THOUSANDS of recent immigrants to the United States are discovering something they don't teach in citizenship class: the United States taxes its citizens and residents on their world-wide income and if you meet certain dollar thresholds, you must register your foreign bank accounts as well as your other foreign financial assets with the government even though you earned little or no interest during the tax year and there was no taxable event regarding your foreign financial assets.

The IRS OVDI Program: In 2009, the IRS began a series of amnesty-type programs under which taxpayers could amend their tax returns to include any foreign income they neglected to report in earlier years, and file delinquent Foreign Bank Account Reports (FBAR's) and asset reports but there is a hitch: not only must you pay the back taxes, interest and a 20% penalty on the amount of tax you owe the government, but there is an additional “monster” penalty of 27.5% based on the value of your foreign accounts and assets.

When the program was first announced, real tax cheats jumped at the chance to avoid criminal investigations and pay whatever the IRS asked, but the programs, commonly called OVDI (offshore voluntary disclosure initiative) took a “one-size-fits-all” approach and it soon became apparent to both the IRS and recent immigrants to the US, that no one in Washington ever thought of the unintended consequences the program had on recent immigrants who were dutifully filing their tax returns but were unaware of the fact that they should have been annually reporting not only the interest they earned on their bank accounts back home, but also letting the IRS know about foreign partnerships and other investments overseas.

The OVDI Program Works But It Is A Long Process: Under the Program, an applicant can get preliminary clearance from the IRS for permission to follow up with detailed information. This can be done very quickly. Once clearance is granted, taxpayers are required to comply with a lengthy check list of documents including amended tax returns for eight years and the delinquent FBAR's. The IRS does not conduct a full-blown audit of the package as they would if the taxpayer had been previously selected for audit but they do assign an experienced agent who works with the taxpayer or his representative to make sure everything is in order. This part of the process can take over a year to complete.

The Real Issue Today Is How To Avoid The 27.5% Penalty. The IRS has built an aspect into the program under which the taxpayer can elect to challenge the penalty by meeting with the agent's manager or an IRS Appeals Officer and attempt to prove that the failure to report foreign interest and investments was not done on purpose. Under this “opt out” procedure, the IRS will take a closer look at the facts of the case and listen to arguments and consider additional information the taxpayer wishes to submit to prove that the 27.5% penalty is disproportionate to the amount of taxes due or otherwise show why the penalty is unfair based on the facts and circumstances of each unique case.

Unfortunately, as burdensome as this may seem, this is not a problem recent immigrants to the US should ignore. In fact under newly enacted legislation, starting in 2013, virtually all the banks in the world who engage in world-wide commerce will be required to report to the IRS the names and details about all of the American citizens as well as green card holders and others who have accounts there. The problem is, under the program, the IRS considers itself as being generous by agreeing to forebear criminal investigation if a taxpayer comes forward before the IRS ever contacts them (hence the “voluntary disclosure”) but if the IRS contacts you first after learning from another source that you have been maintaining foreign accounts and investments in your country of origin, the IRS considers itself free to open criminal investigations if the facts warrant, or stack up multiple penalties which in some cases could equal the amount in the foreign accounts.

The Plight Of Recent Immigrants To The US: Our law office is seeing an increasingly large number of people who are quite innocent, and who are wondering how to be compliant with their taxes. These recent immigrants who are otherwise “squeaky clean” tax compliant citizens who are only now learning that that bank account back home on which they have signing authority, may now be putting them at risk for confiscatory FBAR penalties.

Meet Rahul And Kavita Patel: Here is a typical "composite" scenario: although this example presents a family in India, it represents people from dozens of countries whose citizens have grabbed the golden ring: a US green card and citizenship. Rahul and Kavita Patel are both computer engineers with degrees from the Indian Institute of Technology in New Delhi. They come from prosperous middle class families in Mumbai. Their respective families have put their names on a multitude of bank accounts in India for a variety of reasons. The laws and procedures of India are very complex and the rules for succession and inheritance are even more so. Rather than go through the US equivalent of probate, the common practice in India is simply to put children's names on family bank accounts and partnerships so that in the event of death, a son or a daughter can access their inheritance immediately rather than wait years for such matters to weave their way through the Indian court system. In the case of Rahul Patel, his father put his name on a business bank account as a way to settle an intra-family dispute between other siblings.

