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FBAR OVDI Cause Americans Problems Over IRS Reporting Requirements
By Lance Wallach, CLU, CHFC Abusive Tax Shelter, Listed Transaction, Reportable Transaction
PhoneCall Lance Wallach at (516) 938-5007
Aggressive enforcement of tax rules for American expatriates and their families has prompted some
middle-income earners to renounce their U.S. citizenship rather than risk sizable taxes and penalties.
WSJ's Liam Pleven reports on Lunch Break with Tanya Rivero.
Since 2009, the government campaign has collected more than $6 billion in taxes, interest and penalties
from more than 43,000 U.S. taxpayers who did not file FBAR returns. Federal prosecutors have filed
more than 100 criminal indictments.
The tax dragnet has also swept up many middle-income Americans living abroad, prompting some to
give up their U.S. citizenship. While people who renounce aren't freed of taxes due for past years, they
don't want to risk sizable taxes and penalties for them and their children in the years ahead, experts
The U.S. campaign to fine people who did not report on overseas income could affect millions of
Americans —people, who aren't wealthy, pay taxes in their host country, and who say they weren't trying
to dodge U.S. taxes.
"We have reached the point where middle-class American citizens abroad are being forced to
renounce—especially if they have assets and are moving toward retirement—because of taxes,
paperwork and huge potential penalties.
As word spreads, more Americans are likely to consider surrendering their citizenship. The State
Department estimates that 7.6 million American citizens live outside the U.S., but only a fraction file
required financial disclosure forms.
Mark Mazur, the Treasury Department's assistant secretary for tax policy, said the government's new
enforcement was intended to help make sure all taxpayers pay what they owe "regardless of where
Mr. Mazur said Treasury was looking into how best to work with Congress and the IRS to fine-tune the
system: "You can always improve." The first step is using an accountant with OVDI and FBAR skills. He
should be a CPA and even better should have been an ex IRS agent in the international division of the IRS.
U.S. officials launched their campaign after Swiss banking giant UBS AGUBSN.VX -0.06% admitted in
2009 that it helped wealthy American taxpayers hide money overseas. To avoid criminal charges, the
bank paid $780 million to the U.S. and turned over information on more than 4,400 accounts, ending
decades of Swiss bank secrecy.
In May, Credit Suisse Group CSGN.VX -0.26% pleaded guilty to similar charges and agreed to pay $2.6
billion. Dozens of other Swiss banks are currently negotiating penalties with the U.S. Department of
Justice, officials said.
Following the UBS revelations, U.S. officials announced they would begin vigorously enforcing both new
and long-dormant tax rules.
Unlike other developed nations, the U.S. government taxes citizens on income they earn anywhere in the
U.S. tax liabilities also cover children born to Americans abroad, extending the reach of the IRS across
generations, as well as oceans.
For decades, wealthy taxpayers were able to hide foreign assets in countries where bank-secrecy laws
fostered attractive tax havens, including Switzerland, the Cayman Islands and Panama. You can still see
promoters touting offshore trusts and bank accounts as a way to avoid taxes. Many do it for asset
protection and then run into FBAR and OVDI problems because their accountants are ignorant.
The UBS case signaled the beginning of the end for such havens. Armed with information from the Swiss
bank, U.S. authorities pursued individuals for back taxes, and pressured the tax professionals who
The violations often don't involve unpaid U.S. taxes on wages: The law currently exempts about $100,000
of income earned abroad each year. The most common mistakes usually involved Americans failing to
submit a form called the Foreign Bank Account Report, or Fbar. Since 1970, U.S. taxpayers have been
required to file if they held one or more foreign accounts totaling more than $10,000 over the course of a
year. Until the enforcement push, many Americans never filed an Fbar.
The law is more than 40 years old, but "no one ever heard of it" before the crackdown Fbar penalties are
as steep as 50% of the highest value of the account for each year no report was filed. The IRS fined one
taxpayer for Fbar violations in four separate years, and a settlement reached this month in the case
yielded $1.7 million in penalties, which was more than the account held at the time. Experts say the stiff
penalties were originally enacted to discourage wealthy tycoons from hiding assets abroad.
Penalties and other costs can amount to a third of the balance in an account or more.
"The programs are best for people who have done things serious enough to land them in prison and are
willing to pay huge penalties to stay out," Americans with smaller offshore accounts who entered the
first IRS limited amnesty program paid proportionately higher penalties than taxpayers with larger
accounts, according to Nina Olson, the National Taxpayer Advocate, an IRS ombudsman.
The typical taxpayer with less than $45,000 in undeclared accounts paid nearly six times the back taxes
owed, while the typical taxpayer with more than $7 million in such accounts paid closer to three times
their back taxes, Ms. Olson found.
IRS officials "didn't think about the demographics of the population" of overseas Americans, Ms. Olson
said, often treating middle-class taxpayers the same as "bad actors."
"There's an awful lot of minnows caught up in this," said Marvin Van Horn, a 66-year-old retired financial
controller for Alaska Airlines. He said he entered an IRS limited-amnesty program in 2009: "I assumed it
would be very clear I was not one of those quote-unquote offshore tax cheats, those big whales they
were looking for."
In prior U.S. tax filings, Mr. Van Horn said he hadn't declared rental income from a house he and his
Australian wife own in New Zealand, as well as interest income. He said he didn't know such
declarations were required.
"I have to take some responsibility," Mr. Van Horn said. "It was stupidity and not paying attention on my
The IRS fined him more than $172,000, roughly eight times his back taxes, which amounted to about
$21,000 over six years, Mr. Van Horn, said. With help office,, the fine was reduced to about $25,000.
Spokesmen for the IRS and Ms. Olson said they couldn't comment on individual cases.
We get hundreds of phone calls from people who will be affected by FBAR and OVDI. Most were not
advised of the problems by their so called accountants. Most are now being told that they will owe a
large amount of money. Most are not told how to properly file for amnesty and then opt out to reduce
In a June 3 speech, IRS Commissioner John Koskinen said the agency may not have been
accommodating enough to U.S. citizens who have lived abroad for years. "We have been considering
whether these individuals should have an opportunity to come into compliance that doesn't involve the
type of penalties that are appropriate for U.S.-resident taxpayers who were willfully hiding their
investments overseas," he said.
Scrutiny of Americans abroad will intensify, however, under the Foreign Account Tax Compliance Act, or
Fatca, which Congress passed in 2010. The law's main provisions, which take effect in July, will require
foreign financial institutions to report income of their U.S. customers to the IRS, much as U.S. banks and
brokers file 1099 forms.
Middle-class Americans "face overwhelming problems when they try to engage in standard financial
practices, such as having a small business, saving for retirement, investing, buying life insurance, and
making wills and trusts," because of the laws governing assets abroad.
The penalty for failing to file can be as much as 35% of both contributions and withdrawals each year,
plus 5% of the assets.
ABOUT THE AUTHOR: Lance Wallach
Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement
plans, and tax reduction strategies. He is an American Institute of CPA’s course developer and
instructor and has authored numerous bestselling books about abusive tax shelters, IRS crackdowns
and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes
for more than 50 national publications.
The information provided herein is not intended as legal, accounting, financial or any type of advice for
any specific individual or other entity. You should contact an appropriate professional for any such
Copyright Lance Wallach, CLU, CHFC
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