Cross posted at the Isaac Brock Society
The OVDI Winners and Losers
The Winners: OVDI and OVDP have been fantastic deals for: big time tax cheats resident in the United States and the “cross border professionals” who have will continue to profit from them for years to come. The big time tax cheats have settled with the IRS for pennies on the dollar. They will retain enough of their wealth to live happily for the rest of their lives. The “cross border professionals” (if they really are “professionals”) have generated enough business to fund their retirements.
The Losers: OVDI and OVDP have been vicious assaults on: Immigrants to the U.S., Green Card Holders and U.S. citizens living outside the United States. For them OVDI is a guarantee that their years of saving, investing, hard work, financial responsibility and attempts to comply with the law as they understood will lead to their financial ruin. Why did they enter OVDI? Why would they enter OVDI? More on that in a moment.
The Biggest Loser: Surprise! It’s the IRS and the U.S. government. By allowing U.S. citizens abroad, immigrants and green card holders to be part of the OVDI shakedown, and changing the rules of OVDP mid-stream, they have so eroded their credibility, that honest people are afraid to comply with laws that they are just learning about. It’s in the long term interest of the U.S. government to encourage tax compliance. Instead, citizens are renouncing, immigrants are leaving, and Green Card holders are turning in those cards. The word is out. People who would have immigrated to the U.S. will now go elsewhere. The United States of America has depreciated its most valuable assets – “credibility” and “moral capital”. Both educated people and real estate investors (and others) may be reluctant to immigrate to the U.S. But, this is a subject for a separate post.
This post is for immigrants – Those who currently reside in “Form Nation“
You know, the people who thought they were improving their lives by coming to the U.S. Instead they found themselves caught in an IRS shakedown. They can’t sleep at night. In November I wrote about the effect of OVDI on immigrants. In January I wrote a post about the IRS trust deficit. The last couple of days have featured a stream of comments on that post. If you are an immigrant, you can begin the comments here. Here are the comments that best encapsulate the fear and desperation.
What’s a poor, honest, hard working, frightened immigrant to do?
Yes, you should read and educate yourself and make an informed decision about how to proceed. There are a number of U.S. tax compliance options. That’s the good news. Now the bad news. It’s hard to read and learn while you are under so much pressure. It’s hard to make a decision when you are under such stress. This post is not legal advice and should not be understood to be such. This post is for the purpose of helping you understand where to get advice and the questions to ask that adviser.
Once upon a time in America …
Ronald Reagen (an American president who was worth admiring), once commented that, if you wanted him to read it, it had to be on one page. I offer you some small points that might help you proceed. The very fact that you are so stressed and fearful is proof of your honesty. You have simply been blindsided by an unprovoked, unprincipled, unjust and unimaginable assault on your life. You have not done anything wrong. It’s just that sometimes bad things happen to good people.
Some Thoughts On Your Emotions
You are experiencing fear and confusion. I once heard a great motivational speaker say that “FEAR” is nothing more than:
So, what’s false and what’s evidence? This all seems so unreal
You are probably getting a lot of misleading information from the “cross border professionals”. In fact, the very first post that I wrote for the Isaac Brock Society was titled: We can’t trust the IRS – But can we trust the lawyers and accountants. This was followed by another one describing the “Taxpayer, the IRS and the Cross-Border Professionals“. Now I am not saying that no cross-border professional can be trusted, but you DO need to do your own thinking. Furthermore, you are dealing with primarily with a “compliance problem” that may include some tax issues. (I also want to make it clear that I am aware of some superb cross-border professionals. The problem is that this is a complex area and there just aren’t a lot of them.)
Therefore, the first thing I recommend is that you separate the decision of how to bring yourself into compliance from the decision of what professional (if any to help you with this). It could be worth paying for a couple of hours of legal advice from a competent professional who knows that he will not be retained beyond that two hours. Consider this advice to be repeated.
Nine Considerations – Or A “Note To Give To Your Lawyer”
1. You want to be in compliance – It is obvious (since you are stressed) that you are planning to be in compliance on a “going forward” basis. Obviously you want to be in compliance with the law. Therefore, the real problem is how to deal with past problems, if you want to.
2. No Willfulness – I am assuming that that you have not willfully/knowingly disregarded your legal obligations to file FBARs and/or other obligations. Therefore, you are not (but, hey I don’t know you, so get another opinion), subject to willful penalties and criminal prosecution. But, I am assuming that all of this is new to you and that you have had no reason (as Steven Mospick put it) to think about the IRS for the last few years. Therefore, yours is a “clean up” problem.
