It has been a tough journey for the last 4..5 years. I have learnt a lot through other folks on various forums (ij gniy, moby etc) and want to summarize my own experience here.
BACKGROUND:
- Immigrated from India and on green card with my wife.
- In my case, I inherited accounts in India from my father when he passed away.
- In my wife's case, her father managed her accounts in India (grown through gifts from parents) and filed her returns under her power of attorney.
- My daughter who is a minor had an Indian bond gifted to her by her grand father. When that matured, we had opened an account for her in India. Since the money could not be transferred to the US, we had neglected to declare that in our filings here or file FBAR for it.
- Accounts for all of us in India were non resident (NRO) accounts that were subject to restrictions for transfer out from India
- Most of the income was interest income from banks and taxes were filed by our CPAs in India per Indian tax system.
- None of the money was transferred from the US or originated in the US.
- We had not filed FBARs until 2008, nor had declared our foreign income or claimed tax credit for taxes paid in India.
- We checked "No" to the foreign account question in 1099-B
- Became aware of FBAR in 2008 from a friend and started filing FBAR forms. I owned some mutual funds and did not file FBARs for them (even after 2008) as I thought they were not subject to disclosure.
Entering OVDI:
Our NRO accounts were with HSBC and we learned about HSBC being investigated and the filings by US Govt to get HSBC to reveal all the account holders. Even though our accounts in India were not for evading taxes (We were filing taxes in India), we had not filed FBARs and started worrying about the draconian FBAR penalties, criminal prosecution etc. We had disclosed the accounts since 2008 but were worried about our non disclosure in prior years. Talked to few attorneys and their advice was that entering OVDI 2011 was the best way to avoid risk of criminal prosecution.
Filed under OVDI 2011 and paid back taxes and interest on taxes due for all prior years since 2003. Self assessed 25% FBAR penalty penalty for maximum balance and that came to around USD 350k for us and USD 90k for our daughter. (We did not pay the FBAR penalties with the initial filing just the computation). Also filed under California OVDP and paid California back taxes and interest.
Foreign Tax Credit Issue: IRS looked at our amended returns and did not allow for all the tax credit we paid in India on interest. They claimed that per the dual tax treaty, India should have only taxed us 15% on our interest as taxes and what we paid in India (close to 30% in taxes on interest) was excess. So they only allowed 15% of the interest as tax credit. This ballooned our back taxes due by another 350k on top of what we had already paid. My attorney tried to challenge IRS on the foreign tax credit issue and that it would be unfair for me to be taxed twice since I had already paid to India and cannot claim refund on back years. IRS maintained that they would only allow the 15% credit on interest and did not budge from their position. There was no leniency under the program at all. I also tried talking to the examiner to ask how they would treat my case outside OVDI and they gave generic answers indicating that it does not have to be the worst case and that there is the appeals process that can be availed outside but did not give me any clear assurance.
Exiting the OVDI:
After a lot of discussion, I decided to opt out from OVDI for me as well as my daughter. We hired a new attorney and negotiated a flat rate only payable as a percentage of my FBAR penalty savings over OVDI. The previous lawyer charged by the hour. Frankly in retrospect, I had to do a lot of heavy lifting on my case and feel that if I had to do it again, I would avoid the lawyers and the associated fees. It is not for every one but for those that have done a lot of research, you may be better off doing it on your own.
We made a case for reasonable cause penalty abatement and used some of the arguments made by others on this forum. For instance we used the Google trend information (Thanks to a post in this forum from ij gniy who was kind enough to share his opt out letter with me) to prove that FBAR was not a well known term until much later. Also pointed out all the facts in our case where we had inherited accounts, paid taxes in India and the money did not originate in the US. Clearly this was not the case of someone putting money away to evade taxes from the US. I also got letters from CPAs in India who wrote that we were completely compliant under Indian tax laws and that the money in India was subject to restrictions to transfer outside. They also said they were not aware of US reporting requirements.
IRS examiner was assigned. I must say she was really professional and treated us really well and in the end fairly. She interviewed me and my wife. Lot of the questioning was about what we knew, when, and whether we had discussed with our CPAs who our returns for some of the years and filled out any pre tax work papers that asked about foreign accounts. My attorney had discussed the time line clearly before hand which helped in being organized for the interview. We learnt later that she also call our CPAs to ask about this and they said it was so long back that they did not recall whether we had done the prep tax work and filled out any forms where questions about foreign accounts was asked.
Over the next few months, there were questions asked about some of our amended returns. IRS for instance did not find a 1099 and thought we had under stated income. I had to prove that it was due to the exercise and sale of non qualified options which gets reported on W-2. I had to compile all the evidence and show that I had reported all the sales from my brokerage account. After a a little back and forth, IRS relented.
