OVDI Is Not Working:The OVDI program must be an embarrassment to the current IRS leadership. Originally conceived as a great way to offer stateside American tax cheaters with offshore accounts, a way back into the system with a relatively light slap on the wrist, the IRS has seemed to have gone radio silent. We have heard rumors that the original idea of centralizing everything in Philadelphia (and Austin?) has resulted in a massive choke hold on the IRS’s ability to do its job under OVDI. We understand the IRS now has a plan to decentralize everything yet again. Hopefully this new reorganization will come with a new directive allowing local exam bosses and Appeals Officers to use common sense and good judgment instead of a "malicious compliance" approach and apply the mitigation provisions of the FBAR Manual. This seems like the right thing to do, especially when eight years of back tax returns produce nothing but chump change in delinquent taxes and the imposition of six figure penalties just doesn’t seem to be what Congress could have had in mind when it passed the Bank Secrecy Act and FATCA.
People Who Joined the Program Feel Stuck: In the meantime, thousands of people who acted in good faith to join the program and spent a small fortune in legal and accounting fees hunting for moldy bank records are caught in a cruel limbo wondering when the IRS is ever going to respond to their so-called OVDI packages.
The OVDI program has now proven to be a huge "turn off" for these would-be-compliant taxpayers many of whom are embittered and remorseful about having entered the program in the first place not to mention the financial uncertainty and anxiety over whether the IRS will treat them fairly under the program.
These people cannot do any meaningful financial planning but perhaps more importantly, the slowdown and the one-size-fits all 27.5% tribute seems to be having a reverse effect: anecdotal evidence suggests more and more people are going underground and the whole thing is further undermining the entire voluntary compliance self-reporting system.
The Plight of Recent Immigrants to the US: On top of all this, we are seeing an increasingly large number of a new class of people who are wondering how to be compliant with their taxes: recent immigrants to the United States who are otherwise squeaky clean tax compliant citizens who are only now learning that that bank account back home on which they have signing authority, may now be putting them at risk for confiscatory FBAR penalties.
Meet Rahul and Kavita Patel: Here is a typical "composite" scenario: although this example presents a family in India, it represents people from dozens of countries whose citizens have grabbed the golden ring: a US green card and citizenship. Rahul and Kavita Patel are both computer engineers with degrees from the Indian Institute of Technology in New Delhi. They come from prosperous middle class families in Mumbai. Their respective families have put their names on a multitude of bank accounts in India for a variety of reasons. The laws and procedures of India are very complex and the rules for succession and inheritance are even more so. Rather than go through the US equivalent of probate, the common practice in India is simply to put children’s names on family bank accounts and partnerships so that in the event of death, a son or a daughter can access their inheritance immediately rather than wait years for such matters to weave their way through the Indian court system. In the case of Rahul Patel, his father put his name on a business bank account as a way to settle an intra-family dispute between other siblings.
The Patels were recruited for work eight years ago by a leading Silicon Valley high tech company and they have been living happily in San Jose, CA since then where they are raising a family. They started with Green Card and happily attained their US citizenship after eight years.
During the eight years in which they lived in the US, their families in Mumbai added and deleted their names, sometimes without their knowledge, on a half dozen bank accounts. Kavita and Rahul had no real interest in their parents’ money in India and even though some of them had balances in excess of five figures, they never really considered those accounts as their money. With their new life and prosperity in the United States, they sincerely hoped that their parents and siblings would use that money for their own well-being with no expectation of receiving any of it.
Rahul and Kavita have been model American citizens. They file their forms 1040 on time and usually get a small refund. Their return preparer in San Jose asked them the first year they hired him whether they did any offshore banking to which they replied in the negative not even thinking that the accounts their families had were even remotely relevant. Since they have been here, they have been dutifully filing their returns until they read an article in the Wall Street Journal which tells them they should be registering all foreign bank accounts over $10,000 on which they can sign with the US Treasury Department even if they never use the accounts, have not opened the accounts, have no idea how much money they contain, how much they earn in interest if anything, when they were opened, or even if they were closed during the year.
Immigrants Receive Conflicting and Erroneous Advice:Many immigrants who have come here recently are now thoroughly confused. In the first place, many are wondering why some kind of tax orientation was not part of their immigration process? The Patels are wondering, what use was it to learn all about the Constitution and the names of all the US Presidents if the government they were making application to was setting a trap for them by not even advising them that they were likely to be in great danger. The immigration process was filled with warm and fuzzy flag waving exercises but no one ever mentioned that one of the screwy aspects of becoming an American was, unlike any other civilized nation on the planet, the US government didn’t say it had the power to ruin them economically and embarrass them in front of their employer if they failed to cough up an annual accounting of everything of value at home in India.
The Patels have been all over the internet and have come away even more confused and frightened: some tax professionals advise them not to worry about it and just do nothing. Some "what-me-worry" tax lawyers with a long string of initials after their names advise them to "quietly" fix the problem by just starting to file something next year. They discover lively web sites with some information which seems useful and accurate but then question the credibility of the entire web site when they see crack pots posting weird enactments of Adolf Hitler who is presented as symbolizing American government officials while others gleefully post shameful and embarrassing comments designed to bait Jewish people to egg them on.
There is an Easy Fix to the FBAR Problems of Recent American Immigrants: The tax problems of the Patels can be easily addressed and the IRS presently has the ability to address it now without another Act of Congress: an IRS announcement and Revenue Procedure should be carefully crafted to provide an expedited procedure for recent immigrants to the United States. If they are otherwise fully compliant with their filing and reporting requirements, they should be able to show, without having to do a net worth analysis of their entire family in Mumbai, that they had no reason to know about FBAR's, that now they do, and that they agree to continue to be law abiding, tax paying, prosperous, contributing members of society. The Patels and thousands of others like them from a dozen other countries just want to be free from fear of a government which says it wants to do the right thing but is often its own worst enemy.
This is a chance for the government to show the world that there really is a reason why America is the only country on the planet from which no one is trying to escape and so many are trying to get in.