(1)In the case of any account, the name
and address of the financial institution in which such account is
maintained and the number of such account.

(2) In the case of any stock or security, the name and address of the
issuer and such information as is necessary to identify the class or
issue of which such stock or security is a part.

(3) In the case of any other instrument, contract, or interest—

(A) such information as is necessary to identify such instrument, contract, or
interest, and
(B) the names and addresses of all issuers and counterparties with
respect to such instrument, contract, or interest.

(4)The maximum value of the asset during the taxable year.

(d) Penalty for failure to disclose

(1) In general If any individual
fails to furnish the information described in subsection (c) with
respect to any taxable year at the time and in the manner described in
subsection (a), such person shall pay a penalty of $10,000.

(2) Increase in penalty where failure continues after notification If
any failure described in paragraph (1) continues for more than 90 days
after the day on which the Secretary mails notice of such failure to the
individual, such individual shall pay a penalty (in addition to the
penalties under paragraph (1)) of $10,000 for each 30-day period (or
fraction thereof) during which such failure continues after the
expiration of such 90-day period. The penalty imposed under this
paragraph with respect to any failure shall not exceed $50,000.

(e) Presumption that value of specified foreign financial assets exceeds
dollar threshold If—

(1)the Secretary determines that an individual has
an interest in one or more specified foreign financial assets, and
(2) such individual does not provide sufficient information to
demonstrate the aggregate value of such assets, then the aggregate value
of such assets shall be treated as being in excess of $50,000 (or such
higher dollar amount as the Secretary prescribes for purposes of
subsection (a)) for purposes of assessing the penalties imposed under
this section.

(f) Application to certain entities To the extent provided by the
Secretary in regulations or other guidance, the provisions of this
section shall apply to any domestic entity which is formed or availed of
for purposes of holding, directly or indirectly, specified foreign
financial assets, in the same manner as if such entity were an
individual.

(g) Reasonable cause exception No penalty shall be imposed by this
section on any failure which is shown to be due to reasonable cause and
not due to willful neglect. The fact that a foreign jurisdiction
would impose a civil or criminal penalty on the taxpayer (or any other
person) for disclosing the required information is not reasonable
cause.

(h) Regulations The Secretary shall prescribe such regulations
or other guidance as may be necessary or appropriate to carry out the
purposes of this section, including regulations or other
guidance which provide appropriate exceptions from the application of
this section in the case of—

(1) classes of assets identified by the
Secretary, including any assets with respect to which the Secretary
determines that disclosure under this section would be duplicative of
other disclosures,
(2) nonresident aliens, and
(3) bona fide residents of any possession of the United States.

(Added Pub. L. 111–147, title V, § 511(a), Mar. 18, 2010, 124 Stat.
109.)

THE FOLLOWING POINTS ARE NOTEWORTHY:

THE REFERENCES TO S. 1471 AND OTHER SECTIONS OF THE CHAPTER 4
FATCA PROVISIONS.
THE SECRETARY HAS THE AUTHORITY TO EXEMPT NONRESIDENT ALIENS
FROM THE FORM 8938 FILING OBLIGATION AND HAS CHOSEN TO DO SO.
THE EXEMPTION EXTENDS TO GREEN CARD HOLDERS
WHO ARE, BY VIRTUE OF TREATY TIE BREAKER RULES, NONRESIDENT
ALIENS.
THE SECRETARY MAY PRESCRIBE A REPORTING THRESHOLD WHICH
EXCEEDS $50,000 (WHICH HAS BEEN DONE IN THE CASE OF AMERICANS
ABROAD)
THE SECRETARY HAS THE A BROAD AUTHORITY TO PRESCRIBE
REGULATIONS TO CARRY OUT THE PURPOSES OF S. 6038D. THIS IS
PROBABLY BROAD ENOUGH TO EXEMPT AMERICANS ABROAD, WHICH
PRESUMABLY IS THE BASIS FOR THE SUGGESTED FATCA SAME COUNTRY
EXEMPTION. NOTE THAT IN DECEMBER 2016 TREASURY SPECIFICALLY
CONSIDERED AND REJECTED THE FATCA SAME COUNTRY EXEMPTION
PROPOSED BY “ACA” AND “DEMOCRATS ABROAD”.
IN A CONFLICT BETWEEN U.S. LAW AND THE FOREIGN LAW, THE U.S.
LAW WILL TAKE PRECEDENCE – SEE INTERNAL REVENUE CODE S.
6038D.