The Decision:
I got in the mail the IRS decision on FBAR penalty. They agreed to reasonable cause for my daughter. Her being a minor (and so they did not want her to be penalized for her parents negligence) played a role along with our specific circumstances so they waived her FBAR penalty all together. In case of my jt returns with my wife, they looked at the fact that we had started filing from 2008 onwards and been consistent and did not charge us with any penalties for those years. This is despite the fact that I had omitted filing the FBAR for all accounts especially the PFIC accounts. They charged us for non willfullness penalty for the years 2006 and 2007 (Earlier years were considered outside the SOL). The penalties was 10k for each year and separate for me and my wife for a total of 40k. I had multiple accounts (about 10 of them including PFICs) but IRS examiner took a favorable view and indicated that the penalty for each account would be too much given the circumstances .
Unfortunately, on the foreign interest, IRS maintained that I can only claim 15% of interest as credit. They sent me revised tax calculations which took my PFIC 20% eduction out and instead took the PFIC income per normal calculations. That meant that the taxes increased a little because instead of being charged a flat 20% rate, I was paying taxes at the 35% rate. I found some errors in my returns where I had computed the cost for capital gains at the same currency rates as time of sale (It would be at the time of purchase), and also found that my foreign tax credit was not all due to interest so IRS had computed it incorrectly and treated as though all the taxes were from interest. Once I pointed these two out, IRS obliged quickly and that decreased my outstanding taxes significantly (Currency rates during the time of purchase were much stronger making the gain become much smaller). One positive of getting out of OVDI was also that the accuracy related penalty was removed from all the years in the calculations. They kept it for one of the later years and we challenged it and they quick relented and took it out.
My attorney made one more attempt to convince IRS Ro waive the penalty for the 2 years claiming reasonable clause but IRS maintained that they had already got approvals through multiple level and it was not in her hand to change it. I was free to file an appeal though. I decided to settle the long story with the 40k penalty.
Statute of Limitations:
As I stated above, I found some mistakes in the returns that when corrected made tax calculations favorable to me. Also because the mark to market taxes were taken out in earlier years, the new calculations showed refunds in earlier years. However the latest tax calculations I received from IRS showed those refunds but claimed that due to statute of limitations, I cannot get those refunds. I was furious that while IRS took my taxes willingly for earlier years, they were unwilling to pay back extra taxes that we paid under the process. Their claim was that when I exited the OVDI, my taxes had been applied to various years per the calculations and the statute of limitations outside did not allow claiming refunds for those early years.
We argued with IRS and ultimately they found a clause that allows claiming back refunds if that was due to foreign taxes. This was section 6511(d)(3)(A) which allows refunds for 10 years on refunds due to foreign tax changes etc. But that was only allowed it for the years 2006 and later. I still had refunds owed in 2003 and 2004 that were lost. We decided to agree to it.
Timeline:
Filed for OVDI 2011 :August 2011
Contact from IRS in response with request for response: August 2012
Closing statement 906 sent by IRS: Nov 2012
Opt out decision made Feb 2013
IRS Examiner first contact in response to opt out: May 2013
Final settlement: May 2014
In the end, I think the following things were favorable in my case:
- Accounts were not created from money earned or originated from the US
- Taxes were being paid in India
- We did make an attempt to start filing in 2008 when we learnt about FBAR laws and showed it
- Letters from our CPAs in India that indicated our compliance with tax laws and their ignorance of US reporting requirements
- They did mention in the write up that none of us had any degree or experience in tax matters
- They interviewed the CPAs in the US and while the CPAs did not recollect whether we had filled out prep work forms which could have asked questions on foreign accounts, they stated that had we not filled them out the default in their software would be to mark "No" for foreign accounts.
- We also told them that in Turbotax in early years, when I filed on my own, the default for foreign accounts was "No" and it was not straight forward to answer that question right.
I will update this blog from time to time with more updates. If someone has specific questions, I can be emailed at: ovdioptout at gmail dot com
This has been a very painful journey. In the end, I am happy with opting out of OVDI which really is targeted for people who actually intended to be cheats. I think all immigrants or expats who have a reasonable cause will do far better opting out.
This has been a very painful journey. In the end, I am happy with opting out of OVDI which really is targeted for people who actually intended to be cheats. I think all immigrants or expats who have a reasonable cause will do far better opting out.
Great information...this is definitely going to help many others stuck who are confused on whether they should opt-out of OVDI
ReplyDeleteyou should have made a QQD but in 2011 everybody and their grandmother was advising to join OVDI.