The Patels were recruited for work eight years ago by a leading Silicon Valley high tech company and they have been living happily in San Jose, CA since then where they are raising a family. They started with Green Cards and happily attained their US citizenship after eight years.

During the eight years in which they lived in the US, their families in Mumbai added and deleted their names, sometimes without their knowledge, on a half dozen bank accounts. Kavita and Rahul had no real interest in their parents' money in India and even though some of them had balances in excess of five figures, they never really considered those accounts as their money. With their new life and prosperity in the United States, they sincerely hoped that their parents and siblings would use that money for their own well-being with no expectation of receiving any of it.

Rahul and Kavita have been model American citizens. They file their forms 1040 on time and usually get a small refund. Their return preparer in San Jose asked them the first year they hired him whether they did any offshore banking to which they replied in the negative not even thinking that the accounts their families had were even remotely relevant. Since they have been here, they have been dutifully filing their returns until they read an article in the Wall Street Journal which tells them they should be registering all foreign bank accounts over $10,000 on which they can sign with the US Treasury Department even if they never use the accounts, have not opened the accounts, have no idea how much money they contain, how much they earn in interest if anything, when they were opened, or even if they were closed during the year. For more information about voluntary disclosures, check out the IRS web site and insert “voluntary disclosure” in the search box.

Immigrants Receive Conflicting And Erroneous Advice: Many immigrants are now thoroughly confused. In the first place, many are wondering why some kind of tax orientation was not part of their immigration process? The Patels are wondering, what use was it to learn all about the Constitution and the names of all the US Presidents if the government they were making application to was setting a trap for them by not even advising them that they were likely to be in great danger. The immigration process was filled with warm and fuzzy flag waving exercises but no one ever mentioned that one of the screwy aspects of becoming an American was, unlike any other civilized nation on the planet, the US government didn't say it had the power to ruin them economically and embarrass them in front of their employer if they failed to cough up an annual accounting of everything of value at home in India.

The Patels have been all over the internet and have come away even more confused and frightened: some tax professionals advise them not to worry about it and just do nothing. Some "what-me-worry" tax lawyers with a long string of initials after their names advise them to "quietly" fix the problem by just starting to file something next year. This can be bad advice for many people because of the failure to correct past tax returns which checked the “no” box on Schedule B in answer to the question, “do you have any foreign bank accounts?”

If you are considering addressing any past or current IRS compliance issues, you should make sure the accountant or tax attorney you choose has had experience with the IRS in this area. There are a lot of CPA's who have never even heard about an FBAR. You must also beware of various lively web sites with some information which seems useful and accurate but are really promoting a different agenda. Some advise people to simply renounce their US citizenship which is certainly not an option for many people who have spent years trying to get here in the first place.

As you read this there are many tax practitioners who are urging the IRS to address the tax problems of the Patels by publishing a procedure specially designed for recent immigrants. We are arguing that if a family is otherwise fully compliant with their filing and reporting requirements, they should be able to show, without having to do a net worth analysis of their entire family in Mumbai, that they had no reason to know about FBAR's, that now they do, and that they agree to continue to be law abiding, tax paying, prosperous, contributing members of society. The Patels and thousands of others like them from a dozen other countries just want to be free from fear of a government which says it wants to do the right thing but is often its own worst enemy. This hasn't happened yet and in the meantime thousands of families are wondering what to do. Doing nothing is not an option. Until we get the IRS's attention on behalf of recent immigrants the law “is what it is” and we have to address it as it presently stands.