The Secretary may prescribe – The FATCA Regulations – AND THE
REGULATIONS ARE HERE …

https://www.law.cornell.edu/cfr/text/26/1.6038D-2

https://www.law.cornell.edu/cfr/text/26/1.6038D-3

https://www.law.cornell.edu/cfr/text/26/1.6038D-4

https://www.law.cornell.edu/cfr/text/26/1.6038D-5

S. 6038D gave birth to IRS Form 8938 …

FATCA Form 8938 is the
Form that is used to report the “Foreign Assets” mandated by Internal
Revenue Code S. 6038D.

Effects:

1. Americans abroad are required to report virtually
all of their “foreign assets” (but local to them) to the IRS.

2. This creates a “paper trail” which will make it more likely that Americans abroad will pay an Exit Tax if (when) they renounce U.S. citizenship.

All of these concepts are summarized by the IRS here …

https://www.irs.gov/businesses/corporations/do-i-need-to-file-form-8938-statement-of-specified-foreign-financial-assets

The relationship between Form 8938 and Mr. FBAR is described here
…

https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements

Sec. 512. Penalties for underpayments attributable to undisclosed
foreign financial assets. –

INCREASES PENALTIES WHEN TAXES OWED ON UNDISCLOSED ACCOUNTS ARE FOUND. THE INTERNAL REVENUE CODE REQUIRES THE
FILING OF NUMEROUS INFORMATION
RETURNS. AMERICANS ABROAD ARE “PERSONS SUBJECT TO SPECIAL DISCLOSURE PROVISIONS“.
THESE SPECIFIC DISCLOSURE PROVISIONS INCLUDE S. 6038 (FORM 5471 AND FORM 8865 – FOREIGN CORPORATIONS AND PARTNERSHIPS), S. 6038D (FOREIGN FINANCIAL ASSETS ON FROM
8398) AND FOREIGN TRUST REPORTING S. 6048 https://www.law.cornell.edu/uscode/text/26/subtitle-F/chapter-61/subchapter-A/part-III

Sec. 513. Modification of statute of limitations for significant omission of income in connection with foreign assets. –
WHEN IT COMES TO FOREIGN ACCOUNTS THE IRS CAN AUDIT FOR 6 YEARS INTO OF THE USUAL 3 YEARS

Part III–Other Disclosure Provisions

Sec. 521. Reporting of activities with respect to passive foreign investment companies. –

FOR THE FIRST TIME PFICS ARE REQUIRED TO BE DISCLOSED WHETHER THERE IS OR THERE IS NOT INCOME FROM THE FUNDS (THIS
IS INCREDIBLY SIGNIFICANT) – INTERNAL REV CODE 1298(f) https://www.law.cornell.edu/uscode/text/26/1298
WHAT THIS MEANS IS THAT AMERICANS ABROAD WHO OWN A NON-U.S. MUTUAL FUND ARE REQUIRED TO REPORT THIS TO THE IRS WHETHER OR NOT THEY ARE OTHERWISE REQUIRED TO FILE A U.S. INCOME TAX RETURN!

The disclosure takes place on Form 8621. The instructions to Form 8621 are incomprehensible to all but a select group of tax preparers. IT IS VERY
EXPENSIVE TO PAY A TAX PREPARER TO COMPLETE FORM 8621.

Effect: Americans abroad are effectively prohibited from owning
all but U.S. mutual funds.

Sec. 522. Secretary permitted to require financial institutions to file
certain returns related to withholding on foreign transfers
electronically.

Part IV–Provisions Related to Foreign Trusts

Sec. 531. Clarifications with respect to foreign trusts which are
treated as having a United States beneficiary. – SEE INTERNAL REV CODE
S. 679(f) – https://www.law.cornell.edu/uscode/text/26/679

Sec. 532. Presumption that foreign trust has United States beneficiary.
CREATES A PRESUMPTION THAT THE USA CAN TAX THE BENEFICIARY OF ANY TRUST
ANYWHERE. NOTE THAT THIS IS A PRESUMPTION, BUT IT DOES PUT THE ONUS ON
THE TRUST/BENEFICIARY TO SHOW THAT THE BENEFICIARY IS NOT A U.S. PERSON.