ReplyDelete.....allows claiming back refunds if that was due to foreign taxes. This was section 6511(d)(3)(A) which allows refunds for 10 years on refunds due to foreign tax changes etc. But that was only allowed it for the years 2006 and later. I still had refunds owed in 2003 and 2004 that were lost......
Since this section 6511 allows for 10 years on refunds due to foreign taxes why were 2005,2004,2003 lost ?
My situation was unique in that HSBC was under investigation already. Regarding the statute of limitations and refund, there is some arcane thing that the exception on foreign tax applies only if there was a refund due in the original return (which was not the case for those years) I don't completely understand it but IRS did not relent on our challenge and I just wanted the process to be done.
Deleteo.k thank you - does that mean the refunds that you were owed in 2003 and 2004 came from the 1040Xs for OVDI and you did not originally claim those before ?
DeleteYes
Deletegreat job and thanks for sharing !
ReplyDeleteij.gniy
Thanks ij gniy. Your willingness to share your details was really useful for me and the inspiration to take time and help with my learnings
DeleteGoogle Trend on FBAR was invented by MOBY, who was the very first person shared opt-out story on Jack's blog. I was just his copycat -:). My case shared some common feature among immigrants who are still US residents. Jack's blog was the place a lot ovdi participants shared stories/views/rants/ and Just Me was the most out spoken for immigrants.
ReplyDeleteactually the one that really helped many minnows over the last 2 years was UStax on JATs blog with a lot of facts and guidance.
DeleteHello,
ReplyDeleteI am also considering opting out of the 2011 OVDI program, after spending considerable time energy and money on attorneys
1. Our parents are co-owner on some of the accounts. For these accounts, is the FBAR penalty calculated on the TOTAL value of the account for that year - eg $500 K. Or is the penalty calculated on the prorated 2/3 amount $330K that is owned by my spouse and me
2. For an account exceeding $250K in value under Non WillfulI- Level II is the FBAR penalty $10K for each joint account holder. So in the case of your wife and yourself , it was $10K each = $20K X the number of Years open under the Statute of Limitations = 2 Years for a total of $40K
Thank you!!!
I don't think there is any proration based on ownership. In fact, it would be 10k for each non disclosure so technically for the same account, 10k for you and 10k for your wife.
DeleteIn our case, they did not charge us for each account and instead charged us 10k flat for each year. They looked at only 2 years so it was 10kX2 for me and 10kX2 for my wife. The reason they looked at only 2 years (2006 and 2007) was because I had filed FBARs for 2008 and later and 2003 through 2005 were considered outside statute of limitations.
OVDI Opt Out,
DeleteDid you sign the form 872 to extend the statute of limitations for years all the way to 2003, when you were in OVDI?
When you opted out it appears that IRS skipped 2004 and 2003. Is that the law or was it at the discretion of the IRS examiner?
Yes, I signed it for all years I think. I think they did not specifically go for years 2003 and 2004 outside OVDI because of the law regarding how many years they can go back to. But then on the flip side any taxes paid under OVDI processing were also taken and not credited back even when some amendments in the return resulted in a refund in those years
DeleteHello,
ReplyDeleteI tried to find the above comment on Jack Townsend's Blog as I would like to post the questions to Jack and others as well. However I could not find it.
Could someone please send me the link to the specific page where the original comment is listed on Jack Townsends Blog?
An additional Q:
3. Did the IRS only assign a flat $10K per year for each FBAR filed for you and your wife (and ignore the other accounts)
In other words, was the total FBAR penalty assessed at a flat $10K per tax payer for the years open under the statute of limitations OR did he IRS calculate the penalty for each account. For example for a small account wiht a Balance of say $500, the FBAR penalty Non Wilfull II would be 10% (or $50) for each taxpayer so $50 x 2 = $100 per year. This seems excessive because it is like an OVDI penalty of 25% ( $100 is 25% of $500) for EACH year.
This is important to me because we have a number of small accounts.
THANKS
Yes, it was a flat 10k per year for each person rather than per account. They calculated the actual amount which was larger but indicated that they believe that given the circumstances in my case, it would be appropriate to charge only 10k and not more than that. So discretion was applied as allowed under the law. Depending on your circumstances, it may or may not be the case.
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ReplyDelete1. http://federaltaxcrimes.blogspot.com/2013/11/should-you-opt-out-of-ovdip-11513.html
ReplyDelete2. No, they only looked at years 2003 and later under OVDI and outside OVDI they looked at 2005 and later. My accounts were established in 1990s as well but they did not go back to prior years
I have also heard it all depends on who you get at the IRS reviewing your case after Opt Out. I think you were fortunate to get someone reasonable, though one wonders whether $40K is too high a price to pay for not reporting a small amount of income and not filing out the FBAR which until recently, was an unknown Form, even to CPAs.
