"Barry," an investment banker in Orange County, California, moved to the US in 1990 and became a full-fledged citizen in 1993. He was a signatory on several of his biggest clients' foreign bank accounts. Along with his own foreign bank accounts, the total came to a sizable $4.5 million at its high in 2007, but by 2011 was down to $2.5 million. That's the simple bit. Where things get complicated is Barry, with the help of his CPA, filed FBARs for some of his personal accounts, didn't file anything for his clients' account, and failed to report a portion of his foreign income.
In 2011, he became aware that the IRS was cracking down on unreported foreign accounts and panicked. Would the IRS penalize him for not reporting an FBAR for accounts that were not his, but rather where he was simply a signatory? Would the IRS assess him a monstrous penalty? Was he at risk for criminal charges?
After we sat down and discussed his case, Barry agreed that there was far too much at stake; he had no reasonable option other than to enter into the 2011 Offshore Voluntary Disclosure Initiative (the first OVDP to allow for an opt-out of the standard offshore penalty) and we would deal with the penalties as the case progressed. Our number one priority was to quickly make a disclosure.
Taking a calculated risk: The pursuit of a bright future
As the case developed, we had no guidance on whether or not an opt-out would make sense.
The real problem was that Barry wasn't totally innocent. He knew the FBARs existed, but he didn't report all his accounts. Unfortunately, this immediately took his ability to claim ignorance off the table. Where things were heading, the standard offshore penalty was going to nearly wipe him out. The penalty stood at $1.124 million, his portfolio was down to $2.5 million and he still had years of taxes to pay. With how things were looking, his finances were going to be a distant memory. But, as I explained to Barry, the important thing was that criminal charges were now off the table. Knowing that he wouldn't be going to prison made it a bit easier to stomach the likelihood that Barry was going to lose his entire portfolio. But that would make for a terrible story, so let's continue!
A lawyer's hesitance regarding the opt-out
The safest thing for an attorney to do is to advise a client to take a sure thing. Even if that sure thing is horrible, it's called a 'sure thing' for a reason; it absolves an attorney of a lot of potential failure. This way, no one could come back later and accuse the attorney of dropping the ball or doing a terrible job. I suppose the safest thing for me was to convince Barry that the standard 25% was the best option and to move on with my own life.
But that's not exactly what we are known for. We took the aggressive stance because it was the right thing to do.
The opt-out audit
It took some time for the OVDP opt-out auditor to get assigned and we were relieved to see that she was pleasant enough. She immediately told us that we didn't have to worry about the unfiled FBARs for Barry's clients. We corrected that error and there would be no penalty.
Afterwards, we scheduled the opt-out audit. Barry flew out to our office and the auditor drove up to Connecticut from Washington, DC. The first day we went over the proposed tax changes and agreed with the number that was put before us. At the end of the first day the auditor said, "Great and tomorrow we'll do the Title 31 FBAR audit."
Barry and I went out for dinner; both he and I were nervous. We talked about what we would do if we didn't get a good result and we went over our interview preparation again and again. The next day, Barry's CPA was put on speakerphone and the examiner asked him a few things about the returns. The CPA said nothing incriminating, just that Barry never told him about those accounts and thus he — here being the CPA — never reported them.
Early on in the case, I had noticed that Barry actually did report interest on one of the unreported accounts. I asked the CPA why that didn't alert him to that fact that there was this account that needed an FBAR as well. Barry's CPA said, "Yeah, I guess, you're right. I should have seen that."
Next the auditor turned her attention to Barry. He was so nervous and the auditor asked him the same questions over and over again, just in slightly different formats. It came out that Barry did have a good idea he needed to report the income and all of the unreported accounts.
Feeling like he had dropped the ball, Barry said, "I'm not really good at lying." I told him he did fine, that our goal all along was never for him to lie, that the auditor could tell he was not a criminal mastermind and I was cautiously optimistic that any FBAR penalties would not be as extreme as they could have been. No matter what I said, Barry was expecting the worst and later told me he hoped the plane back to California would crash somewhere in the Rocky Mountains.
Positive OVDP Opt-Out Results: A.k.a. a sigh of relief!
While the auditor was back at her home base in DC, she called me to ask me a few follow up questions on the tax changes. After I answered them, she said, almost as if she was mentioning it incidentally, "We've decided to assess Barry five non-willful penalties."
I nearly jumped out of my seat with joy, but managed to say, as nonchalantly as I could, "Yeah, I think Barry will agree to that."
I hung up the phone, called Barry and said, "Guess what buddy? Can you live with a $50,000 penalty? Can you? Can you!?"
Barry was not as thrilled as I thought he would be. Not that he didn't love the result, because he did. The five non-willful penalties of $10,000 each (one additional year fell of the statue of limitation to assess FBAR penalties) represented a tiny fraction of the million-plus dollars he thought he would have had to pay.
"I've been wasting my time worrying about this; I should have trusted you," he said quietly.
"Barry," I responded, "I'll be honest, I wasn't so sure myself. So could you please do me a favor and be happy?"
"Of course. This time I'll take your advice," he said, and I knew that he was smiling.
Note: If you happen to come across a Barry in Orange County who somehow manages to match this description, it is purely coincidence. In order to protect his identity, his name and a few minor facts have been changed.