Sec. 533. Uncompensated use of trust property. –
BASICALLY THE USE OF TRUST PROPERTY IS NOW TREATED AS A TAXABLE DISTRIBUTION TO THE PERSON
USING THE PROPERTY – IRC SECTION 643(I)https://www.law.cornell.edu/uscode/text/26/643

Sec. 534. Reporting requirement of United States owners of foreign
trusts. –
AMENDS THE REPORTING REQUIREMENTS WITH RESPECT TO FOREIGN
TRUSTS – THE SECRETARY CAN SPECIFY WHICH INFORMATION IS REQUIRED TO BE
REPORTED

Sec. 535. Minimum penalty with respect to failure to report on certain
foreign trusts. –
CREATES A PENALTY FOR FAILURE TO DISCLOSE THE INTEREST IN THE FOREIGN TRUST (SEE S. 534 ABOVE) WHICH IS THE GREATER OF 10,000 OR 35% OF THE VALUE OF THE REPORTABLE AMOUNT OF THE TRUST. (INTERNAL REVENUE CODE S. 677)
https://www.law.cornell.edu/uscode/text/26/6677

Part V–Substitute Dividends and Dividend Equivalent Payments Received
by Foreign Persons Treated as Dividends

Sec. 541. Substitute dividends and dividend equivalent payments received
by foreign persons treated as dividends.

Subtitle B–Delay in Application of Worldwide Allocation of Interest

Sec. 551. Delay in application of worldwide allocation of interest

What do you Think of the Penalties in These Three Cases of Unreported FBARs ?

Ty Warner

Ty Warner, founder/owner of the Beanie Babies line, was sentenced in July 2015 for tax evasion.The panel of three U.S. District Court judges gave him 2 years of probation and 500 hours of community service. The sentencing guidelines ranged from 46 months up to a maximum of 57 months. He agreed to pay back taxes and interest of $16 million as well as a $53.5 million penalty (the full FBAR penalty of 50% of the balance of the highest account-$107,000,000). According to Melissa Harris (author of this article that appeared in the Chicago Tribune, July 15, 2015) Warner’s sentence was “a punishment that reduces evading millions in taxes to a speeding ticket,” and that the sentence “flies in the face of both reason and justice”.

Warner had an estimated net worth of $2.5 billion, and was the 209th richest American. According to Janet Novak of Forbes:

He admitted that around Jan. 31, 1996, he flew to Zurich and deposited about $80 million at UBS AG, instructing that no account statements be sent to him in the U.S., and that he kept the account secret until November 2007. During that period he failed to report at least $24.4 million in interest income on the account to the Internal Revenue Service, evading at least $5.6 million in taxes. He also failed to file with the Treasury the required annual “FBAR” report on his foreign accounts

What beggars belief is that Mr. Warner never provided any explanation for:

why he opened the account
the origin of the funds
audits of his books & records show the funds did not come from his company
his personal domestic accounts showed no signs of the origin of the funds

In fact the evidence suggested that the funds may have been pre-tax payments of some sort. To this day, the extent of his willful tax evasion is in reality, unknown.

So why did Mr. Warner get off so lightly? Was it because his lawyer Mark Matthews used the Olenicoff Defense?
Was it because his creation, the Beanie Babies line of stuffed toys, was just too cute for anyone to believe he was guilty of such evasion?

Peter Henning a Wayne State University Law School Professor and co-author of ‘Securities Crimes ”said in an interview, “I don’t want to say anything goes,….Clearly you can’t consider race or wealth. But you are looking at character. That is something judges can take into account. The question is how much should it weigh into the decision?”

This is where Mr. Warner hit the jackpot. He received 70 letters of support from friends, employees and recipients of his charity, actions which had nothing to do with the charges and only someone with money could do.

U.S. District Judge Charles Kocoras (of the panel) based his sentence on:

…..a reading of 70 letters, Kocoras found that “Mr. Warner’s private acts of kindness, generosity and benevolence” were “overwhelming,” with many occurring before he was under investigation and, in Kocoras’ words, motivated by “the purest of intentions.” Most were done “quietly and privately.” The judge concluded: “Never have I had a defendant in any case — white-collar crime or otherwise — demonstrate the level of humanity and concern for the welfare of others as has Mr. Warner.”

So a man guilty of many years of tax evasion, who did not even account for the origin of the account nor any records of it, received an incredibly light sentence based upon support from his family, friends and beneficiaries of his kindness. Where is the law here?

*******

Dan Horsky
The second case is that of retired university business professor Dan Horsky. He amassed a $220 million dollar fortune, hidden in secret foreign accounts. He was a citizen of the United States as well as Israel and the United Kingdom. He spent thirty years teaching at the University of Rochester in Rochester, New York.