ReplyDeleteThe program seems very discriminatory toward immigrants to the US. Even though the immigrants are full US citizens, they are still second class citizens in that they subjected to the same harsh penalties for benign,inherited accounts as US born citizens who own undeclared foreign accounts.
Hopefully by the time your daughter grows up, there will be enough blowback to cause this attitude to change.
I am really horrified by reading about on FBAR penalties. Why there is no debate or discussion in Main stream media (CNN, FOX etc.) while it is impacting millions of people and I believe people Living in misery once they came to know about FBAR penalties. I think media (Domestic and International) should educate people about this. Most of the people still don't know about this requirement.
ReplyDeleteHad people known about it, why anybody will take this risk and push the family into misery? After all most of the H1B and Green card holder may not owe more income taxes since they usually transfer after tax money from US.
In my case I have bank account before coming to US and I was maintaining those account without knowing anything about FBAR and I was transferring my after tax salary money to my Indian account. I came to know it FBAR only when my CPA mentioned about it only this year. It already damaged lot to me in terms of my professional and personal life. I am really worried about my future
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Deletehttp://www.theglobeandmail.com/globe-investor/personal-finance/taxes/new-irs-amnesty-program-offers-expats-a-ray-of-hope/article19063135/?cmpid=rss1
DeleteLooks like IRS is softening stance towards expats. Let us hope immigrants are next.
Folks,
DeleteDoes *anyone* know of a case where first-time Fbar filers / new disclosures were audited? All the cases seem to be of high profile tax evaders.
I came to know of all this mess recently and don't want to miss filing fbar at least from this year. (Filed a tax extension so I can buy time to figure this out)
I have not heard of this though I keep hearing that IRS will get strict on silent disclosures. Note that FBAR filing deadline is June 30 and has nothing to do with Tax extensions.
DeleteBeen in US for around 12+ years.. still on VISA which itself is a torture.. been sending to native country for all these years.. heard about requirement of declaration of Foreign accounts/FBAR only this year.. one of these foreign banks used to send me 1099 and i reported them under regular schedule B (not under foreign account as i never checked on it), the other bank never sent me 1099 and i didn't bother to report it.. for the most part it also taxed me heavily in my native country..
Deletemy total federal tax liability for all these years adds up to around 5k - 8K.. what's my best option? if i go under OVDI, my entire balance will be probably gone..
Past 3-4 months has been a real torture for me.. almost daily i think of ending my life out of fear of financial security for my family.. however think about my 2 small kids.. i postpone it.. not sure how long i can hold it.. i am on XANAX (anti-depressants) and my wife constantly reminds me of my kids whenever i head out..
Please HELP!!.. This issue is so sensitive that i am not able to share it with anyone too.. i had no criminal intentions.. all i did was transfer after tax money to my home country bank.. never brought any of it back to USA.. and the total tax liability for all these years would come to a max of around 8K..
Please HELP!!.. what's my best option here?
Hi, It is not worth ruining your life over this. If you like, I can provide you specific advise and guidance from my experience. Drop me an email at ovdioptout@gmail.com
DeleteI hope you are okay now, i feel bad for you. That must have been terrible.
DeleteThe irs should have a system where they immediately check on people with foreign bank accounts and let them be aware of their international legal obligations and especially all the forms they have to fill up.
Their system is very complicated, even their own accountants have no clues... I went to the irs office here in 2008, they all looked at me like an extra terrestrial annd did not know what i was talking about.
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Deleteto clarify a few things with regards to the "Turkish Bazar" scenarios :
ReplyDeleteFor an account exceeding $250K in value under Non WillfulI- Level II is the FBAR penalty $10K for each joint account holder...... that was not necessarily the case here !
The examiner has the following options :
1. The NW penalty is up to $10K per account and violation/year.
2. Mitigation guidelines for NW ...Level1,2,3
Of course $40K is a very steep penalty in this case. But the reality is that the IRS views penalties as a revenue source, that a cost-benefit analysis is performed around whether or not to assert penalties, and that only penalties that have high dollar amounts attached to them are worth enforcing.
ReplyDeleteThe problem in his case was that the account balances were too high and they felt by giving his daughter a total break that they have been lenient enough already.....Turkish Bazar again.
Guys i am wondering if someone is in my situation. I want to opt out but my lawyer is stating as otherwise. He said since i have a Schedule C (business expenses) that it will be a headace to do an opt out as irs will want each and every expense justified along with a bank statement?
