Summary of my OVDI 2011 case

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.