According to the Justice Department report:

One investment in a business referred to as Company A, however, succeeded spectacularly. In 2000, Horsky transferred his investments into a nominee account in the name of “Horsky Holdings” at an offshore bank in Zurich, Switzerland (the “Swiss Bank”) to conceal his financial transactions and accounts from the IRS and the U.S. Treasury Department.

In 2008, Horsky received approximately $80 million in proceeds from selling Company A’s stock. Horsky filed a fraudulent 2008 tax return that underreported his income by more than $40 million and disclosed only approximately $7 million of his gain from the sale. The Swiss Bank opened multiple accounts for Horsky to assist him in concealing his assets: including one small account for which Horsky admitted that he was a U.S. citizen and resident and another much larger account for which he claimed he was an Israeli citizen and resident. Horsky took some of his gains from selling Company A’s stock and invested in Company B’s stock. By 2015, Horsky’s offshore holdings hidden from the IRS exceeded $220 million.

Horsky willfully filed fraudulent federal income tax returns that failed to report his income from, and beneficial interest in and control over, his foreign financial accounts. In addition, Horsky failed to file Reports of Foreign Bank and Financial Accounts (FBARs) up and through 2011, and also filed fraudulent 2012 and 2013 FBARs. In total, in a 15-year tax evasion scheme, Horsky evaded more than $18 million in income and gift tax liabilities.

Professor Horsky’s willfulness was more involved than simply failing to report income. In 2011, He had another individual gain signature authority over the Zurich accounts. Horsky provided instructions to this individual. Then this individual was to relinquish his U.S. citizenship. In 2014, this operson filed a false 8854, did not disclose his net worth or his foreign assets and he falsely certified five years of compliance with all tax obligations.

Mr. Horskey’s sentence consisted of:

seven months in prison
one year of supervised release
fine of $250,000
$100 million penalty
over $13 million in taxes owed

Again, the prison sentence was far below the maximum of five years. I guess committing an intensely willful crime which included outright fraud (and no letters attesting to his character), Professor Horsky failed to even receive one year of prison.

An interesting observation of Eric Rasmussen at thetaxprof site : (Scroll down to “comments”)

Interesting settlement. He’s paying just $13 million of the $18 million in taxes he owes, but $100 million more in penalties? Is this a whistleblower case? The IRS used to say the whistleblower gets a percentage only of the taxes recovered not the criminal violation penalties. They lost a big case on that in Tax Court. Is the idea going to reappear here?

*******

Milo & Lois Kentera

NB: all printscreens in the Kentera account are from the Complaint filed August 13, 2016

A more complete account of the Kentera’s situation is here

The third case is that of Milo and Lois Kentera. This is much closer to the “minnow” level of FBAR “violation.” Even though this is not an expat case as the Kenteras live in the US, I am sure we all can identify with them.

Milo Kentera was a pharmacist and inherited a Swiss bank account when his father died in 1984. At this time, the account was under $10,000 USD and remained so for twenty years. During that time, Milo added his wife Lois (a homemaker) to the account. Starting in 1984, he always advised his tax advisors/accountants of the account and he reported it on 1040 Schedule B. So far so good.

In 2005, the account gained enough to be over the FBAR filing threshold. However, the accountant did not prepare or file an FBAR. In 2007, Milo received $257,112 (a portion of the sale of his parents’ property in Montenegro; his siblings received the other $371,536). He put this money into the Swiss account. A second accountant did not ask if any interest was earned on the account so that was omitted and again, no FBAR was filed. In 2010, yet another accountant failed to prepare or file an FBAR even though he/she included the interest and the account on Schedule B.

Mr. Kentera came forward on his own, having heard of the OVDI on the radio.

By then the “2011 IRS Reign of FBAR Terror was going full throttle. Toward the deadline of the program, the Kenteras entered the 2011 OVDI program. They filed six years of FBARs for 2005-2010 (inclusive) and amended their returns to include the interest income from the account. The following printscreens show the amounts of money involved in terms of omitted tax income, balance of the account etc.

Nearly two years later, in August 2013, the IRS assessed a miscellaneous penalty of $90,092. The Kenteras then chose to opt out of OVDI. The agent who had their case then advised that they should receive non-willful FBAR penalties, which were as follows:

Lois Kentera:

$500 for 2006;
$2,500 per year for 2007, 2008, 2009, and 2010,
for a total penalty of $10,500;

Milo Kentera:

$500 for 2006;
$10,000 per year for 2007, 2008, 2009, and 2010,
for a total penalty of $40,500.

