Thursday, August 2, 2012

Tax Justice II: No FBAR Penalties For Otherwise Compliant Recent Immigrants To The United States

We recently blogged and published an article about Tax Justice for Americans abroad with little or no economic connection to the United States. In our article, we argued that paying a 27.5% tribute to the IRS under the voluntary disclosure program made no sense for Americans abroad who simply want to be compliant in light of the new IRS emphasis on international compliance. Moreover, squeezing compliant-hopeful people into a one-size-fits all funnel with the end closed off is probably an excessive fine or penalty under the Eighth Amendment if not a cruel and unusual punishment.

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.


  1. One interestion question I have is if someone's name is put on an account without their knowledge or involvement can they be truely obligated to file an FBAR.

    There is parralel scenario I am thinking of in Canadian tax law called "Granny Trusts" which is perfect legal form of tax avoidance involving Canadian residents receiving inheirtances from non resident(I am not saying this is "good" law but it is completely accepted by Canada Revenue) Basically lets say a parent of Canadian resident living in India is going to leave a large inheirtance to their Canadian resident child. If they leave it directly at time of death to the Canadian Resident child the child must pay all taxes(typically cap gains) going forward and if the proceeds are held in a foreign account declare it on Form T1135. However, with proper planning a non Canadian resident settlor can setup a trust without the involvement of the Canadian resident but yet with the Canadian resident as the trust beneficiary. In this scenario the Canadian resident only pays tax on direct distributions from the offshore trust and is NOT required to disclose the existence of the trust(because they had nothing to do with setting it up)on Form T1135.

    Here are some links to Canadian Tax lawyer blog that explains it better than I can:

    1. Hi Tim: Regarding the Granny Trusts in Canada, please refer to the IRS FAQ’s regarding FBAR's which are reprinted on my web site. As you know, FBAR's must be filed by US Persons with a financial interest in or signature authority over any financial account in a foreign country.

      The FAQ’s go on to say,

      “Q. What constitutes signature or other authority over an account?"

      “A. A person has signature authority over an account if such person can control the disposition of money or other property in it by delivery of a document containing his or her signature (or his or her signature and that of one or more other persons) to the bank or other person with whom the account is maintained."

      “Other authority exists in a person who can exercise power that is comparable to signature authority over an account by direct communication to the bank or other person with whom the account is maintained, either orally or by some other means.”

      I would have to review the terms of the trust you have in mind but I find it difficult to conclude that a person who had no knowledge of the account could be obligated to file an FBAR. If the terms of the trust are such that the beneficiary could get complete dominion and control over the account simply by presenting himself at the bank, that might present a different picture but as I understand your scenario, a lack of knowledge of the account would make it rather difficult for the IRS to argue that any failure to file FBAR's was willful. There is also the notion of “willful blindness” where the IRS argues that a person simply turned his back on knowledge which should be obvious to him which would present a different picture.

      This is of course not a legal opinion on which you can rely but if I had the opportunity to review an actual situation I could give you a more definite answer.

      Hope this helps.

  2. Thank you, Mr Mopsick, for addressing this issue!

  3. Similarly,
    from my email to Alberta, Canada Premier Alison Redford, Alberta Minister of Finance Doug Horner, my MLA Dr. David Swann and my Member of Parliament, Michelle Rempel,

    "...Thank goodness that Canada is standing up for its US dual citizens and Accidental American citizens (those born of US parents in Canada or Canadian parents in the US for a short time but not permanent residents there), as well as solely-US citizens resident in Canada by stating that it will not collect penalties for US citizens resident in Canada or dual US / Canadian citizens, nor will it collect penalties or taxes for the US for US citizens in Canada who are also Canadian citizens, from the time they became Canadian citizens. That is a stronger statement so far than any other country in the world, but still not enough in regard to FATCA, which will be a significant loss of sovereignty for Canada and will be against Canadian privacy laws, as well as a cost for ALL Canadians as they will share the costs that Canada’s banks will have to bear. There will likely be law suits when this happens if FATCA is not revised, or better scrapped, for countries around the world. Regardless of what happens with the FATCA overreach, my letter to Premier Redford was specifically about what I consider the very real need for transparency, which should come from the US, but in that likely absence should come from corporations or the Alberta or Canadian Government in hiring US workers for northern oil and gas jobs. They absolutely need to know what they are up against for the expense of administration of their US taxes and financial reporting if they are living in and working in Canada. These will be workers that would not be expected to be literate about the complexities of complying with US tax regulations from a foreign country. If these facts are not given to potential US workers in Canada, I believe it constitutes entrapment. They will be subject to what we ‘US persons’ already in Canada are subject to."

  4. I love your image of a forlorn, sad and bewildered Statute of Liberty. I think Liberty is truly
    crushed at what a once great nation is doing to her citizens and former citizens who choose to
    live their lives elsewhere and to new immigrants who want to contribute to US.

    Thank you for all the work you have done on behalf of ACA and now for new immigrants. I take
    exception, however, to your statement: "America is the only country on the planet from which no one is trying to escape and so many are trying to get in."

    There are many other countries with that distinction. Canada is one of them.

    I believe my Swedish, German and Irish ancestors who settled long ago in the US would today remain in those nations or choose a more welcoming alternative like Canada.

  5. What about the issue of communal property. A wife's account where the taxpayer has no signature authority, but a Financial interest?

  6. But till such time as such rules exist, what is your advice to people like the Patels?


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