ReplyDeleteSo confused don't know what to do
Thanks
Anon000
In my case, they did not question any of the existing income or deductions etc. But I did not have business expense.
DeleteCan you please share the details of attorney you have worked.with?. I am looking for some one who is less expensive and Has all the knowledge of FBAR issue. Do you have any suggestion?.
DeleteOV... Wondering in your package did you send original tax returns plus Amended return. Do you also need to fix if you find a domestic problem or just Foriegn?
DeleteThanks
Yes, I sent the original returns as well as the amended returns. I focused only on foreign issues though it is possible that IRS may look at any other issues as well. But in case they find an issue, they will just request information and then add taxes if they find you did a mistake.
DeleteOVDI i am wondering i went into pre clearance and now i am having second thoughts i am wondering would anything happen if i bypassed and did a go forward filing?
DeleteDid you ever come across this scenario?
I have not come across that scenario so hard to say what the risk is. What I do know is that IRS is overwhelmed with all these cases and while we always imagine the worst case scenario, IRS also needs to prioritize and does it based on various factors including the size of accounts, underlying circumstances etc.
DeleteHello OVdi question in ovdp did irs only question offshore accounts or anything domestic as well? Did you receive a idr and if so what kind of idr?
DeleteThanks
I think once they do an audit, they can question anything in your return domestic or foreign. In my case, they looked at some 1099 which they had but I had not claimed in my capital gains. I had to show that it was reported on my W-2 as income and they were fine.
DeleteDo you know any attorney who is less expensive and has all the knowledge about FBAR issue?. Can you please share the Attorney details with whom you have worked?.
ReplyDeleteRevising my response. My attorney was certainly not cheap and there were disagreements with how the fees were charged. It is settled now but do not feel like recommending them at this point. If you are sufficiently savvy, I suggest going on your own especially given the simplified guidelines under OVDI.
DeleteSo streamline process for Domestic residents on visa etc. Wondering if anyone knows what should one do if he is aready in IRS PReclearence? How to move from Pre Clearence to Streamline process?
ReplyDeleteI love this blogs honesty when it comes to describing experiences with tax lawyers and his description of the vicious circle of the Tax Bermuda Triangle is just a classic
ReplyDeletethank you for the link... great blog for research
ReplyDelete@OVDI Opt Out, thanks for sharing your experience. Based on your timeline 2005 and 2006 should have been closed years. Were these years assessed based on consent you signed during OVDI?
ReplyDeleteThey did assess 2005 and 2006 since I had given consent to extend when inside OVDI.
DeleteThanks for sharing. Considering that you had paid tax back in India, I feel the penalty was still excessive. They show you this big gun designed for terrorists, drug dealers... and then you are happy they only hit you with a hammer... A government that claims high moral across the world is certainly showing what it really is, which by the way, will not surprise many, but did surprise me...
ReplyDeleteYou really mentioned what is OVDI and how to save and manage our taxes with the help of this.
ReplyDeleteThe Online understanding of the OVDI can be easy with the help of this blog.
OVDI
Hello, is there a way that I could establish contact with you to discusss how we could help immigrants and expats to be less troubled with FBAR issues?
ReplyDeleteSend me an email at ovdioptout@gmail.com
DeleteThanks! I just sent an email.
DeleteHello, is there a way that I could establish contact with you to discusss how we could help immigrants and expats to be less troubled with FBAR issues?
ReplyDeleteHi, is your email id ovdioptout@gmail.com still the best way to contact you?
ReplyDeleteCan I contact you at ovdioptout@gmail.com to get couple of tax attorneys contact that are familiar with handling tax cases related to people with indian origin, especially for US citizens who have lived in India for couple of years and are back to USA to help resolve FBAR / tax related issues, Thanks
ReplyDeleteI do not have any specific attorneys to recommend unfortunately as the one I had I would not recommend (Too expensive and did not think I got the value). There are many others that you can find through various sites but I do not have a personal experience with them. Good luck!
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ReplyDeleteHi OvdiOptout,
ReplyDeleteI am currently filing OVDP Letter and atachment, for year 2015 I have filed FBAR and disclosed foreign income , so now in the form 14457
Question no 10. Please check the box to estimate the annual range of the highest aggregate value of your offshore accounts
do I have to include year 2015 ( even I have filed FBAR and disclosed foreign income for year 2015)
or I need to consider only from 2014.
please let me know.
Hello, I do not have the answers to your question. I suggest checking with the right expert since I do not want to mislead you. It has been a while now.
Delete