The Kenteras were understandably upset and did not want to accept this fine of $60,000 either as they felt they had reasonable cause. Virginia la Torre Jeker defines what is involved in establishing reasonable cause when one has relied upon a tax adviser:

“…various cases have noted that the taxpayer must prove three elements. First, the adviser must be a competent professional with sufficient expertise (for example, you cannot rely on an insurance agent for tax advice); second, the taxpayer must provide necessary and accurate information to the adviser; and finally, the taxpayer must rely in good faith on the adviser’s judgment.

The Kenteras then filed a complaint in District Court alleging that the IRS had incorrectly calculated their penalties.
The end result was unchanged; they still had to pay the penalties.

It would appear obvious from the get go that the Kenteras did not belong in the OVDI program. However, “quiet disclosures”* were discouraged and Streamlined was not yet available (began Sept 1, 2012); the FactStatement 2011-13 came out during the first week of December. The Kenteras were put in a program they did not belong in; they clearly satisfied the three conditions for “reasonable cause” and most of all, they are an example of “those that are hurt the worst are the ones who try to come into compliance.”

**it was not entirely clear at that time whether a “quiet disclosure” was simply filing going forward OR filing amended returns (presumably changed by FBAR accounts’ earnings). In any event, while the IRS insisted people enter the programs, there is no law that indicates one must do so.

*******

These three cases present some interesting observations about the treatment of those who had not filed FBARs.

First of all, the first and second cases are Homelanders who had very large offshore accounts. Both took very deliberate steps to conceal the accounts. Mr. Holsky even went so far as to include fraudulent attempts as to ownership and citizenship of the person with signing authority for the account. Neither of them came forward on their own. Neither were able to enter the “amnesty” program, yet Mr. Warner received no jail time and Mr. Horsky received less than a year. The amounts of money involved for both are staggering to those of us who will never have anywhere near that kind of money.I can’t really evaluate their impact but I’d be willing to bet, that in proportion to their total wealth, both were able to absorb the loss without a major change in their style of living.

In contrast, the Kenteras, also Homelanders, had a very modest account which they inherited. They always advised their accountants of its existence. Three professionals in the tax compliance community failed to prepare or file FBAR even though two of them did report the interest and existence of the account on Schedule B. They received very bad (I would say criminal) advice and went into OVDI coming out with an original penalty assessment of $90,092. So they opt out and the IRS agent then gives then a non-willful penalty totalling $60,000.

Was it really necessary for Mr. Kentera to receive the maximum non-willful penalty for 4 years? It seems their honesty in pointing out the existence of the account counted for nothing. The fact remains that their situation clearly QUALIFIES FOR REASONABLE CAUSE. Yet the intent of Mr. Warner and even more so for Mr. Holsky, was clearly to conceal yet neither of them received anywhere near the maximum penalty; they did not come forward on their own and could not take part in the amnesty program.

In the past (scroll down to “Statistics on Minnows in the OVDP”) we have seen demonstrations that the least wealthy pay the highest percentage of penalties, the comparison of the three cases cannot fail to boil your blood and make the average person seriously consider not becoming compliant due to obvious treatment of “minnows” as nothing short of appalling. Why does the IRS continually fail to see this? Is it really a surprise that 7 out of 8 million #Americansabroad have yet to become compliant in spite of Streamlined?

Never Forget What Happened in 2011

reblogged from the Isaac Brock Society

A Series of Posts to Explain the Anger and Vehemence Fueling the anti-FATCA, anti-IGA & anti-CBT Movement

Streamlined, as inadequate as it is, would not have come to be were it not for the blood spilled by these in OVDI. https://t.co/lgEJ1RQYnS

— U.S. Citizen Abroad (@USCitizenAbroad) November 23, 2015

Perspective:

This post was written approximately 3 months after the mass hysteria (there simply is no other word for it) of late Fall 2011. Brock was less than a month old. We had only just started to gather information, starting at the ExpatForum. Renunciation was a very scary topic only slightly less than the terror of imagining losing everything due to FBAR penalties. IMHO, FBAR will prove to be the number one issue that fueled the expat movement, hands-down.

An excerpt from January 5, 2012 post from the renounceuscitizenship WordPress Blog

PART I: The Players

RenounceUSCitizenship writes:

The IRS assault on U.S. citizens living outside the United States has been a frightening interplay among three groups:

1. The Taxpayers

2. The Cross Border Professionals

3. The IRS

Let’s imagine the perspective of each.