3. Clean Up – In paragraph 2, I noted that yours is a “clean up” problem. (Remember the IRS thinks you are dirty – just trying to make you smile). Your goal is to “clean up” past mistakes. But, there is nothing you can do know that will change what you have done in the past. You are under no legal obligation to correct your past mistakes. That said, you may want to file old returns or you may want to just comply from today on.
4. Determine Any Tax Liability – Your route to compliance will be impacted on whether you own any tax. For example, the FAQs for OVDI (if I am reading this correctly) make it clear that if you do NOT owe any taxes and have simply not filed FBARs that you need only file the FBARs. That’s why the starting point it determine tax liability.
5. OVDI is an optional program. It is not mandatory. (On the other hand, filing FBARs and 1040s is mandatory.) There are other ways to come into compliance, and frankly for most people, OVDI is just too expensive and too time consuming. Some alternatives to OVDI are simply filing returns outside of OVDI (either with or without notifying the IRS – but review your facts with a professional before making that decision) or compliance going forward. An excellent discussion of these issues is here. Just remember that OVDI is optional – problem is that a lot of lawyers make it sound like it’s mandatory. It’s not. Of course, (as Just Me) points out the lawyers are optional. You can remind the lawyers of that (especially when they tell you to enter OVDI without considering your facts).
6. OVDI needs to be understood. It is not explained very well by our goods friends – those “cross border professionals”. Without getting lost in the technicalities you need to understood the following points:
A. Once you are in OVDI you are agreeing to pay back taxes, interest, and an “in lieu of penalty” which could be as much as 27.5% of the value of your world assets. In other words, the penalty is applied to far more than your bank accounts. Funny, I rarely hear that discussed. You need to understand: the penalty base (what the penalty is applied to) and the percentage. If you want to read about the interaction of the “penalty base” and the “percent” read this.
B. The only way to avoid the “in lieu” of penalty is to “opt out” of the program.
C. Don’t forget to add the legal fees. They will be huge.
So, if you are asking yourself: why would any sane person enter OVDI the answer is one reason and one reason only. They are criminals plain and simple and OVDI is a less expensive option for them – particularly if it means they avoid jail.
Why would a non-criminal enter OVDI? There are only two reasons:
First, they get very bad legal advice – this is usually the case
Second, they get very good legal advice – this is possible but less common (The “very good” legal advice would demonstrate that somehow OVDI was a “better deal”. There are some situations where it can be.)
Note that the Isaac Brock Society issued a press release warning people about the perils of OVDI. It is a good general introduction. To put it simply: you should operate with a presumption that you will NOT enter OVDI unless a competent lawyer explains why it is the best option for you!
7. “Form Crime” and Fear of the “FBAR Fundraiser” – What will happen if I don’t enter OVDI?
The answer is who knows? The United States AKA “Form Nation” is a pioneer in “Form Crime“. Not only does the U.S. have onerous tax requirements, but it has a large number of penalties for not filing forms. Mr. FBAR – is a very nasty form and filing your very first FBAR is frightening. FBAR and the OVDI decision has been the subject of much discussion including a classic discussion between an OVDI minnow and an IRS attorney.
But the main point that you need to remember is that the IRS cannot impose FBAR fines if there is “reasonable cause” for not filing the FBAR. Now, “reasonable cause” is not clear, but my point is that FBAR fines are not automatic. There is a series of steps that the IRS must go through before imposing penalties. Furthermore, even if the IRS does impose FBAR fines, they cannot enforce them without getting help from the Department of Justice. In many cases, the “FBAR Fundraiser” is more trouble than its worth to the IRS.
Finally, do the arithmetic on the maximum FBAR fines. Don’t just presume that the “in lieu of” penalty in OVDI is less expensive. It may or may not be.
8. Fear of Compliance Going Forward – What if they come after me for past years?
The answer is that they do. What is relevant is your “state of mind” and conduct at the time you failed to file the past returns. A failure to correct past omissions, does NOT turn those past omissions into willful omissions. You get audited. What does that mean? Who knows? It won’t be pleasant. But the IRS is threatening to audit people who opt out of OVDI anyway. So, maybe the way to view this is: do you want the greater chance of an audit with an OVDI opt out or the chance of an audit later?
9. How complex is your situation? Are their any other “Form Nation” information returns that you have failed to file? If so, how do you want to deal with those?
I could go on and on. But, I am going to stop. My hope is that I have provided enough structure to help you think rationally about this. But, not enough to overwhelm you.
From my perspective (and I acknowledge that this is just my opinion):
Get a compliance counseling session from somebody who understands that they are being paid for a couple of hours of advice.
In closing – This post is NOT legal advice. It is only an attempt to help you organize your thinking. All the Best!