The Perspective of the Taxpayers

I suspect that few U.S. expats will forget the events of 2011. It was a year where they realized how quickly life could change. For the most part U.S. citizens living abroad are hard working honest people who are paying higher income and value added taxes than they would be in the U.S. The U.S. uses citizenship-based taxation. Many of them have been filing U.S. tax returns. But, virtually none of them (except those who always had the benefit of specialized and expensive legal and tax advice) knew about FBAR. When they heard about FBAR, OVDI and the rest they were:

– scared out of their minds; and

– wanted to be compliant

It’s just that they didn’t know how. Hence, they did what anybody would do. They sought professional help.

Furthermore, professional help did not come easily. It did not come inexpensively. It was typically like this: “Yes, I will meet with you. But, bring in a money order for $2000 (or more) and we will start the conversation. The conversation usually focused on whether to enter OVDI. Entering OVDI was a logical option, an expensive option, but I believe for most people a bad option. It was also (because it was a new kind of program) something not well understood by the so called “cross border professionals”.

The Decision To Enter OVDI

For many there was no “decision” to enter OVDI. The entry into OVDI was an “emotional reaction” based on fear.

What happened was something like this:

1. Media publishes articles written by journalists who don’t have a clue what they are talking about. Yes, the IRS is going after U.S. taxpayers who don’t reside in the U.S. Yes, there is OVDI and you must get in the program by August 31, 2011. No, OVDI is not amnesty – but let’s pretend that it is and enter it. I have said before and I will say again that some people entered the OVDI program, without a consideration of their individual circumstances, following the advice of the so called “cross border professionals”. They will regret this.

It is interesting that the advice from a number of lawyers was something like:

“You must enter OVDI” – the IRS frowns on quiet disclosures, etc. These lawyers either did not think that “reasonable cause” was available or that the IRS would not consider arguments based on “reasonable cause”. The important point is that there were “cross border professionals” who did NOT inform their clients that:

A. OVDI was an optional program

B. Filing of FBARs was mandatory

C. The FBAR statute recognizes that “reasonable cause” was and continues to be a defense

(It is interesting that the effect of this advice was to deter people from doing what was mandatory (just file the damm FBARs) and encourage people to do what was voluntary (enter OVDI).

The purpose of OVDI was to go after people who were using foreign banks and other entities to evade U.S. taxes. There is nothing illegal about having a foreign bank account. Most U.S. citizens living outside the United States had local bank accounts for the purpose of living their lives. On the other hand, the IRS has publicized the cases of U.S. citizens living inside the U.S. who used foreign bank accounts for tax evasion. Those of you who are aware of (outside of OVDI) anybody paying FBAR penalties based on willfulness, please leave a comment.

Anybody could have entered OVDI – why would the IRS stop you? By entering OVDI you are simply agreeing to pay them penalties. Furthermore, the range of assets subjected to penalties in the OVDI program is greater than what is required to be disclosed on an FBAR (something not explained by some lawyers). Hence, it is clearly to the advantage of the IRS that people enter OVDI (plus the IRS doesn’t have to waste time on “reasonable cause” arguments).

It is important to note that OVDI is a program which is designed for criminals and removes “reasonable cause” from the discussion. The only way to get “reasonable cause” into the discussion is to “opt out” and subject yourself to a full audit along with all the risks and high costs associated with it.

“Reasonable cause” has always been a defense to FBAR penalties. S. 5314 of the FBAR statute bars the imposition of FBAR penalties if two conditions are met:

1. Failure to file FBARs was due to “reasonable cause”; and

2. The FBAR is filed

Now, I understand that there is no clear definition of “reasonable cause”. I also understand that this is a determination made by the IRS. My point is that the same “reasonable cause” arguments must be made either inside OVDI (after an opt out) or outside OVDI.

While OVDI was going on, few “cross border professionals” talked about “reasonable cause”. Maybe, they thought that the IRS wouldn’t recognize or apply the law. Who knows? I invite a lawyer who encouraged clients to enter OVDI to comment on this.

Now, if you came to the “expat movement” in say, 2013 or so, you might not think there is so much new info here. But in early 2012, this was very unusual. To find a concise and correct assessment that did not favour the completely chaotic viewpoint of the media and tax compliance community was not only life-saving (literally) but became the base for what we have become today: those who would dare fight back when the U.S. government came knocking, coming after you, your families and your hard-earned, non-U.S. money.

Next: stories of expats in the 2009 OVDP/2011 OVDI